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

Hi, everyone, and thank you for joining us today. Welcome to Strauss Group Fourth Quarter and Fiscal Year 2023 Results Virtual Conference. Following the formal presentation, we will conduct a Q&A session. Please feel free to post any questions you may have in the chat box or send it to me via e-mail or whatsapp. As a reminder, this online Zoom conference is being recorded Tuesday, March 26, 2024. 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 early 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 demands for our products, the timely development of our new products and their adoption by the market, increased competition in the industry and price reductions as well as due to risks as identified in the documents filed by the company with the Israeli Securities Authority. Online with me today are Mr. Shai Babad, Strauss Group's CEO; and Mr. Ariel Chetrit, Group's CFO; and myself, Daniella Finn, Head of Investor Relations. As usual, we shall start with a recap of the quarterly results by CEO, Shai Babad and then move on to the financial highlights of the quarter presented by CFO, Ariel Chetrit. Shai, please go ahead.

Thank you very much, Daniella. Thank you very much, everybody, for joining us today. We can't start talk about 2023 without mentioning the fact that Israel is still in a worse situation. Unfortunately, we still have 134 hostages who haven't come back home. We still have our soldiers fighting in Gaza. And for the past 6 months, Strauss as well was much involved, very much involved in contributing to the civil efforts in this war. We've tried to impact with our products more than 600,000 people. Our people have donated more than 8,000 hours. We've donated more than 4 -- almost 4.5 million products that we gave to soldiers to people who were evacuated from their houses, to people who are injured. We had partnered up with NGO Israeli Organization that aided and assisted people who were affected by the war. And overall, we contributed something like -- we donated something like ILS 17.5 million or ILS 18 million in all initiatives during the -- since beginning of the war and going forward. Here, I just would like to say a prayer that all hostages will come back home, all soldiers will come back safely -- thank you for that, safely back home and that the war will be over as soon as possible. And I thought that you can't talk about '23 without mentioning that major part of our lives. Today, we will try to talk about as a little bit -- talk about the results in the numbers of 2023. And we'll elaborate more on the financial results. And I'll also elaborate a little bit about the strategy update that we gave today. We approved it yesterday in the Board and we issued our update to -- we issued our updated -- yet, we issued our update today this morning. So I'll start with the numbers. We are talking about in Q4, a continuous growth of almost 5% in sales, yet margins are still low and still declining due to major effect of cost of goods and inflation that we are hitting. If you look yearly, it's the same phenomenon. We have reached almost ILS 10.5 billion for the first time. We've reached almost ILS 10.6 billion in revenues, and we crossed the ILS 10 billion revenues with organic growth of more than 7%. By the way, this is in line with our strategy to grow 5% CAGR each year. We are exceeding that. So on the one hand, very good sales all across our organization. But on the other hand, when we look at gross profit and specifically EBIT margins and net margins, they are still relatively low for the reasons I mentioned before. If we look at by company segments, so Strauss Israel operations did quite well with revenue increase, a substantial revenue increase, but -- and also a huge increase in profit, but the profit here is a little bit misleading from the minus ILS 22 million we had in 2022 is due to the, of course, they recall that we had in the confectionery, so Strauss Israel is recovering and getting back on track, but still margins are below the double digit and relatively low because of cost of goods. If we look at Coffee. Coffee has decreased from last year, mainly because of cost of Robusta green coffee prices, which have continued to erode this year, although the expectations were that they will decrease and maybe Brazil in the fourth quarter and I will elaborate on that a little bit more later, we -- our results even -- our margins even deteriorated even more because the expectations were for green prices to reduce at the end of the day, they increased and we have us and the competition have reduced prices and eventually, that resulted in decreasing profits and decreasing margins. And that affected our Coffee company all across. When we look at Sabra, so there's a positive result, a small positive results, but it's mainly due to the insurance -- onetime insurance we have received of ILS 42 million. So if I take that out, there is an improvement from the minus ILS 100 million or above ILS 100 million. But still, although we managed to get back on shelf and managed to get 40% market share back and to be the market leader, Sabra was a very strong brand. We have a cost structure of a plant that is not -- that is too big for the size of the business that we have today. The plant can produce 110 million pounds or 120 million pounds a year, and we are selling today 60 million pounds, 70 million pounds a year. We understand we're a not going to get back to 60%, 65% market share that we had before. The retailers have told us that -- when we have the conversations with them they took us back and it will take us back, but they are going to distribute the -- distribute their share between 2 to 3 different players and not to remain only with us or just their private label. And we see that this phenomenon is all across the retailers in the U.S. And that, of course, will affect our ability to get back to the 60%. And therefore, we will adjust and restructure the business to get back to profitable -- profitability, high profitability. When we look at the Water, our Strauss Water company. So more or less, we did like last year, there is a small decrease from last year, mainly due to Water business here in Israel due to the war and due to the jurisdictional reform that was before the war, sales of white goods have decreased in Israel, and that, of course, had also an impact on our Water business as well. So that's overall how we conclude the results of the company, but at the end of the day, 7.3% margin. Our plans were for 2023, we're under 3 main streams, recover streams that how do we take the underperformance and turn around, how do we build back trust, on the performance side is how do we build the new growth engines and how do we improve profitability, and on the transform side how do we change our operational structure, to change the way we operate and also increase the level of quality of food safety. So when we look at recovery of underperforming business and here is, I spoke a little bit about this about Sabra and Obela before. So you can see we're getting back to margins of 38%, 40%, but yet we understand we're not going to get back to those 60s, we're probably aiming to get to somewhere between 45% and 50%. And that means we'll have to restructure the business, restructure the cost of the business in order to bring back profitability. When we look at our confectionary, here the story is a little bit better, we are getting back to almost the same market shares that we had before, concentrating on much less SKUs than we had before, actually 1/3 of the SKUs on the products that we had before, and which are much more profitable. But on the other hand, cost of cocoa, cost of goods at operational cost inside of the factory are affecting still the margins, and there is a plan here of how to regain back profitability and bring back the business to -- we already brought -- almost brought back on the market share and other parties to bring back profitability to the same levels we were before the recall. And when we look at that transformation, so on the operational excellence side, we build, we put procedures and policies in order to have one quality standards all across our operational -- all across our operations at parts here in Israel. Our policy was 0 recall outside the plant, and we actually managed to achieve it in 2023, besides one recall that was not from the factory that we have, but from outsourcing that we do, we had 0 recalls outside our plants, which was very good news. And we also upgraded our quality and our food safety standards all over our plants. We're also going through and started and we're still going through a digitalization transformation. We are investing a lot of CapEx in IT, updating our -- upgrading our data system, upgrading the way we get the data, analyze data, our BI system, upgrading our cybersecurity going on the cloud and putting -- and transforming into the cloud and a lot of other -- and bringing digitalization into our plants and all of those moves will help us and assist us to increase productivity. Also, in supply chain, we have really a lot of efficiency moves that will help us to have a better supply chain. The one organization in building the one operational team required from us also to build a team with the same standards and values and also to bring procedures and synergies into those teams, and there was a lot of work also to bringing -- empowering and to bringing the people together. And last but not least, looking into our plants, we upgraded our OEE, our operational productivities that we manufacture more with our existing plans in better quality. Jumping into the strategy that we updated today. The strategy -- the updated strategy is mainly divided into 4 major pillars, which constitute the update, the major update of the strategy. The first pillar talks about the home base in Israel. Looking in Israel, we have a diversity and -- a diversified portfolio, sorry, which has all the products that we generate everywhere. And through that product -- through those products and through innovation, our major focus in Israel is going to develop into 2 things. One is going into more and more and more into the snacking trend. Today in the world, people are less consuming in ordinary meals 3 times a day, but they're consuming in between meals and they snack in between meals. And this trend is growing year by year. And since we have such a diversified portfolio in Israel, which covers almost all snacking categories from sweet snacks to salty snacks to dairy snacks to fresh salad snacks. Our ability to provide solutions in snacking all through different occasions and all through the day is very, very unique. And what we'll focus in the next 3 years is to take advantage of that and substantial growth in Israel will come from our emphasis on snacking, from innovation in products and snacking from reaching new communities with new products in snacking and enlarging our portfolio. So that's layer #1. Layer #2 in our home base is going to building our new leg, our new engine in Israel, a new growth engine in Israel, which is the plant based. We have invested more than ILS 250 million in plant-based factory here in Israel. And the purpose and our intentional targets for this plant is that all our dairies products and the variety of products that we've given our dairies, we will be able to also produce them and give them in plant-based version. That means plant-based yogurts, plant-based [ madani ] -- desserts -- sorry, desserts, plant-based cheese, plant-based drinks, plant-based protein drinks. So there's so much variety that also is answering our snacking trend, it's giving solution to our snacking trend, but also giving new solutions, new products to new communities in the variety of products that we have today, but answering people who we have sensitivity to milk. So in Israel, snacking is going to be a major focus and also building a new engine of growth of plant-based variety of products. Going to the second layer, we are going into Brazil -- today in Brazil, we are #1 coffee company with 33%, 34% market share. We are -- we started building Brazil as more like a dry food company, which means that we are not on the only stag in the coffee category, we slowly but gradually growing into new categories, into plant-based categories in Brazil, into juice powders in Brazil, into protein drinks in Brazil, ready-to-drink in Brazil, into corn solutions in Brazil. There are categories in the dry segment that we have entered because we have built in Brazil a platform, a supply chain platform and that can go up to -- reach up to 200,000 clients at the end. And with that platform, which is very, very, very unique, we believe that we can distribute not only coffee, which is the basis, which is the core, but also to build on that core all those different categories. The reason for that, one is we generate growth, but we also generate very healthy growth because in all those categories, our margins today are very, very high. And in all those categories, the volatility is very, very low. So our aim is through M&As and through organic growth, we will grow those categories so that as part of the portfolio, the share of the portfolio will be much higher in Brazil and Brazil will be a large food company, not only in coffee and one of our major growth engines for the upcoming years is to growing the segment of non-R&G in Brazil. So this is regarding Brazil, taking the core, the R&G, making more productivity, making it more profitable on the one hand. But on the other hand, growing a lot, a non-R&G and going into new categories and also increasing the current categories which we are in. The third pillar is our Water Solutions. Today, we have -- when we talk about the core, we have in Israel, a water company, and we have in China, the water company, the partnership we've built with Haier. In Israel, taking consideration the core, what we will do in the next 3 years is develop further portfolio of products. We understand that in order to increase our share in Israel to continue to grow in Israel and also to enable us to take innovation outside Israel, we need to bring a variety of products which will answer different needs of different communities. So one of the major things we will focus on the 3 -- in the next 3 years is the launching of new products into the portfolio. On the other hand, we will continue to extend and build on this -- on the current legs and also into new legs in water solutions. If we look in China, we have built a second plant, we're going to -- we put down a strategy that we want to become #1 in China in POU solutions with the second plant and with the partnership with Haier, we believe this is achievable and that we can continue to grow in double-digit figures, so that we'll reach a position of a #1 player. But also with the new portfolio that we will launch, we think that with the new portfolio and with the right partner, we can extend the water solutions into new geographies. And in the next 3 years, we will take those seeds that we are looking into planting in the water solutions in new geographies and start working in order to extend our water solution, not just on the current geographies, but also in new geographies. And last but not least, the basis of all this is how do we make our company future-ready, how do we make our company more resilient. And this is all across all the 3 pillars that you see above. And that is divided into 3 major focuses that we are going to undertake. One is how do we improve performance. And here is the transition, the transformation of how we do things today and how we want to change the way we operate today into where we need to go. And I'll little bit explain, we have divided our work into 9 different streams from revenue management to go-to-market, to design to value, to marketing and ROI and then on the cost side for manufacturing, S&OP, procurement, supply chain, logistics, working capital and G&A. And for all of those streams, we have put down a work of how do we do a transformation of changing the way we were bringing new methods, bringing new technologies, bringing new digitalization in order to have those processes done in a much better way. It's much, much more than cost savings. It's becoming excellent and changing the way we do things. If I can give an analogy to that, I always use a sport analogy that when you run a 10K run, then the first time you will run it, it will take you an hour and 20 minutes -- an hour and 15 minutes, and then you run, you run and run. At the end of the day, you can reach 45 minutes, 42 minutes. But if you want to improve that, the improvement is going to be incremental, like in small, like 10 seconds, 15 seconds, it's not going to be anymore in minutes incremental. There is a stage in cost savings that if you do the same thing in the same way, you are not going to improve. But if you start -- if you try not to do the same thing, in case with a bicycle, then you're already going to catch yourself for 42 minutes to 20 minutes. And then you can start again doing and cutting down and doing it in a faster way. And then from a bicycle to move to a car, et cetera, et cetera. The same way we are looking at what we are doing here in the organization. We have reached a place where cost savings doing the same thing, running the same way, it's not going to give us a substantial number of savings. But if we'll move into new technologies, new methods, new ways of doing things, under the new operational structure, the way -- the platform productivity that we can generate is much higher. And also, we will be able to achieve a higher efficiency in everything that we do. So this is one change in building your resilient. The second one is it has to do with our culture. It has to be the right culture, the right agility culture, the right comfortability culture and the right execution culture in order to be able to adapt to change in order to move from running to a bicycle, you need to build the culture of knowing how to ride a bicycle. And the organization is working in parallel on working on changing the culture and adapting the culture that, that change that we want to do in performance will come better, will come in easier way that execution will come much faster and it's a stream by itself in parallel working on performance, we are working on the health and all the organizational culture. And last but not least, we understand that in order to have a resilient organization, we have to focus and optimize our portfolio that means that there will be parts of our portfolio, which are not core in a second, I'll say what are the criteria that one is core and one is not core, that will no longer be in our portfolio. We will rotate a substantial part of our business. And we will do M&As and some of the businesses, we will depart for them, and we will divest on them in order to make sure that we focus on where there is core and where we have a competitive edge and where we have healthy growth. And all of that -- next slide, Daniella, please. All of that will take us from a place where if today 67% of our operations that are from sales is today considered to be core and core is examined under the following pillars. First, it has to have a substantial growth of 4%, 5% that is sustainable. It has to have a double-digit margin of more than 10% in operating profit. It has to be the right trends, and it has to be a place where we have a competitive edge, and we have an advantage and we are a substantial player in that category, in that market. If it answers all the categories then it falls under core. Today, only 67% of our operations are considered to be core and 33% of our business is not -- doesn't fall under those lenses. By the end of 2026, by doing everything I described before by focusing on the core Israel in snacking and on the right product, by building the right plant-based, by focusing in Brazil, and how to improve the margins in R&G, by building the non-R&G categories, by extending our water solution with the right portfolio and extending into new geographies, and by building the resilience of performance -- of performing savings, which in a second, I'll show you also what is the target for that. And by changing the culture health and also by optimizing the portfolio, all this will lead us to a much more healthier business with more sustainable growth that 85% of it, approximately 85% of it is core. And if I sum up -- and you have, by the way, all the presentation -- a more detailed presentation, like something like 27 or 30 slides, detailing everything that I said now that we have uploaded today and it's also mentioned in the reports that we issued today. But if you have any questions, if you like to elaborate more, we will sit down in personal meetings and explain this more. For the first time, we put down a set of goals that our strategy is supposed to lead us to do. So one of them, as I mentioned before, is the 5% growth, sustainable growth. This was already in the last strategy. We're just continuing saying that in the updated strategy, we keep ourselves with the 5%. Then for the first time we are issuing what we aim to be on profitable margin. You've seen that in 2023, we finished with 7.3% margin. Our ambition is to get back to between 10% to 12% margins. And by transformation of 60% of our activity of core to 85% activity of core with all the new growth engines that we're bringing in. And with the productivity, the productivity that I talked about before in the resilience, we believe and the target that we have set is to bring between ILS 300 million to ILS 400 million in platform. When I say platform, that means it goes all the way down to the profit, and it's not a onetime saving. It's not a onetime cut. It's platformatic savings that will lead us for the next years to come. So those are the 3 major guidelines or north stars that we have set as financial targets in the organization. In order to reach that, we need to become #1, stay #1 snacking company in Israel. We need to improve our margins in Israel, and we need to extend our plant-based offering in the new categories in the new variations of offering. In Brazil, we have to maintain our #1 position, as the #1 coffee company. We have to work on margins, increase margins by working on how do we do pricing right in Brazil and how do we increase productivity in R&G in Brazil. But on the other hand, we need to expand our non-R&G share through M&A, as I mentioned before, it's very profitable. It's much less volatile and with the platform that we set ourselves in Brazil, it will be the right thing for us to do it. And I want to remind everybody Brazil is 250 million people -- civilians country. The potential of expansion there, building a dry food company is huge. When we look at the water solution. So the aim is to become #1 in China. We are already #1 in Israel. We set ourselves by the end of 2026 to become #1 in China in POU solutions. Again, improve the profitability, mainly in Israel and also expand our product offering. We will not be able to reach the first 2, if we don't expand our product offering and bring new products and variation of products into the company. So with that, I hand it to Ariel to give a financial analysis of our reports.

Thank you very much, Shai. Good day, everybody. Further to the presentation that Shai gave, please take the next couple of weeks to deep dive into our strategy presentation. And we will be more than happy to meet with you in the coming weeks and discuss further our strategy, our strategic goals and how we are going to get there. I will focus very briefly on the fourth quarter of 2023 results. In the fourth quarter, we grew almost 10% in sales and organically, excluding the FX translation effect, approximately 5%. If you look at the right-hand side, we can see the 4 segments growth -- sales growth. You can see that the Coffee segment grew by 8%, but if we exclude the translation effect, we -- the Coffee segment did not grow in the fourth quarter. We have the year 2 opposing trends. One positive trend of the positive sales growth came from Central Eastern Europe. The activities there grew both in volume and in value because of the price increases. On the other hand, Brazil -- Brazil's activity decreased during the fourth quarter because of the increase in discounts and decrease in selling prices further to what Shai explained before. And with that, also, if we look at the Strauss Coffee Israel activity in the fourth quarter due to the war, we experienced our Strauss Coffee chain sales decreased a little bit, and therefore, we saw some decrease in Strauss Coffee Israel sales. Moving forward to Strauss Israel segment. A very high increase in sales of almost 15%. 40% of that is due to price increases that we made during the first half of the year, and this is the effect in the fourth quarter and 60% of the increase in sales were due to increasing volume and mix improvements. Going further to the Dips and Spreads segment, Sabra and Obela activities in Israeli shekels, the sales grew by 5%. But in local currency decreased by 3.7%, and the Water segment, the sales we represent the Israeli water sales and the U.K. water sales was stable in Q4, mainly due to the effect of the war and the decline in the demand for electricity appliances and also including our water appliances. Moving to the gross profit line. We see here in Q4 gross profit amount of ILS 852 million. Actually, this is the highest gross profit number that we ever experienced in Q4 in Strauss Group. Having said that, we still, of course, are very well aware of the fact that the gross profitability is much lower than what we used to have a couple of years ago. This is mainly due to the very steep increase in raw material prices. And it is very important to understand that at least for Strauss may raw material prices, we are still experiencing a very steep increase, both in green coffee prices, mainly the Robusta, which is about 70% of our green coffee consumption. Also in cocoa, sugar, energy, sesame and, of course, Israeli raw milk prices. All of these prices continue to climb during the year of 2023. If we go further to the EBIT results, we can see here a very significant improvement in our nominal monetary results ILS 181 million in operating profit. It is very similar to our operating profit in the years '21 and '20. We are very pleased with this result because we saw over the quarters of 2023, a very gradual, but continuous improvement. And now you can see that the momentum is taking us to nominal amounts that we already have shown before. And hopefully, of course, we will improve that in the coming quarters. Still the profitability, the operating profitability is lower than what we -- it were used before due to the high increase in raw materials. If we look at Brazil, the fourth quarter, it's very important to mention here a few major phenomenon. First, as Shai explained, the expectations in the fourth quarter and also in the second half of this year, in Brazil, of all the players, you can also see it in JD's reports it was for a decrease in green coffee prices. And therefore, most of the players in Brazil decreased their selling prices, either by decreasing their lease prices or increasing their promotions. So we see a decrease in Três Corações sales in the fourth quarter by 2.3%. On the other hand, unfortunately, the expectation for the decrease in green coffee and input prices did not materialize, then we experienced stagnation and even an increase in Robusta green coffee prices, which led to narrowing the margins in our coffee activity in Brazil. And as you see here, stagnation in the gross profit for the fourth quarter compared to last -- the fourth quarter last year. The second phenomena is related to our strategy in Brazil. As Shai explained, we are building in very, very significant distribution system that we eventually in a couple of years, distribute our products to more than 200,000 sale points around Brazil. This is a very large project and investment that we are doing in Brazil in the past year, 1.5 years, and we will continue in 2024 of increasing our sales points from 70,000 in 2021, again, to almost triple this amount in 2025 or 2026. We believe very much in this -- in the big potential for doing that, not only for selling our coffee products, but as Shai explained, for expanding our non-R&G and non-coffee products dramatically through organically and through M&As in the next couple of years. And this distribution system will let us leverage the results of Brazil dramatically in the next couple of years and increase margins there. So therefore, in the fourth quarter, we see a decline in the operating results resulting both from the decrease in gross profitability and the increase in our investments of our sales operations. In Sabra, we see a slow recovery in our results. The fourth quarter in Sabra traditionally was the weakest quarter in terms of P&L results. We used to see there a -- or very low positive single-digit result or low losses in the fourth quarter. We can see the year that we are gradually improving our resource there. And our aim, as Shai said, is to return to a high single-digit or low double-digit profitability in 2026, and we will see this gradual improvement over the next say 2.5 years. And going to the net income. Again, we are very pleased to see that our nominal absolute amount of net income is very similar to what we saw in 2021, the fourth quarter of 2021, higher than what we saw in the fourth quarter of 2020. This is the result of a gradual improvement in our results. And hopefully, this momentum will continue into next year. Still, we have to improve our net income profitability through all of our strategy -- strategic initiatives that Shai described before. Last but not least, our net debt-to-EBITDA ratio as we promised, went down to 2x. We are keeping our net debt at a range of ILS 2.2 billion to ILS 2.5 billion. We are not aiming at increasing our net debt in the future. Therefore, we believe that our gearing ratio will remain at these areas of 2, maybe a little bit less than 2, which will give us a lot of financial flexibility and comfort for the coming years to all the opportunities that we might capture in the future. I will stop here and leave the rest of the time for your Q&A.

Thank you very much, Shai and Ariel. Just would like to remind everybody, if you have any questions, you're more than welcome to put them on the chat or send them directly to me. In the meantime, we have a couple of questions from Chris Reimer from Barclays. Thank you, Chris for sending the questions. What other opportunities you're looking for at expanding the Water business, what kind of products can be added to the portfolio?

So first of all, I'll start with the second part. The products that can be added to the portfolio are a variety of prices, portfolio that can be -- products that can be more affordable, not just 1 segment on price, it can start from affordable, for medium and then premium and other products that we have in mind that we have already not in mind, that we have in production or in development -- thank you for that, in development is that they have other additional functionalities to the products that we have today. So that we'll have a variety of products with more functions on the one hand, but on the other hand, with a variety of prices. And expansion into new geographies, meaning that we are looking at one of the major strengths of Strauss is to do innovation and they take it globally with partners. This is what we've been doing for the past 20 years. This is the real competitive edge of Strauss. If you look at Strauss, we are very unique that we have the non-Haier PepsiCo that Lima Brothers for more than 20 years, and all of them simultaneously at the same period of time as partners and it's very, very substantial partners. And on the other hand, every time we had an innovation this, well, this is what we did. We took it outside, our water business we took outside and that we did with Haier. Our coffee business in Lima, in Brazil -- with the Lima Brothers in Brazil, our Hummus business in Sabra with PepsiCo, et cetera, et cetera. So with our Water business, once we have the right portfolio of products is to find where the right geographies for us to expand in water and clean water and purification water is such a huge chain, specifically -- especially after COVID-19 is which geography is the right geography for you guys, but which partner will be the right partner for that geography. Whether it's with existing partners or whether it's with new partners, we have started already initiating this process. And in the next 3 years, we'll probably plan to see for new growth of our water business alongside expanding our water business that already is in China to becoming #1.

Thank you. The second question is regarding expansion in Brazil. How do you see this coming about? What kind of products can be added and what kind of synergies are there?

So synergies, I think we spoke a lot with the platform that we have, with the dry platform that we have with reaching 200,000 customers. We already have products such as plant-based, such as proteins, drinks such as ready-to-drink, such as powder juices, such as corn, et cetera. In all of those, there's a potential for growth, mainly through M&A, but not only. And also there are adjacent categories, which we are looking in today, that we might decide to enter. I'm not going to specify them right now, but there are adjacent categories in which we can grow again through M&A. I think that during the years, we have proven that we have the ability and the capabilities of building new categories in Brazil under the current platform and the major platform of the R&G and this is what we will continue doing. But on speedy -- in a faster way and in a more substantial way because we understand today that the more the share of those activities will be from our portfolio, the less volatile our portfolio would be and the more profitable our portfolio would be. But here is one very important note. All of those categories cannot stand by themselves. They are all dependent on the volumes and the substantial impact of the core, the R&G. So on top of the R&G, there's a lot of marginal effect that can come from those new categories. Without the R&G, those categories are not as sustainable, because they cannot cover the overhead of 200,000 points of -- sales point of all the platform that we have today in Brazil.

And the last question is the strategic plan we mentioned turning around the Sabra and sweet snacks segments. Can you provide any detail on what this entails?

So yes, we gave it in the detailed report saying that with Sabra and with confectionery, we want to get back to historical margins that we had before the incidents that we had in 2022, and we want to reach it by the end of 2026. When it comes to the sweet snacks, we wanted to do this by regaining the same sales or even a little bit more than we had before and with the market share approximately the same market share that we had before. And with Sabra, we want to do this understanding that we are not going to generate the same market share as we had before because the category itself and the players themselves changed the rules of the game.

Thank you. We have a few more questions. David Kaplan from Psagot, is asking what percent of the Israel coffee business is sold in the away-from-home market. Another was it part of the reason that there was a contraction in the Israel Coffee sector in Q4?

I will answer that. Approximately 7% of the Israel Coffee business is sold away-from-home. It's not a very significant part. But of course, during the war period, the activity there was very low. And therefore, temporarily, it affected our results.

Thank you, David. And I have a couple of questions from Tal Klausner from Hardman Johnston. Thank you, Tal. The level of divestiture is quite extensive. How do you avoid one, a leaky backtrack where the growth is constantly held back by divestitures; and two, divestitures come with deleverage as fixed costs now need to be covered by remaining operations. Can you really expand margins while putting more pressure on the existing portfolio?

So that's why, although there will be divestments, the divestments will be done gradually, and it will be like the other guys taking over...

Closing of the business.

Yes, like we run out of the business. It's going to be very, very gradual and very incremental on the one hand over the next 3 years. On the other hand, the business that are going to be divested are such businesses that the impact on the results as so -- is major negative so that although we have overheads, it's better to make the portfolio absorb those overheads and some of those overheads will be cut and some of those overhead will be also taken out because we divest the activities with a lot of -- with some of the fixed costs and with those overheads, but at the end of the day, we want to have a much more healthier company with 85% of it is core and it's a journey. That's why I said it's not going to happen. The move from 67% to 85% is not going to happen in '24. It's by the end of 2026. So that first, we'll do it gradually and not at all at once, we will be able to absorb it while continuing growth. And yes, of course, when we talk about growth and 5% growth, of course, it's platform ready growth, we are not taking -- it's not going to take into consideration that we're going to grow 5% on top of everything we divest as well. It's saying that from the current activities that we have today with the current activities that we will stay, we will grow 5% and more, and this is how our plan is constituting.

Thank you, Shai. And one more question from Tal. Brazil is your white space, but somebody else's fort city, what gives you the right to win there?

So nothing gives us the right anywhere. We will not give it right. I think we have the ability to say it that way, maybe to win there because we have been there for more than 20 years. We have very, very, very strong local partners. And I think this is 1 of the major advantages of Strauss. What gives us the ability to win into China is not the fact that we came with our water solutions to China is saying, we're going to teach the Chinese how to train purified water. No it's because we partnered up with Haier, which is a very, very strong conglomerate in China with go-to market abilities and notion of the Chinese market. The same in Brazil with the Lima Brothers, the same with the capabilities that was built there. Our advantage from here is to bring the innovation to bring sometimes the product, bring sometimes the know-how. But the knowledge of the market, understanding of the market needs, understanding the consumer, understanding the brains, understanding of the social environment there is totally up to the partners, and we have very, very, very strong partners there. We've been very, very successful over the past 20 years. And we think that as the business were built in the past 20 years and became the largest coffee company in Brazil, where they're way, way behind, we believe that now building all that platform, the next layer and the next step is something that is achievable and that we have the ability to do so. I don't think that we have the right.

Thank you. A few more questions from Feng Zhang from Jefferies. Thank you, Feng for your questions. What categories businesses are considered non-core? What does the 33% include on Slide 13 and does the 15% in '26 include any divestment assumptions.

So of course, getting to the 85% includes divestment assumptions, as we mentioned before. I'm not going to go into the specific categories in which are not core. All we said is we get craterous of what is not core activity, anything and I repeat that, anything that doesn't have substantial growth, anything when we don't have a competitive edge, anything that a long way does cannot generate profitability, a sustainable profitability of double-digit anywhere that falls under those 3 major categories anyway that we don't think falls under market trends as well. When we look at those categories, it doesn't follow into those categories, and we don't think that for the long run, not just currently, but for the long run, we can't fix it, then change it to turn it, then it's not going to be core and it's going to be divested. And whatever remains non-core in our portfolio. There'll also be justification for that because sometimes there are non-core activities, which drive the core, which aids the core without them the core cannot be core. So those 50% that remain -- very similar, by the way, to many other companies who have the same percent international companies that have the same percentage of core and noncore. Those are ones that's supposed to support the core because you can't have all 100% core activity. But having something between 80% to 90% core activity is I think something which is achievable and that's where we wanted.

Thank you. And the next question is, is the CapEx guidance only for '24 to '26 -- it's relatively higher than 3% compared to other CPG companies. Will it go back to previous levels beyond 2026. How much could you split between fixing the problems, are you reinvesting versus building new capacities?

So after 2026, we do think that it will reduce that to lower levels, but we are not in a position now to give an estimation of what that number would be. We do think that we need to increase the number, and I didn't mention when I was talking about the strategy. Thank you for that comment. We do think we need to increase the numbers now and the CapEx now because if we want our core to have better margin, to be more productive and to bring more activity into the core. That means we need to invest. We need to invest in our plants. We need to invest in our supply chain. We need to invest in digitalization in the IT system. We really, really need to invest. Now to your question, how it's divided. I say it's not fixing the problem. Nothing is about fixing the problem. It's about upgrading, how we do the things we do today. So I would say about 50% is upgrading or 50% to 60% upgrading of what we do today and how we have better plants, better supply chain, better IT system and between 40% to 50% is investing on where the new engine grows, such as the plant based is or such as the plant we're building in China and such as other activities that will push and invest in growth.

And a couple of more questions, cost savings. Of the NIS 300 million to NIS 400 million, the net savings, how much will drop through to the profit line and how much reinvested in OpEx. How much one-off costs for this cost saving program?

So there's no one-off cost, and those are not cost savings. And I'm not calling cost savings because there's no way you could have generated ILS 300 million to ILS 400 million platform at cost savings. It's changing the way we do things that changed the operation. Just one example, we're going through one of the streams is the R&G streams. We got new systems of pricing, and we thought and we guided now our people how to use those new systems or how to give discounts or how to do assortments, a way to do the same promotion -- special -- I'll discuss, special promotions, and we have changed the way we're doing things. And by changing the way we're doing things, we are able to really be more productive and then to bring substantial value into the net profit. So it's not cost savings. It's changing. And I'll just give one specific example in R&G but it is also streams that I mentioned before. It's a journey. For the next 2 years, it's not something that's going to come in 1 month or 2 months. It's not a 3 months project and when then we go. It's a project we started 6 months ago and will follow us for the next 2 years in really changing the way we operate. So by the end of those 3 years, we'll have a more profound and more excellent way of doing things and more efficient way of doing things. And the yield of that will be the result of that will be, that we will bring ILS 300 million to ILS 400 million into our profit line. It's not a onetime, and it's a platformatic change.

And it is incorporated in our 10% to 12% goal for 2026, the operating profitability.

Yes. But it's only one of the topics that is imperative. It's not -- it's one of the components. It's not -- everything that we do will lead us to the 10% to 12%. It's the portfolio optimization, it's the new growth engines. It's improving our margins. It's everything that we are going to -- it's changing the culture. It's everything that we're snacking in Israel. It's everything that we do and the focus that we're going to put all of it together with the transformation of how we do things is going to bring us back to the 10% to 12%.

Thank you. And the last question from Feng Zhang from Jefferies is on Brazil. How large is the non-R&G sales as a percentage of sales at the moment? What is the growth rate? How is the profitability of these non-core businesses relative to coffee. How should we be -- how should we expect the profitability to improve in Brazil?

So we didn't distribute those numbers and those figures there. I will mention, but it became -- it started to become a substantial part of the portfolio, and it's growing. And its growth rate is high. It's higher than the growth rate of the R&G, that's for sure. The profitability is very hard. It's a -- profitability stays with the core profitability of a double-digit profitability. And that's why it's part of what we want to become more core extends with the growth and the standards and the criteria of what we call core, and therefore, we want to invest in more. So by the end of '26, the part of the non-R&G from the portfolio will be higher -- substantially higher than what it is today and its impact correspondent result will be also higher. Nonetheless, we are going to work on R&G, how do we do better pricing in R&G, how do we do productivity in R&G in order also to improve the margins there, so that will be less impacted by the volatility of the green coffee prices.

Great. Thank you very much. I'd like to thank you all for participating today. Before we finish off, I'd like to just turn over to Shai for a couple of closing remarks.

So first of all, thank you very, very much for coming here today. I want to sum up again with what I started with. It was a very difficult year here in Israel with the war and everything that has been going on. It affected all of us. We had employees that were injured. We have -- people have their families kidnapped, and we have more than 300 people who were in reserves, fighting this war. Hopefully, I very hope that this will be over soon that all the hostages will come back home, then all the soldiers will come back home and will have some peaceful times here in Israel. It was also very complex, complicated and difficult year for the business here in Israel, but also outside of Israel with everything that goes on the macroeconomics and geopolitical issues that brought up inflation, that brought up interest rates and everything that we had to tackle. I really believe that the strategic plan that we put out a very, very focused and detailed players that are drawn from it will help us and either go through these high waves and get that to those high margins to the 10% to 12% margins that we have disclosed today in our strategy. I do think that with continuous growth and with continuous effort and especially getting into the new growth engines in Israel and Brazil and in our water company, there is a sustainable route for growth and also -- but healthy growth with profitability for the next few years. You are more than welcome to deeply into the strategy and to learn them if you want us to meet one-on-one and to disclose more and to discuss internal as more. As you know us, we are always open for that. We will more than welcome to -- more than happy to do so. And with that, I'll conclude and hopefully wish you a very good rest of the week, and see you next time.

Great. Thank you very much. See you all next quarter. Stay safe.