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Edited Transcript of EBRO.MC earnings conference call or presentation 31-Oct-19 12:00pm GMT

Q3 2019 Ebro Foods SA Earnings Call

Madrid Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Ebro Foods SA earnings conference call or presentation Thursday, October 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Conference Call Participants

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* José Manuel Rito

Banco Português de Investimento, S.A., Research Division - Analyst

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Presentation

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Unidentified Company Representative, [1]

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During the third quarter, the U.S. harvest was completed, and the European harvest began. The U.S. harvest was approximately 20% down on the previous year due to severe rainfall during the spring, which led to a reduction in the planted area. Market prices are rising as a result, but we have sufficient provisions to take us through the end of the year. The European harvest look positive except for Andalusia, which has struggled with salinity issues and is expected to see production drop by 15%, which may push prices upwards.

Sales figures are performing very well across Europe, where our brands continue to grow, while the rest of the market remains flat. We are coming to the end of a very good year in Spain, France, the U.K. and Thailand.

During the third quarter, we acquired renowned basmati brand Tilda for $342 million. Tilda was the first company to bring basmati rice to Europe 40 years ago, and now sells rice in over 50 countries, with a significant market share in the U.K., the Middle East, North America and India. Tilda further consolidates our position as leaders in the premium segment. We are waiting to see how Brexit will unfold and how it will affect us. Although in theory, it should be very positive for us, given the extent of our industrial footprint in the United Kingdom. In the U.S.A., following the issues at the Freeport and Memphis plants, we made some organizational changes and are now starting to see improvement in terms of productivity. Price for the first 9 months of '19 as a result -- (foreign language) as a result, sales increased 9.2% year-on-year to EUR 1,134.5 million despite having canceled the nonprofitable business that's from Freeport. Advertising investment rose by 18.6% to EUR 25 million. The division's EBITDA grew by 18.3% to EUR 140 million. The growth rate was higher than in previous quarters. And on a stand-alone basis, the quarter regained the rate last seen in Q3 '17. At the same time, the entry into force of IFRS '16 had a positive impact of EUR 2.7 million. Currency exchange had a positive effect of EUR 4.2 million. Tilda was consolidated in September and contributed EUR 1.3 million.

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Unidentified Company Representative, [2]

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Good afternoon, ladies and gentlemen. Thank you very much for attending the on-site presentation before the bank holiday. Do you have a bank holiday? Or you're under punishment? Well, some of you have, and some of you haven't. As I was saying, we're going to carefully analyze the results for the first 9 months of this year. It is customary to give you the guidance and our overview on the estimate closing figures for the end of this year. As usually, we will start with rice. During the third quarter, the U.S. harvest was completed, and the European harvest began. The U.S. harvest was approximately 20% down on the previous year due to severe rainfall during the spring, which led to a reduction in the planted area. In the U.S.A., the harvest is roughly by the month of June in Texas, and it finishes by October or September, October in Arkansas. So this is the reason why there is a 20% down on the previous year.

Market prices are rising, as I've told, but we have sufficient provisions to take us through the end of the year. It is in the upward trend because the U.S. is highly linked to the global markets because of its export factor. If prices goes up -- go up, they reduce exports. So the increases are more moderate because prices in the U.S. are higher than global prices. And once their prices go up, the niche markets like Mexico tend to focus on other origins, and supply and demand is really balanced again. However, when it comes to the European harvest, well, it looks positive, except for Andalusia, which has struggled with salinity issues. And in the Guadalquivir River, there was a shortage of water on previous years. And harvest in Andalusia -- or the production really dropped by 15%, which may push prices upwards, especially on Q4 and Q1 2020 when all the price negotiations are negotiated between the main farmers and agricultural comparatives (sic) [cooperatives].

Sales figures are performing very well across Europe. We are experiencing a very flat growth. However, the group sales continued to grow both in Spain and France. And also, in the United Kingdom, we may have had thought it was Brexit linked. But given the recent events of Brexit, we haven't seen any decline, and we are experiencing a very positive year in the United Kingdom. And also in Thailand, after the major investments we carried out in the country, we are very pleased with the results in Thailand.

During Q3, we acquired renowned basmati brand Tilda for $342 million. As you all know, Tilda is a very prestigious brand of basmati rice. They introduced basmati rice 40 years ago. It's a company with an Indian origin that set up in the United Kingdom, but they have a strong presence in the United Kingdom, the Middle East, North America and India. And it further consolidates our position as leaders in the premium segment with major synergies with the other business area of the group in India, because they had no facilities in India, so we can leverage on these volumes.

In the Middle East, we are major players with American Rice, now we include basmati. And in the United Kingdom, we didn't have any brand presence. We had a presence in the ethnical industrial segment but not brand related, so it's a very complementary acquisition.

We are waiting to see how Brexit will unfold and how it will affect us. Although in theory, there won't be any negative for us. If things remain the same, business as usual. And in the case of a hard Brexit, the fact that we have 2 plants in the United Kingdom covers us from the customs point of view because, really, we would be very advantageous from a tariff point of view. And this would be very favorable, as I said, for companies with a footprint in the industrial sector in the United Kingdom versus pure exporting players.

In the United States, following the issues of the Freeport and Memphis plants, we made some major organizational changes with our -- head count changes, structural changes. And we are now starting to see improvement in terms of productivity, and we were changing some profitability issues because we really need to tackle certain efficiency issues in terms of packaging. But now we have fully identified them, and we have already ongoing projects to solve them.

It's been a year in which the results could have been much better. But the problems, the industrial problems we are facing are very well controlled. And we are creating new teams. We've undergone several new changes in the industrial area. We have 2 Spanish industrial managers, and we strongly believe this is going to have a positive impact on efficiencies.

As far as the sales are concerned, we grew 9.2% year-on-year to EUR 1,134.5 million despite having canceled the nonprofitable business volumes from Freeport. Advertising investment rose to EUR 25 million, this is plus EUR 4 million. And the division's EBITDA grew by 18.3% to EUR 140 million. The growth rate was higher than in previous quarters. And on a stand-alone basis, the quarter regained the rate last seen in Q3 '17, which is an all-time high for Riviana profits. At the same time, the entry into force of IFRS 16 had a positive impact of EUR 2.7 million. Currency exchange, on the other hand, had a positive effect of EUR 4.2 million.

In constant terms, we are growing at a EUR 14 million rate. We have recovered EUR 14 million out of the EUR 30 million, that EUR 30 million, the all-time high with the Riviana last year. We could have recovered EUR 8 million more hadn't we had all suffered certain incidents, production losses and productivity problems at plant sites. But we are aligned to recover the results for 2017.

Operating profit climbed 6.2%, up to EUR 101 million driven by a 23% uptick in Q3 on a stand-alone basis.

Rice 2019 outlook. We expect the division's year-end sales to climb 10% to EUR 1,553.5 million with Tilda contributing for the first 12 months EUR 46 million -- EUR 47 million. The sellers have left the channel very uploaded, which is very practical. So their distributors have very high stocks, and that hasn't been -- that's been the case, which led to certain discrepancies for the completion accounts. And we are not very pleased, by the way, with the major supply in the channel. Well, everything will be duly digested, hopefully.

Now advertising investment is set to grow by EUR 7.1 million compared to the same previous year -- same period. And EBITDA will grow by 20% to EUR 193.8 million, and the EBITDA margin will climb by 100 basis points to 12.5%. Tilda's contribution will stand at EUR 6 million. Sales ex the United Kingdom will be very complicated. Now the -- if the exchange rate remains at current levels, then it will have a positive impact of EUR 5 million. On a stand-alone basis, growth in the third quarter came in at 23% with a margin of close to 13%. So we are improving our efficiency, margin and results margin. So we are fully aligned with the goal and target to meet last year's all-time high.

Moving on to pasta. Wheat harvests have been very poor across all producer countries, with France and Spain being the only countries to produce good-quality harvests. Despite high stock levels during the previous campaign, there have been considerable price hikes in the wheat market. Fortunately, the group has more than sufficient provisions in place, especially in the United States, where they will take us through the second quarter 2020.

We have reasonably good prices for the second quarter of 2020. And by June, July 2020, the new harvest may arrive. So hopefully, we won't suffer many incidents linked to this issue, the bad harvest in 2019.

In Europe, in Panzani mainly, this year, our policy to reduce promotions and improve our sales mix is proving successful and producing returns for the brand and for the distributor. We want to defend the profitability, really, as I said, for the brand and for the distributor. The excessive promotions lead to cannibalization and weaker [thoughts] on the category, and this is something we are trying to avoid. However, in North America, very different results. We registered very positive results in Canada, seeing our market share grow, and strong take up of our latest product launches. In the U.S., however, we had to face numerous logistical difficulties due to problems with our new northeast distribution center. We changed the distribution center and the logistical distributor. And the problem is that their facilities weren't up to date and really ready when we needed them. That led to a litigation against the distributor and the logistics supplier because they argue the warehouse was delivered lately. But this led to an impact of 10 days with no purchase orders in a very important area of the United States. The problem has been solved, but we've suffered the 10-day stock loss and plenty of tensions against your current customers and clients. This has an impact of EUR 2.6 million, most importantly, in pasta rather than rice because the northeastern part of the United States is the most heavily consuming pasta area, the more Italian part, Pennsylvania, New York and Boston, among others.

Fresh pasta is performing well and has recorded a sharp growth in both Bertagni -- we really are very pleased with the Bertagni's performance. Olivieri still holds a 48% market share, however, in a very competitive market with very little profitability. Monterrat in France is having a difficult year due to the pork crisis, minus EUR 2 million EBITDA. Why? Because, as I said, the pork crisis where -- this is where we serve a lot of paté and sandwiches, and pork is much more expensive because of the pork disease. And we still suffer a lot of problems in Monterrat, again, as I said, because of the epidemics facing pork.

During Q3, we sold Alimentación Santé for EUR 58 million, resulting in capital gains of EUR 17.2 million in under 3 years. So it's been a very positive investment -- divestment, as I want to say. Our turnover grew 4.8% to EUR 948.8 million, building on the trends seen in recent quarters. Obviously, the last quarter is the best quarter of the year, to be honest.

We boosted advertising for the first 9 months of the year, trying to improve our mix. EBITDA for the division grew to EUR 107.1 million, by 7.7% roughly, and posted margin growth of 3 basis points. This is because of the change in mix, despite the increased price in durum wheat and the negative contribution of Roland Monterrat. The new accounting treatment of leases contributed positively with EUR 5.4 million, whereas FX had barely no impact on these results.

Rice EBITDA is very important in the United States. The new IFRS 16 increased amortization charges, meaning EBIT fell by about -- to EUR 63.7 million.

What is the 2019 outlook? We expect the division's year-end sales to climb 2.2% to EUR 1,294 million. But as I said, the fourth quarter's always very positive, and we'll try to see how we offset our policy to reduce promotions this year. Advertising investment will be lower this quarter. We are going to invest less. And we are going to try and improve our investment, advertising at the point of sale. EBITDA will grow by EUR 6.8 million to EUR 160 million, regaining margin growth in the fourth quarter of 15.3% as a result of the improved mix.

If the exchange rate remains at current levels, it will have a positive impact of EUR 0.87 million. And since Bertagni has been integrated into the group, it has grown by close to 15%. The change in the scope of consolidation will provide EUR 3.1 million, this company having been consolidated as from April 2018. This is a very clear and very positive bet of the company so far.

As far as the P&L is concerned, for the first 9 months of the year, the consolidated sales figure grew 7.2% to EUR 2,035.2 million, showing a healthy increase in business. Advertising investment grew by 5.8% to EUR 69.4 million. EBITDA grew by 13% to EUR 236 million. The exchange rate had a positive effect of EUR 4.6 million on EBITDA. The entry into force of the new IFRS 16, leases, added EUR 8.7 million to this figure so far. And on a stand-alone basis, Q3, so the EBITDA contribution regained 2017 levels, growing by 31% to EUR 77.5 million. Operating profit grew 0.6% to EUR 150.5 million, as this year saw a lower positive extraordinary income following the sale of SOS business in Mexico during 2018, and a higher negative extraordinary income, primarily due to the restructuring costs in North America. Whereas net profit grew by 15.1% to EUR 114.7 million. And the results of Alimentación Santé have now been consolidated. And as a result, the comparative figures for the previous years have also been removed. They are not appearing on the first 9 months, and neither on the first 9 months of this comparison.

What is our outlook for the P&L in 2019? The group sales are forecast to grow significantly by 6.5% to EUR 2,784.6 million in spite of lower volumes, willingly, obviously, at Freeport and reductions in promotions in pasta in Europe. By year-end, we forecast that we will have invested a further 5.8% in advertising, so plus EUR 5 million more additional in advertising than previous year, taking the total to EUR 94 million. And EBITDA will grow by 11% to EUR 340.6 million. FX remaining flat, the exchange will contribute EUR 5.9 million and IFRS 16 will provide EUR 12 million. Tilda is forecast to continue (sic) [contribute] EUR 6 million. We expect the net profit to increase up to EUR 159 million. This is an increase of 12.4%.

Debt performance, this is something worth mentioning. We ended the first 9 months of the year having increased our net debt by EUR 321 million to EUR 1,041 million on last year after making significant CapEx growth investments, above all, thanks to the acquisition of Tilda, which stands at EUR 342 million, and the allocation of leases as debt, which stands at EUR 90 million. Please remember that in this figure, EUR 1,041 million, we are accounting for certain put options of EUR 161 million if the minority shareholders were to exercise these options.

Equity grew by EUR 146 million year-on-year to EUR 2,257 million for the first 9 months of the year. During these 9 months, CapEx grew to EUR 107 million, and we expect it to reach at the end of the year, EUR 158 million. The most significant projects, please remember -- or the most significant investments we are currently considering are as follows: the new prepared foods in the La Rinconada rice plant; the new lines of skillet gnocchi in Canada; as well as certain investments in order to optimize distribution in France; the expansion of the RTS facility in Memphis package lines, it's twice as much as we had. Also by end of the year, and also taking into consideration that Tilda will have only contributed for 4 months, we forecast a net debt-to-EBITDA 2019 multiple to reach just under 3x. So we still have a theoretical high debt. However, please bear in mind that EUR 90 million are due to the IFRS 16 implementation, and EUR 160 million are put options that we do not forecast to be exercised in the short run because our minority shareholders have maintained their willingness to stay in the company in the long run. But we need to include these EUR 160 million in put options, anyway.

By way of conclusion, let me give you my personal view and skip the script now, the personal view on the year. With stable raw materials for almost all the year, we have only expected certain pickups at the end of the year, mainly in pasta. The prices are going from EUR 220 last year or last campaign to over EUR 280 this year. However, we are fully hedged in the United States until the second half of the year. We are also hedged in Europe, not as much as in the United States, but we are comfortable about it. Rice in the United States has experienced, as said, an uptick, but it's not to worry some and certain stability in Spain.

However, on the flip side, basmati has experienced a major improvement after the takeover of Tilda. The raw materials markets are reaching minus 10% below the previous year, so we expect major savings. And we really see that Tilda has started on the right foot, and basmati rice is bought at much cheaper prices on the previous year, which seems to point at a very good market situation.

We have recovered the performance in the United States, but not as much as we could have expected. We grow in our Rice division in Europe in a flat environment, whereas in the United States, we have also suffered problems facing our own company, not the market. So this is a good thing because it's something we can mend. We have suffered some organizational, structural and efficiency problems at the plant sites, and this is much better than suffering consumption problems or market-related problems. This is not the case. The problems we are having are at our hands, and we can solve them quite easily. We have already taken the necessary measures in order to go back to previous profitability levels we experienced in 2017. We are midway through though. 2017 was an all-time high in the United States, and we have recovered most of the losses last year. Still, not all of them. So it is an improvement on 2018. But still, we're not at levels seen in 2017, the all-time high.

As pasta is concerned, Panzani, we had less promotion investments trying to dignify the category. The problem is twofold here. Roland Monterrat, which is declining and having a negative contribution. This is something we'll have to solve very soon. But on the flip side, the purchase of the fresh pasta in Bertagni has been a great input for the premium segment, which is contributing more than expected. And the price we paid that may have seemed expensive, it's now quite sensitive, and also help us consolidate the rest of the group. We've carried out major CapEx investments. And you know that the maturity period, you all know -- [interpreter says they do not receive a sound in the booth. Sorry, all of a sudden, the mic is disconnected. We will resume translation as soon as we receive sound again.]

(technical difficulty)

With that note of private label businesses or some of the private label businesses, because we strongly believe that private label with negative profitability levels is not our goal and is not interesting to us. And this is my personal summary on today -- on this years.

We have EUR 340 million EBITDA as a consequence of all these factors. And let's focus on the positive side of things. We are growing on the previous year. And we also know that we have to -- what is it that we have to do in those areas of declining growth.

And I'd like to open up to questions. Q&A starts now. Please use the microphone if you may. Thank you.

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Questions and Answers

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José Manuel Rito, Banco Português de Investimento, S.A., Research Division - Analyst [1]

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José from CaixaBank. Going forward, in 2020, given the evolution of raw material prices and the areas of improvement this year, what do you think is going to be the margin evolution going forward? Do you consider any major improvements in 2020? When do you expect to recover 2017's margins? Do you have any visibility on this? This is my first question. The second question has to do with your debt. You're going to reach a multiple of 3x net debt to EBITDA. On previous results announcement, you said you're comfortable with the multiple of 3x net debt to EBITDA. Now going forward, was this going to be your strategy? Do you intend to deleverage? Can you maintain the 3x net debt to EBITDA because of potential acquisitions? Or deleverage will be due to disposal of assets?

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Unidentified Company Representative, [2]

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With regards to your first question, margins, I strongly believe that the raw material prices evolution. [The interpreter apologizes again. Unfortunately, we're not receiving any sound in the booth and therefore, we cannot translate. We are utterly sorry for this. And we are going to translate it as soon as possible to reply to the first question.] (technical difficulty)

Prices may be higher than in 2018, but they will be partly offset because of the negative prices or lower prices in other raw materials. This is as far as price is concerned. Now when it comes to the efficiency levels, and if we're going back to 2017 results, [The interpreter is certainly sorry. Once again, the microphone is on and off all the time.]

(technical difficulty)

The U.S.A. is midway through. It's going to be close to reaching its all-time high year results. We know that we have suffered one-offs. I mean, the problems are not going to happen again. Hopefully, we're not going to have any other major logistical issues because, as I said, we're amidst a litigation against a logistics supplier and also the structural problems are one-offs. I mean, we have also solved them, organizational changes that affect personnel changes in the VP of production in the United States. An awful lot of changes have taken place. We've identified all funnels and bottlenecks and relevant investments, and I strongly believe we are aligned to achieve 2017's all-time high results. But please remember, it was an all-time high year. It was a very positive year. We're just [EUR 40 million] behind. So we are right on track, and hopefully, the United States will continue to grow, and it's going to be a major cash cow. That's all I wanted to say with regards to rice.

Now let's focus on pasta. We have adequate hedges until the second quarter. We don't really know what happens in June and July. Two things can happen with the new harvest. Okay, positive harvest thus dissipating this uptick effect, or bad harvest that lead to an explosion. But I do not have a crystal ball today. And I can't tell you what's going to happen in the future. That will be seen by the month of May, roughly, and that's when we will accurately know what is going to be the situation facing the second half of the year.

We have a footprint in flat growth margins (sic) [markets], with better growth in certain parts of North America, like Canada. Whereas in the other markets, we have maintained our profitability levels. I do not envisage dry pasta growth. I mean, however, in other products like more premium products like fresh pasta, yes, we still envisage a premium category growth. And we strongly believe our fresh pasta will unlock its entire potential worldwide. Sales in France, Spain only confirm the trend. Garofalo is the real challenge in the premium sector, and it's been a roaring success. That's all. As far as margins are concerned, we expect stable pasta margins. We want to continue growing in rice in the United States, and in premium and specialties.

With regards to our net debt, I would like it to be below 3x multiple, but this is -- costs less because of the interest rate scenario. We receive 10-year offers below 1.3%. So in the past, having a lot of debt or a little debt, it was very determined by the interest rate scenarios. Today, having a huge leverage is less important when the interest rates are so, so flat or even negative. So our perspective is somehow different. Perhaps, it'd be absurd to have 0 debt. It's not that we are super comfortable, but neither are we uncomfortable having a 3x net debt-to-EBITDA ratio. And 20% is not to be called in the short run because of the puts and IFRS. Our acquisition policy mainly focuses in -- only, we find all those assets that can complement our strategy. Well, we saw Tilda, and we were undoubtedly paying, obviously, a very high price because we needed to do these investments, and Bertagni as well. However, at the moment, we are not negotiating any takeover of any single company. However, the current level of debt is not going to prevent us from examining other options that may be extremely complementary. Whereas in the meantime, we are going to try and focus on short-payback CapEx. We're going to be very active increasing our competitiveness because these are the pillars of the sustainability of our labels. And we're not worried about that, if this is what you're asking.

Please, another question? I think my answer was quite long. But I wanted to be very, very detailed in order to solve all the potential questions that you may have. Well, so if you do not have any other questions? Is anyone asking any other question?

[The interpreter apologizes. The speaker's not using the microphone, but apparently, the question is regarding working capital.] Well, ladies and gentlemen, thank you very much. Enjoy your bank holiday, All Saint's Day, if you stay here in Madrid or if you go elsewhere. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]