Hi, everyone, and thank you for joining us today. Welcome to Strauss Group first quarter 2022 results virtual conference. Following management's formal presentation, we will conduct a Q&A session. Please feel free to post any questions you may have in the chat box or via an email or my WhatsApp. As a reminder, this online Zoom conference is being recorded Wednesday, May 25th, 2022. I'd 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 obligations to update this 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 new products and their adoption by the market, increased competition in the industry and price reduction, 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, and Mr. Ariel Chetrit, CFO, and myself, Daniella Finn, Head of Investor Relations. We shall start with the quarter's highlight presented by CEO Giora Bardea, followed by a recap of the quarterly results by CFO Ariel Chetrit. Giora, please go ahead.
Hey, good morning, good afternoon, everyone. No question, it's very clear that we are now in a kind of complex period of time. I still don't talk about specifically Israel or Strauss. I talk about hyperinflation, the war in Eastern Europe, supply chain, energy, and some companies with the issue of, you know, stability. In this kind of environment, we should manage and lead our business in order to get into much better days. Yet in here in Strauss, we have a kind of, let's call it tricky quarter. On one hand, if you look at the numbers, and I'm sure that you already have done, we have amazing, really amazing growth. If we just for a second, we ignore or put aside the recall issue.
We have, like, almost 50% growth in our group with amazing profit, which are great numbers. Unfortunately, during this period of time, we suffer, or we got hit from two major crisis. One in Sabra, United States, in Virginia, and one here in Israel. Just to be sure that we understand the resilience of our portfolio. We always talk about it many times, and I mentioned in our call, in talking internally, externally, that the Strauss portfolio is really solid and resilient because of the variety, because of the diversity of the elements. Means different countries, different currencies, different categories, different channels, go to market. While we manage such a portfolio, we can, let's say, manage the crisis in a better way.
On one end, we have the recall in Israel. We have the stock and production in Sabra, but at the same time, all the rest of our categories and business are amazing. Let's start in Israel, the dairy, the fresh salads, the salty snacks and others. The water company is doing great. East Europe coffee, Brazil coffee. It means that we had a kind of mixture between great business and we need to manage the one- time event of the crisis. Before we talk specifically about Sabra and then later Sabra and the confectionery, we put ahead of ourselves four major principles to manage this crisis, which are that's leading us and are guiding us how to make decisions during this period of time.
We really believe that the way we manage the crisis, it's a key to get out of the crisis much stronger, better, more professional, and get back the trust. The first is the wellness and the health of all consumers. Zero compromise there. Second is to keep and to build the trust, the way we manage the process. The third one is to protect our employees and the rest of the stakeholders, because at the end of the day, during the crisis and the day after, we should have them as a partner. No matter if it's customers, consumers, stock market, our employees, et cetera.
The last one, we understand that the beauty would be if we will leverage this kind of crisis to get out of it much more professional, much more resilient, much more improving our, safety and quality, culture. These are the four principles. Short update about what's going on. In Sabra, we are already in the process of getting back to the shelves. Almost 50% of the factory is running already, and now we are building the inventory in order to go to the market, and we believe that not later than the end or mid-second half, we'll be there fully. Recall in Israel is a bit more complicated because of the size of the business, because of the complexity. We are now learning, try to understand much better what happened.
During this period of learning, we are improving aggressively all the processes, machinery, raw materials, in order to be back in the market, at least before the end of the time that we got from the government, which is three months. It means hopefully in a couple of weeks we start gradually, I say gradually, back on shelves. We decided that with we should continue with our, let's call it the strategic journey. A couple of months ago, Ariel and myself will present our journey, the strategic journey, and we believe that the company is strong enough and resilient enough in order to continue. Yes, maybe it will change a bit here, a bit there, make some, you know, updates or adaptation.
Conceptually, we believe that the company is strong enough to continue the main journey for our next five, six, seven years, with some small adjustments. Last but not least, is the food tech. The day before yesterday, we celebrated Israel here, the launch of Kitchen 2.0. We have amazing, great global partners that will invest together with us in food tech. We host here in Tel Aviv more than 160 investors, global and Israelis, and our 23 startups that's already in The Kitchen 1.0, present them and call them for action in order to invest.
We really believe and continue to invest in the food tech as a part of our belief that in order to nourish a better tomorrow, which is our vision, is to be much stronger and lead the food tech. Just to complete, thank you for supporting us. We really believe that the support of you as investors and the rest of the stakeholders is a key in our back to highway that will become very soon. I will hand over to Ariel, the Group CFO, please.
Thank you very much, Giora. Good morning, good afternoon, good evening to everybody on this call. We appreciate you taking your time to be with us today. First of all, we are working diligently these days with relation to the two major events that we are experiencing both in Sabra and with our confectionery recall, to make sure that you, our investors, are timely updated and really understand the effects on current results and the effects on forward-looking results for this year. Hopefully, you weren't surprised to see the results for this first quarter of 2022, as we reported to you previously about the expected losses, net loss for Sabra this quarter, for the first quarter.
We also reported an immediate report about the expected losses due to the confectionery recall for this quarter. Probably you were not surprised to see the results for this quarter, and maybe hopefully you were positively surprised to see the upside and the nice results that we have in our other activities, mainly Brazil coffee company, the water company and the other segments and activities in Strauss Israel. To briefly go through the first quarter results, let's start with the top line. We grew in our sales 10.2% in Israeli shekels, 11.5% if we exclude the FX exchange translation. This is a very nice result that also incorporates the decline in Sabra sales in this first quarter and due to the confectionery recall.
Taking into account that these decreases were incorporated in our financial statements, you can see that our normal growth this quarter was even much higher than this. If we look at the segments, different segments growth on the right-hand side of this bridge report, you can see the confectionery recall effect on the sales, which was the sales for the first quarter, which was ILS 64 million. You can see the Sabra effect on sales, which was ILS -42 million. All the other segments, you can see a very solid stable and nice momentum of growth. Strauss Water continuing for many quarters now. Again, another high single-digit growth of almost 8%.
In Strauss Israel, just prior to the confectionery recall for the first quarter, the business grew almost 7%, and this is after six years of growing on an average of around 5% in Israel, which demonstrates our very good track record of growth in Strauss Israel, and also shows why we grew so much in our market share during these years. Strauss Coffee with almost 36% growth that comes mainly from Brazil and the Eastern Europe countries, aside from Ukraine and Russia, which suffered a little bit, not materially, but a little bit, this quarter due to the Russia-Ukraine war.
If we look at the gross profit, we can see a steep decline of ILS 150 million from ILS 812 million in the first quarter of last year to ILS 662 million in the first quarter of this year, and a steep decrease in the margin from 39% to 29%. This decrease is mainly due to the confectionery recall, and also attributed to the decrease in Sabra's activity in the first quarter, and accordingly, also a very big decrease in their gross profit.
We can still see a decrease in the gross margin of the coffee company, but we can see that the absolute gross profit is growing nicely from ILS 272 million in the first quarter of last year to ILS 295 million in the first quarter of this year. We can see the results on the operating profit, ILS 102 million this quarter, again, mainly because of the ILS 154 million write-off due to the confectionery recall. You can see it on the right-hand side of this bridge. Dips & Spreads mainly because of Sabra, a decrease of ILS 26 million.
On the left-hand side, you can see also one-time expenses, totally almost ILS 30 million decrease in the Dips & Spreads, and this is due to Sabra's partial activity during the first quarter of this year. The other segments, Strauss Water, Strauss Israel prior to the confectionery recall, and Strauss Coffee are growing nicely. In Strauss Israel almost 8% and double digits in Strauss Water and in Strauss Coffee. When we look at the contribution to the nice growth, both in sales and in gross profit and operating profit, we cannot neglect the outstanding performance of Três Corações in Brazil. As we promised, we amended, or we updated and adjusted the selling prices of our coffee products in Brazil during the previous year.
This quarter, we finally caught up with the increase in the green coffee prices. Once we caught up with the raw material prices, we can see the nice increase in sales and in profits in local currency. Now, as green coffee prices are stabilized, at least for the past 3-4 months, they're pretty much stabilized. We can say that Três Corações is now more stable in its business and should be expected to show more resilient results in 2022. If we look at the net income, we can see that all these effects went down to the bottom line, ILS 43 million net income this quarter, compared to ILS 206 million net income in the first quarter of last year.
On the right-hand side, we can see the ILS 190 million effect of the confectionery recall, which is the material thing that affected our net income. Also, the other decreases in EBIT due to Sabra's loss this quarter. Although we are having, as Giora said, a great activity and success with our FoodTech hub, we are seeing there. As you can see, we are registering it from in accounting terms, we're registering profits for the past few quarters. We on an annual basis, as we said before, we see this activity now contributing to our profit and not recording net losses on an annual basis anymore.
Our finance expenses grew this quarter compared to the previous quarter, the first quarter of last year. This is mainly due to the mark-to-market of our FX hedges. If we look at our gearing ratio, our gearing ratio grew from 1.4 the first quarter of last year, it was roughly 1.3 at the end of 2021, and now it's 1.8. The main cause for this is, of course, a steep decrease in our EBITDA this quarter, which of course causes an increase in the gearing ratio. A few words about the financial effects of the two main events, both in Sabra with the factory adjustment plan and with the confectionery recall in Israel.
As you've seen in our immediate reports and in this first quarter report, the effect of the confectionery recall for the first quarter was a decrease of ILS 64 million in our revenues sales and a decrease of ILS 154 million in our operating profit and ILS 190 million in our net income. We projected a range of ILS 172.3 million-ILS 230 million net- profit effect on the whole year of 2022. If we recorded already ILS 119 million, you should expect another ILS 50 million-ILS 110 million net- profit effect on our next quarters.
If you look at it logically, most of it should be recorded in the second quarter this year because as you all know, the second quarter incorporates the period that the factory is not working. We're losing potential sales, therefore losing potential profits. Also, we will have to write- off the sales and the inventory that we produced during the month of April. Therefore, you should expect the main effect of the remainder of our projection to be written in our Q2 results. This is with regards to the confectionery recall. With regards to the Sabra adjustment plan, last quarter, when we reported the annual results, we projected a loss of $4-$7 million our share, 50% Strauss' share, on the first quarter. The actual result was a $4.5 million loss.
Therefore, our projections were correct. For the second quarter, we reported this in our MD&A, this quarter. We project for the second quarter a loss of $15 million-$17 million our share, 50% Strauss share, in dollars. $15 million-$17 million Strauss share. Out of that, we expect to have $6 million-$8 million of one-time costs due to write-offs of inventory and reorganization costs and so on. You should expect these numbers to appear in our second quarter results. With regards to all the other activities, as you can see, all the other activities are behaving from a business and financial perspective, normally. Therefore, you can expect the regular momentum and trends that you see and put your projections for the other activities.
We're happy to say that at least up until today, the effect of the Russia-Ukraine war on the results of Strauss Group, both for the first quarter and from what we see from the 1st of April, up until today, the 25th of May, is not material. Therefore, it probably will not materially affect our second quarter results. I will conclude with that and invite all of you to ask questions.
Thank you, Ariel. We do have a question from Chris Reimer from Barclays. Thank you, Chris. Regarding the confectionery factory in Israel, the Ministry of Health referred to minimum three-month closure. Do you have any option to reopen earlier if the necessary work is completed?
Yes, if the Ministry of Health closed the factory, ordered a closure of the factory for up to three months, which will end at around the end of July. We are doing our utmost efforts to come back to production before that, together with the Ministry of Health. We are, of course, optimistic about that, but we cannot project the exact date of coming back to production. Once we can commit to such a date, we will inform you of course.
Thanks. There are a couple of follow-ups on this question. Following on that, given the impact of the earnings for the quarter, are your previous estimates on the impact to net income for the full year still in line?
Yes, they certainly are.
Another follow-up: Do you have an estimate for the total cost of the recall? What happens if there are delays or any other obstructions to reopen?
The reason that we took an estimation, which is the range between ILS 170 million-ILS 230 million on the net profit, is because we saw different scenarios, and we put the different scenarios in this range. Yes, there are scenarios, whereas the going back to normalcy will take more time and be more gradual than we would prefer it to be, and therefore the range. This this reflects the higher range. Of course, the lower range reflects our more optimistic scenarios. We cannot give you the total recall costs, but we gave you the total recall effect, which includes in it the recall costs plus the loss of potential profits and sales that will occur in the weeks that we are not producing in our factory.
Thank you. The second question from Chris from Barclays is regarding Sabra. Looking at the U.S., can you elaborate on the work that is going on at Sabra plant? Can you give any more color on the timeline? Will there be a ramp-up in time?
With regard to Sabra, what we can say is that we again we are optimistic that we will be able to come back to production in the second half of this year. We already are producing in half of our factory. Roughly half of our production is now being utilized, and we're building the inventory and really starting these days to sell the inventory that we have built in the last couple of weeks. For the second half of the factory, which is still shut down, we will come to production for sure in the second half this year. We will do our utmost efforts to make it as soon as possible, but we cannot commit to an exact time.
Once we come back to production, again, it will take a few weeks or months to come back to total appearances back to what we were before the adjustment plan on the shelves in the stores. We project that at the end of this year or the beginning of next year, we will see normality or come back to normal activities in terms of run rates.
Thank you, Ariel. We have a couple of questions from Eric Liu of Harris Associates. Thank you, Eric. Why were Israel Coffee margins down 600 basis points versus Q1 of last year? The margin in Q1 of last year were abnormally high, but why?
The Q1 margins went down mainly because of the confectionery recall effect. Again, if we look at the operating margin, the effect of the confectionery recall was ILS 154 million on the operating margin, and it was roughly ILS 140 million on the gross profit margin.
Ariel, sorry. The question was on Israeli Coffee margins.
Sorry. I thought Strauss Israel. Sorry.
No.
Eric, back to your question on the Israeli Coffee. Yes. The margins with Israeli Coffee in the past, let's say if you look at the average past two years, you can see that the margins were higher than what we are used to in the past. If you look at the years, let's say 2015 - 2019, we can see that the Coffee Israel margins were usually between 18%-22% on an annual basis. Of course, it fluctuates a little bit when you look at a specific quarter. Therefore, what we can say is that this quarter, the 22% margin is more reflective of the regular margin in Strauss Coffee Israel, whereas the first quarter of last year was due to a few one-time effects, higher than usual.
Also, there are the green coffee prices that were lower in the previous quarter and higher in this quarter that made this effect. If we talk about expectations going forward, then the previous history reflects better the expectations going forward, meaning 18%-22% is the average historical rate, and this is the average that we should expect going forward.
Thanks, Ariel. One more question from Eric: Have you identified the specific issue causing the Salmonella? What caused it?
Yeah. Still we didn't find. It's a bit tricky, kind of a virus or contamination, which makes our life much more complicated to find exactly what we call the smoking gun. Now we are running thousands of samples in order to really understand if it comes from raw materials, from the environment, from one or the other any of the lines. It will take another couple of days, maybe a couple of weeks, to understand exactly. Yes, it's not sure. Maybe in the end of the process, we'll have a kind of couple of speculations or assumptions about the smoking gun. We hope not. We will find it, but it takes some time.
Now we are almost more than 10,000 sampling in all the area, in all the raw materials, all the finished goods to try to filter and to pinpoint. I hope the moment we'll get to know, we'll update you.
Thank you, Giora. I think there are no more questions at this point. I wanna thank you all very much for participating. A record of this Zoom will be posted on our website as well as all the other materials, and we'll be happy to conduct further one-on-one calls as necessary. Thanks again for joining us, and see you next quarter.
Thank you very much.
Thank you.