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Edited Transcript of MZB.MI earnings conference call or presentation 5-Mar-20 4:45pm GMT

Q4 2019 Massimo Zanetti Beverage Group SpA Earnings Call

Villorba Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Massimo Zanetti Beverage Group SpA earnings conference call or presentation Thursday, March 5, 2020 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 Fiscal Year 2019 Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. 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 full year 2019 conference call. Together with me, as usual, Leonardo Rossi, our Chief Finance Officer; and Marina Cargnello, our Investor Relator.

Let's commence now, Slide 2 of the presentation, some highlights on our 2019 full year results. The revenues increased by 2.6% at current exchange rates, plus 0.2% at constant exchange rates, showing continuous sales mix improvement and solid fourth quarter in volumes in all channels. Our gross profit per kilo is stable and a positive performance in light of the reduction in sales prices due to the decrease in the cost of green coffee.

Going to Slide 3, more details on our full year 2019. The total revenue were up 2.6% at current exchange rate and 0.2% at constant exchange rate, as already highlighted. The volume 131,000 tons is up by 2.8% with a very solid fourth quarter, showing an improved trend in all main countries and in all channels. The gross profit, EUR 407.7 million, up 4.9%, with the margin on revenues of 44.6% compared with 43.6% for the full year 2019, a plus 100 basis points.

The EBITDA adjusted, EUR 84 million, plus 13.9%, EBITDA on a comparable basis -- I mean, adjusted and excluding the effects of IFRS 16, is EUR 73.8 million, stable versus last year. EBITDA reported EUR 80.5 million, plus 13%.

The net income adjusted excluding the effects of IFRS 16 is EUR 18.2 million, minus 8.6%. The net debt before IFRS effect, EUR 219.3 million versus EUR 174.7 million as of December of last year. Excluding Café Pacaembu acquisition of mid-October, the net debt would have been EUR 194 million, in line with our guidance. The net debt reported is EUR 266.5 million, with EUR 47.2 million impact of IFRS 16.

Slide 4, volumes by channel. Overall, the volumes were up by 2.8% versus last year. Food Service showing plus 4.7%, with a solid growth of almost all regions, in particular, APAC region. The Mass Market is showing a 1.7%, positive performance, thanks to the fourth quarter showing an improving trend versus previous quarters. And Private Label, plus 3.4%, with positive performance in all region. As already highlighted, the fourth quarter showed an improved trend in all main countries and in all channels.

Going to Slide 5, revenues by channel. The Food Service channel increased 3.9% at constant ForEx, mainly due to the positive performance in Americas and APAC and stable sales in Europe. The performance of the Mass Market and Private Label channels is explained by the softness in roasted coffee sales price, reflecting the reduction of the green coffee cost.

Revenues by region. Americas performance is attributable to the Private Label channel due to the slight decrease of roasted coffee sales price, a consequence of the decrease of the cost of green coffee. The Mass Market and the Food Service show a solid growth in the fourth quarter. In particular, the U.S.A. Mass Market branded business grew volume by plus 9% and share across all key markets in second half, despite an extremely aggressive trade promotion activity. Food Service increased, thanks to the strong performance year-on-year in the Segafredo and Kauai brands.

Northern Europe is driven by positive performance in Mass Market and Private Label and stable in Food Service. 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 acquisition of The Bean Alliance Group.

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. In full year 2019, revenues increased EUR 23.3 million to EUR 914.5 million, plus 2.6%, as already mentioned before. The FX affected the numbers for EUR 21.8 million or plus 2.4%. Organically, revenues increased by EUR 1.5 million or 0 plus 2% (sic) [plus 0.2%].

Out of this, the volumes of coffee increased the numbers by EUR 21.9 million, plus 2.5%, while the price/mix has a negative effect for EUR 27.5 million, minus 3.1%, and the other products contributing for EUR 7.1 million or plus 0.8%.

If we move to the gross profit, the gross profit increased by EUR 18.9 million to EUR 388.8 million (sic) [EUR 407.7 million], plus 4.9%. Again, the FX were positively affecting the outcome for EUR 6.7 million, plus 1.7%. Organically, the gross profit increased by EUR 12.2 million or plus 3.1%. And again, volumes were positively affecting the numbers for EUR 9.1 million, plus 2.3%. The price/mix was negative for EUR 1.87 million or minus 0.4% and the other products increasing EUR 4.8 million, plus 1.2%.

On the right side of the slide, you can see the gross profit EUR per kilo at constant FX rates. And you can see that basically, the gross profit is unchanged, EUR 2.51 versus EUR 2.52 in the previous year. The gross profit in percentage has increased 100 basis point, moving from 43.6% to 44.6% in revenues.

For what concerns operating expenses, have increased by EUR 8.6 million, plus 2.7%, to EUR 323.7 million after taking out nonrecurring costs for EUR 3.5 million. We have various factors affecting these numbers. We have the IFRS 16 decreasing for EUR 10.3 million, minus 3.2%, and the FX increasing the cost for EUR 5.7 million, plus 1.8%.

Organically, the OpEx show an increase of EUR 13.2 million, plus 4.1%. And you can see on the right side of the chart, again, the organic operating expenses increased year-on-year is this EUR 13.2 million, nearly half of that -- more than half of that is coming from the acquisition that we have done throughout the year. Net of these, the services have shown an increase of 3.2%, mainly driven by advertising, outsourcing for capsule production, especially in Italy, and travel costs. And the personnel costs have increased 2%, mainly through the policy of increasing sales and marketing mainly in APAC and in Europe, while the other costs decreased mainly through a better credit management throughout the group.

As mentioned, the group has sustained a nonrecurring costs for EUR 3.5 million, EUR 2.9 million were related to services and personnel was EUR 0.4 million and other costs for the difference.

If we move to the EBITDA adjusted. EBITDA adjusted was EUR 84 million. The IFRS positively impacted the numbers by EUR 10.3 million. The FX was still positive by EUR 1.1 million. And as you can see, increase in gross profit was offset by approximately EUR 1 million for the operating expenses. As mentioned before, the EBITDA adjusted excludes the nonrecurring items for EUR 3.5 million.

If we move quickly below EBITDA, the other effects of the implementation of the IFRS 16 throughout the P&L is an increase in depreciation and amortization. Out of the EUR 11.6 million, EUR 9.3 million are due to the new accounting principles, and the FX is another EUR 0.5 million increase.

For the net finance and income costs, the increase of EUR 1.5 million is driven mostly by, again, the IFRS 16, which affected the numbers by EUR 1.3 million.

The net income for the year is for EUR 15.3 million versus EUR 19.9 million in the previous year.

If we analyze the free cash flow, our free cash flow for the period was EUR 32.7 million versus EUR 28.7 million the year before. For what concerns the change in net working capital was mainly affected by an increase in physical stock across the group, both for green coffee and finished products, which was somehow compensated by a better management of the trade receivables and trade payables.

For what concerns CapEx, which show figures of EUR 35.5 million. The increase versus previous year is mainly driven by the investment that the group has made for the implementation of the new ERP across the group and the investment which was mentioned throughout the year of the Portuguese plants.

If we move to the net debt, starting from the EUR 174.7 million of December of last year, we -- the group paid interest for EUR 6.3 million. We have a positive free cash flow of EUR 32.7 million, net of effects of IFRS 16 for EUR 10.3 million, then the group made a nonrecurring investment for EUR 53.5 million. Those includes the investment in BAG and in Pacaembu, including earn-out and delayed payments.

The group also paid dividends for EUR 6.7 million. And so we closed the year at EUR 219.3 million. This is before the impact of the new accounting principle IFRS 16, adding another EUR 47.2 million, so that the official numbers for net debt is EUR 266.5 million. As mentioned before, net of the acquisition of Café Pacaembu, which were not in the card when we provided guidelines, the net debt would have been EUR 194 million.

Now I give back the floor to Pascal for his comments on the outlook for the year 2020.

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

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Thank you, Leonardo. So concerning the 2020 outlook, considering the results achieved in the full year 2019 and the current trends and situation, our expectations for 2020 are a slight increase in revenues resulting from the improvement in the product and channel mix and a growth in volumes in line with the market trends, a stable EBITDA compared with 2019 and the net debt is expected to be around EUR 250 million after a EUR 50 million CapEx.

And now we are ready to answer to 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 Luca Bacoccoli of Banca IMI.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [2]

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Some questions from my side. The first one is on the 2019 performance. If you can help us to reconcile the reported performance with the organic performance, so what is the top line and the adjusted EBITDA performance, excluding the Pacaembu acquisition as well as The Bean Alliance Group impact?

And the second question is regards to the guidelines for the 2020, and I was wondering if the targets are including the Pacaembu consolidation for the full year, and also if you are already somehow the factoring in any expected slowdown in consumption, if any, due to the COVID spread in the Asian area, and maybe perhaps also in Europe.

Finally, my last question is on the CapEx. There's a quite big step-up expected in 2020. So I was wondering if there are any, let's say, extraordinary project that you are implementing this year?

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

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Okay. So I will -- thank you, Luca. I will give you some information on Café Pacaembu. First of all, on the 2019 contribution, for you to make your analysis and expectation for 2020, so as you know, this is an acquisition that we have done in October. We have integrated the company in the last quarter, and we can account around EUR 4 million sales for 2019, with an EBITDA that is almost EUR 0.5 million. Concerning the 2020, we have an expectation of EUR 20 million sales, EUR 2.5 million EBITDA, which is a 12.3% margin on EBITDA. This is an acquisition, as you know, that we have paid EUR 22.7 million. So it's almost 10x EBITDA as per our policy and, let's say, discipline when we buy a company.

In what concerns BAG, the reserves are absolutely in line with expectation. The company delivered in 11 months EUR 14 million sales and EUR 1.7 million in EBITDA.

Now going to your second question, the target Pacaembu, I think, if it has been considered in the full year guidance. The answer is, yes.

And let's go now to -- let's say, to the concern that we may or you may have on COVID-19. Evidently, this is something that is a concern of our group as well. Fortunately, coffee, we can consider with the history and past history of issues like this, that is like alcohol and cigarette, usually it's quite resistant to some -- to the crisis.

Going to Asia. Asia, we -- let's say, the biggest country, and you were talking about Thailand, I can just say that for the time being, it's a country that is -- we are seeing completely different than maybe the rest of the world. We have -- it's a very internal market. And January and February, just for your information, we have beat the budget 2020 for the month, and we over -- we exceeded the 2019 January and February the same. And discussing with local management because this is what we have done, we have no -- there is no, let's say, concern, particular concern, thanks to the fact that Thailand is a country where we are spread out in all the country with more than 20 showroom, and we are not only in Bangkok or Phuket, where we may have some problems with tourism.

When it comes to other countries in the group, especially in China, because this is where we have a very small company, so the impact will be very reduced. And please consider that Asia, in general, APAC region is only 8% of our group business. Major business is coming from the U.S. We're discussing with the local management. There is no concern for the moment.

And in Europe, again, we have discussed the issue internally, and there is no major concern at the moment. A deception of maybe some activities where we have tourism. But let me remind you that our group is global. We are working in more than 40 countries, and we are spread out, and we are selling in various channel and various type of products. Our group is developing and launching as well new products in the coming months, launching new packaging in Asia. Australia, which is a market that is very important for us, thanks to BAG, we are developing very well. January and February has been good. And so we have taken the approach to be conservative, reasonably conservative. And we will follow carefully the situation of COVID in the coming weeks, I have to say.

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Leonardo Rossi, Massimo Zanetti Beverage Group S.p.A. - CFO & Director [4]

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And for what concerned the EUR 50 million in CapEx, we have basically EUR 7 million coming out of the -- just for the accounting principle IFRS 16, the increase EUR 7 million. Then we have another EUR 7 million more or less for the ongoing implementation of the ERP across the group and the finalization of the investment in the Portuguese plants. And then we are clearly also stepping up our investments for the bar equipment for growing in the service channel as well as investments in the various plants of the group to increase our efficiency and output capacity.

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Luca Bacoccoli, Banca IMI SpA, Research Division - Research Analyst [5]

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Okay. Just a follow-up question for that. The first one is on the ERP project. So if you can give us an update on this project if it's going smoothly or are you recording, let's say, any disruption during the implementation process? And the other one is on the Segafredo brand. The relaunch seems -- is going well. So I was wondering if -- do you expect further acceleration in 2020, thanks to the efforts on the marketing activities on this brand?

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Leonardo Rossi, Massimo Zanetti Beverage Group S.p.A. - CFO & Director [6]

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Okay. So for what concerned the ERP, we have closed later this summer, at the same time, the first set, which was the global template definition, and we are now working with the pilot test with a company of the group here in Europe. We already started with a small company but it's not, let's say, the one that is manufacturing. Now we are testing the whole systems to the manufacturing company, and we expect to be operative by the end of this year and then start setting up the process for the next 2 years in Europe.

For Segafredo Zanetti, perhaps, Pascal, you want to take it?

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Pascal Héritier, Massimo Zanetti Beverage Group S.p.A. - COO & General Manager [7]

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Yes. Overall, the Mass Market distribution reacted positively on the new range of products and the new image of the branch -- of the brand, which emphasize the solid roots and strong experience in doing the quality coffee. As you may know, we have incurred some delays in the introduction of these new products in the Italian Mass Market. And right now, the distribution is progressing. And also thanks to the media support, I think we expect results to come. Again, as you may remember, all the blends have been publicly renewed, adding new premium SKU with bio and certified coffee, so it's probably a new life of Segafredo in Italy.

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Operator [8]

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And the next question is from Isacco Brambilla of Mediobanca.

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Isacco Brambilla, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [9]

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A couple of questions from my side. The first one is on the development of volumes in the final quarter. Looks a nice inversion versus the previous quarter. So just if you could elaborate a little more on what changed versus the other quarters of 2019 and how you expect it to evolve in 2020? You are mentioning in line with market trends. Just confirmation on which are the market trends in our view? And then also looking at 2020, your view on coffee prices, how we should expect it to evolve?

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

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Okay. So in the last quarter, and you have to say that, let's say, above this old channel reacted very well. We had a very strong fourth quarter, I would say, particularly in the Mass Market, that the fourth quarter represents an increase of plus 9%. So the trend was very, very positive. And a big bunch of this increase is coming from a very strong performance in the U.S. So we have been able to reverse the situation. As we were mentioning last year that we were working very hard in the U.S. to -- and we were expecting to come back on track by the end of the year, and this has been the case. So we deliver the numbers on the Mass Market in the U.S.

And in Europe, it has been, let's say, stable, but the trend is turning positively. And in the APAC region, the Mass Market is not representative, but we have been -- we had a very strong performance in the APAC region, particularly, I would say, in Thailand that delivered a very strong fourth quarter.

Concerning the 2020 expectation, as we said before, we -- the outlook has been given taking into consideration the actual trends that -- and the actual situation. We have been, let's say, a little bit conservative in our expectation of growth.

Coming to the price of green coffee. For the price of the green coffee, actually, we -- if you remember last year, we were expecting sort of an increase in prices, which were not the case, as Brazil delivered a very standard growth. We got some sanction in the price in the very end of this year. Then price, especially for how they're kicking back, now are bouncing up again, but it seems that report is showing that Brazil is again ready for another big crop -- bumper crop again.

So we have to see. We are clearly monitoring very closely the prices. There is not still a very clear direction like increasing volatility, and we will see. I mean we have made our budget assumption based on prices that were fairly stable. So we have to see how the crop news will develop in the coming weeks and months.

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Isacco Brambilla, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [11]

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Very helpful. Maybe just a little follow-up. Sorry if I ask something you have already stated. But on inventories, the increase in -- what drove the increase in 2019? And should we expect it -- this trend of increasing inventory to continue also in 2020?

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

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I'm sorry. Can you repeat the question?

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Isacco Brambilla, Mediobanca - Banca di credito finanziario S.p.A., Research Division - Equity Analyst [13]

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Yes, sure. The increase in inventory, which we saw in 2019, which were the drivers behind the cash absorption we saw from inventory and how you expect it to evolve in 2020?

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

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Well, the increase was physical stock in the last quarter, in particular, as the company were taking cover in the green coffee for the spike that we were envisioning and was developing in the very end of the year. So I think this will be managed out throughout the year.

This is for what concern the -- how to say, the green coffee concern. The finished product, we didn't see any particular issue. And we think this would be managed out throughout the year. We didn't see -- unless there's something very big taking on the price side, but we will see big swings in the working capital.

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Operator [15]

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(Operator Instructions) Mr. Héritier, 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 [16]

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Okay. Thank you to all participants. And if you have other questions, as usual, please free to contact us any time. Thank you to everybody, and goodbye.

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Operator [17]

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