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

Hi, everyone, and thank you for standing by. Welcome to Strauss Group's second quarter 2021 results. [Operator Instructions] As a reminder, this online Zoom conference is being recorded today, Tuesday, 17th of August 2021. I would like to remind everyone that the online conference 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 timely 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 as identified in the documents filed by the company with the Israeli Security (sic) [ Securities ] Authority. With us online today are Mr. Giora Bardea, CEO of Strauss Group; and Mr. Ariel Chetrit, CFO; and myself, Daniella Finn, Head of Investor Relations. Giora, please go ahead.

Hello. Good afternoon, good morning to everyone. In Strauss, we continue to closely manage the opportunities and risk during this very volatile times. Since you all understand that we are living in really uncertainty days, we are very proud to report today the results of the first quarter, which we can see our experience and some challenges for this coming next quarter. The main topic when we look at the group is the strong momentum on growth. After a long time, we can see that, this quarter, we are having double-digit growth and the major phenomena that we have this growth in all our categories, countries and businesses. Second is the market share. During this period of time, as a branded company, we are very proud that in most of our brands, and mainly in the blockbusters, we have regained market share or we protect the market share. I talk about Israel, which increased market share. We'll see [ it play with stock ] later. We see Sabra a little bit decreased but more than 560%, coffee companies as well. During these volatile times, it's very important, on one hand, to continue and to keep the momentum with all the strategical approach. So we continue to expand our business, penetrate or expand to new categories as well as the investing capacity in CapEx, so on one hand, to protect -- to cross the pandemic and all the rest of the crisis that's around us but not to give up and not to lose the long-term strategy and the long-term journey to achieve the company goals. Another very important point that this quarter, remarkable results in our home base. As an international company, we understand the resilience, and a powerful home base is crucial for the long-term journey out of Israel as well. So we grew the business in Israel, not Strauss Israel. I'm talking about the business in Israel. It's the coffee in Israel, water in Israel and Strauss Israel, more than 8% over last year. Last point is very important is to talk about the resilience. I just mentioned the resilience. The combination of the corona and the uncertainty time on the corona, the third wave, the fourth wave in Israel, out of Israel, Brazil, United States, et cetera, at the same time, in Israel, we had some issues with our neighbors in what we call Shomer Homot. It was operation in Israel. And all the issue with the supply chain, all of them, we led with very strong resilience financially and operationally. When you look at the near future, in the near future, it's mainly -- the main issue is supply chain. I'm sure you are familiar with the challenges about transportation, about shortage of some raw materials and spare parts and mainly the green coffee increased price. So this is the main challenge for the next couple of months. And you will see later how we mitigate and how we believe we can gain with all this phenomena. A couple of words about each one of the businesses. So you can see that the rally in Israel is continued 7.7% growth, strong EBIT. We leverage on the growth, and we have -- the EBIT is 10.1% over last year. Market share, 0.3%, which is 12.4% from the total Israel food business. We can see the AFH and on-the-go [ fields ] in Israel. The last quarter was the beginning of, let's say, more and more reopen the office, hotels and attractions, parks. Unfortunately, during the last couple of weeks, it's back to maybe, hopefully not, the first -- the fourth wave of the corona. But during the quarter, we opened most of the on-the-go and AFH, so it impact the growth. Very important in Israel, in order to meet the demand in our Israeli business, the dairy, the confectionery, the coffee and the salty snacks, we invested a lot of money in our capacity. We have a huge master plan, what we call, in order to invest in our infrastructure. Future, mainly about Alpro and plant-based activities and opened a new channel. We found in Israel that there is a special channel, not the traditional one, like the big ones, the discount, but more professional like the butchers and bakeries, and we developed a special channel in order to meet the demands in these special retailers. Next one, please. Coffee. You can see here a nice growth of almost 14% in local currency. The majority of this growth comes from the opening, as I said, opening in Europe, in Israel, in Brazil of the AFH. Coffee in Israel, up to 23% growth and mainly from the Elite Coffee chain. It's a 70 point of sales in Israel and a lot of activities in AFH. In Brazil, impressive increase of almost 14% in local currency and, as I said before, a huge challenge with pricing, we'll talk later, and improved momentum. After a couple of quarters with some challenging in Europe, now in our Eastern Europe, we have momentum in all the countries. EBIT of the coffee company, totally coffee company,7%. But we see the erosion that came from the green coffee. The market share in Brazil, 30%, including the Mitzui. I believe you remember, and if not, you can find it in some -- in last year, we bought a local company, Mitzui Coffee, and we gained almost 2% from the synergy with this business that we merged into 3C. Future challenge mainly is to mitigate the increase of the green coffee, part of it by production, productivity and other activities, and the major one is increased price. We already have done in Brazil. We have done In Ukraine, in Poland, and we understand that this is, unfortunately, the only way to mitigate the price increase of the green coffee. Sabra and Obela, this is our joint venture with Pepsi, increased sales in local currency, more than 8% in the United States and in Obela out of United States. When you translate it to shekel, Israeli shekel, it's 2.2%. And we have a new CEO in Sabra. In Sabra, this is the only place in our portfolio where we have some challenges over the supply chain. In Virginia, we have some challenges with the COVID. People sometimes refuse to come to the factory. We invested a lot of money in order to protect the employees and to share with them, to give them the best environmental protection in order to feel comfortable. But still, we lost almost $5 million -- less than $5 million in [ cash ]. It means that we didn't meet the demand because the supply was problematic and it hit our profitability in Sabra. The water continued amazing rally that we started a couple of quarters ago. You can see here the strong quarter of 16.5% almost, 16.4%. And we are very proud to have this close in all our countries or geographies, Israel, U.K. and China as well. Operating income improved by 6 -- 13%. You can see the momentum in all the activities. We launched in Israel, you can see it in the picture, a new machine, which is much more modern IoT system, amazing launch with unbelievable sales in Israel. And we believe this machine will help us to expand the business out of Israel during the next couple of years. You can see in Haier in China, sales up to 22.4% in local currency and reached in the quarter CNY 345 million. The business is growing amazingly. Income, up to 11% better than last year. If we excluded the subsidiary that we got from the government last year, ILS 11 million for the new factory that we built in China. We're already #1 in online, and we believe the new factory and the new R&D center that we developed and we completed lately will help us to be a leader very soon in offline as well. So down the road, their ambitions is to be #1, both in online and offline in China in, what we call, ready point of use and point of entry, means the point of drinking and the entrance to the apartment to serve all kind of water in the residential apartments. Last but not least, about the growth and the innovation. I'm sure that you're all familiar with our kitchen and innovation growth arm. We celebrated a month ago the 20th startup that joined the kitchen, and we have very successful follow investments in some of the kitchen operation companies. Aleph Farms raised USD 105 million, and we'll see our share in the third quarter very soon. And we have some, let's call it, test and learn, very innovative product that we produce here in Israel, and we launched them in the United States in order to check what is the best way to bring some of the innovation, which is from the kitchen or out of the kitchen hub, how -- what is the best way to launch new products in the United States. This is the first one, Upland, and pretty soon, I believe, we can learn and expand our innovation from Israel to United States and maybe to other countries as well. So thank you very much, and I will hand over to Ariel, and we'll be very happy to answer any questions after Ariel will complete his script.

Sorry. Hi, everybody. Good afternoon. Good morning. Happy to be here with you. A short summary of the financial results for this quarter and a very brief look for the first half of 2021. Let's start with the overlook of the organic results for the quarter and year-to-date. Maybe at the beginning, I will just state that this quarter, the foreign exchange translation effect was relatively very minor compared to the effect that we experienced in many previous quarters. So this quarter, the effect was only ILS 40 million on the top line and ILS 5 billion on the EBIT line, which is small, and therefore, the organic results and the reported Israeli shekel results are quite similar. So if you look at the second quarter, the sales growth organically was almost 11%. In the first half, it was 5%. Just to show you the difference between the first quarter and the second quarter, in the first quarter, we were flat in sales. In the second quarter, as you can see here, almost 11% and the average is 5%. Just to remind you the first quarter last year was the peak sales of March because of the panic buy phenomena of the COVID-19 at the beginning of the pandemic. And therefore, the sales in the first quarter of this year were flat. But in the second quarter, we see the exact -- exactly opposite phenomena where many channels were reopened in 2021, away from home, on-the-go and outside the consumption channels. And in the previous -- the second quarter of 2020, those channels were completely closed. And this explains the very nice growth that we have in the second quarter. If we look at the gross profit, we can see that we grew 8% in the second quarter, 1.6% in the first half. This is mainly due to the effect of increase in different inputs. For Strauss Coffee, it was mainly green coffee milk in Strauss Israel and transportation costs during the first half of the year. If we look at the EBIT line, we can see a decrease of 3.7% in the second quarter but increase of 1.2% once we exclude the onetime Chinese subsidy that we received for the building of our new factory in China for our Haier Strauss Water partnership. And in the year-to-date results, we see a growth of 4.1% and, excluding the onetime subsidy, 6.5%. Looking into the net income line, we can see that we decreased this quarter. But once we exclude the Chinese onetime subsidy, we grew almost 2%. And year-to-date, we grew almost 10% and, once we exclude the subsidy, 14% in our net income. If we look at second quarter sales, we can see that this quarter growth is quite special compared to growth in previous quarters. We can see that the growth is across the board. All the segments, all the business units grew significantly this quarter. And if we look at the reasons and root causes for this growth, we can see that we grew -- we continue to grow very nicely in the retail channels across the different business units, but we also grew very, very significantly in the away from home, in the on-the-go channels this quarter. In the previous quarter, second quarter of 2020, you can see that we increased almost 50% because, at the beginning of the pandemic, everything was shut down and people did not consume foods and drinks outside of home. And in this quarter, in most of our geographies, the markets were relatively open, not fully operating as they did before the pandemic but quite open, and we see -- we saw a significant growth. If we look at the gross profit, we can see a nice growth of almost of -- a bit more than ILS 50 million in the gross profit line, but the gross profitability decreased by about 1% from 38.4% to 37.3%, and this is mainly due to our input inflation; first and foremost, the green coffee price increases; and in Israel, the milk, raw milk price increases. And across all of our geographies, the transportation costs grew dramatically. If we look at the EBIT line, once we exclude the onetime subsidy in China and inorganic M&A and translation effect, we can see that we grew only ILS 1 million in our EBIT from this ILS 211 million to ILS 212 million. You can see that in 3 out of our 4 operating segments, we grew in our operating line. But in our dips and spreads, mainly Sabra, we decreased in our operating profit. The first reason for the decrease in, let's say, operating profitability was, of course, a decrease in our gross profitability due to the input inflation. But the second reason is a more temporary reason. Last year, second quarter, we freezed most of our operating expenses, sales, marketing and the G&A because we stopped traveling. We stopped our -- all of our activities, projects, some of our marketing expenses. And we only focused on the very necessities of our business, manufacturing, delivering, distributing and logistics. And therefore, we saved a lot of OpEx costs. But this quarter and the second quarter of 2021, we were back to close to normal, let's say, not totally normal but close to normal OpEx costs and, therefore, the decrease in the operating profit. If we look at the net income, we can see that the decrease came from the EBIT. The other items did not change the net income. On the one hand, we decreased in our finance expenses due to improving our interest rates dramatically last year once we optimized our debt structure for the whole group. And therefore, our interest platform going ahead is much lower than what it was in the previous years. And on the other hand, our taxes grew from Q2 2020 by ILS 21 million due to the fact that, last year, we had a onetime temporary decrease in tax payments because we decreased our provisions for taxes in several of our geographies. If we look very briefly on the year-to-date results on the top line, as I mentioned before, we grew organically 5%. And as you can see, we grew very nicely in the first half in 3 out of our 4 segments, Strauss Coffee, Strong Israel, Strauss Water, and we were stagnant in our international dips and spreads. And once we look at our EBIT for the first 6 months, we can see a nice growth of ILS 10 million. We maintained our EBIT profitability at almost 12%, very similar to what we saw in the first half of 2020 and 2019. And when we look at the net income, we can see a nice growth in the half year of ILS 26 million, nice growth in profitability to 7.9% net income profitability. And we can see that this growth came from the growing EBIT and the improvement of our finance expenses relatively to the first half of last year. It's also important to mention that in our incubator, in our kitchen FoodTech hub, we have a pretty big portfolio of 20 companies. In the first quarter of this year, we registered a profit from dilution in our holdings in a few of our investments due to advanced rounds of finance that they have made in the first quarter. In the second quarter, we didn't register any major profits from advanced finance rounds of this portfolio. But in the third quarter, as we reported in our immediate reports, we had a very significant finance round in our successful investment in Aleph Farms, a cultured meat company, which raised $105 million. And from this phase and our dilution in our holdings, we registered a ILS 58 million profit that will appear in our Q3 reports. So with this, I will end a brief summary of the quarter, and we'll be happy to answer any questions that you have.

Thank you, Ariel and Giora. [Operator Instructions] In the meantime, I'm going to ask a question on behalf of Chris Reimer from Barclays. And Chris asked the following question. First quarter in a while where organic growth was posted in Sabra. I was wondering if you could give some color on the changes in the operations there. And what, in your view, still needs to happen before margins improve or stabilize?

Giora, do you want me to take that? So first of all, I'm not sure that Giora mentioned it, but it's written in the presentation. We have a new CEO in Sabra. He started to lead the company from the 1st of August. So it's relatively very fresh. And we believe that his experience and knowledge and capabilities will help Sabra continue its journey with success in the future. We also believe that the infrastructure and strategic plans that were built by Tomer, the previous CEO in Sabra, are very solid and will be used by the new CEO and the new management in the future. So this is just a remark about the management -- changes in the Sabra leadership team. With relation to the business itself, we believe that we have a few challenges to overcome in order to give us a more promising future in -- both in top line and in our margins. First of all, we have to build a very solid innovation pipeline because innovation in the segments of dips and spreads and fresh salads is crucial, is key to growth in the top line. And therefore, we are working on our innovation pipeline very hardly. Second, we have to work on improving our product quality because we believe that we can win the competition better once we improve the quality of some of our products there. Third, we need to look at adjacent categories that we can also enter into and not only focus on hummus and related salads for the near future. This is a very important thing for the top line. Also, we have to stabilize our supply chain. As you know, the corona posed some significant challenges for our supply chain, employment issues, salary issues, and we must improve our supply chain to make sure that the business is stabilized, and this will allow us to secure the orders that we received without any cuts as we experienced in some of the previous quarters. And last but not least, we think there is a lot of room for productivity in Sabra. We started to look into major, major automation and productivity, CapEx programs for the near future. And we are very positive about the ROIs of these programs. And we're sure that, in the future, these investments will improve our productivity and help us secure our margins.