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Edited Transcript of MZB.MI earnings conference call or presentation 7-Nov-19 4:45pm GMT

Q3 2019 Massimo Zanetti Beverage Group SpA Earnings Call

Villorba Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Massimo Zanetti Beverage Group SpA earnings conference call or presentation Thursday, November 7, 2019 at 4:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leonardo Rossi

Massimo Zanetti Beverage Group S.p.A. - CFO & Director

* Pascal Héritier

Massimo Zanetti Beverage Group S.p.A. - COO & General Manager

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Conference Call Participants

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* Isacco Brambilla

Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst

* Luca Bacoccoli

Banca IMI SpA, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Massimo Zanetti Beverage Group 9 Months 2019 Results Conference Call. (Operator Instructions) At this time, I would like to turn the conference over to Pascal Héritier, COO of Massimo Zanetti Beverage Group. Please go ahead, sir.

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [2]

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Ladies and gentlemen, good morning and good evening, everyone, and thank you very much for joining our 9 months 2019 conference call. Together with me, as usual, Leonardo Rossi, CFO; and Marina Cargnello, our Investor Relations.

Let's commence Slide 2, 9 Month Highlights. The revenues increased by 2% at current exchange rates, minus 0.8% at constant exchange rates, showing continuous sales mix improvement and a solid third quarter in the Food Service and Mass Market channels. Our gross profit per kilo increased 1.5%, a positive performance in light of the reduction in sales price due to the decrease in the cost of green coffee.

Going to Slide 3, let's give more details on 9-month results. Total revenue were up 2% at current exchange rates, as said before, minus 0.8% at constant exchange rates. Volume, 64,000 tons (sic) [94,000], up 0.6%, with the third quarter at 1.8%, showing an improved trend in all main countries in the Food Service and Mass Market channels. Gross profit reached EUR 300 million, plus 5%, with the margin on revenues of 45% compared with 43.7% of 9 months 2018; therefore, was plus 130 basis points.

The EBITDA adjusted, if we exclude the effects of IFRS 16, reached EUR 50.9 million, plus 0.7%. EBITDA, EUR 55.9 million, a plus 10.4%. Net income adjusted and excluding effects of IFRS 16 reached EUR 10.2 million, a decrease of 18%. Eventually, net debt before IFRS 16 effect, EUR 211.7 million versus the EUR 174.7 million as of December 31, 2019 -- 2018, EUR 259.7 million if we include IFRS 16 effects.

Moving to Slide 4, volume by channel. The overall volumes were up 0.6% versus last year. The Food Service showed a 3% increase, a positive performance of Americas and in APAC and a solid third quarter in all regions. Mass Market, minus 1.7%, mainly driven by the softness in U.S. and by the timing effect on the relaunch of Segafredo range in Italy. Private Label, plus 2.2%, mainly led by the growth in Americas and APAC.

Going to Slide 5, revenues by channel. The revenue from the Food Service channel was up 3.5% compared with the 9 months of 2018, thanks to the positive performance in the Americas and in APAC and a solid third quarter in all regions. The performance of the Mass Market and Private Label channel is explained by the slight decrease of roasted coffee sales price and a consequence of the reduction of the cost of green coffee.

Going to Slide 6, revenues by region. Americas, minus 4% at constant ForEx was mainly due to the decline in the market (sic) [Mass Market] in the cans category, a slight decline at constant ForEx of the Private Label channel and by the solid growth at constant ForEx in the Food Service channel. Northern Europe is driven by positive performance in all channels. The revenue in Southern Europe is mainly driven by the timing effect of the Segafredo brand relaunch in the Italian Mass Market. Last but not least, Asia Pacific posted a solid revenue growth, also reflecting the recent acquisition of The Bean Alliance.

Let me give now the floor to Leonardo for a review of the financials.

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Leonardo Rossi, Massimo Zanetti Beverage Group S.p.A. - CFO & Director [3]

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Good evening, everyone.

Chart #7, revenue bridge. Revenues increased EUR 12.8 million to EUR 666.9 million, plus 2%, the FX contributing for EUR 17.9 million, plus 2.7%. Organically, revenues decreased by EUR 5.1 million, minus 0.8%. Out of these volumes, coffee was flat at EUR 3.7 million or plus 0.6%. The price/mix effect was negative for EUR 15 million, minus 2.4%. And other products, with a positive effect of EUR 6.3 million, plus 1%. Overall, the Australian acquisition contributed with EUR 9.2 million to the sales of the group.

Now turning to gross profit. Gross profit increased by EUR 14.2 million to EUR 300 million, plus 5%. Again, the FX there is positively affecting the outcome with EUR 5.5 million, plus 1.9%. Organically, the group has added EUR 8.7 million. Out of these volumes, FX is positive for EUR 1.5 million, 0.5%. The price/mix effect is positive for EUR 3.6 million, plus 1.2%. And the other increase in those of EUR 3.6 million. The Australian acquisition contributed for EUR 5.2 million.

On the right-hand side of the chart, you can see the gross profit euro per kilo at constant FX. And you can see that the figure has improved from EUR 2.53 to EUR 2.57, an increase of 1.5%, reflecting the growth in the channel and the price/mix.

If we move to the operating expense business. Group-wise, the operating expenses have increased EUR 6.6 million, plus 2.8%, to EUR 241.8 million, after taking out the nonrecurring cost for EUR 2.4 million. Net of the IFRS 16, which is decreasing the numbers for EUR 7.3 million and the FX impact increasing costs for EUR 4.8 million, the organic OpEx showed an increase of EUR 9.1 million or plus 3.9%. We have to consider that, overall, the Australian acquisition has contributed to the cost for EUR 3.9 million. If you take out the impact of the acquisition all throughout the year, the services has shown an increase of 3.7%, mainly affected by higher agent commission, maintenance, travel and outsourcing services, especially in Italy. The personnel costs out of the acquisition done in the year is increasing 1.7% and is mainly related to the increase in sales and marketing especially in Asia, but also in other regions.

The effect of all what we have described before is seen in the EBITDA adjusted number, which is growing from EUR 50.6 million to EUR 58.2 million at the end of the year. We have the positive impact of IFRS 16 for EUR 7.3 million, the FX impacting EUR 0.7 million. And then we see that the gross profit increases are nearly offset by the increase in operating expenses.

If we go and move quickly to the income statement, Chart 11, we see that the depreciation and amortization has increased in the -- for EUR 7.1 million and has been affected by EUR 6.7 million for the IFRS 16 and EUR 0.5 million of FX, meaning that out of those 2 effects, depreciation and amortization are in line with previous year. So what concern the net income and finance cost, the increase of EUR 2.1 million is for EUR 1 million due to the IFRS 16 effect again. Then we have loss from FX and hedging of EUR 0.5 million. The increase in the profit and loss of equity consolidated company of EUR 0.2 million is mainly related to the partnership in Virtus.

If we go to the free cash flow and change in net working capital, the free cash flow has been positive for EUR 9 million versus EUR 1.4 million in the previous year and has been positively affected by the IFRS 16 for EUR 7.2 million. The change in working capital, you can see an increase in inventories, and this is mainly driven by the increase in the physical stock as the companies are facing the fourth quarter of the year. We also have some one-off effects, for example, in Italy, that was building its stock for the new Segafredo range and also the impact, in part, of the acquisitions on -- in the beginning of the year.

The net debt. If we move from the EUR 174.7 million in December of 2018, we have paid interest for EUR 5.2 million. Free cash flow was positive for EUR 9 million, but then we have to discount EUR 7.3 million of IFRS 16 effect. Then we had the nonrecurring investment on beginning of the year, the Australian acquisition and the Portuguese one. We paid dividend for EUR 6.7 million, so we end up at EUR 211.7 million before the IFRS 16. Then we have EUR 48.1 million of the new accounting principles, so the overall debt comes in at EUR 259.7 million. The structure between fixed and variable interest rate has slightly changed but is nothing, I would say, that is significant. We have half and half between fixed and variable interest.

Now I'll leave the floor then to Pascal.

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [4]

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Thank you, Leonardo.

Let's go to the 2019 outlook full year. And considering the results achieved in the 9 months and the current trends, our expectations for full year 2019 are the following: a slight increase in revenues resulting from an improvement in the product and channel mix and the growth in volumes in line with the market trends; an increase of EBITDA adjusted of around 1%; then taking into account the M&A already announced in the first quarter of 2019, the net debt is expected to be around EUR 195 million.

I want to emphasize that those guidance excludes the effects of IFRS 16. Now we are ready to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Isacco Brambilla with Mediobanca.

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Isacco Brambilla, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [2]

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I have 3. The first one is on the trend in volumes. We have been observing the improvement in the past couple of quarters. I was wondering whether this growth pace may be assumed, even looking into 2020, as a reasonable, sustainable pace. Second question is on the acquisition in Brazil you have recently announced. In case you have no kind of nondisclosure agreement, I was wondering whether the magnitude of deal of the accretion in terms of turnover or EBITDA may be comparable to the acquisition in Australia you completed at the beginning of the year. And then last question is on the tax rate. It looks quite high in the 9 months of 2019. Is this impacted by some kind of one-off element? Or this should be seen as a sustainable rate also for full year '19 and going fourth quarter?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [3]

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Thank you, Isacco, for your questions. In terms of trend in volumes, if we come to 2020, as per your question, we will give the guidance, as you know, during the presentation of the full year next year, February. In that concern, we can say that 2019, the volumes are, let's say, increasing, and we had a very good -- I would say, good month of October.

Concerning the acquisition in Brazil, as you can -- as mentioned to you, we have a -- let's say, we have a, let's say, a nondisclosure agreement with the seller and on the price and the deal has been considered not price sensitive. This is the reason we didn't disclose the price in -- when we will report the full year 2019, you will find in there all the details because those information are mandatory information that we have to provide to the market. The seller are aware about this (inaudible).

And as for the 2019 results, Café Pacaembu is not included in the assets, as you know. So what can you see in the tax rate, 41% is -- we are planning to optimize the tax rate, but it's a fact that this year would be higher than the previous year? So yes, I think that 41% can be quite a good estimate for this year.

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Isacco Brambilla, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [4]

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Okay. Okay. Maybe just one follow-up. I see an improvement in the performance of South Europe, and you are mentioning first results from the relaunch of Segafredo in Italy, I guess. Can you elaborate a little bit on that and provide us more color on the performance of the brand in Italy?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [5]

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So well, overall, as you have seen, perhaps, we started advertising on television beginning of this month. So far, the -- all indication are positive. The product is having a good receipt in the shelves. We are analyzing clearly the situation on a weekly basis to get better insight, but so far so good, I would say. Justifying a little bit on the volumes performance, in the third quarter, we had positive volume performance across the board and across the channels. So this is something positive. The business is -- it seems to starting up but still is not enough to offset the first half of the year, but this is something positive. We think we can build on also in the fourth quarter.

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Operator [6]

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(Operator Instructions) The next question is from Luca Bacoccoli with Banca IMI.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [7]

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Some questions for you. The first one is on the advertising expenses. You mentioned the campaign launched on the TV, which was quite relevant from my point of view, so I was wondering how this could impact the profitability for this year. And related to that, I was wondering if you can elaborate on the new guidance at the EBITDA level, which was lowered to 1%.

And then the second question is on the Brazilian acquisition. Your Chairman, Mr. Zanetti, on a recent interview, stated that this deal will allow for the group to basically penetrate the LatAm market. So if you can clarify what is your strategy here, so if you think to increase your critical mass there through M&A or organically.

And the last question is on the single-serve business. If you can, please, do you have an idea of the growth of the segment in the first 9 months? So if you see any, let's say, slowdown in that category.

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [8]

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Thanks, Luca, for your questions. Coming back to your first question in terms of pricing, currently, we see a lot of publicity on the television. The media campaign will, of course, have quite a good impact in the fourth quarter in terms of cost, but as well we're expecting in terms of volumes and revenues. But we have been very good in optimizing the mechanics. We have optimized it, as well the effectiveness and the efficiencies. We've been able as well to manage a very good price with TV and with -- thanks to our agency. We will do as well in the fourth quarter, we will exploit all the sponsorship we have in all our media and digital channel, coming with a digital, as well, campaign very soon and about to reinforce this launch of the new packaging in the Italian market.

Going through the Brazilian strategy, the acquisition of Pacaembu, that is the #9 in the rating of Brazilian companies, will give us the opportunity to be more efficient in terms of production. It's a company that is very optimized, so we will be able to produce. The objective is to produce for all Latin America and Central America, (inaudible) with Latin America countries or all our products as well as Segafredo products. We are -- the objective is to push and to progress in terms of distribution. We have recently started distribution in the quarter. We are pushing as well our distribution in Colombia. We are looking for a new distributor in Indonesia. And performance, despite the fact (inaudible) in Chile and Argentina, where there is some troubles today, we had anyhow some good results coming from the market. So this factory will give us, first, a company having a very nice reputation in terms of quality, [allowing] us to be more efficient in acquiring the green coffee in the market because they are bigger than the company we have now, and in order to be as well more efficient in our promotion of our Segafredo products in all Latin American countries. So it was a very -- it was an important acquisition but, let's say, less strategic, like maybe somebody can think.

In terms of single-serve, the single-serve branded pure coffee product is up high single digit, and profitability has improved. What we can say that in France, we have increased the assortment of San Marco with biodegradable products or compostable and organic with pressure compostable capsules. And the product has been very well received by the market, enjoying very nice results. In the Iberia, we had as well very good performance, and this is positive. And not without a product index, the launch of our new Segafredo products in Italy is coming with a large number of new SKUs in the single-serve area.

I hope I answered all your questions.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [9]

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Yes, Pascal. Sure. Just a follow-up on the route-to-market strategy. If I understood correctly, you are intending to, let's say, increase the distribution penetration in LatAm. Is that the case?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [10]

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It is the case. But don't forget that the Latin America countries, for the time being, is a small portion of all Americas. So it's important to progress in those countries, Brazil being one of the main countries where the coffee consumption is growing in a very good pace and is, let's say, forecasted to growth of -- the growth is looking very nice for the following years. But we do have as well in Argentina, that is doing well, (inaudible). Those countries are for the time being, for our business, our group, a relatively small business. Potential is there, but we are in those markets only with Segafredo products. And for the time being, there is no intention to go with other products.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [11]

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Okay. So we should not expect a big step-up on SG&A, right?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [12]

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No, for the time being, we do invest in those countries through distribution. The only country, obviously, the accounts of Pacaembu being a company that we just acquired will give some impact, like it has been the case for [back of] this year.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [13]

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Okay. And just finally, a clarification on the volume growth that you mentioned were improving in the third quarter, so growing 1.8%. So I was wondering what is the contribution from the Australian acquisition on this performance.

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [14]

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That this account for -- if we exclude (inaudible), the performance in APAC region has been an increase in both -- in turnover of 2.4%.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [15]

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Sorry?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [16]

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(inaudible) 2.4% in value and 3% in volumes.

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Operator [17]

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(Operator Instructions) Mr. Héritier, gentlemen, there are no more questions registered at this time.

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [18]

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Okay. Thank you to all the participants. And regarding to your other questions, please feel free to contact us any time. I would like to thank you, everybody, and goodbye, good night, good evening.

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Operator [19]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.