Hi, everyone, thanks for joining us today. Welcome to Strauss Group third quarter 2022 results virtual conference. Following management's presentation, we will conduct a Q&A session. Please feel free to post any questions you may have in the chat box via email or WhatsApp me directly. As a reminder, this online group conference is being recorded Monday, November 28, 2022. I would like to remind everyone that this online webinar may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and may change as time passes. Strauss does not assume any obligation to update that information.
Actual events or results may differ materially from those projected, including as a result of changing industry and market trends, reduced demand for our products, the timely development of our new products and their adoption by the market, increased competition in the industry and price reductions, as well as due to risks identified in the documents filed by the company with the Israel Securities Authority. Online today are Mr. Giora Bardea, CEO of Strauss Group, Mr. Shai Babad, who will commence as CEO of the group this coming Thursday, Mr. Ariel Chetrit, CFO of the group, and myself, Daniella Finn, Director of Investor Relations. Before we start, I would like to welcome Shai to Strauss Group and wish him the best of luck. Shai, please go ahead and introduce yourself. Unmute.
There we go. Hi, Daniella. Thank you very much for introducing me. It's a pleasure to be here with all of you. I'll just give a two-minute short brief about myself, and then we'll move on. My name is Shai Babad. I'm 46 years old. I live in Hod Hasharon. I'm the proud father of three daughters. My eldest is six years old, and my youngest is a year and a half, and the center one is four and a half years old. Before joining Strauss, I was the CEO of a holding group called Blue Square. It's a big holding group in Israel that holds real estate, retail, energy, public transportation and more.
Before that, I was seven years in the Israeli government, five years out of them as the CEO of the Ministry of Finance of Israel. Two years as the Head of the Israeli FCC, which is equivalent to the Federal Communications Commission, the regulator for broadcast television and radio station. Before that, I was eight years in ZIM shipping company. I was started there as the head of the budget and economic division. Then later on assumed the role as the CEO of ZIM Israel and Near East, responsible for 23 countries in the Mediterranean, including Israel. Before that, I worked a little bit for strategic consulting, was also working for Apax, the VC. Started my way as a lawyer. This is kind of a brief on my resume and my professional career.
I'm very, very happy to be here and join the group.
Thank you very much, and we of course wish you all the best of luck in your new role. As usual, we shall start with a recap of the quarterly results by CEO Giora Bardea, and then move on to the financial highlights for the quarter presented by CFO Ariel Chetrit. Giora, please go ahead.
Hey, good morning. Good afternoon, everyone. First of all, Shai, welcome to our family, to our company.
Thank you very much.
I'm sure you will take it far, far away. Thanks a lot. A short brief about our third quarter of Strauss Group. The result of this quarter are heavily impacted by three major phenomena. One is still the adjustment plan with Sabra, the hummus company, and the recall in a confectionery here in Israel. Second is the inflation, the third one is the growth, very impressive and organic growth. Couple of words about each one of them. Let's first talk about the recall and the Sabra adjustment plan. We nowadays, mid or end of November, we feel much more better about the recovery. In Sabra, all lines in the factory in Virginia are already working, and products are on the shelves in all United States.
Still, we have a couple of retailers that we need to continue to negotiate, but the majority are already there. We can see that last week, the market share of Sabra, we achieved a 34% market share, which is number one brand in hummus in United States. Don't forget, we start every around May with 5% market share after the adjustment plan and closing the factory. Here, United States, we feel comfortable with Sabra. In Israel, the confectionery, recall, but a bit slower. During the last couple of weeks, we fixed the lines, and now we feel much more stable with our manufacturing lines and all the procedure in the factory.
Last week, we announced about back to the market product from the factory because we saw during the last couple of months, we sell a lot of product from outsourced. Nowadays, we sell product in addition to the outsourced, we sell product from the factory, and we feel, and we learn that the consumer and the customer here in Israel, they accepted the product, and the market share of a couple of products that are already there are the same level as before the recall. We feel comfortable that slowly it will take another couple of weeks until we have all the lines, all the brands on the shelf. Second, which is very challenging is the inflation.
In our diverse portfolio in Israel and out of Israel, different category, we're challenging the inflation in a different set of actions. Out of Israel and mainly the coffee and Sabra, we can increase price and you can see from the results that the coffee company doing amazing out of Israel because they can cover the inflation of green coffee and other element of pricing with a price increase. In Israel, it's much more challenging, so we take a different set of actions and measures. Like a lot of productivity project, change some of the portfolio, and we are working very, very hard to close the gap here in Israel about the inflation. It will take some more time, but we'll do.
The third one is about our growth. Out of the hummus in United States and the confectionery in Israel, all the rest of our business units in Israel and out of Israel are having very impressive growth. In Brazil, in East Europe, water company in Israel, China and U.K. In Israel, of course, the dairy business, the salads and food business and the salty snacks. They're all having organic growth, which bring us the safety and the feeling that we are on the right categories with the right brands, with the right momentum. Last but not least, we continue and we insist, and we talk on that, I believe in the last quarter and the quarter before, we insist to continue our strategic plan.
On one hand to manage the crisis and the challenges, but on the other hand, not to forget that we are talking about the company that are 80 years or 85 years old and we should look forward. It means that we continue to invest in CapEx, in new factories, digital, cyber, a lot of technology, food tech technology in order to be ready and to build and to have the right capabilities and infrastructure that will fit and take the company to the next level in the future. Not to stay and wait till we'll complete the recall and the Sabra, but at the same time to manage both taking care about the challenges and take the company to the next step.
This is short one, and I hand over to Ariel to deep dive about with the numbers.
Thank you very much, Giora. Good morning, good afternoon to everybody online, thank you for joining this conference. I will begin with a short brief of the financial results for the third quarter, and we'll start with the top line. The group grew 8.5% this quarter in sales. We can see that most of the growth or most of the sales this quarter, more than 50% come from the coffee, Strauss Coffee segment. This is mostly due to the price, selling price adjustments that we have made in Brazil and in Central Eastern Europe through the last year.
On the other hand, we can see the smaller parts in sales that come from Strauss Israel and the Dips & Spreads segments, mainly due to the decrease in sales that we have experienced in Sabra and the confectionery due to the confectionery recall and the adjustment plan in Sabra. If we look at the whole Group, we can see that we are in line with our strategy plan for growing more than 5% on a CAGR base in the top line. We grew more than that, even, taking into consideration the decline in sales that we had experienced in Sabra and the confectionery.
If we look at the different businesses here in this bridge, we can see that in the middle of the bridge, we can see the different businesses on an ongoing basis. Taking aside, you can see on the right-hand side the Sabra and confectionery negative effect. If we look at the rest of the business, we can see very solid and high growth in all of our businesses. This is in the coffee we can see 33.5% growth. It's important to note that yes, a big chunk of this growth is due to the fact that we increased selling prices in Europe and Brazil in the past year, but we are still growing in volume in all of the countries.
It's important to note that because we can see a very solid demand to our coffee products all around the world. We can see that even though we have increased our prices in double-digit and so-in some places, dozens of a percentage of increase, we still do not see a decline in the volume of our sales, which is a very positive sign. If we look in the middle, we can see Strauss Israel without confectionery. We see that we are growing 3.8%. I can tell you that we are growing in all of our categories and segments in Strauss Israel, putting aside the confectionery division. We're not growing only in our financial results, we are also growing in our market share.
This is the seventh consecutive year that we are growing in Strauss Israel in our market share. This year, of course, putting aside the confectionery, it shows how we are robust in our market and position with our different brands. We are also growing in our market share in the different coffee geographies. This is also very important to mention. In Brazil, we have reached already 32.5% market share. We have grown in our market share in most of the Central European countries this for the past nine months. In Strauss Water, you can see here the sales of mainly Strauss Water Israel and also a contributing, a small contribution are the sales of Strauss Water U.K., and we are growing by 9.5%.
This is again the fourth consecutive year that we are growing on an average of more than 7% CAGR on our sales, increasing constantly our customer base in our water segment. If we look at the gross profit and gross profitability, we can see here the three main challenges that we are experiencing these nine months, and especially this third quarter. First, the confectionery recall was resulted in losses, in operating losses also, this quarter. We decreased in our gross profitability this quarter due to this effect. We also, you can see a decrease in Strauss Israel gross profitability this quarter due to the inflation that we're experiences...
experiencing in all of our categories, but mainly this quarter in the raw milk prices, which increased by 15% this quarter and influenced our health and health segment. Although we grew in sales in this segment by 3.2%, you can see that we have decreased in our gross profitability and our EBIT. In coffee, we are maintaining our gross profitability after increasing our selling prices for the past year. We can see that we're stabilizing in our profitability. If you look in our financial statements at the EBIT profitability, we can see that the coffee segment profitability grew by one percentage from 10% to more than 11% this quarter.
If we look at the EBIT bridge for this quarter, we can see at the central part of the bridge, the very large increase in our operating results in Strauss Coffee, ILS 52 million. This is partially we declined in our operating results in Strauss Coffee Israel, but we have increased much more than that in our operating coffee results for Brazil and Central Eastern Europe. We can see again a third quarter of phenomenal results for Brazil, which is you can see it all over the P&L. We are experiencing a great quarter in Central Eastern Europe, both in top line and in bottom line. For all of you who wants to extract the bottom line of Central Eastern Europe, you can take the business, the coffee segment results and.
Subtract from that the Israel coffee results and the Brazilian results that are, we report separately. You will reach the Central Eastern Europe EBIT results for this quarter, and you can see that they have increased substantially. The ILS 65 million decrease here represents our TKH, The Kitchen FoodTech Hub activity. The third quarter of 2021, we saw Aleph Farms, one of our portfolio companies, which had a very large fundraise, which was done according to a value of ILS 300 million. We recorded an accounting profit, one-time profit of ILS 72 million in the third quarter of 2021.
In this quarter, we haven't recorded any capital gains from our kitchen portfolio companies, therefore, there is a big difference quarter-over-quarter. On the right-hand side you can see the losses compared to the third quarter of 2021 in the confectionery and Sabra due to the recall and the adjustment plan. If we look in how all that translating into our net income, our net income for this quarter is ILS 35 million, compared to ILS 14 million in the third quarter of 2021. The main difference here is the three, let's say, temporary activities which influenced our results for this quarter very substantially. The confectionery influenced the net income by ILS 71 million.
The Sabra decline in net income was around ILS 36 million, our share, Strauss Group share. The Kitchen FoodTech Hub quarter-over-quarter difference was about ILS 65 million. This all amounts to around ILS 170 million, which also means that if we take aside these temporary events, our net income is stable compared to the previous quarters. If we look at our gearing ratio, we can see an increase in our gearing ratio. This is due to a some increase in our net debt. We had a lower operating cash flow due to the Sabra and confectionery events, and we had to increase our net debt a little bit. The increase in our gearing ratio is mainly due to the decrease, the sharp decrease in our EBITDA for the last 12 months.
This is expected to be lower in the next quarters as the EBITDA recovers gradually. Sometime in the second half of next year, we expect to return to a circa to two times net debt to EBITDA as we were before in previous years. I will stop here and leave the room for questions. You can ask them directly or through the chat.
Excellent. Thank you very much, Gior and Ariel. We do have a few questions. The first question is from Chris Reimer of Barclays. Thank you very much, Chris. How should we be looking at margins going forward, considering the inflationary pressure? What, if anything, are some actions that the company can take to protect margins? That's the first question.
Thank you for the question. First of all, what we are doing in order to really meet this very big challenge of high inflation in commodities and all the other inputs is, first of all, we are increasing our productivity efforts. We have just reported a few weeks ago about the reorganization that we are commencing in our, in the group. This reorganization is mainly an artifact of two main, let's say, reasons and goals. One of them is adjusting our operating model to the strategy that we have reported and launched in March this year.
Now we will operate in a model that allows us to grow in the right areas, both organically and inorganically, focus in the four geographies that we have highlighted in our strategy. The other goal is to be more efficient, be more agile, and build a more lean cost structure, and therefore, this plan is expected to reduce our cost platform by ILS 65 million-ILS 80 million. We will enjoy a small part of this reduction in 2022. The main substantial part of this reduction we will see in 2023, and maybe the last tail of this reduction we will experience in the first quarter of 2024. This is one thing that we're doing in addition to the regular productivity activities.
We are not stopping at this, we are planning to continue our productivity efforts after reorganizing in our new operating model next year, and to increase our productivity efforts. Of course, abroad, as you can see, we have increased our selling prices, and now we have caught with the increased inflation in our inputs. You can see there that we are stabilizing in our margins and increasing our absolute profit very substantially, both in Brazil and in Central Eastern Europe. We have really met our challenges there, and we can see that now in the past six months, coffee, green coffee prices are stabilizing, and therefore, we believe that we are in the right platform of both costs and selling prices to continue growing in volumes in the future there.
As you know, we cannot address other plans for our future in the Israel geography. We cannot talk about our plans for pricing in Israel. Therefore, once and when we will have anything to update you, we promise to do this once it happens. Hopefully we will meet all the challenges, and you can see how we manage our profitability for next year.
Thanks, Ariel. Actually, the second half of Chris's question was addressing that that program and the impact, but you've already answered that, so I'll move on to Chris's next question. That is, when you refer to almost full production at the confectionery facility, what does that mean? Looking forward, could you still see impact into 2023?
Okay. We are... As we speak, today, the 28th of November, we are almost in full capacity in our confectionery plants, working in 90% of our lines in three shifts, and producing the daily amount that, let's say, it's 90%-95% of our expected capacity there. We're almost there. Next month, we believe that we will be there 100%. This is production-wise. As Giora explained, we are building our inventories. These days, as we speak, we are starting to relaunch our flag products, our main products, chocolate bars and chocolate snacks, and we are relaunching them into the market. The very first results of relaunching individual products into the market are, they look promising, but it's still a very early stage.
We still have a lot ahead of us. We believe that our next step will be to reach a balanced operating profit. We do not, we cannot say now when it will be, but certainly we are aiming for it to be as soon as possible because we are reaching a minimum amount of sales that is needed to reach this balance. Afterwards, any increase in sales will result in increased profit. We are looking very optimistic on next year, but still, we have a gradual journey ahead of us.
Thanks, Ariel, and thanks, Chris. The next questions are from David Kaplan from Psagot. His first question is very similar to the last one, I'm not quite sure if there's anything to add. How quickly is the confectionery getting back up to speed? If you could say as a percent of capacity, that would be great.
I told you, I think, 90%-95% we'll be there in December. Production-wise, we have reached the stability that we want to reach. Still, the big challenge is to meet the market. We will meet this challenge in the next few weeks and months. We are very optimistic about it, still, we have to wait patiently.
Great. David's next question is, are you taking the opportunity to rationalize and optimize the product line?
We sure have. We've done that both in Sabra plants and in the confectionery plants. We are optimizing and rationalizing by a few, let's say, kinds of actions. First is the right distribution and the right share between outsourced products and insourced factory produced products. Longer batches and longer production times in the lines, making sure that our parental products are produced in the factory. All of these actions are making sure that we are much more efficient in our production, and where we can leverage our, let's say, capabilities or the demand meet the demand by outsourced products, we are optimizing that now.
Excellent. The next question from David is on coffee. How much of the recent increase in commodity pricing will translate into increased sales? How much is mitigated by derivatives transactions?
As I said before, in the past year, we have increased our selling prices in coffee outside of Israel, Central Eastern Europe, all of the Central Eastern Europe countries, and in Brazil, by a very, you know, a double-digit amount. Depends on the... Double-digit percentage depends on the country. We have cut. Already in this quarter finished catching up with the input of green coffee price increase and energy increase, and therefore, we have stabilized our margins in all of the coffee countries. Now, since we are growing in volume, we can see a very large increase in absolute monetary amounts in our sales and profit. This is with relation to catching up with the commodity input increase.
With relation to hedging, we have a hedging policy, with all of our commodities. In coffee, we usually hedge anywhere between four to 12 months, depending on the situation. We are increasing our hedges when coffee prices are attractive, and we are decreasing our hedge time when coffee prices are at their peak. This is exactly what we're continuing to do.
Thank you. The final question from David is: Can you talk about the recent reorganization of business lines and explain why those are more optimal than how things were structured previously? We've slightly answered that, but maybe if you can go a bit more into detail.
Yeah. I partially answered that, but moving part of the products to outsource clears the field in the factory to produce our main products with long batches and very short stops between each and every production. Before that, we had hundreds of SKUs in our factory that were produced in short batches, and this is a very major factor that increases our profitability or our efficiency in the production lines.
Ariel, I think, David was referring to the reorganization, the restructuring program across the businesses here at Strauss.
Okay. The restructuring program is not only related to production, okay? The restructuring is related to the whole strategic operating model. What we are doing is we are, in many places, we are decreasing our layers, managerial layers. We are increasing our span of control of managing people. By that, we are making the organization much more productive, much more agile, and, you know, we are reducing our FTEs by doing that. On the other side, we are building the right positions in the different places to fit our focus, both abroad and in Israel.
In Israel, we are building one operating division that will professionally manage all the operating activities in Israel, and we believe that this will bring a lot of additional future efficiencies into our supply chain in Israel.
Thank you. We have a final couple of questions from Martin Deboo of Jefferies. Martin is looking to drill down on the drivers of coffee division growth. What are these drivers?
The drivers of the coffee division growth are everywhere, actually, both in Brazil or Central Eastern Europe and in Coffee Israel. First and foremost, innovation. Okay. We are bringing new products. We are entering new coffee segments. The capsules and coffee machines and beans, which are very strong in some European countries, we are experiencing a very nice growth there. We're continuing to invest in our big brands, traditional brands in Israel, in Brazil, in Europe, roast and ground coffee, where we are successful at it. We can see also there a very nice growth. In some places, mainly in Brazil, this is part of our strategy, we are entering other segments that are not coffee in order to extend and leverage our capabilities there.
Thank you, Ariel. The final question from Martin from Jefferies is, how does Strauss view the entry of Carrefour private label into the Israeli market?
First and, of course, we look at every newcomer private label competitor into the market very seriously. Of course, we plan to do our best in meeting the relevant challenges. We don't see it as a material issue. We believe. We know. We've seen that in the past, and we believe that it will happen also this time. We believe that the retailers have their win-win situation where they have a very strong branded product in every category on the shelf, number one and sometimes also number two, and next to that, their private label. We've seen that with all the big chains, retailers in Israel, and we expect to see the same with Carrefour.
Of course, they will bring their private label very strongly. Next to the private label, they will want to have the number one or even number two branded products. Strauss Israel have, almost in all the categories, a market share which puts us in the first or second place. Therefore, we feel very positive about, let's say, co-living with the private brand of Carrefour in the future.
Just to follow up on that, Martin says that, for example, we are seeing reports that Carrefour coffee capsules have taken a 40% market share in Israel. Is that credible in your eyes?
I don't know these numbers, but what I know is that our capsule share in the retailers in Israel is roughly 50%, and we are maintaining this market share through this.
50 without Nespresso.
Yeah.
That's the retail.
50 in the retail. In the retail. Okay, Nespresso, we don't have official numbers, so we cannot say because they're not selling through retail. But in the retail, we are 50% of the market share, and we don't see a decline there. If Carrefour are doing these numbers, then maybe other brands are suffering, but not Strauss Coffee.
Okay. Great. I think there are no more questions at this time. I wanna thank everybody for joining. I'd also like to hand it over to Giora just to say a couple of departure words. Giora, please go ahead.
Just to say thank you so much for your partnership along the way. I'm here, I'm leaving after 25 years. Maybe some of you guys are joining or investing in the days of Elite and then Strauss. Thank you for the partnership and being our colleagues along the way. I'm sure that Strauss and Shai and Ariel and Daniella and the rest of the team will continue to be and to build a relationship and trust among you. Thank you so much.
Thanks, Giora, and we of course wish you the best of luck in your future endeavors. Shai, best of luck from us leading this fabulous company. To all our investors out there, thank you very much for joining us today. We look forward to connecting with you next quarter. A recording of this conference call will be available on the website at a later stage. Thank you very much.