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

Hi, everyone, and thanks for joining us today. Welcome to Strauss Group Third Quarter 2022 Results Virtual Conference. Following management's presentation, we will conduct a Q&A session. [Operator Instructions] As a reminder, this online Zoom conference is being recorded Monday, November 28, 2022. I would 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 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 identified in the documents filed by the company with the Israeli Securities Authority. Online today are Mr. Giora Bardea, CEO of Strauss Group; Mr. Shai Babad, who will commence as CEO of the group this coming Thursday; Mr. Ariel Chetrit, CFO of the group; and myself, Daniella Finn, Director of Investor Relations. Before we start, I would like to welcome Shai to Strauss Group and wish him the best of luck. Shai, please go ahead and introduce yourself.

Hi, Daniella, thank you very much for introducing me. It's a pleasure to be here with all of you. I'll just give a 2-minute short brief about myself, and then we'll move on. So my name is Shai Babad. I'm 46 years old. I live in Water Sharon and the proud father of 3 daughters. My eldest is 6 years old and my youngest is 1.5 years, and the center one is 4.5 years old. Before joining Strauss, I was the CEO of the holding group called Blue Square. It's a big holding group in Israel that holds real estate, retail, energy, public transportation and more. Before that, I was 7 years in the Israeli government, 5 years out of them as the CEO of the Ministry of Finance of Israel and then 2 years as the Head of the Israeli FCC, which is equivalent to the Federal Communication Consul, the regulator for broadcast television and radio station. Before that, I was 8 years in ZIM shipping company, I was started there as the Head of the Budget & Economic Division and then later on assumed the role as CEO of ZIM Israel & Near East, responsible for 23 countries in the Mediterranean, including Israel. Before that, I worked a little bit for strategic consulting. I was also working for APEX, the VC and started my way as a lawyer. So this is kind of a brief on my resume and my professional career. And I'm very, very happy to be here and join the group.

Thank you very much. And we, of course, wish you all the best of luck in your new role. As usual, we will start with a recap of the quarterly results by CEO, Giora Bardea, and then move on to the financial highlights for the quarter presented by CFO, Ariel Chetrit. Giora, please go ahead.

Good morning, good afternoon, everyone. So first of all, Shai, welcome to our family, to our company.

Thank you very much.

And I am sure, you will take it far, far away. So thanks a lot. A short brief about our third quarter of Strauss Group. The result of this quarter are heavily impacted by 3 major phenomenons. One is still the adjustment plan in Sabra, United States, the hummus company and the recall in confectionery here in Israel. Second is the inflation. And the third one is the growth, very impressive and organic growth. A couple of words about each one of them. But let's first talk about the recall and the Sabra adjustment. We nowadays, mid or end of November, we feel much more better about the recovery. In Sabra, all lines in the factory in Virginia are already working and products are on the shelves in all the United States. Still, we have a couple of retailers that we need to continue to negotiate, but the majority are already there. We can see that last week, the market share of Sabra, we achieved a 34% market share, which is #1 brand in hummus in United States. Don't forget, we start every -- in around May with 5% market share after the adjustment plan and closing the factory. So here, United States, we feel comfortable with Sabra. In Israel, the confectionery recall, same-same, but a bit slower. During the last couple of weeks, we fixed the lines and now we feel much more stable with our manufacturing lines and older procedure in the factory. Last week, we announced about debt to the market product from the factory because we saw during the last couple of months, we saw a lot of products were outsourced. Nowadays, we sell product in addition to the outsourced. We sell products from the factory, and we feel and we learn that the consumer and the customer here in Israel, they accepted the product and the market share of a couple of products that are already there are at the same level as before the recall. So we feel comfortable, but slowly, slowly. It will take another couple of weeks until we have all the lines, all the brands on the shelf. Second, which is very challenging is the inflation. In our diverse profile -- portfolio in Israel, out of Israel, different category, we're struggling or we're challenging the inflation in a different set of action. Out of Israel and mainly the coffee and in Sabra, we can increase price. And you can see from the results that the Coffee company doing amazing out of Israel because they can cover the inflation of green coffee and other element of pricing with a price increase. In Israel, it's much more challenging. So we take a different set of actions and measures like a lot of productivity, project change some of the portfolio, and we are working very, very hard to close the gap even in Israel, about the inflation. It will take some more time, but we'll do. The third one is about our growth. Out of the homes in the United States and the confectionery Israel, all the rest of our business units in Israel and out of Israel are having very impressive growth. In Brazil, in East Europe, water company in Israel, China and U.K. and in Israel, of course, the dairy business, the salads and food business and the salty snacks. They all having organic growth, which bring us the safetiness and the feeling that we are on the right categories, with the right brands, with the right momentum. Last but not least, we continue to re-insist and we talked on that, I believe, in the last quarter and the quarter before, we insisted to continue our strategic plan. On one hand, to manage the crisis and the challenges, but on the other hand, not to forget that we are talking about a company that are 80 years or 85 years old, and we should look forward. It means that we continue to invest in CapEx in refractory digital, cyber, a lot of technology, food technology in order to be ready and to build and to have the right capabilities and infrastructure that will fit and take the company to the next level in the future. Not to stay and wait until we'll complete the recall and the Sabra, but at the same time, to manage both taking care about the challenges and take the company to the next stage. So this is a short one, and I hand over to Ariel to deep dive about with the numbers.

Thank you very much, Giora. Good morning, good afternoon to everybody online, and thank you for joining its conference. I will begin with a short brief of the financial results for the third quarter, and we'll start with the top line. The group grew 8.5% this quarter in sales. And we can see that most of the growth or most of the sales this quarter, more than 50% come from the Coffee, Strauss Coffee segment. This is mostly due to the price -- selling price adjustments that we have made in Brazil and in Central Eastern Europe through the last year. And on the other hand, we can see the smaller parts in sales that come from Strauss Israel and the dips and spreads segments mainly due to the decrease in sales that we have experienced in Sabra and confectionery due to the confectionery recall and the adjustment plan in Sabra. If we look at the whole group, we can see that we are in line with our strategy plan for growing more than 5% on a CAGR base in the top line. We grew more than that, even taking into consideration the decline in sales that we have experienced in Sabra and the confectionery. And if we look at the different businesses here in this bridge, we can see that in the middle of the bridge, we can see the different businesses on an ongoing basis, taking aside, you can see on the right-hand side, the Sabra and confectionery negative effect. So if we look at the rest of the business, we can see very solid and high growth in all of our businesses. This is in the coffee; we can see a 33.5% growth. It's important to note that, yes, a big chunk of this growth is due to the fact that we increased selling prices in Europe and Brazil in the past year, but we are still growing in volume in all of the countries. It's important to note that because we can see a very solid demand to our coffee products all around the world. And we can see that even though we have increased our prices in double digit and in some places, dozens of percentage have increased, we still do not see a decline in the volume of our sales, which is a very positive sign. If we look in the middle, we can see Strauss Israel without confectionery, and we see that we are growing 3.8%. I can tell you that we are growing in all of our categories and segments in Strauss Israel, putting aside the confectionery division. And we're not growing only in our financial results. We are also growing in our market share. This is the 7th consecutive year that we are growing in Strauss Israel in our market share. This year, of course, taking -- putting aside the confectionery. And it shows how we are robust in our market and position with our different brands. We are also growing in our market share in the different coffee geographies. This is also very important to mention. In Brazil, we have reached already 32.5% market share, and we are -- we have grown in our market share in most of the Central European countries this -- for the past 9 months. In Strauss Water, you can see here the sales of mainly Strauss Water Israel and also contributing -- a small contribution are the sales of Strauss Water U.K. and we are growing by 9.5%. And this is, again, the fourth consecutive year that we are growing on an average of more than 7% CAGR in -- on our sales, increasing constantly our customer base in our Water segment. If we look at the gross profit and gross profitability, we can see here the 3 main challenges that we are experiencing these 9 months and especially this third quarter. First, the confectionery recall was resulted in losses -- in operating losses also this quarter. And we decreased in our gross profitability this quarter due to this effect. We also -- you can see a decrease in Strauss Israel gross profitability this quarter due to the inflation that we're experiencing in all of our categories, but mainly this quarter in the raw milk prices, which increased by 15% this quarter and influenced our health and -- health segment. And we -- although we're growing sales in this segment by 3.2%, you can see that we have decreased in our gross profitability and our EBIT. And in coffee, we are maintaining our gross profitability after increasing our selling prices for the past year. So we can see that we are stabilizing in our profitability. And if you look in our financial statements at the EBIT profitability, we can see that the coffee segment profitability grew by 1 percentage from 10% to more than 11% this quarter. If we look at the EBIT bridge for this quarter, we can see at the central part of the bridge, the very large increase in our operating results in Strauss Coffee, ILS 52 million. This is partially, we declined in our operating results in Strauss Coffee Israel, but we have increased much more than that in our operating coffee results for Brazil and Central Eastern Europe. We can see, again, a third quarter of phenomenal results for Brazil, which is -- you can see it all over the P&L and we are experiencing a great quarter in Central Eastern Europe, both in top line and bottom line. For all of you who want to extract the bottom line of Central Eastern Europe, you can take the business -- the coffee segment results and subtract on that the Israel coffee results and the Brazilian results that are -- we report separately, and you will reach the Central Eastern Europe EBIT results for this quarter. And you can see that they have increased substantially. The ILS 65 million decrease here represents our [ TKH ], the Kitchen FoodTech hub activity. Last -- the third quarter of 2021, we saw Aleph Farms, one of our portfolio companies, which had a very large fund raise, which was done according to a value of $300 million. We recorded an accounting profit, onetime profit of ILS 72 million in the third quarter of 2021. And this quarter, we haven't recorded any capital gains from our kitchen portfolio companies. And therefore, there's a big difference quarter-over-quarter. And on the right-hand, you can see the losses compared to the third quarter of 2021 in the confectionery and Sabra due to the recall and the adjustment plan. If we look and how all that translate into our net income, our net income for this quarter is ILS 35 million compared to ILS 204 million in the third quarter of 2021. The main difference here is the 3 -- let's say, a temporary activities, which were -- which influenced our results for this quarter very substantially. The confectionery influenced the net income by ILS 71 million, the Sabra decline in net income was around ILS 36 million, our share -- Strauss Group share and Kitchen FoodTech hub quarter-over-quarter difference was about ILS 65 million. This all amounts to around ILS 170 million, which also means that if we take aside these temporary events, our net income is stable compared to the previous quarters. And if we look at our gearing rate, we can see an increase in our gearing ratio. This is due to some increase in our net debt. We had a lower operating cash flow due to the Sabra and confectionery events and we have to increase our net debt a little bit. But the increase in our gearing ratio is mainly due to the decrease -- a sharp decrease in our EBITDA for the last 12 months. This is expected to be lower in the next quarters as the EBITDA recovers gradually and sometime in the second half of next year, we expect to return to circa 2x net debt-to-EBITDA as we were before in previous years. I will stop here and leave the room for questions. You can ask them directly or through the chat.

Excellent. Thank you very much, Giora and Ariel, and we do have a few questions. And the first question is from Chris Reimer of Barclays. Thank you very much, Chris. How should we be looking at margins going forward considering the inflationary pressure and what, if anything, are some actions that the company can take to protect margins? That's first question.

Okay. Thank you for the question. First of all, what we are doing in order to really meet this very big challenge of high inflation in commodities and all the other inputs is -- first of all, we are increasing our productivity efforts. We have just reported a few weeks ago about the reorganization that we are commencing in our -- in the group. This reorganization is mainly an artifact of 2 main, let's say, reasons and goals. One of them is adjusting our operating model to a strategy that we have reported and launched in March this year. And now we will operate in a model that allows us to grow in the right areas, both organically and inorganically focused in the 4 geographies that we have highlighted in our strategy. And the other goal is to be more efficient, be more agile and build a more lean cost structure. And therefore, this plan is expected to reduce our cost platform by ILS 65 million to ILS 80 million. We will enjoy a small part of this reduction in 2022. The main substantial part of this reduction we would see in 2023 and maybe the last tail of this reduction we will experience in the first quarter of 2024. This is one thing that we are doing in addition to the regular productivity activities. We are not stopping at this and we are planning to continue our productivity efforts after reorganizing in our new operating model next year and to increase our productivity efforts. Of course, abroad, as you can see, we have increased our selling prices. And now we have caught with the increased inflation in our input, and you can see here that we are stabilizing in our margins and increasing our absolute profit very substantially, both in Brazil and in Central Eastern Europe. So we have really met our challenges there. And we can see that now in the past 6 months, coffee -- green coffee prices are stabilizing. And therefore, we believe that we are in the right platform of both costs and selling prices to continue growing in volumes in the future there. And as you know, we cannot address other plan for our future in the Israel geography, we cannot talk about our plans for pricing in Israel. We -- and therefore, once -- and when we will have anything to update you, we promise to do this once it happens. And hopefully, we will meet all the challenges and you can see how we manage our profitability for next year.

Thanks, Ariel. Actually, the second half of Chris' question was addressing that program and the impact but you've already answered that. So I'll move on to Chris' next question. And that is, when you refer to almost full production at the confectionery facility, what does that mean? And looking forward, could you still see impact into 2023?

Okay. So we are -- as we speak today, the 28th of November, we are almost in full capacity in our confectionery plants, working in 90% of our lines in 3 shifts and producing the daily amount that, let's say, it's 90% to 95% of our expected capacity there. So we're almost there. Next month, we believe that we will be there 100%. This is production-wise. As Giora explained, we are building our inventories. These days, as we speak, we are starting to relaunch our flag products, our main products chocolate bars and chocolate snacks, and we are relaunching them into the market. And the very first results of relaunching individual products into the market, they look promising, but it's still a very early stage. We still have a lot ahead of us. With that, our next step will be to reach a balanced operating profit. We do not -- we cannot say now when it will be. But certainly, we are aiming for it to be as soon as possible because we are reaching a minimum amount of sales that is needed to reach this balance. And afterwards, any increase in sales will result in increased profit. So we are looking very optimistic on next year, but still, we have a gradual journey ahead of us.

Thanks, Ariel and thanks, Chris. The next questions are from David Kaplan from Psagot. His first question is very similar to the last one. So I'm not quite sure if there's anything to add, but how quickly is the confectionery getting back up to speed. If you could say as a percentage of capacity, well, that would be great.

So I told you, I think 90% to 95% will be there in December. And production-wise, we have reached the stability that we want to reach. Still, the big challenge is to meet the market, and we will meet this challenge in the next few weeks and months. We are very optimistic about it, but still we have to wait patiently.

Great. And David's next question is, are you taking the opportunity to rationalize and optimize the product line?

We sure have. We've done that both in Sabra plants and in the confectionery plants. We are optimizing in rationalizing by a few, let's say, kinds of actions. First is the right distribution and the right share between outsourced products and in-source factory produced products, longer batches and longer production times in the lines, making sure that our Pareto products are produced in the factory and all of these actions are making sure that we are much more efficient in our production and where we can leverage our let's say, capabilities or the demand -- meet the demand by outsourced product, we are optimizing that now.

Excellent. The next question from David is on coffee. How much of the recent increase in commodity pricing will translate into increased sales? How much is mitigated by derivatives transactions?

So as I said before, in the past year, we have increased our selling prices in coffee outside of Israel, Central Eastern Europe, all of the Central Eastern Europe countries. And in Brazil, by a very -- a double-digit amount depends on the double-digit percentage, depends on the country. And we have caught already in this quarter, finished catching up with the input of green coffee price increase and energy increase. And therefore, we have stabilized our margins in all of the coffee countries. Now since we are growing in volume, we can see a very large increase in absolute monetary amounts in our sales and profit and -- so this is with relation to the -- to catching up with the commodity input increase. With relation to hedging, we have a hedging policy with all of our commodities. In coffee, we usually hedge anywhere between 4 to 12 months depending on the situation. We are increasing our hedges when coffee prices are attractive, and we are decreasing our hedge time when coffee prices are at their peak, and this is exactly what we're continuing to do.

And the final question from David is can you talk about the recent reorganization of business lines and explain why that more optimal -- those are more optimal than how things are structured -- restructured previously? And we've certainly answered that, but maybe if you can go a bit more into detail.

Yes, I partially answered that. But what -- again, moving part of the product to outsource clears the fields in the factory to produce our main products with long batches and very short stops between each and every production. Before that, we had hundreds of SKUs in our factory that were produced in short batches. And this is a very, very major factor that increases our profitability or our efficiency in the production lines.

Ariel, I think David was referring to the reorganization, the restructuring program across the businesses here at Strauss?

Okay. So the restructuring program is not only related to production, okay? The restructuring is related to the whole strategic operating model. So we -- what we are doing is we are -- in many places, we are decreasing our layers, managerial layers. We are increasing our stand of control of managing people. And by that, we are making the organization much more productive, much more agile, and we are reducing our FTEs by doing that. On the other side, we are putting the -- we are building the right positions in the different places to fit our focus both abroad and in Israel. So in Israel, we are building one operating division that will professionally manage all the operating activities in Israel, and we believe that this will bring a lot of additional future efficiencies into our supply chain in Israel.

Thank you. And we have a final couple of questions from Martin Deboo of Jefferies. Martin is looking to drill down on the drivers of coffee division growth. What are these drivers?

So the drivers of the coffee division growth are everywhere, actually, both in Brazil or Central Eastern Europe and in Coffee Israel. First and foremost, innovation, okay? We are bringing new products and we are entering new coffee segments, the capsules and coffee machines and beans, which are very strong in some European countries. We are experiencing a very nice growth there. We are continuing to invest in our big brands, traditional brands in Israel, in Brazil, in Europe, roast and ground coffee where we are successful at it, and we can see also there a very nice growth. And in some places, mainly in Brazil. This is part of our strategy. We are entering other segments that are not coffee in order to expand and leverage our capabilities there.

Thank you, Ariel. And the final question from Martin from Jefferies is how does Strauss view the entry of Carrefour private label into the Israeli market?

So first, of course, we look at every newcomer, private label competitor into the market very seriously. And of course, we plan to do our best in meeting the relevant challenges. But we don't see it as a material issue. We believe -- we know -- we've seen that in the past, and we believe that it will happen also this time. We believe that the retailers have their win-win situation where they have a very strong branded product in every category on the shelf. #1 and number -- sometimes also #2. And next to that, they're private label. And we've seen that with all the big chains retailers in Israel, and we expect to see the same with Carrefour. Of course, they will bring their private label very strongly. But next to the private label, they will want to have the #1 or even #2 branded products and Strauss Israel have almost in all the categories in market share, which puts us in the first or second place. So therefore, we feel very positive about, let's say, co-living with the private brand of Carrefour in the future.

Just a follow-up on that, Martin says that, for example, we are seeing reports that Carrefour coffee capsules have taken a 40% market share in Israel. Is that credible in your eyes?

I don't know these numbers. But what I know is that our capsule share in the retailers in Israel is roughly 50%, 5-0, and we are maintaining this market share through this...

5-0 without NESPRESSO.

Yes. 5-0 in the retail, in the retail, okay. NESPRESSO, we don't have official numbers. So we cannot say because they're not selling through retail. But in the retail, we are 5-0, 50% of the market share, and we don't see a decline there. So if Carrefour are doing these numbers, then maybe other brands are suffering, but not Strauss coffee.

Okay. Great. I think there are no more questions at this time. So I want to thank everybody for joining. And I'd also like to hand it over to Giora just to say a couple of departure words. Giora, please go ahead.

Just to say thank you so much for your partnership along the way. I'm here, I'm leaving after 25 years. And maybe some of you guys are joining or investing in the days of Elite and then Strauss. So thank you for the partnership and being our [indiscernible] belief the way and I'm sure that at Strauss and Shai, Ariel and Daniella and the rest of the team will continue to be -- to build a relationship and trust among you. So thank you so much.

Thanks, Giora. And we, of course, wish you the best of luck in your future endeavors. Shai, best of luck from us, leading this fabulous company. And to all our investors out there, thank you very much for joining us today. We look forward to connecting with you next quarter. A recording of this conference call will be available on the website at a later stage. Thank you very much.