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

[Audio Gap] People really endeavored quite a challenging year last year. The second platform that we're working on is transformation. As you know, the organization is going through a transformation to have a better future fit to our strategy. And this transformation is focused on 2 main areas: centralizing areas in our group to make sure that we have -- we are building the best center of excellence and make sure that we are achieving the maximum efficiency and optimization in our functions. So we're centralizing or we are in the last stages of the process of centralizing our operations, IT, HR, finance. On the other hand, we are focusing -- we want to focus more on being consumer-centric and therefore, building the right focus in our business units for that matter. And Raanan Kovalsky, the CEO of Strauss Israel will focus mainly on the sales and marketing side of our operations here in Israel. The last pillar of our program for 2023 is performance. We want to make sure that we are going back to our regular normal performance metrics. First and foremost, we must go back to our strategy plan. We must regain our performance KPIs and come back to what we targeted for the next 5 years when we issued our strategy at the beginning of last year. And certainly, this year, we will revise whatever needs to be revised in our strategy to make sure that we are heading on the right course for the next 3 or 4 years. The second item is productivity. We have initiated last year, at the end of last year, the ONE Strauss reorganization program, which in terms of productivity, should bring us a platform or a cost-saving platform of roughly ILS 65 billion to ILS 80 million that will be achieved finally by the mid -- the first half of 2024. We are going according to plan and everything goes as we planned for. But this is not enough. So we are focusing on additional productivity endeavors in many more channels, including procurement, logistics, revenue management, design to value and other supply chain areas. And we assume and believe that at the end of this year, we will come back to you with a more detailed plan and share with you our goals for our productivity improvement for the next 2 years. If we'll dive a little bit into the -- a few of the 4 major business segments of our group, Strauss Israel, we can see sales above ILS 1 billion. This is the first quarter that we exceeded the ILS 1 billion mark. And a nice growth of 7.6%. About half of it came from the price adjustment that we declared at the end of December and implemented at the beginning of January. So we've seen a full go through of this pricing in our first quarter results. And the second half close to 4% quantity growth and volume growth, which is very good news. And we can see that we are gaining market shares -- continuing to gain market shares also through this first quarter. We are also, on the other hand, continued to suffer from very, very high input inflation. Actually, we are not seeing, in the first quarter any reduction in the input inflation and this causes a deterioration and a decrease in our profitability -- gross profitability and then this deterioration goes down to the EBIT profitability. And unfortunately, also, if we look at the input prices after the balance sheet date up until today, the 30th of May, we can still see very high prices and even in some inputs and commodities, the prices went even higher than what we've seen in the first quarter. It is very hard now to say what will be at the second half of the year. And it seems like also the analysts' projections are somewhat divided on this matter. Looking at our confectionery business, we can see that we are regaining our share. We are regaining our sales, but still not achieving the full previous normal [ life ] platform that we've seen in the years '20 and '21. We have reached the 21.6% market share in the confectionery market in Israel for the first quarter. Actually, if we look at the StoreNext results for the month of May, we can see that we are continuing to regain market share, and we've reached the 23% mark. But still, we're not at the mark of where we were before the recall, which was roughly anywhere between 27 and 29 percentage market share. So roughly, we've reached 80% of the sales platform that was there before the recall. In Strauss Coffee, we can see good growth achievements in the first quarter, 10% organic growth, almost 20%, including the translation effect because of the devaluation of the Israeli shekel against most of the foreign currencies. And this organic growth is also divided roughly half with -- to price increases with the price increases of coffee that were made through the year of 2022 and additional 2 price increases that were made this quarter in Poland and Romania and the other half roughly is due to volume increase. Brazil continues its very solid momentum of increasing market share to 33.6%. In Israel, Coffee Israel, we see gross margins deteriorate or continue to erode because of the higher green coffee prices. Still a nice profitability for the first quarter of above 16% EBIT profitability, but erosion from what we were used to see in the years '20 and '21 and excellent results for our CEE countries with also improvement in our EBIT there for the first quarter. Strauss quarter is growing in sales about 3%. A slight slowdown in our growth rate that was between 5% and 7% in the previous quarters. This is little bit due to the inflation and the interest increase here in Israel, which contributes to the decrease of consumption of electronic machines and also our water machines. But still, we see a nice momentum of growth, just a slower growth here in Israel. Excellent results in Haier Strauss Water in China with almost 9% growth in sales and a solid net profitability of way above 10%. And -- and we continue investing in our infrastructure also in China, not only in Israel, and we approved the second manufacturing facility to make sure that we will have the right capacity for growth because the first facility -- manufacturing facility is reaching its capacity in the next couple of years. And also a very promising partnership with Culligan, the biggest water company in the world. We're starting our journey together in the U.K., trying to broaden our business there and build there a good solid business that will be relevant also in our profit lines in the next few years and then even considering to go outside of the U.K. to explore other geographies. Sabra and Obela, still challenges, lots of challenges in Sabra. Sabra is recovering, but the rate of recovery, as we said in our last quarter talk is slower than what we expected, and the rate continues -- of recovery continues to be slow, although there is a constant recovery all the time. We're gaining constantly market share. We've reached in April, the market share of almost 39%, but we're still very far away from our previous market share before the adjustment plan in the factory and the closure of the factory, which was roughly 60% in the past. Obela, we completed divestment of Obela in Western Europe, mainly Germany. Therefore, we are expecting from now on to see Obela breakeven or positive results in the future. Other activities, we're continuing our journey in cutting edge with cutting-edge innovation. We launched a new platform called the Strauss NEO. I'm sure we will be able to tell you about some of the initiatives that we have there in the next couple of quarters. So stay tuned. The Kitchen #2, our second kitchen hub opened, already invested into start-up full tech investments. But of course, the environment for start-ups today is quite rough and not -- we do not expect in the very near future any material rounds of money raising for our startups. And when we have to do that, of course, we delist from our balance sheet, those investments that we do not see their ability to continue to exist in the future. Having said that, the fair value of our start-up portfolio for today is roughly ILS 0.5 billion, which is quite nice and quite promising for the future that it will add a very nice economic value to the group. Shai Babad just joined me and just came. As we said, we apologize, we had a few misfortunes there. But I will let Shai to wrap up this part of the presentation, and then I'll continue with a short summary of the financial results.

Hello, everybody. I'm very, very sorry for the delay. We are running some tactic things today, which were urgent and we needed to take care of them. So I apologize for delaying today. Just to sum up the first quarter, major focuses as we see them and also looking ahead. One of the things which we started to do in this -- in the first quarter were to work very, very hard on productivity and to put a major focus on improving our productivity from understanding that although we are growing very much when it comes to our top line and the substantial growth, and we do see substantial growth also looking forward, we do see our margins being deteriorated. And therefore, there'll be a large focus on that. We already started that with working on ONE. The ONE initiative which will save between ILS 65 million to ILS 80 million. We'll see the full platform in quarter 1 of 2024. And adding to one was also the organizational change, which basically changed us from a holding company to one company, making the decision-making processes and implementation much faster and much more agile than it was before, whether we talk about finance, HR, operations or consumer centricity. And on the other hand, we also focus very much on portfolio optimization. This is something we started this quarter. We'll continue in the future to come. As you know, we already -- as we reported, we changed our partnership in the U.K., taking out Virgin, coming in with Culligan, making a new structure, new partnership, which we already see the seeds that we planned being giving some prosperity, a small prosperity that has started. And we see nice growth there. We also decided after many years of loss that we will go out and divest our Obela sales activity within Europe, and we took that out. We also sold -- we're in process of selling Serbia, our coffee business there. And as I said before -- and we also looked at our confectionery and took out some of the categories that were tails and that we saw that are not profitable. And we will continue to look at our portfolio. We will continue to look at optimizing our portfolio on the one hand; on productivity, on the other hand, one and the ILS 65 million, ILS [ 80 ] million, which we set to do is start -- it's an initial start. We're also looking at 8 different layers of revenue management, marketing and sales, design to value procurement, manufacturing, complexity and S&OP. And in all those projects that we are launching these days, we'll set out targets, which we will share in the near future regarding how we're going to increase the margins from the 8%, 9% we have today, to a much higher target getting us back to the average of the industry into places where we are in the past. So that we will work on the one hand, on continuing the 5% growth that we committed to in our strategy that we just published last year. So on the one hand, we will continue to grow 5% and above. But on the other hand, we will improve the margin drastically and we work with that. We do understand that price increase will not cover everything that -- all the erosion that we had in the COGS, in the cost of goods. And we do understand that beside increasing prices and increasing prices internationally is easier. In Israel, it's higher, it's -- we have more obstacles in increasing prices here in Israel. So we do understand that a lot of improvement in the margins will come from productivity and will come from portfolio optimization, and we are working on that very, very hard. Another thing which is very important also to note, we started this quarter, it will continue in the next quarters is our investments, our CapEx. Our CapEx has drastically increased. We are putting a lot of investments in core business in infrastructure, in our factories, in our logistics warehouses and we will continue to upgrade them from an understanding that if we want to be more productive, if we want to be more efficient, we need to make sure that we upgrade our infrastructure in a substantial way. So that's one stream that is already in place. Another stream, which we started already in place and will continue with us in the next quarter is also our IT strategic investments. We are investing a lot, almost, I think, doubled our investments in IT with putting a big attention on moving into cloud, on data gathering and data analysis, on digitizing our plants and our supply chain and our warehouses and bringing much higher level of digitization and IT system into our infrastructure, into our business. And I think that [indiscernible] today investing in IT and investing in infrastructure is something which will assist us a lot in being more productive and also much faster when it comes to innovation and entering new categories and improving our portfolio. So those are the major highlights when it comes to the first quarter and also looking ahead, but we are talking about -- as I said, we talked about productivity, we talked about ONE, we talked about portfolio optimization and also investments in CapEx in infrastructure and IT. And on the other hand, we will continue our growth. Last and not least is, because the world is changing and because the economic environment is different than what was a year ago, whether we look at inflation, whether we look at regulation in Israel, whether we look at interest rates and looking at the international arena, whether we look at coffee prices, so we will revise our strategy, and we will look at what we committed. We are not going to change the 5% increase, but we are going to look and focus more and give directions, more concrete and more focused directions than what we're going to do in each geography, whether it's Brazil, whether it's the U.S., whether it's China, whether it's Israel, those geographies that we said that we're going to focus on. We are going to set specific targets for them and revise and see that through everything that changed macroeconomic, do we still set the same targets? Do we still aim the same directions? And specifically in Israel, we are going to look at things because -- and due to everything that is happening now in Israel. So those are the major focuses that we did focus in quarter 1, and we'll continue to focus in the next few quarters. And you will see that going ahead, some of the things that were done here in the first quarter will also come into place in the next couple of quarters.

Thank you very much, Shai. Let's continue with a very brief summary of our financial results. So if we look first at our sales, we can see that our sales increased by 12.4% and organically taking -- neutralizing the translation effect, almost 8%, we can see that we grow in all of our businesses and roughly half of the organic growth came from price increases, both in Israel and abroad, and the other half came from volume increases. And what we can see that, on the other hand, gross profitability eroded with relation to the comparative years of '21 and '20. We were used to see gross profitability rates of almost 40% in the first quarter, and now we've reached only about 33%, and this erosion is happening in all of our business segments due to the high inflation of our inputs. We can see that this erosion is going down to the EBIT margins, where our EBIT margins are much lower than what we were used to see in previous quarters in '21 and '20. And this is mainly due to the -- again, the increase in input inflation and also due to the fact that a recovery in Sabra and in the confectionery was not -- is not completed yet. If we look at, specifically at the 4 business segments, we can see that in Strauss Israel, we are almost at the same platform, absolute monetary platform of EBIT profit. The difference between the current platform in the first quarter of '23 to the previous platform in the first quarter of '21 and '20 is mainly due to not gaining back our 100% profit platform in our confectionery division. If we look at the coffee, we can see that the first quarter EBIT platform is roughly the same as we've seen in previous first quarters in last year. But the main difference between this quarter and the first quarter of '21 and '20 is that we are missing profit in Strauss Coffee, Israel because of the very high green coffee prices that eroded our gross profitability in Strauss Coffee, Israel. If we look in -- on Brazil for the first quarter of 2023, we can see -- we can see that the sales grew only by 1%. This is mainly due to a price decrease compared to the first quarter of 2022. In the first quarter of 2022, we increased prices very sharply -- selling prices very sharply, more than the increase in the raw materials, the green coffee prices, therefore, resulting in very high sales and very high profit. After the first half of 2022, we lowered the prices to normalize the selling prices and make them more correlative to the input green coffee prices and therefore, comparing the first quarter of this year and the first quarter of last year, we see a very small increase in sales, which is mainly due to an increase in volumes in Brazil. And therefore, you can see the nice increase in our market share in Brazil. If we look at the gross profit and gross profitability in Brazil, we can see that the numbers are roughly the same this quarter and the previous quarter -- the first quarter of 2022. And the main reason, again, is that we are now on a lower selling price platform, and therefore, the gross profit is not increasing. The first quarter of last year was a very high selling price platform that was not sustainable. And going down to our EBIT margin, we see 2 effects. The first effect is normalizing the gross profitability and gross profit in Brazil. And the second effect is an increase in our marketing and selling expenses in this quarter due to seasonality and due to the fact that we launched a program to increase our distribution system in Brazil, and we expect to see the results of increasing the distribution system in adding a lot of new selling points for our business in Brazil and therefore, increases -- increasing our growth rate in the future. So we will see the fruit from this increase in the OpEx in Três Corações. Having said all that, we can still see that our profit is more than doubled than what the profit -- the EBIT profits that we were used to see in '21 and 2020, we are in a new zone of profit. As we said last year, we are -- we roughly doubled or close to doubled our profit platform in Brazil, and we will continue to make sure that this new platform of profit will go on for the next years. Sabra reached only -- as you see here, in terms of sales, 2/3 of her normalized sales platform, as you see in '21 and in the first quarter of 2020. So this is not enough to give us the right -- the good leverage to be profitable. And therefore, we were only breakeven this quarter in our profits in Sabra. And last but not least, if we look at the Water China, again, very nice growth rate in the top line and bottom line, net income profitability much higher than 10%. And by the way, the decrease of profits compared to the first quarter of '22 is because a onetime government grant that we received in the first quarter of 2022. So we are very pleased of our results in terms of profit and sales in higher Strauss Water China. Last slide, if we look at the net profit, we can see the recovery that we've seen in our EBIT line going down to our net profit. But still, in terms of profitability, we see there's an erosion of profitability. And the main icon for this erosion is, first and foremost, the continuing very high inflation in our inputs. And second, the fact that we have not came back to our normalized platform of activity, both in the confectionery business and in our Sabra business. Looking at our net debt-to-EBITDA ratio, the ratio remained the same as it was at the end of 2022, around 3%, 3.1%. The causes for this ratio to be high is the fact that our EBITDA is very, very low. We have -- we put in this KPI, the EBITDA of the last 12 months. And therefore, the EBITDA contains 9 months of 2022, which was a very low result EBITDA, affecting very much this high leverage value. But going forward, we expect at the end of this year to reach 2 or even lower gearing rates because the EBITDA will be normalized. And because we do not expect our net debt to rise anymore. We have enough sources to fund our activities in the group. I will stop here, and let's share the last few minutes for a few Q&As.

Thank you, both, Shai and Ariel. And yes, we have a couple of questions from investors. I'm starting with Chris Reimer from Barclays. First one is what's the time line for the Serbia divestment? And are there more similar divestments in the pipeline? Are you guys with us. Seems like you're frozen...

An authority in Serbia will decide and give an approval to the deal. We hope they will, but we are waiting for it. Only after that confirmation, we'll be able to move forward...

Shai, just start, please from the first sentence because you guys were frozen. We didn't hear the beginning of your answer.

From start again. The deal is pending, the approval of the Serbian competition authority. Till we have that approval, we can't move forward. Right now, all the material has been sent to the competition authority in Serbia. They will have a look at it, something like that from what they told us something that we can guarantee, you can take something between 2 to 4 months. Hopefully, it will be done quickly, but we can't say more than that at the moment. Regarding are we foreseeing any further divestments? So I will say this. As I said before, when I summarize the presentation Ariel gave instead of me here, I would like to say thank you, Ariel for covering for me. We all -- we are going to look very, very thoroughly at our portfolio and decide how do we optimize our portfolio and what are the businesses that are in line with our strategy, in line with the margins and the profitability targets that we set to ourselves, in line with the future growth that we are foreseeing and targeting. And anything that will fall under that will continue. Anything that we'll think that doesn't fall under that, then we'll have 2 options. One, fix it and see if we can get there. If we can't, then we'll divest. So everything is open. We will continue to optimize our portfolio. But more than that at the moment, unfortunately, I can't say.

And the second question from Chris is the net debt-to-EBITDA ratio has increased steadily over the last year. What is the company's view on the higher debt level in terms of sustainability? And is there a plan to lower it? So I think, Ariel, you kind of answered that question, but maybe just a one line or if you have something to add.

Yes. I think I answered that question on my last slide presentation. Just to say -- to add to that, that we will -- once we normalize our EBITDA platform, therefore, at this point, we believe that our gearing rate will be back to normal or the normal rates that the Strauss Group used to have roughly around 2. And with relation to our net debt, we do not see any reason for an increase in the net debt. We will know to bring our sources from other places i.e., improvement in our profitability, improvement in our optimization, in our cost structure and if we need optimization in our portfolio and other divestments like we've done in Serbia.

Great. Thank you. And we're moving on to David Kaplan from Psagot. First question is quite lengthy. If I did my math right, it sees the price increases in the local market versus Q1 2022 led to a ILS 37 million, 3.8% of the ILS 74 million increase in revenues compared to the same quarter last year, which was entirely offset by the approximately ILS 40 million increase in input inflation. Can you confirm?

Roughly, it is correct.

Great. And the second question from David is, what is driving customers in CEE, in Central and Eastern Europe to buy more coffee?

So what we see in Central and Eastern Europe, we see that consumers do not buy more coffee. They buy coffee, okay. They consume coffee. As they have consumed coffee before, we see our position there strengthening, okay, which means that on average, we are having very good innovation and good business programs in place there. And what I can say, which is not surprising to us, but might be surprising to people who are not familiar with the coffee industry. Although we are seeing dozens of percentage of increases in coffee prices, selling prices to consumers, we are not seeing any major decrease in volume consumption, okay? Maybe in some places, 1% decrease, 2% or even an increase in volume consumption. Therefore, this is very reassuring, but we have to say that this is what we see in the coffee industry for the past 3 decades. So it's not a new phenomenon.

Great. And the final question from David today is, what are the challenges that Sabra is facing in getting back on the shelves in the U.S. Sort of a freeze there again...