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

Hello, everybody. Welcome to our Third Quarter 2021 Conference Call. [Operator Instructions] I'd like to remind everybody that any statements that will be made here today are forward-looking statements, and the actual results may differ materially. Today with me are Giora Bardea, CEO and President of Strauss Group; and Ariel Chetrit, CFO of Strauss Group; and myself, Daniella Finn, Head of Investor Relations. Giora, Please go ahead.

Good morning, good afternoon, all. No question that we are experiencing very complex seasonal days. It's a combination of, in some countries, in some geographies, the corona is all over or almost over, even people behave that it's over already. We see a very nice GDP growth in many Western countries and some Eastern as well. Inflation, very high inflation in some countries and at the same time, we see unbelievable boom at what we call the labor market. People move -- I know Israel, United States, people move and change position and career almost overnight. At the same time, a set of very interesting kind of challenges when it comes to supply chain, inventory, delays on supplying materials, raw materials, spare parts. We see the increase inflation of raw materials and packaging goods all over. Some of the climate crisis or impact of many business, but mainly our business and the coffee -- green coffee is part of that. So altogether, it's a kind of perfect storm during the last half year. And nobody knows how long it will take, but we believe that we, in Strauss, we navigate our business, our people, our commitment to the stakeholders in a different and positive way. Allow me very quick couple of words about our main business and then Ariel will deep dive on the financial details. A bit about the group. So we are having -- and we are very happy with what we call the momentum of the growth. 7% growth after a couple of years of stagnant growth driven from time to time, it was negative growth, we are very happy on that. Our financial stability and flexibility stayed very strong, yes, but at the same time, very complex, as I mentioned at the very beginning, how to enjoy, how to leverage the growth of the top line and to take it all the way to the gross profit, operating profit and net profit. Very challenging and later, I believe, part of my review, and Ariel will deep dive, we'll share how we believe we can do. We have very strong home base and more and more, we understand the importance and the critical position of our home base in Israel. Our global journey needs the back of the Israeli, the back or the backbone, if you will, of the Israeli -- Strauss Israel, Strauss Coffee Israel, Strauss Water Israel, and we see the results that are very, very strong, which allow us to grow and expand our business out of Israel and do a lot of innovation as well. So we completed the quarter with ILS 300 million operating profit and ILS 200 million net profit. Yes, part of that -- part of that comes from the kitchen -- the kitchen, the FoodTech kitchen innovation that we have here in Israel. And later, I will elaborate specifically about the ILS 50 million, ILS 52 million, for many reasons, -- hardly change the slide, just a second. Okay. When we talk about Israel, in Israel, the growth of Israel, this is the fifth or sixth year that quarter-after-quarter, Strauss Israel are growing. This quarter, it's even more powerful since the food and beverage industry in Israel, a decline, some because of the corona because of the holiday season by 3.6%, and our strong Israel increased and grew 2.4%. We see a lot of new categories that need to consumer needs and the consumer new trends, the dealer grow on behalf of that. And market share of Strauss Israel, I believe you remember, we check not just the brand and the categories, we check the total position of Strauss Israel in the food industry in Israel. So we increased 0.4%, which put us on 12.3% from the total food and beverage, very nice increase in EBIT. We improved the EBIT in 6.4%. Yes, I repeat again, not too high EBIT. There is some issue with the margin of the gross margin. The gross profit is okay, the margin eroded. Coffee. Coffee still same story about the momentum, very nice momentum of the growth and the majority, very clear to see comes from Brazil, the amount and the proportion of the business in Brazil in the total coffee business is huge. And the coffee business in Brazil, doing very, very nice and the total coffee company, if we excluded the currency impact, are 14% and together with the currency, it's 12%, very nice growth. Yes, in Brazil, and I'm sure you know, the hedge of -- on green coffee is very, very short, and it's a physical inventory. So Brazil suffered the first before any of our -- the rest of our business, coffee business, Brazil suffer or got the hit before all of them. And very soon, increased prices and made another couple of measures in order to protect the business, and we can see unbelievable growth, both in volume and in value in Brazil. A bit about Sabra. In Sabra, there is some good news and some less good news. The good news is that we see that the category is stagnant because a couple of quarters before, we were a little bit concerned from the category decline, but now the category stagnant. We see growth of Sabra 1.3%, and we protect the market share, more than 61%. Yes, in Sabra, we still -- that's going to suffer, got hit from the corona, mainly in our supply chain. In the factory, a lot of turnover of employees, a lot of changes in the production lines in order to protect the people there. So we invested a lot of money. We lost a lot of sales that we were not able to produce and to deliver to the market. And therefore, you see that Sabra having -- still having a set of challenges. We believe in the category. We believe in the product. We believe in the brand. We believe in our partner and no question that the future should be much, much better. Strauss Water continued the momentum of amazing growth in Israel and in China, improving the operating profit and improving the installment base in Israel. And as you know, when you put or install a machine in a family in Israel, it's for 36 months from the moment that we installed the machinery, we see in the picture. So it's very important for us, not just to sell power to service, but to install to have better and higher household penetration. China grew 9%, and the new factory already in China in Gemo, we’re almost in full capacity, and we believe it will help us with one of the major challenges in China, which is better technology and to move from OEM orientation or strategy to at-home technology that will allow us to be more premium product. Last but not least, the growth and innovation business. Here, as I said before, we continue to invest in new initiatives or startups in our kitchen. Nowadays, we are having 22 different companies. As we already reported to the market on July, we had amazing round of Aleph Farms raising almost more than USD 100 million and we gain from a little bit dilution, we gained more than ILS 50 million that help us to -- this quarter to improve our operating and net profit. I will hand over to Ariel to continue from here.

Thank you very much, Giora. Good to see you, everybody. Good day to you all, and I will continue with a brief overview of the financial results for this quarter. Daniella, please interrupt if you don't see the presentation or do not hear me well when I move the slides. So an overlook for the third quarter and year-to-date, we can see that in the top line, as Giora mentioned, we are in a quite nice growth momentum, which is derived both by volume growth. And especially in this quarter, price growth, mainly in Brazil, where we have increased our selling prices quite considerably. And we will see it later in the Brazil activity results. This momentum is eroded once we look at the gross margins of the group, both in the quarter and year-to-date. The gross margin itself is higher than in the previous period, but the gross profitability eroded in the quarter and in the year-to-date, mainly due to the very considerable increase that are -- we are meeting in our different inputs. But we must say that the main increase, both in percentage and in monetary terms is the increase of the green coffee. When we look at the EBIT lines quarter and year-to-date, we can see an increase in our profit and in our profitability. And it is leveraged into our net income, which both in the quarter and year-to-date increases by a higher percentage than the increase in the EBIT lines. When we look at the top line and our sales, we can see that our sales momentum comes from most of our segment. We can see that in Strauss Coffee, the momentum is both from volume and price increases in Brazil, totaling almost 12% this quarter. In Strauss Israel, 2.4%, like Giora said, the market -- the food and beverage market in Israel, declined by more than 3%. Therefore, we are increasing quite materially in our market share. And you should also take into consideration that the timing of the holidays this year was in such a way that we lost some sales in September and gained them back in October, i.e., the fourth quarter, therefore, represent the normative percentage of growth is a bit higher. Dips in spreads, as Giora said, we are stagnant in local currency. And I want talk more about it because Giora already mentioned the different challenges that we have in Sabra. And in the Water segment, we are growing almost 5%, continuing our very positive momentum with innovation, a very strong base of the customers in Israel. As you know, Strauss Water China is not incorporated in the sales, but rather, 49% of -- is our share in their net profit is incorporated in our equity profit line. And -- but as Giora mentioned, we grew in China by 9% in sales this quarter. Therefore, the momentum is really excluding Sabra across the board. We can see that in the different channels, we started to look at it since the corona began. We can see that we are continuing to grow quite rapidly in the retail channels. Although the market is opening and the away-from-home activity is gradually but steadily going back to the levels that it was previously. The retail is still growing, at least for Strauss Group and therefore, we are very -- we see it as a very positive sign. The away-from-home is recovering, not yet to the full normative level that it was before the corona in 2019, still around 15% to 17% lower than the levels that we registered in 2019 previous to the corona. If we look at the gross profit, as Giora mentioned, we are growing in the gross profit only by ILS 4 million. Therefore, our growth -- massive growth in sales eroded our gross profitability by almost 2% due to the steep increase of different inputs, materials, but mainly, as I said, coffee. And we -- if we look at the different segments, we can see that the erosion in gross profitability in Strauss Israel is relatively low from 39.3% to 38.9%. There was, of course, an increase in the different inputs in Israel, raw materials, raw milk, energy, shipping, of course, but this erosion was mitigated by 2 major facts. First of all, is the significant increase in sales in volume and in market share, which was leveraged to the gross profit line, leveraging our fixed or semi-fixed manufacturing costs. And the second mitigation was different optimization and efficiency programs that we have for automation in our factories, our plants, and this helped us a lot to mitigate the erosion in gross profitability. When we look at coffee, most of the erosion -- it's quite a significant erosion, almost around 3% FTE percentage. Most of the erosion is due to the steep increase of green coffee prices. I remind you that our coffee, green coffee coverage outside of Brazil is for longer periods, mainly 6 to 12 months depends on the circumstances. And therefore, in many areas, we are still, let's say, enjoying benefiting from lower and older prices of green coffee. But in Brazil, our coverage is almost immediate on only 2 or 3 months physical coverage. And therefore, most of the decrease in gross profitability came from Brazil this quarter and also the previous 2 quarters. And we can see that this was the main effect on erosion of the gross profitability of the group. And also in the other 2 segments, they are much smaller, but we can see an erosion in gross profitability, both in Sabra and Strauss Water due to the increase in the input prices. When we look at Brazil, it's important to understand what's happening there, and we can see this quarter, a beginning of a turnaround in profits, not in profitability, but in profits. As we've seen in previous quarters, but we see it in this quarter very significantly, we are increasing our top line, not only by volume, we are increasing our top line in volume for many, many quarters now, and we've talked about it for the past few years, and this is very good news, of course, because the business is really growing. But this quarter, we are increasing our top line also by increasing our selling prices. Our input prices in Brazil rose by close to 60% to 70% this 9 months, and we have increased our selling prices by a few dozen of percentage in increasing selling prices. We have not increased the prices enough to mitigate the whole input green coffee price increase, but at least some of it, and you can see it in the results here. The gross profit grew absolutely speaking, in monetary terms, by BRL 50 million. This is -- these are data in 100% in local currency, BRL 50 million, we can see that BRL 346 million for this quarter is the highest gross profit that we've seen in Brazil I think ever, but you can see here the previous third quarter for the last 3 years. So in monetary terms, we have increased our profit -- gross profit quite dramatically. Still, we haven't increased the prices enough to maintain the gross profitability. Therefore, the gross profitability is still eroding. But what we look as the very, very positive sign is that the monetary gross profit is growing. And as we said, it's a process. It's a gradual process. And this is what we've seen in Brazil in the past 20 years when there were up cycles and down cycles, and we are starting to see the up cycle now in the profit itself. You can see that the gross profit went down or was leveraged down to the EBIT profit, BRL 101 million, quite a high number compared in monetary terms to previous years, third quarter, but still the profitability is lower. So the conclusion for the third quarter is that we are progressing in the right vector, the right direction in Brazil. When we look at the EBIT line for Strauss Group, we can see that our profit is ILS 300 million compared to ILS 250 million in the third quarter for 2020, a steep increase in profitability. But if we look at the different causes of profit and profitability, we can see that they are varied. In Strauss Israel, we see a nice increase continuously over the many, many past quarters, as Giora said, a nice increase in profit -- operational profitability this quarter. In Strauss Coffee, as I said before, the main cause is Brazil. We can see also a decline in profitability in Strauss Coffee, Israel. This is mainly due to the holiday seasonality, as I explained before, in Strauss Israel, it also affected the Strauss Coffee Israel. But mainly the erosion came from Brazil in terms of profitability, but the profit itself starts to, let's say, meet the same numbers that we had last year due to the phenomena that we've seen this quarter in Brazil. In Sabra, we can see a decrease in profit and profitability. And hopefully, we have -- we see a starting, let's say, beginning of positive signs for an improvement in next year in Sabra's results. And in Strauss Water, we continue to see very strong profit results and profitability that there is -- you can see from the materials, if you look -- deep dive into them, there is an increase in the profit and profitability in Strauss Water Israel and a decrease in profit and profitability in Strauss Water China, but the decrease in Strauss China is mainly due to a onetime tax benefit that we received in the third quarter of last year, and we did not receive this year. Still, the profitability -- the net income profitability in Strauss China this quarter is almost 12%, 11.9%, which is quite high, and we are quite satisfied with these areas of net profitability in China. Therefore, this quarter, we see China's results is very satisfying. Of course, there is the FoodTech results. We already reported in July that we will see a substantial profit from the fundraising in Aleph Farms, the cultured meat company. And we can see this profit registered in the third quarter, which increased quite nicely our operating results. As we said before, we see our FoodTech activity as a very promising activity for our future to increase the value of the Strauss Group in so many areas and also in monetary terms, of course, economic value in the future. You can see our disclosure in the MD&A about the fair value of the 22 company portfolio that we have and you can see that steadily, it is increasing every quarter. And we just want to mention and to remind you that there will be a volatility in profits and losses from the FoodTech activity in the future. But all in all, we do expect to see more profits than losses in this activity in the future. Therefore, a positive also, let's say, accounting contribution to our results. Net profit is mainly contributed by the operating profit increase. You can see an increase in the net profitability to 8.9%. The other items, finance expenses and taxes are without any material changes compared to the third quarter of last year. Therefore, I will not go through it. And I suggest that I'll stop my presentation at this point and let you ask any questions that you have for our third quarter results.

Thank you, Giora and Ariel. I have a question that was passed from Chris Reimer from Barclays Bank. And Chris has 2 questions. The first one is regarding raw material costs, what are the -- what's the overall impact? And how do you see the potential for passing on costs in the current environment?

So regarding the raw material cost itself and cost increase, we did not give monetary disclosures regarding this increase. But we gave a detailed table of the percentage increase, so you can get the idea. If you want to guesstimate the -- let's say, input cost increase in this quarter, you can just take the 2% erosion in our gross profitability. So if the sales for this quarter were roughly ILS 2.3 billion, 2% of it is ILS 66 million. And of course, we have mitigated, as I explained before, this erosion quite nicely with different measures, as I explained this quarter. So you can double it roughly to guesstimate the area of cost input increase for this quarter. So anywhere between ILS 120 million to ILS 140 million, ILS 150 million will be a good guesstimate. This is the best estimate that I can give you without disclosing materials that -- and data that we didn't disclose in our financial statements. With relation to how we are dealing with it or how can we -- do we believe that we can pass it through in the future, we cannot relate to our future plans and estimates with relation to that. But what I can say is the following: First of all, you've seen and we explained exactly what we have done in the previous 3 quarters. And you can see that at least for now, as we're speaking, November 16, we are passing through our price increases. And we are not tackling any significant, let's say, challenges. As you know, it's a global phenomenon. Therefore, we are not the only ones that are increasing our prices where we have done it. This is the first thing to state as a fact for now. Of course, there's no assurance that we will not meet any challenges in the future, but we can -- as I said, we cannot talk about future plans regarding pricing. The second thing that I want to say is look at the history, at least we explained and we showed you very well the history in Brazil and in many other coffee countries in Europe and around the world. And when we look at the past 20 years, we can see that both in steep decreases and in steep increases in green coffee prices, the market eventually adapts. The market prices to consumers eventually adapt and close the gap, if it's a downturn or even if it's an upturn. Therefore, we can only say that the very long history in the past 20 years teaches us that markets adapt, and we will have to see what happens this time. As I said, for the third quarter, we have positive signs of increasing profit absolute numbers, and we see it as a positive signal.

And the second question from Chris Reimer from Barclays. Specifically in Sabra, there was a sequential improvement in operating margin. Is there anything that still needs to be addressed in the operations or should we see improvements from here on?

Yes. Thank you. Please allow me to make a little bit wider picture about Sabra, and it will be much more clear. We -- in Israel, during the last 20 years, we are this small company globally, very strong in Israel. The journey to go out of Israel and to expand the business internationally, having ups and downs all the way. I remember the days of everyone in Israel and out of Israel, look at us as crazy when we talk about selling coffee to the Brazilian. I remember the days talking about selling water in China. Nowadays people ask the same, not you specifically, but we ask ourselves about selling homes in the United States. It's very similar. We are here for a long, long journey. We believe -- and we just finished now a project that we got some feedback, both from Interbrand, United States and McKinsey, they all talk about a brand, which is much, much bigger, stronger, wider than the product, huge potential. We talk about a plant-based product. We talk about healthier products with hummus as a convenient food and snacking. So we have all the ingredients, let's call it, in order to build a sustainable business. The journey in Sabra started very nice, and we jumped very fast from the date that we bought Sabra and then join -- Pepsi join us to unbelievable market share and distribution. I'm sure that you -- some of you may be having the experience about the United States market share, our distribution is 87%; market share, 61%. So it means that in the United States, there is still huge potential. Yes, it's all about better and excellent execution. Nowadays, because of a lot of very nice reasons and explanation, we don't do good enough, but we will do. We have all the building blocks to make Sabra a much bigger and more profitable. We believe 100% and Pepsi together with us, together with us, ready to invest time and money and what we need in order to make it or bring it back to the highway.

Okay. If there are no further questions, we will end this call. A recording of this call will be available on our website. Thank you all for joining us today, and we look forward to seeing you next quarter. Thanks. Goodbye.

Thanks. Goodbye.