Earnings Call: Q2 2021

Aug 17, 2021

Hi, everyone. Thank you for standing by. Welcome to Straus Group's 2nd Quarter 2021 Results. All participants at present are in a listen only mode. Please keep yourself on mute unless you want to ask questions. Following management's formal presentation will be given time will be given for the questions and answer session. Feel free to also post any questions you may have on the chat box. As a reminder, this online Zoom conference is being recorded today, Tuesday, 17th August, 2021. I would like to remind everyone that the online conference 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 timing 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 Security Authority. With us online today are Mr. Giora Vardeea, CEO of Straus Group and Mr. Ariel Sheitret, CFO and myself, Daniela Finn, Head of Investor Relations. Giora, please go ahead. Hey, all. Good afternoon, good morning to everyone. At Strauss, we continue to closely manage the opportunities and risks during these very volatile times. Since you will understand that we are living in a really uncertainty days, we are very proud to report today the results of the Q1, which we can see our experience and some challenges for this kind next quarter. The main topic when we look at the group is the strong momentum on growth. After a long time, we can see that this quarter, we are having double digit growth and the major phenomena that we have this growth in all our categories, countries and businesses. 2nd is the market share. During this period of time, as a branded company, we are very proud that in most of our brands and mainly in the blockbusters, we're having regained market share or we protect the market share. I talk about Israel, which increased market share. We'll see it later. We'll talk later. We see Sabra a little bit decrease, but more than 60%, coffee companies as well. During these volatile times, it's very important on one hand to continue and to keep the momentum with all the strategical approach. So we continue to expand our business, penetrate or expand to new categories as well as invest in capacity in CapEx. So on one hand, to protect and to cross the pandemic and all the rest of the crisis that's around us, but not to give up and not to lose the long term strategy and the long term journey to achieve the company goals. Another very important point that this quarter, remarkable results in our home base. As an international company, we understand the resilience and a powerful home base is crucial for the long term journey out of Israel as well. So we grew the business in Israel, not Straus Israel. I'm talking about the business in Israel. It's the coffee in Israel, water in Israel, Strauss Israel, more than 8% over last year. Last point is very important is to talk about the resilience. I just mentioned the resilience. The combination of the corona and the uncertainty time of the corona, the 3rd wave, the 4th wave in Israel, out of Israel, Brazil, United States, etcetera. At the same time, in Israel, we had some issues with our neighbors in what we call Shomer Chomot. It was operation in Israel. And all the issue was the supply chain. All of them we led with very strong resilience, very strong resilience financially and operationally. When we look at the near future, the near future, it's mainly the main issue is supply chain. I'm sure you all you are familiar with the challenges about transportation, about shortage of some raw materials and spare parts and mainly the green coffee increased price. So this is the main challenge for the next couple of months and you will see later how we mitigate and how we believe we can gain with all this phenomena. A couple of words about each one of the business. So you can see that the rally in Israel is continue, 7.7% growth, strong EBIT. We leverage on the growth and the EBIT is 10.1% over last year. Market share, 0.3%, percent, which is 12.4 percent from the total Israel Food business. We can see the AFH and On the Go. Since in Israel, the last quarter was the beginning of, let's say, more and more reopen the office, hotels and attractions, parks. Unfortunately, during the last couple of weeks, it's back to maybe hopefully not the first the 4th wave of the corona. But during the quarter, we opened most of the On the Go and the FH, so it's impacted the growth. Very important in Israel, in order to meet the demand in our Israeli business, the dairy, the confectionery, the coffee and the salty snacks. We invest a lot of money in our capacity. We have a huge master plan, what we call, in order to invest in our infrastructure. Future, mainly about ARPRO and plant based activities and open a new channel. We found in Israel that there is a special channel, not the traditional one like the big ones, the discount, but more professional like the butchers and bakeries. And we developed a special channel in order to meet the demands in these special retailers. Next one please. Coffee, you can see here a nice growth of almost 14% in local currency. The majority of this growth comes from the opening, as I said, opening in Europe, in Israel, in Brazil of the AFH. Coffee in Israel, up to 23% growth and mainly from the Elite Coffee chain. It's a 70 point of sales in Israel and a lot of activities in AFH. In Brazil, impressive increase of almost 14% in local currency. And as I said before, a huge challenge with pricing, we'll talk later, and improved momentum after a couple of quarters with some challenging in Europe. Now in our Eastern Europe, we have momentum in all the countries. EBIT of the coffee company, totally coffee company, 7%, but we see the erosion that came from the green coffee. The market share in Brazil, 30%, including the Mitsui, I believe you remember, and if not, you can find it in some in last year. We bought a local company Mitsui Coffee, and we're growing almost 2% from the synergy with this business that we merged into 3C. Future challenge mainly is to mitigate the increase of the green coffee, part of it by production, productivity and other activities. And the major one is increased price. We already have done in Brazil, we have done in Ukraine, in Poland, and we understand that this is unfortunately the only way to mitigate the price increase of the green coffee. Sabra and Nobela, this is our joint venture with Pepsi, increased sales in local currency more than 8% in the United States and in Nobela out of United States. When we translate it to shekel Israeli shekel, it's 2.2%. And we have a new CEO in Sabra. In Sabra, this is the only place in our portfolio where we have some challenges over the supply chain. In Virginia, we have some challenges with COVID. People sometimes refuse to come to the factory. We invest a lot of money in order to protect the employees and to share with them, to give them the best environmental protection in order to feel comfortable. But still, we lost almost $5,000,000 less than $5,000,000 in cuts means that we didn't meet the demand because the supply was problematic and it hit our profitability in Sabra. The water continued amazing rally that we started a couple of quarters ago. You can see here the strong quarter of 16.5%, almost 16.4% and we are very proud to have this growth in all our countries or geographies, Israel, UK and China as well. Operating income improved by 6% 13%. You can see the momentum in all the activities. We launched in Israel, you can see it in the picture, the new machine, which is much more modern IoT system, amazing launch with unbelievable sales in Israel. And we believe this machine will help us to expand the business out of Israel during the next couple of years. You can see in higher in China sales up to 22.4% in local currency and reached in the quarter €345,000,000 The business is growing amazingly. Income up to 11% better than last year. If we excluded the subsidiary that we got from the government last year, ILS 11,000,000 for the new factory that we built in China. We're already number 1 in online, and we believe the new factory and the new R and D center that we developed and we completed lately will help us to be a leader very soon in offline as well. So down the road, they're ambitious, is to be number 1, both in online and offline in China, in what we call ready point of use and point of entry, means the point of drinking and the entrance to the apartment to serve all kind of water in the residential apartments. Last but not least, about the growth and innovation. I'm sure that you're familiar with our kitchen and innovation growth arm. We celebrate a month ago the 20th startup that joined the kitchen. And we have very successful follow investments in some of the kitchen companies. Alepharm raised USD 105,000,000 and we'll see our share in the Q3 very soon. And we have some, let's call it, test and learn, very innovative product that we produce here in Israel and we launched them in United States in order to check what is the best way to bring some of the innovation, which is from the kitchen or out of the kitchen, Kitchen Hub. What is the best way to launch new product in United States? This is the first one, Upland. And very soon, I believe, we can learn and expand our innovation from Israel to United States or maybe to other countries as well. So thank you very much, and I will hand over to Ariel, and we'll be very happy to answer any question after Ariel will complete his screen. Ariel, unmute. Sorry. Hi, everybody. Good afternoon. Good morning. Happy to be here with you. A short summary of the financial results for this quarter and a very brief look for the first half of twenty twenty one. Let's start with the overlook of the organic results for the quarter year to date. Maybe at the beginning, I will just state that this quarter, the foreign exchange translation effect was relatively very minor compared to the effect that we experienced in many previous quarters. So this quarter, the effect was only ILS 40,000,000 on the top line and ILS 5,000,000,000 on the EBIT line, which is small. And therefore, the organic results and the reported Israeli shekel results are quite similar. So if you look at the 2nd quarter, the sales growth organically was almost 11%. In the first half, it was 5%. Just to show you the difference between the quarter and the second quarter. In the Q1, we were flat in sales. The 2nd quarter, as you can see here, almost 11% and the average is 5%. Just to remind you, the Q1 last year was the peak sales of March because of the panic by phenomena of the COVID-nineteen at the beginning of the pandemic. And therefore, the sales in the Q1 of this year were flat. But in the Q2, we see the exact exactly opposite phenomena where many channels were reopened in 2021 away from home, on the go and outside the consumption channels. And in the previous Q2 of 2020, those channels were completely closed and this explains the very nice growth that we have in the Q2. If we look at the gross profit, we can see that we grew 8% in the Q2, 1.6% in the first half. This is mainly due to the effect of increase in different inputs. For Strauss Group, it was mainly green coffee, milk in Strauss Israel and transportation costs during the first half of the year. If we look at the EBIT line, we can see a decrease of 3.7% in the second quarter, but increase of 1.2% once we exclude the onetime Chinese subsidy that we received for the building of our new factory in China for our higher Strauss Water Partnership. And in the year to date results, we see a growth of 4.1% and excluding the one time subsidy, 6.5%. Looking into the net income line, we can see that we decreased this quarter. But once we exclude the Chinese one time subsidy, we grew almost 2%. And in year to date, we grew almost 10%. And once we exclude the subsidy, 14% in our net income. If we look at 2nd quarter sales, we can see that this quarter growth is quite special compared to growth in previous quarters. We can see that the growth is across the board. All the segments, all the business units grew significantly this quarter. And if we look at the reasons and root causes for this growth, we can see that we grew we continue to grow very nicely in the retail channels across the different business units. But we also grew very, very significantly in the away from home, in the on the go channels this quarter. In the previous quarter, Q2 of 2020, you can see that we decreased almost 50% because at the beginning of the pandemic, everything was shut down and people did not consume foods and drinks outside of home. And in this quarter, in most of our geographies, the markets were relatively open, not fully operating as they did before the pandemic, but quite open and we saw a significant growth. If we look at the gross profit, we can see a nice growth of almost of a bit more than NIS 50,000,000 in the gross profit line. But the gross profitability decreased by about 1% from 38.4% to 37.3%. And this is mainly due to our input inflation. 1st and foremost, the green coffee in price increases. And in Israel, the milk, raw milk price increases and across all of our geographies, the transportation costs grew dramatically. If we look at the EBIT line, once we exclude the onetime subsidy in China and an organic M and A and transition effect, we can see that we grew only EUR 1,000,000 in our EBIT from EUR 211,000,000 to EUR 212,000,000. You can see that in 3 out of our four operating segments, we grew in our operating line. But in our dividend spreads, mainly Sabra, we decreased in our operating profit. The first reason for the decrease in, let's say, operating profitability was, of course, the decrease in our gross profitability due to the input inflation. But the second reason is a more temporary reason. Last year, Q2, we freed most of our operating expenses, sales, marketing and the G and A because we stopped traveling, we stopped our all of our activities, projects, some of our marketing expenses. And we only focused on the very necessities of our business, manufacturing, delivering, distributing and logistics. And therefore, we saved a lot of OpEx costs. But this quarter, in the Q2 of 2021, we were back to close to normal, let's say, not totally normal, but close to normal OpEx costs and therefore, the decrease in the operating profit. If we look at the net income, we can see that the decrease came from the EBIT. The other items did not change the net income. On the one hand, we decreased in our finance expenses due to improving our interest rates dramatically last year once we optimized our debt structure for the whole group. And therefore, our interest platform going ahead is much lower than what it was in the previous years. And on the other hand, our taxes grew from Q2 2020 by ILS 21,000,000 due to the fact that last year, we had a onetime temporary decrease in tax payments because we decreased our provisions for taxes in several of our geographies. If we look very briefly on the year to date results on the top line, as I mentioned before, we grew organically 5%. And as you can see, we grew very nicely in the first half in 3 out of our 4 segments, Charles Coffee, Charles Israel and Charles Water. And we were stagnant in our international dips and spreads. And once we look at our EBIT for the 1st 6 months, we can see a nice growth of ILS10 1,000,000. We maintained our EBIT profitability at almost 12%, very similar to what we saw in the first half of twenty twenty twenty nineteen. And when we look at the net income, we can see a nice growth in the half year of NIS 26,000,000, nice growth in profitability to 7.9% net income profitability. And we can see that this growth came from the growing EBIT and the improvement of our finance expenses relatively to the first half of last year. It's also important to mention that in our incubator, in our kitchen food tech hub, we have a pretty big portfolio of 20 companies. In the Q1 of this year, we registered a profit from dilution in our holdings in a few of our investments due to advanced rounds of finance that they have made in the Q1. In the Q2, we didn't register any major profits from advanced finance rounds of this portfolio. But in the Q3, as we reported in our immediate reports, we had a very significant finance round in our successful investment in Aleph Farms, the cultured meat company, which raised $105,000,000 And from this raise and our dilution in our holdings, we registered a NIS 58,000,000 profit that will appear in our Q3 reports. So with this, I will end the brief summary of the quarter, and we'll be happy to answer any questions that you have. Thank you, Ariel and Giora. I remind you, you may post any questions you may have on the chat box or unmute yourself and ask directly. In the meantime, I'm going to ask a question on behalf of Chris Riemer from Barclays. And Chris asked the following question. 1st quarter in a while where organic growth was posted in Sabra. I was wondering if you could give some color on the changes in the operations there. And what in your view still needs to happen before margins improve or stabilize? Yiora, do you want me to take that? So first of all, I'm not sure that Yura mentioned it, but it's written in the presentation. We have a new CEO in Sabra. He started to lead the company from the 1st August. So it's relatively very fresh. And we believe that his experience and knowledge and capabilities will help Sabra continue its journey with success in the future. We also believe that infrastructure and strategic plans that were built by Tomer, the previous CEO in Sabra, are very solid and will be used by the new CEO and new management in the future. So this is just a remark about management changes in the Sabra leadership team. With relation to the business itself, we believe that we have a few challenges to overcome in order to give us a more promising future in both in top line and in our margins. First of all, we have to build a very solid innovation pipeline because innovation in the segments of the dips and spreads and fresh salad is crucial, is key to growth in the top line. And therefore, we're working on our innovation pipeline very hardly. 2nd, we have to work on improving our product quality because we believe that we can win the competition better once we improve the quality of some of our products there. 3rd, we need to look at adjacent categories that we can also enter into and not only focus on hummus and related salads for the near future. This is a very important thing for the top line. Also, we have to stabilize our supply chain. As you know, the corona posed some significant challenges for our supply chain, employment issues, salary issues. And we must improve our supply chain to make sure that the business is stabilized. And this will allow us to secure the orders that we receive without any cuts as we experienced in some of the previous quarters. And last but not least, we think there is a lot of room for productivity in Sabra. We started to look into major, major automation and productivity CapEx programs for the near future. And we are very positive about the ROIs of these programs. And we're sure that in the future, these investments will improve our productivity and help us secure our margins. Thanks, Ariel. And a follow-up question from Chris. How should we be looking at margins overall going forward post COVID lockdowns? And can you provide any details as to the factors which may continue to impact margins? So I have nothing to I guess, no news when we talk about the input inflation phenomena worldwide, of course, it is also related to many of our categories in Strauss. Our main, main, main challenge will be the green coffee. And we will have challenges in other inputs, but we don't see the other challenges as tough as the green coffee challenge because we believe that we have enough productivity, mitigation, hedge and other tools to tackle the challenges in the other inputs that are rising. With relation to green coffee. Green coffee, we need to distinct between Brazil and the other business coffee units. In Brazil, we are not hedged. And therefore, the changes in green coffee are translated immediately into our costs of sales. And therefore, our main mitigation plan there is to raise the selling prices, and we are doing that. We have raised the selling prices in February, in May and again in at the beginning of August by tens of percent. I cannot tell the exact amount because we cannot disclose it. But since the green coffee rose by more than 50% from last year up till now, we have raised also our selling prices dramatically. We believe that towards the end of the year, we will reach a parity between the raise in green coffee prices and the raise in our selling prices to the retailers. And therefore, from there on, we will stabilize our margins, which we believe will be higher the margins will be higher than what we experienced in 2020 and the first half of twenty twenty one. But we need to see how this rally of green coffee price increase ends because we're not sure yet that the rally has ended. We have to wait until around October to see what will be the crops, the certain crops of green coffee for next year. Once the crops are certain, then the prices will stabilize and we will see if the rally has ended or we still have unfortunately room for more increases. Thank you, Ariel. Thanks, Fiora. If there are no more questions, I'd like to thank you all for joining us today, and we look forward to seeing you on the next call. I remind you all that all the materials, the presentation and the entire financial packages are posted on our website. And a recording of this conference call or the Zoom conference call will be available at a later stage as well. Enjoy the rest of your summer. Stay safe. Take care. See you next time. Bye. Thank you.