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

Hello, everyone, and thank you for joining us today. Welcome to Strauss Group First Quarter 2024 Results. Following the formal presentation, we will conduct a Q&A session. [Operator Instructions] As a reminder, this online Zoom conference is being recorded today, Monday, 27th of May 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 only predictions and may change as time passes. Strauss Group 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 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, Director 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, Daniella. Thank you very much, everybody, for joining us today. What I will try to do in the next 5 to 10 minutes to just give a general overview of where we stand this quarter and how is it in line with our strategy that we have published 3 months ago, and then I'll pass it on to Ariel. I can start talking about the results of this quarter without talking about what we are going through for the past 7, 8 months Israel is still in the worst situation. And this has an effect on all of us, not just on the citizens, also on companies, companies employees. We had a soldier that died a week ago, and we had a hostages that was brought that back dead on last Saturday. As a company, we're doing our utmost to support during this very, very difficult times, all citizens around this country in multiple activities. And here, I want to take -- just to say whether we take a good pray that the situation will end that the hostages will come back quickly and then our soldiers will come back safely back home. Looking at the results. So we see that net sales have grown by 1.5%, but organic growth went down by 0.7%. The major reason is the fact that this year, the passover, the Jewish holiday last year occurred in the beginning of April this year, happened in the end of April. And because of the shifting of the Jewish holiday, it affected our sales. If we look at January till the end of April, we see also organic growth, and we see growth according to plan. But when we look at our gross profit and EBIT, we still see that margins are relatively low, we used to be around 39%, 40% of the gross profit side and around 12%, 13% on the EBIT side, and we see that we have deteriorated because of cost of goods. Cost of goods is the major effect on our results. Net profit, we actually exceeded our results from last year. With almost 90% increase, but it's mainly because of tax audits that gave us some refunds of tax back and that impacted the net profit results. When we look on the different companies, so looking at Strauss Israel operation in Israel, margin is still relatively big. And also there's a small increase in revenues and in EBIT compared to last year. But our major deficit this quarter happened in our coffee operations, mainly in Brazil. Brazilian situation whereas Robusta, green coffee has been increasing for the past 3, 4 quarters gradually without any stabilization. Last year, we were under the assumption, and we forecast that green coffee prices are going to decrease. And therefore, we reduced discounts at the end of -- increased discounts, sorry. At the end of the day, it didn't happen and what we did since then as went back to increasing prices, but our increasing prices lags the increase in Robusta and therefore, our margins have been affected by that in the results accordingly relatively low compared to what we are used to. When we look ahead and focus ahead, we believe that at the end prices of Robusta will stabilize and eventually will start going down as we have a lag when prices increase, we also have the lag when prices decrease. And therefore, we believe that -- we hope and forecast that for the next second half of the year, prices will stabilize or even a little bit go down and we'll have a much more robust second half in 2024 when it comes to our coffee operations in Brazil. In Strauss Water relatively had a good quarter. There's still continuous growth in revenues and in EBIT, especially this growth, and I mentioned it a bit ahead in our operations in China, where there's double-digit growth in sales and also growth in profitability. And overall, this is the picture of the results. When we're going Israel, I think the major thing to notice here is that funding indulgence has a substantial increase in revenues and also substantial increase in EBIT, I think that our confectionery business is on track with the turnaround plan according to our strategy. And slowly, we're getting back market share. We have now managed to get -- got back to 26.6% market share compared to the 28% we had before. So we're almost fully back and with double-digit EBIT margins this quarter. When we look at our coffee operations, still there's a little bit of deterioration in operational profit because of coffee prices that have been continuing to increase. But overall, you can see that we are totally on total margins of 11.5%, 11.6% on our overall activity in Israel. As mentioned before, our major setback this quarter is with our international operations in our coffee business, mainly in Brazil, Central and Eastern Europe operations are relatively the same, same as last year. And the major difference is Brazil, which what I described before. It's important to notice that in Brazil, our strategy is talking -- also talking about how do we increase our operations in non-R&G, understanding that R&G is very, very volatile and prices are going up and down and affecting drastically our margins. Our strategy talked about reaching 40% share of non-R&G activity. And we are going towards that through M&A and through adding activities to our non-R&G. All our operations in the non-R&G segments with double-digit margins and with a very good mid- to high single-digit CAGR. So the more we move into those categories, the easier for us to hedge our margins in Brazil on the 1 hand. And on the other hand, we are working on productivity on the 1 hand and on increasing prices, continued increase in prices in Brazil in order to mitigate the raising in green coffee. Another important thing to notice in Brazil is that in the first month of this year because we were the first one we are the market and we're the first one to increase prices in time until the competition increased prices as well. And in the first price, we lost volume, and therefore, we lost revenues. So overall, this quarter, we were impacted by the fact that also in January, we had a loss of market share and a loss of profit. And looking ahead, we don't believe the loss of market share is sustainable. We think that we'll get back the market share that we lost it will still stay the market leader. But we do think that because of the volatility of coffee prices, there will be an effect on the market share, especially when we lead the market and we are driving the price increases in Brazil. Looking at the water business, just to mention that in China, you can see this substantial increase in sales with 30% growth and continuous improvement also in our EBIT in China and overall business of -- our water businesses was 12.3% market share -- margins. Looking into our strategy, strategy was broken down to 4 major pillars. So one was talking about stronger home base in Israel, how do we invest more in our core activities, how do we get more in our core activities. How do we use the fact that our categories mainly play in snacking segment, where we are very, very diversified. They are having a snacking solution in almost all our categories in the dairies, in salty snacks, in the confectionery and in the fresh status. And since this category is growing and it's a trend that people don't keep are usual meals, but they moved into snacking solutions. So this is a lot of what we are working on, and we're investing not in our brand and our core brands, while we optimize our portfolio that we closed SKUs that we think about are relevant. And we're also getting out of activities, which we don't think are part of our core. When we look at Brazil, I mentioned before, so one is working on productivity, the other is increasing prices in R&G, but also increasing our non-R&G through M&As and continuing to grow our company in Brazil as a dry food company, not just in the coffee segment. And last but not least in our international water, our strategy is talking about how do we enhance our portfolio offering by giving different machines and developing different machines on different segments, from low end to high end and with different functionalities. And the other side is how do we get back to be or get that? How do we get into being #1 in China in market share and increase -- and also deploying new geographies. All of this is going and working according to our strategy. And last but not least, our strategy is talking about how do we make the company future fit and how do we go through transformation and resiliency? And here, there are 3 major things. We are doing under that transform. The first part of the slide I already talked about in how do we deal with the core. I just mentioned that in Israel, we're also -- when we look at our growth engines, we're also looking at innovation and client base. We are building right now. We're in the middle of building a prime-based factory in Israel, the factory will be ready by mid to end next year, then we'll launch our new product. And this is a new segment, a very growth segment that we are getting into. Going into -- back into the transformation, how do we make the company resilience, there are 3 different layers. The first 1 is performance, how do we enhance our performance and make our performance much more productive and transformed. We have 8 different streams that we launched in how do we take the way we operate today and transform and operate today by bringing new technologies, by bringing methods, by bringing new tools and by training our people to do things differently. Those streams go through revenue management, marketing and ROI, design to value, manufacturing, supply chain, logistics, procurement and working capital. And in all of those, we are transforming the way we operate. We set a target that by the end of 2026, we have reached ILS 300 million of productivity, platformatic productivity, which supposed to help us increase our margins to the target that we set ourselves between 10% to 12%. So that's the first thing that we are working on. We can see also in the first quarter that we are on track within those streams with the targets that we set for ourselves. When we look at our culture, we understand that in order to serve performance. We also need to change our culture. We need to work on becoming much more accountable and more execution-driven and more agile to the way we are today. And there is also streams that are working on, we call it a constitution, comfortability and execution that are working along with the company in order to train our people to be more agile, to be adaptive to change and to learn how to use all the new tools in order to make that transformation work. And last but not least, we set a goal that our core activity from 65% to the core activity, which is a core activity we define as growing by 5% or mid-single digit and with double-digit margins and the place where we are either #1 or 2, and we have a substantial position in the market. So anything that doesn't fall in that core is not core. And by optimizing our portfolio, what part of the operations that we have today, activities that we have today, we will divest, as you've seen in time and has been announced in Israel, the activities we're divesting here, alongside with the turnaround that we need to do in some of our businesses such as the confectionery and such as Sabra lasting almost 75% is Sabra. Sabra today, is under a turnaround plan. There's a new CEO in place that comes with the vast experience in the food industry, works for Pepsi for the past 20 years. And there's also a new Chairman in place. The new Chairman, he used to be the CEO of Frito-Lay in the U.S. His name is Tom Greco, very, very experienced professional. And by August, we are supposed to come up with a strategy plan, how do we do the turnaround in Sabra to bring Sabra back on track because although there's an improvement this quarter in several results. We still don't see a path and a track of a full turnaround unlike what we see in confectionery that we do see the turnaround, and we are now affected by the cocoa prices, which eventually we believe will standardize. So taking that in consideration, we believe that in Sabra once we'll have a plan ready will either execute it and do the turnaround or we'll think of other solutions about what do we do in Sabra in our portfolio. That's it for me, and I'm now passing it to Ariel.

Thank you, Shai. Good day, everybody. I'll start with mentioning that in the first quarter, we restructured the segment reporting according to our managerial a new structure, a new operating model. And of course, according to the strategy that we published a few months ago in a way that the segment of Coffee Israel moved from the general segment of Strauss Coffee to the general segment of Strauss Israel and still you have all the information about all the segments and the subsegments that you've seen before and the corresponding numbers for previous years were adjusted accordingly. . Starting with the sales, we grew in this quarter by 1.4%, organically, minus 0.7%. If we look on the right-hand side, we can see the main causes for this growth. So starting with Strauss Israel, again, including Coffee Israel in it. The segment grew by 1.7%. As Shai mentioned, the timing of the Hebrew holidays, the Hebrew passover holidays affected us very strongly. In April, we see -- we've seen a very high growth in Strauss Israel compared to April of last year. And therefore, we have to compare the first trimester in January until April of the 1 year in order to really understand what happened economically. And what we see, as Shai said, is that our growth momentum and growth rate in Strauss Israel is roughly what we've seen in previous quarters and according to our strategic plan. Moving onwards to Strauss Coffee International. This is only our activities -- coffee activities in Central Eastern Europe and in Brazil. We see that the growth in Israeli shekel nominal terms, only by 0.3%. But in local currencies, we decreased by 4.5%. The decrease came mainly from 2 main areas, 2 main geographies. The first 1 is Brazil, and Shai explained the reasons of this decrease in quantity. And the other geographic area is mainly Russia, but we see this Russia decline as a temporary decline and we expect sales to return to normal rates in the coming quarters. In the water segment, we are very pleased with the growth of the 3%, taking into consideration that we're under the experience of steel of war here in Israel and the demand for appliances, electronic appliances has slowed down in Israel. But still, over the slowdown, we are managing to increase our installed base of customers in Israel. And as you can see, very solid and good results, top line and bottom line for Strauss Water. And in the other segment is the Sabra sales growth, which in Israeli shekel terms was 3%, but in local currency, only 0.5% is as Shai explained, we are still experiencing the challenges of going back to the sales point and increasing our market share. In gross profit and gross profitability, we can see that the nominal numbers are growing very nicely, ILS 874 million in gross profit this quarter, much higher than the previous quarters or several years backwards. So this is on a positive note. Also on a positive note, we can see that our gross margin increased by 1% compared to the first quarter of 2023. But we still have a long way to go to previous gross margins of 36% to 39% that we know from the past. And this is a part of our strategic assets we explained 2 months ago, and we are planning to increase gradually our gross margins over the next 3 years. The EBIT margin is around 8% like the first quarter of last year. EBIT result is also pretty much the same as it was the last year. We are still investing in operational expenses, operating expenses, mainly sales and marketing, more than we have in the past because we want to make sure that we invest in our brands and make sure that according to our strategy, we allocate our resources to -- mainly to our core activities, and this is exactly what we're doing. So we are increasing our core resource allocation according to our strategic plan. And therefore, you can see that the result is similar to last year, although the gross margin was higher than the first quarter of last year. In the net income, as Shai explained, we enjoy a benefit of a positive tax audit for the years sorry, 2018 until 2021. Looking forward, it means that we will enjoy a couple of million shekels of tax benefit in the coming years as long as the tax audit aspect will not change in the future. So we see it's a very good sign. And of course, this helps us to enjoy a 6.2 net profit margin this quarter. We -- by talking about our net debt-to-EBITDA ratio, which is 2.3 at the end of the first quarter, we always have a 0/negative free cash flow in the first quarter of the year. First quarter of the year is a more challenging quarter in terms of the cash flow. Therefore, it always affect a little bit negatively our gearing ratio. But also in the first quarter, we invested ILS 130 million in building our second factory of Haier Strauss Water in China, and we believe that this investment is a strategic investment that will benefit us very much in the future. So this investment also had an effect on our gearing for the first quarter. But all in all, looking forward to the next quarters, we will see an improved gearing ratio. I will stop here, and let's give some time for questions.

Thank you, Ariel and Shai. [Operator Instructions] First couple of questions are from Chris Reimer from Barclays. Thank you, Chris, for your questions. The first one is, can you elaborate a bit on how the strategic plan is progressing and touch on the main points and the company's expectations going forward.

All right. So I'll jump to the slide that talks about the different pillars of the strategy and we will take it from there. So when we look at the pillar, there's renew the core, when you look at the pillar of how do we work with the core categories, how do we optimize our core categories and brands in this we are working with stacking. So it's pretty much around the plan. We don't see that back there. When we look about Brazil, optimizing our R&G in Brazil, this should be Brazil. So we do have our leadership in Brazil. We do think we are lagging behind because of the prices of green coffee and improving the margins in Brazil is not according to plan. But we don't foresee that for long green coffee prices will stay the way and where they are at the level that they are. And at the end of the day, like we are lagging behind today, we increased the price, increased price would bring coffee prices will decrease, we will enjoy and that will increase our margins. When we talk about optimizing the increase in portfolio for water, we have a couple of solutions in progress that we are developing right now in affordable machines, medium machines and premium machines that will launch to the market. This is according to plan. When we look about the expanded building and the plant base in Israel and working on the engines, in Israel, as I mentioned before, this is also a long plan. We will probably start operating our new plants around August, September next year and launch our new products in farm base category. When we look about expanding non-R&G and beyond coffee, all those categories that have a double-digit margin that will help us bring Brazil to be less volatile and much more solid on margins. Here, we're still lagging behind there. We are examining a number of M&As that we think will do in Brazil, still a little bit lagging behind, but it's the first quarter of the strategy. There's still a lot of time, and we believe we'll get back on track there. When we talk about growing in China and into new geographies and water is growing in China, is growing way over plan, and we are promising them very, very well. We believe that we will reach the target of becoming #1 until 2026 and with very high margins and growth. When we look about entering into geographies, this is still in, as we say, that is still in planning, but it is according to the track that we set ourselves of 1 geography, which partner with which products and this is at work. When we look about the transform. So our journey of performance and transformation, we are on track with the targets that we put ourselves, but we actually stretched our target a lot because of cost of goods, and we set ourselves new targets that will help us do better with cost of goods understanding not everything can come from pricing. When we look at the stretch targets, we are a little bit lagging behind, but we believe we will be able to catch up somewhere around the end of the second quarter, third quarter. When we look about the goal of high-performance culture, this is still in work. This is a journey. It's changing the culture of the organization, and bringing more contemplating execution into the organization. It's a journey that takes time. We are on track, but it was something that will finalize in the next 18 months. And when we talk about portfolio optimization, so when it comes about our portfolio optimization operations, so we have seen that we have divested Serbia. We expect to divest 3 operations here in Israel. Hopefully, they'll be in track. A lot of it, it doesn't depend on us because it has to go through a legislation of the Israeli Competition Authority. So depending on the time of the authorization that will come from there as well. But overall, that is also on track. The major places that we see also when we talk about optimizing the portfolio, it talks about also the turnaround for businesses that we are looking to do turnaround. So in our confectionery business, we think the turnaround, the confectionery is on track and even above what we have expected. The only thing that is affecting there is the cocoa prices that will affect us in the next few quarters. But taking into consideration that the cocoa prices are not fairly sustainable for the long term, we believe that the turnaround will be completed by the end of 2026 in our strategy. When we look -- we talk about Sabra, I mentioned it before there, there's new management in place, this new CEO. We are coming up with the strategy plan for the next 3 years with the turnaround plan, we'll have to check this plan and to see whether it's valid. If it will be better, then we'll set it up as part of the KPIs of the strategy. If not, then we'll have to think about other solutions for Sabra. So overall, if I look at where we are with strategy in most, everything is on track. We are lagging behind a little bit because of coffee prices mainly in Brazil. We are lagging a little bit behind because we still have to have -- may we wish to get to full turnaround trend for Sabra. But for the rest of the activities, we think we are on track. And of course, cost of goods is affecting us way more than we thought, and therefore, we are stretching our productivity efforts and making sure that we'll be able to meet the challenges that are brought by us with the cost of goods. I hope I answered your question.

Thank you. And the second question from Chris is how are plans for the expansion of products in Brazil going?

So it's not the expansion of products like M&A is in the dry categories. We have set ourselves there with a platform and logistic platform and supply chain platform that can reach 150,000 clients today, and we'll be able to reach by the end of this year, beginning of next year, 200,000 clients. It's 1 of the largest supply chain platform, distribution platforms they are in Brazil. And on that platform, there are many categories in the dry categories that we can actually distribute and sell. And therefore, we are already there in corn, in plant based, in protein drinks, in ready-to-drink. We are there in the juices, powder juices, cocoa drinks and also in non-R&G, which are coffee related, which is coffee machines and capsular and beans which are there as well. So we will continue to enhance and go into more M&As, either in the categories that we're already there, such as corn powder, juice powders or cocoa drinks, but we will also look at other dry categories, which can fit our platform very, very well and that we have economy of scale that will help us to increase our margins and increase our sales there. So it's going up to plan. There are several M&As that we are examining right now. It's a little bit too early as is less than a quarter past since we launched the strategy to see what we'll finalize, but we hope that already this year, we will be able to finalize the at least one deal.

Thank you. And the next questions are from Feng Zhang from Jeffrey. Feng, thank you very much for your questions. And the first question is, could you specify about the weakness in health and wellness in Israel and in coffee. How much impact was probably holiday phasing and how much from the underlying weak demand, how much of the phasing effect will benefit Q2? And any color on the current consumer behavior?

So we don't see any color on the current consumer behavior change, almost most of the weakness that you see, if not all, but it is because of the phasing. When we look at January, April, we already see that we are mostly up to plan. There are some technical functioning in our plants, in our dairies in the south and a little bit in the North that a little bit affected the supply and demand are our ability to supply on time and it would affect a little bit, but mostly, there's no change in the market trend. The holiday was the main reason for this lag. We do think that in the coffee segment, there is another problem of coffee prices that as long as coffee or Robusta will stay as high as it is, it will affect the results for H2 as well. So margin-wise, there is an issue that we're still watching but on the dairy, we don't see any impact that we should have. Especially when we focus on snacking and going a lot around the snacking solutions in our dairies, I think there is a boost there. And since we are very -- we launched several products also with proteins and launched them on the dairies we think that will also help us in the systems in getting additional growth.

Thank you. And the next question from Feng is, do you expect fiscal year '24 to be within the range of midterm guidance, i.e., top line to be over 5% and operating margin, 10% to 12%.

2024, we don't think that this will be the case. As we said in our strategy, we are aiming to have 5% CAGR. We do think that on growth side, we'll be able to meet it. But on margin side, getting to 10% to 12% will be by 2026 as we launched the new strategy. Especially with COGS as they are today, I don't think there's anywhere that we'll be able to reach in 2024 between 10% to 12% margins. And this is not, by the way, the tracking of the strategy then, the strategy depends on how we get there in 3 years. The -- all the transformation in performance that we set ourselves to do is broken down to stages. It's a long journey of changing the way we operate. It's not just doing savings or cost cutting. It's really transforming in each stream the way we operate. This takes time, this takes training, this takes a lot of our reoccurring activities that we have to do in order to make sure that this comes into tax. And this also takes CapEx investment in IT and machinery to bring that productivity and that takes time.