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

Hi, everyone, and thank you for joining us today. Welcome to Strauss Group First Quarter 2022 Results Virtual Conference. [Operator Instructions]. I'd like to remind everyone that this online webinar 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 obligations to update this 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 new products and their adoption by the market, increased competition in the industry and price reduction as well as due to risks identified in the documents filed by the company with the Israeli Securities Authority. Online today are Mr. Giora Bardea, CEO of Strauss Group; and Mr. Ariel Chetrit, CFO; and myself Daniella Finn, Head of Investor Relations. We shall start with the quarter's highlight presented by CEO, Giora Bardea, followed by a recap of the quarterly results by CFO, Ariel Chetrit. Giora, please go ahead.

Good morning, good afternoon, everyone. No question, it's very clear that we are now in a kind of complex period of time. And I don't -- still don't talk about specifically Israel of trials, talking about [ deeper ] inflation, the war in the East Europe, supply chain, energy and some companies with issue of stability. And in this kind of environment, we should manage and lead our business in order to get into much better date. Yet in here in Israel, we have a kind of, let's call it, a tricky quarter. On one hand, if you look at these numbers, and I'm sure that you already have done, we have amazing, really amazing growth. If we could just for a second, just for a second, we ignored or put aside the recall issue. So here we have like almost 50% growth in our group with amazing profits, which are great numbers. But unfortunately, during this period of time, we suffer or we got hit from 2 major crisis, one in Sabra United States, in Virginia and one in here in Israel. So just to make sure that we understand that the resilience of our portfolio, we already talked about it many, many times. I mentioned in our calling, talking internally, externally that the Strauss portfolio is really solid and resilient because of the variety, because of the diversity of the elements, means different countries, different currencies, different categories, different channels, go-to-market. And so while we manage such a portfolio, we can, let's say, manage the crisis in a better way. On one hand, we have the recall in Israel. We have the stop production in Sabra. But at the same time, all the rest of our categories and business are amazing. We get start in Israel, the dairy, the fresh salads, the salty snacks and others. The Water company is doing great. East Europe coffee, Brazil coffee, so it means that we a kind of mixture between great business, and we will need to manage the onetime, hopefully onetime event of the crisis. Before we talk specifically about Sabra and then later Sabra and the confectionery, we put ahead of ourselves 4 major principles to manage these crisis, which are leaving us and are guiding us how to take decisions during this period of time. We really believe that the way we manage the crisis, it's a key to get out, out of the crisis much stronger, better, more professional and get back the trust. The first is the wellness and the health of all consumers, zero compromise. Second is to keep and to build the trust the way we manage the process. The third one is to protect our employees and the rest of the stakeholders because at the end of the day, during the crisis and the day after, we should have them as a partner. And no matter if it's customers, consumers, stock market, our employees, et cetera. And the last one, we understand that the beauty would be if we will leverage this kind of crisis to get out of it much more professional, much more resilient, much more improving our safety and quality culture. These are the 4 principles. A short update about what's going on in Sabra. We are already in the process of getting back to the shelves almost 50% of the factory is running already. And now we are building the inventory in terms of to go to the market. And we believe that not played in the end will mean second half we'll increase it fully. Because it is a bit more complicated because of the size of the business, because of the complexity, we are now learning trying to understand much better what happened. But during this period of learning, we're improving aggressively all the processes, machinery, raw materials in order to be back in the market at least before the end of the time that we got from the government, which is 3 months, it means, hopefully, in a couple of weeks, we start gradually, let's say, gradually back on shelf. We decided that we should continue with our, let's call it, the strategic journey. A couple of months ago, Ariel and myself present our journey, the strategical journey. And we believe that the company is strong enough and resilient enough in order to continue. Yes, maybe it will change in and be here and be there, make some updates or adaptation. But conceptually, we believe that the company is strong enough to continue the main journey for our next 5, 6, 7 years with some small adjustments. Last but not least is the FoodTech. The day before yesterday, we celebrated in here, the launch of Kitchen 2.0. We have amazing great global partners that will invest together with us in FoodTech. We host here in Tel Aviv more than 170, 60 -- 160 investors, global and Israelis and our 23 startups that's already in the kitchen 1.0 present them and call them for action in order to invest. So we really believe we'll continue to invest in FoodTech in the part of our belief that in order to nourishing better tomorrow, which is our vision, is to be much stronger and lead the FoodTech. So just to complete, thank you for supporting us. We really believe that the support of you as investors and the rest of the stakeholders is a key in our best to highway that will become very soon. So I will hand over to Ariel, the Group CFO, please.

Thank you very much, Giora. Good morning, good afternoon, good evening to everybody on this call. We appreciate taking your time to be with us today. First of all, we are working intelligently these days with relation to the 2 major events that we are experiencing, both in Sabra and in our -- with our confectionery recall to make sure that you, our investors, are timely updated and really understand the effects on current results and the effects on forward-looking results for this year. Hopefully, you weren't surprised to see the results for this first quarter of 2022, as we reported to you previously about the expected losses -- net loss for Sabra this quarter for the first quarter. And we also reported an immediate report about the expected losses due to the confectionery recall for this quarter. So probably, you were not surprised to see the results for this quarter. And maybe, hopefully, you were positively surprised to see the upside and the nice results that we have in our other activities, mainly Brazil, Coffee Company, the Water Company and the other segments and activities in Strauss Israel. So to briefly go through the first quarter results, let's start with the top line. We grew in our sales a 10.2% in the Israeli shekel, 11.5% if we exclude the FX exchange translation. And this is a very nice result that also incorporates the decline in Sabra sales in this first quarter and due to the confectionery recall. So taking into account that these decreases were incorporated in our financial statements, you can see that our normal growth in this quarter was even much higher than this. If we look at the segments, different segments growth on the right-hand side of this bridge report, you can see the confectionery recall effect on the sales, which was the sales for the first quarter, which was NIS 64 million. And you can see the Sabra effect on sales, which was minus NIS 42 million. But all the other segments, you can see a very solid, stable and nice momentum of growth. Strauss Water continuing many -- for many quarters now, again, another high single-digit growth of almost 8%. In Strauss Israel, just prior to the confectionery recall for the first quarter, the business grew almost 7%, and this is after 6 years of growing on an average of around 5% in Israel, which demonstrates our very good track record of growth in Strauss Israel and also shows why we grew so much in our market share during these years. And Strauss Coffee with a 30 -- almost 36% growth that comes mainly from Brazil and the Eastern Europe countries, aside from Ukraine and Russia, which suffered a little bit, not materially, but a little bit this quarter due to the Russia-Ukraine war. If we look at the gross profit, we can see a steep decline of NIS 150 million from NIS 812 million on the first quarter of last year to NIS 662 million in the first quarter of this year and a steep decrease in the margin from 39% to 29%. This decrease is mainly due to the confectionary recall and also attributed to the decrease in Sabra's activity in the first quarter and accordingly, also a very big decrease in the gross profit. We can still see a decrease in the margin of the Coffee -- gross margin of the Coffee Company, but we can see that the gross profit -- absolute gross profit is growing nicely from NIS 272 million in the first quarter of last year to NIS 295 million in the first quarter of this year. We can see the results on the operating profit, NIS 102 million this quarter, again mainly because of the NIS 154 million that we -- the write-off due to the confectionery recall. You can see it on the right-hand side of this bridge. And Dips & Spreads mainly because of Sabra, a decrease of NIS 26 million. And on the left-hand side, you can see also onetime expenses, totally almost NIS 30 million decrease in the Dips & Spreads and this is due to Sabra's partial activity during the first quarter of this year. The other segment Strauss Water, Strauss Israel, prior to the confectionery recall and Strauss Coffee are growing nicely, in Strauss Israel almost 8% and double digits in Strauss Water and in Strauss Coffee. And when we look at the contribution to the nice growth both in sales and in gross profit and operating profit, we cannot neglect the outstanding performance of Tres Coracoes in Brazil. As we promised, we amended or we updated and adjusted the selling prices of our coffee products in Brazil during the previous year. This quarter, we finally caught up with the increase in the green coffee prices. And once we got caught up with the raw material prices, we can see the nice increase in sales and in profit in local currency. And now as green coffee prices are stabilized, at least for the past 3 to 4 months, they are pretty much stabilized, we can say that Tres Coracoes is now more stabilized in its business and should be expected to show more resilient results in 2022. If we look at the net income, we can see that all these effects went down to the bottom line, NIS 43 million net income this quarter compared to NIS 206 million net income in the first quarter of last year. On the right-hand side, we can see the NIS 119 million effect of the confectionery recall, which is the material thing that affected our net income. Also the decrease -- the other decreases in EBIT due to Sabra's loss this quarter. And although we are having, as Giora said, a great, great, great activity and success with our FoodTech Hub we are seeing there. As you can see, we are registering from -- in accounting terms we are registering a profit for the past few quarters. And we on an annual basis, as we said before, we see this activity now contributing to our profit and not recording net losses on an annual basis anymore. Our finance expenses grew this quarter compared to the previous quarter -- the first quarter of last year. This is mainly due to the mark-to-market of our FX hedges. And if we look at our gearing ratio, our gearing ratio grew from the -- net debt-to-EBITDA from 1.4 in the first quarter of last year. It was roughly 1.3 at the end of 2021. And now it's 1.8. And the main cause for this is, of course, the steep decrease in our EBITDA this quarter, which, of course, it causes an increase in the gearing ratio. A few words about the financial effects of the 2 main events, both in Sabra with the factory adjustment plan and in -- and with the confectionary recall in Israel. As you've seen in our immediate reports and in this first quarter report, the effect of the confectionery recall for the first quarter was a decrease of NIS 64 million in net -- in our revenues, sales and a decrease of NIS 154 million in our operating profit and NIS 119 million in our net income. We projected a range of NIS 170 million to NIS 230 million net profit effect on the whole year of 2022. And if we recorded already NIS 119 million, you should expect another NIS 50 million to NIS 110 million net profit effect on our next quarters. And if you look at it logically, most of it should be recorded in the second quarter this year because as you all know, the second quarter incorporates the period that the factory is not working. We are losing potential sales, therefore, losing potential profits. And also, we will have to write off the sales and the inventory that we produced during the month of April. Therefore, you should expect the main effect of the remainder of our projection to be written in our Q2 results. This is with regard to the confectionery report. With regards to the Sabra adjustment plan, last quarter, when we reported the annual results, we projected a loss of $4 million to $7 million our share, 50% Strauss share on the first quarter. The actual result was a $4.5 million loss. Therefore, our projections were correct. For the second quarter, we reported this in our MD&A this quarter. So we project for the second quarter, a loss of $15 million to $17 million, our share, 50% Strauss' share -- $15 million to $17 million Strauss' share. And out of that, we expect to have $6 million to $8 million of onetime costs due to write-offs of inventory and reorganization costs and so on. So you should expect these numbers to appear in our second quarter results. And with regards to all the other activities, as you can see, all the other activities are behaving from a business and financial perspective normally. Therefore, you can expect the regular momentum and trends that you see and put your projections for the other activities. And we are happy to say that at least up until today, the effect of the Russia-Ukraine war on the results of Strauss Group both for the first quarter and from what we see from the 1st of April up until today, the 25th of May is not material. And therefore, it probably will not materially affect our second quarter results. I will conclude with that and invite all of you to ask a question.

[Interpreted] Thank you, Ariel. And we do have a question from Chris Reimer from Barclays. Regarding the confectionery factory in Israel, the Ministry of Health referred to minimum treatment closure. You have any option to reopen earlier if the necessary work is completed?

So we -- yes, the -- the Health Ministry closed the factory -- ordered the closure of the factory for up to 3 months, which will end at around the end of July. We are doing our utmost efforts to come back to production before that, together with the Ministry of the -- Health Ministry. And we are, of course, optimistic about that, but we cannot project the exact date of coming back to production. And once we can commit to such a date, we will inform you, of course.

[Interpreted] And there are a couple of follow-ups on this question. And following on that, and given the impact of the earnings for the quarter, are your previous estimates on the impact to net income for the full year still in line?

Yes, there certainly are.

[Interpreted] And another follow-up, do you have an estimate of the total cost of the recall and what happens if there are delays or any other constructions to reopen?

So the reason that we took an estimation, which is a range between NIS 170 million to NIS 230 million on the net profit is because we saw different scenarios, and we put the different scenarios in this range. Yes, there are scenarios whereas the -- going back to normalcy will take more time and be more gradual than we would prefer it to be. And therefore, the rate that this reflects the higher range. And of course, the lower range reflects our more optimistic scenarios. We cannot give you the total recall costs, but we gave you the total recall effect, which could include in it the recall cost plus the loss of potential profit and sales that will occur in the weeks that we are not producing in our factory.

[Interpreted] And the second question from Chris from Barclays is regarding Sabra. Looking at the U.S., can you elaborate on the work that is going on at Sabra plant? And can you give any more color on the time line? Will there be a ramp-up in time?

So with regarding Sabra, what we can say is that we -- again, we are optimistic that we will be able to come back to production in the second half of this year. We already are producing in half of our factory. So roughly half of our production is now being utilized. And we're building the inventory and really starting these days to save the inventory that we have built in the last couple of weeks. For the second half of the factory, which is still shut down, we will come to production for sure in the second half this year. We will do our utmost efforts to make it as soon as possible that we cannot commit to an exact time. And once we come back to production, again, it will take a few weeks or months to come back to total appearances back to what we were before the adjustment plan on the shelves in the stores. And we project that at the end of this year or the beginning of next year, we see normality or come back to normal activities in terms of run rate.

[Interpreted] And we have a couple of questions from Eric Liu of Harris Associates. Thank you, Eric. Why Israel Coffee margins down 600 basis points versus Q1 of last year? The margin in Q1 of last year were abnormally high, but why?

So the Q1 margins went down mainly because of the confectionery recall effect. Again, if we look at the operating margin, the effect of the confectionery recall was NIS 154 million on the operating margin, and it was roughly NIS 140 million on the gross profit margin.

[Interpreted] Ariel, sorry, the question was on Israel Coffee margins.

Israel Coffee, sorry, I thought Strauss Israel. Sorry. So Eric, back to your question on the Israeli Coffee. And yes, the margins with Israeli Coffee in the past, let's say, if you look at the average past 2 years, you can see that the margins were higher than what we are used to in the past. If you look at the years, let's say, 2015 to 2019, we can see that the Coffee -- Israel Coffee margins were usually between 18% to 22% on an annual basis. Of course, it fluctuates a little bit when you look at a specific quarter. Therefore, what we can say is that this quarter, the 22% margin is more reflective of the regular margin in Strauss Coffee Israel. Whereas, the first quarter of last year was due to many -- a few could be onetime effects, higher than usual. Also, there are the green coffee prices that were lower in the previous quarter and higher in this quarter that made this effect. But if we talk about expectations going forward, then the previous history reflects more -- reflects better the expectations going forward, meaning 18% to 22% is the average historical rate, and this is the average that we should expect going forward.

[Interpreted] And one more question from Eric. Have you identified a specific issue causing salmonella? What caused it?

Still it is fine. It's a bit tricky kind of virus or contamination, which makes our life much more complicated to find exactly what we call the smoking game. So now we are running thousands of thousands of samples in order to really understand if it comes from raw materials, from environmental, from one of each -- any of the lines. It will take another couple of days, maybe a couple of weeks in order to understand exactly. But yes, it's not sure, maybe in the end of the process, we will have a kind of a couple of speculation or assumption about the smoking gum. We hope not, we will find it, but it takes some time. So now we are almost more than 10,000 sampling, in all areas, in all the raw materials, all the finished goods to try to filter and to pinpoint. I hope the moment we'll get to now, we'll update you.

Thank you, Giora. I think there are no more questions at this point. I want to thank you all very much for participating. A recall of this Zoom will be posted on our website as well as all the other materials, and we'll be happy to conduct further one-on-one calls as necessary. Thanks again for joining us and see you next quarter.

Thank you very much.

Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]