Strauss Group Ltd. (STRS) Earnings Call Transcript & Summary

Hello, everybody, and welcome to the First Quarter 2021 Results of Strauss Group. With me today are Ariel Chetrit, the Group CFO. And apologies on behalf of the CEO, Giora Bardea, who will be joining us shortly, but he's currently tied up on another call. [Operator Instructions] As a reminder, this Zoom meeting will be recorded and will be found on our website at a later stage. I'd like to remind everyone that the conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. Strauss does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for our products, the time and development of our new products and their adoption by the market, increased competition in the industry and price reductions as well as due to risks identified in the documents filed by the company with the Israeli Securities Authority. With this, I'd like to pass the call on to Ariel Chetrit, Group CFO. Ariel, please go ahead.

Thank you very much, Daniella. Hello, everybody. Good day, and thank you very much for joining us. I will share the presentation. Okay. First of all, again, our apologies that Giora Bardea, our CEO, could not attend this call. You have in your materials in the presentations that were sent or published, you have a brief discussion and presentation of the major 5 trends that we see in our space and arena worldwide. And maybe next time, it will be a good opportunity to present them and talk a little bit about them, but they're pretty much self-explanatory. And if you go over the materials and you have any questions later on or on this call, please feel free to ask us at the end of this call. Or later on, please contact Daniella straightly. So I will get directly into the financial results of this quarter. And I want to begin with an overview of the organic results without the translation effect on our first quarter. As you can see on the top, we are stable in our sales, a bit below the first quarter of last year, minus 0.4%. While being stable on the top line, we are declining 4% on the gross profit line, as I will explain later on. And we are reversing this trend once we are going down to the EBIT line and growing by almost 12% organically. And it is increased even more when we go down to the bottom line, the net income growth is almost 26%. And just a reminder, we distributed on April a ILS 270 million dividend that was declared during the month of March. If we will look a little bit deeper into the top line results, as I said, we are stable in our organic top line results, minus 0.4%. But when we look at these results, we must understand the relations between the first quarter of 2021 and the first quarter of 2020. I want to remind all of you that the first quarter of 2020 was very ambiguous. The first 2 months, January and February, were without any corona effect, except for our activities in China, which are not included in the top line of our results. So without any corona effect, business as usual. And the month of March was the month of panic purchasing, panic buying all over the world when we witnessed increases of double-digit growth rates in all food and beverage markets around the world and, of course, also in Strauss. On the contrary, the first quarter of 2021 was reflected with the January, February full corona everywhere around the world, maybe except China, but also in Israel. Even though now the corona is almost behind us, January and February were the peak of the third wave of corona here in Israel, and of course, third wave peaks everywhere around the world during these months. And the month of March was, let's say, a "regular" corona month worldwide without any phenomenas of a panic purchase or over-purchasing that we witnessed in the different markets. Therefore, we, in this quarter, reached the peak of our sales that we have witnessed in the first quarter of last year. And therefore, we are pretty content with these results in the top line. If we look at the right-hand side of this slide, on the bottom part, we can see that in our 2 biggest segments that comprise together, almost around more than 80% of the sales, we were pretty much stable in our sales, minus 0.7% in Strauss Coffee and 0.9% in Strauss Israel. Again, as I said before, we see these results as very good results. Compared to 2019, we are around 8% or 9% higher than the first quarter of 2019. Therefore, these results are quite good. We can see that in our Dips & Spreads segment, we went down organically 11.5%. This is mainly due to the fact that in our Sabra business in North America, last year, the first quarter, as I said, witnessed a peak in sales. January and February were as usual. In March, we saw a very sharp rise in our sales. But this quarter, we are still with the corona in North America. And we still are experiencing a very low platform of portability, the Grab and Go hummus package products that we sell in the States because many, many of the channels, the universities, the airports, convenience stores, et cetera, are not open regularly during this quarter. And we also have witnessed some supply chain constraints this quarter. The peak of the third wave in our activity in Sabra came in January and February. Many employees, some of them were positive to corona, but many of them were -- had to go through the separation because of the different circumstances when we see positive cases in our plant, and we didn't have a full capacity working staff for the whole quarter. In Strauss Water, on the contrary, we see a dramatic, a very positive improvement in our sales. Just to remind you, everybody, the sales in our Strauss Water segment does not include Strauss Water China. Haier Strauss Water, our activity in China, it includes only or mainly our activity in Water Israel and in the U.K., which is relatively small. And we can see a very sharp increase in sales reflected by the greater demand for our appliances during the past year of the corona when people are much more conscious about their health, their convenience and the environment issue. And therefore, we see an increase in demand for our products. Also, we see a very strong improvement in our services, quality, and it explains also part of this very, very good increase in sales. If we go to our gross profit, we can see a decline of 4% organically. Also in our gross profitability, we can see a decline. And on the one hand, we see stability of a pretty good gross profitability in Strauss Israel of 40.2%. But on the other hand, we see a decline in gross profit and gross profitability in Strauss Coffee. And this is the main reason for the decline in the group's gross profitability. And in Strauss Coffee, if we deep dive, we can see that our activity in Brazil is the main contributor to the decline in the gross profit and the gross profitability of the group. On this point, it's important to mention a few very important facts. The first one is that on the top line in our business in Brazil, Três Corações, is growing rapidly, high single digit and sometimes double digit during the past following quarters. And we see it as a very positive trend that will make us much stronger in the future in terms of our competitive position and with a prospect for our future profit once the margins go back to normality in the future. Second fact is that we have raised our list prices in Brazil for the first time in 2 years during the month of March. So we are not seeing it in our reported results for Q1, but we have raised our list prices in the range of 5% to 10% during the month of March. And these raises were accepted by the market, by the retailers and the consumers in April and in -- during May. And therefore, this will be the beginning of an improvement in our margins in the next, hopefully, in the next quarters. Another fact is that during the month of May, we have made a second tranche of list price increases. We will have to see in the next couple of months how this second tranche is accepted. But we believe that there is no other way, and we must raise our prices in order to improve our margins and give the right answer to the sharp increase in green coffee prices in Brazil in the last 9 months or so. The third -- another fact is that other coffee players in Brazil are also raising prices, which shows us that it is the whole dynamic there that is starting to -- beginning to change over -- after 2 years of lowering or maintaining stable prices by all of the players -- coffee players in Brazil. We see it also as a positive financial sign for the dynamics that will show in the next quarters to come. And these are the main facts that are important to remember about our prospects of recovery in Brazil. If we look at the EBIT line, we can see that we reversed the decline in gross profit, and we can see an increase of almost 12% organically in the EBIT line; and in the EBIT profitability, a sharp increase to 14%. If we look at the explanation to this increase, on the left side, we can see that there are still a pretty material translation effects that caused a decrease in our EBIT profit. But on the right side, we can see that Strauss Water and Strauss Israel contributed nicely to the EBIT increase in this quarter, while Strauss Coffee and our Dips & Spreads segment were pretty much stable and a bit decrease during this quarter. And last but not least, you can see on the right side a ILS 22 million increase, which is mainly attributed to capital gains on our Kitchen Hub, our FoodTech hub companies portfolio. In this quarter, we registered ILS 29 million of equity profits related to our Kitchen FoodTech hub portfolio. And for the first time, we have incorporated a very thorough disclosure on our FoodTech hub activity, profits and fair value of the portfolio in our MD&A. And we are planning to continue with this disclosure for the next quarters and years for your convenience, so you will be able to analyze our FoodTech hub activity better. It is important to say that these profits and earnings are not onetime earnings. They are not onetime earnings. We see them as continuous earnings that represent the growth in the fair value and success rate of our portfolio of 19 FoodTech hub companies. Saying that, what I mean is that we will continue to see in the future more profits as more companies raise funds in progressive rounds of fundraising with higher net worth, but we will not see it every quarter. So on an annual basis, we are likely to see profits from fundraising -- material fundraising of our FoodTech hub portfolio companies. But on a quarterly basis, in some quarters, we'll see profits. And in other quarters, we'll see only our share in the FoodTech hub companies losses for the quarter. And therefore, the variability in our Kitchen results in the equity line in our P&L will be higher than it was before. On the profitability -- EBIT profitability side, we can see that in -- except for our Dips & Spreads segment, we see improvement in all of the segments, okay? So the improvement in profitability is not only because of this FoodTech hub profit. It is also because of the contribution of Strauss Israel, Strauss Coffee and Strauss Water to the EBIT profitability this quarter. Net income increases even more than the EBIT, almost 26% organically. And if we look at the bridge, we can see that the EBIT contributed ILS 21 million. But another major contributor was the financial expenses, the finance expenses, which were much lower this quarter compared to the first quarter last year. One of the contributors to this decrease in finance expenses is our debt portfolio optimization that we managed and changed and executed last year. This lowered our interest rate quite dramatically as a new platform. And therefore, this lower rate of finance expenses is a new platform that will continue to be with us for the next couple of years. I will finish with this and open the discussion for any questions that you have.

Thank you, Ariel. [Operator Instructions] But I guess we have no questions. It's all clear this quarter. So thank you, Ariel, very much. I would like to remind you that this -- the recording of this call will be available on our website. All the materials, the press release, the entire financial results and the analyst presentation are all available on the Investors section of the Strauss Group website. Thank you all for joining us today, and we look forward to talking to you next quarter.

Thank you.