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Edited Transcript of STRS.TA earnings conference call or presentation 25-May-20 1:00pm GMT

Q1 2020 Strauss Group Ltd Earnings Call

Petach Tikva Jun 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Strauss Group Ltd earnings conference call or presentation Monday, May 25, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ariel Chetrit

Strauss Group Ltd. - CFO

* Giora Bardea

Strauss Group Ltd. - President & CEO

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Conference Call Participants

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* Chris Reimer

Barclays Bank PLC, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Strauss Group First Quarter 2020 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Monday, May 25, 2020.

I would like to remind everyone that the conference call 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, included as a result of changing industry and market trends, reduced demand for our products, the timely 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 identified in the documents filed by the company with the ISA.

With us online today are Mr. Giora Bardea, CEO of Strauss Group; Mr. Ariel Chetrit, CFO; and Ms. Daniella Finn, Director of Investor Relations.

Mr. Bardea, would you like to begin?

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Giora Bardea, Strauss Group Ltd. - President & CEO [2]

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Okay. Good afternoon, everyone. And thank you very much for joining us today, especially for those who are on vacation of Memorial Day and Bank Day, so thanks for joining us. With me today are Ariel Chetrit, the Group CFO; and Daniella Finn, the Head of Investor Relations.

No question that this quarter was very unique. After -- during the global pandemic impacted our life, we should check very carefully what happened and how to look forward to the near future of our countries, people, business.

I would like to share with you a bit about the way Strauss decided to manage the unique situation of the crisis. So let's start, please, first with what we call the top principles to manage the crisis. First and foremost, we start from February running all the time till now the -- taking care about and committed to our employees' health is the first and foremost priority. We talk about the physical, we talk about the mental, we talk about financial situation. Second is the business continuity. All over, we understand that food and beverage during this period of time, during this kind of time of panic, the food and beverage are crucial for people. They first run to buy, like, what we call the panic buy, so to continue to be responsible that our product would be on the shelf, all the time, all over. Third one is financial stability. We decided from the very beginning that we should protect our cash since nobody knows at this time what will happen, how long it will take, what will happen in supply chain. We took some very, very strong steps in order to protect and to be flat with our cash. The fourth one is, what we call here, to look around 360 and to watch and listen to all the stakeholders. In order to cross such a situation, is the clarity, the transparency, the real trust -- to get trust from all over is crucial, start from employees, go to shareholders, go to the suppliers, vendors, retailers, consumers, et cetera. So we invest a lot of time and money in order to be open and to share communication with all the stakeholders.

Next one is the readiness for the future scenario and mitigation. Since the future was uncertainty, since the future was really a big surprise for all of us, we immediately, mid-March, planned some tough and what we call here, red line scenario in order to mitigate and to protect the business. We know now we decided where to cut costs, where to cut expenses like CapEx, OpEx, all over marketing, people, et cetera. Fortunately, till this time, we don't need to use it, but we have a full mitigation plan for any scenario that might happen in the near or long-term future. Last is to look on some opportunities. We understand that the unique situation might bring or raise different opportunities in our countries, categories, consumer, customers. And we try to understand how the future will look like and which kind of opportunities we should elaborate or we should approach.

Slide #4. We manage the crisis in 3 different horizons. One from the left side is the health crisis. In some of the countries, we are now at the second level, which is the middle cycle. But the first one was just the health crisis, to take the measures in order to protect the health and the safety of our people. The second one, which, in Israel, in some Europe countries, hopefully, in the U.S. soon, but still not in Brazil, we understood that we'll continue to live with the corona for a couple of months and maybe even more, we play till the end of '20 and all over 2021 and that we combine it with understanding of the recession. So it's a kind of combination from 2 different dimensions of the COVID with all the restrictions from the governments all over and recession, slowdown economy in our country. So this is approximately the horizon that nowadays Strauss in most of the countries are operating. Last is the future, what we call here, the 2022 onward, how the future will look like and what we need to do in order to win in the new situation there.

Slide #6. We found 6 major implications that most of the CPG market companies are living with. The first one is the online shopping. Second one is the domestic at-home nesting, is what we use to call it nesting at home, a lot of impact of people live at home, what it means about consumption, what it means about the way they behave, they enjoy themselves, indulge themselves. Third one is the paralyze or shutdown almost totally of AFH, away-from-home channels, on-the-go channels, impulse products. It's a significant decline during this period of time and will be still there even in some countries that we open already.

Next one is focus on well-known and loyal to the brand. For us, as a branded company, it's very important. And we see all over that consumers during this short visit in the shops and supermarkets, they used to go and buy mainly the very familiar brands, kind of loyalty to the old and traditional brands. Next one is working from home, operating from home or from distance. It's about employees. It's about our -- us as a global company, international company. We need to learn how to manage from distance our JV partners and other operation needs to meet the people and working from home for our employees as well. Last one is the supply chain. Just to remind you all, at the very beginning of the shutdown, we didn't know at that time what will happen about shipments, airlines, and how we can transform -- not transform, sorry, transport our raw materials and our housing appliances. So we decided immediately in Strauss to change our policy in inventory level and how to manage the supply chain.

Slide #7 is about the situation in Strauss specifically. First and foremost, we protect the, what we call, the frontline people. We understand that our factory team, our sales, distribution, supply chain team, they are the front liners, and we should protect them. And we did a lot of -- invest a lot of time and money by really buy them all the equipment that they need to protect their health and safety. We incented them with a lot of money in order to give them the feeling that the company understands how much they take a risk running the business, being in the front line. We moved immediately to working from home. And as I said before, we invest a lot of money and attention to communicate with our people. The results are very clear, very stable attendance in our factories. We didn't lose even 1 day -- except Sabra in the United States which is a bit different government, we didn't lose even 1 day of production or visit at the store, which is very, very crucial for a company like Strauss.

About the business continuity, this is the one in the middle one, the green one in the middle. We changed our policy on inventory and working capital and raw material. We changed the mix, the -- in order to leverage on the capacity because we have a lot of restrictions about the capacity and shifts, so we need to change a bit the SKUs, the production. And we found ourselves in much better productivity level. The result of this measurement is that we didn't lose again our supply to the store, our product all over. And I don't talk about a couple of days here and there because of the panic at the very beginning, but during February, March, April, May, we are on the shelf all over at the right level of demand. The financial agility, our IT system, our finance system changed the way how they operate almost overnight in order to enable the company to continue to operate, and therefore, we gained a lot of stability internally and externally with taking the right decision not to have a problem, an obstacle and then take some, let's call it, panic kind of decision.

I'm jumping to Slide #14. Just to summarize, so we found and we experienced some tailwinds and some headwinds. Let's talk first about the tailwinds. First and foremost, we are in the right category with the right side of the coin in terms of, in a way, enjoying from the crisis. So because our products are, most of them, home used, and this is the time for people to buy products in order to stay at home and eat, drink at home. Second, we don't have a strong presence in AFH. It's 7% of our total revenue is AFH, which enabled us a kind of more stable results during the quarter. We are having in all of our countries, very strong brands, as I said before, which is very important during the crisis. Our agility, our structure and partnership in Israel and out of Israel enabled us to change the system and are operating almost overnight. Supply chain was very strong and very, very good things. The majority of the -- of our raw materials are local in Brazil, United States, in Israel and Europe. So the majority of our raw materials are local in the different countries, so it helped us to continue -- to have the continuity of our supply. Our online offering is more challenging, but we changed some of the system in order to build and develop some capabilities in online sales.

The headwinds on the other side is, I'm sure that you know and Ariel in a minute will elaborate, is about the currencies. Yes, we are challenging ourselves with the issue in Brazil and a bit in Russia with currencies. Our supply chain cost was increased because of a lot of measurements that we took in order to protect the people, to continue their supply chain, inventory, as I said before, so it's a bit -- it's costing and the lockdown negative impact on our AFH and single-serve and impulse products. And we still -- at this stage, we still don't know what would be the impact in terms of recession, slowdown of the economy. We hope like, in the past, that the economy -- well, the impact on recession will be small or minor one on a company with the right team, brands and distribution like Strauss, but this is kind of still question mark for the future.

I will hand over to Ariel to take from here and to deep dive on our first quarter results.

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Ariel Chetrit, Strauss Group Ltd. - CFO [3]

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Thank you very much, Giora. Good afternoon, and good morning, everybody. I'm happy to have you with us on our call.

And as you have heard from Giora, we had a very mixed quarter in our results in terms of different trends in our categories, in our channels and in our cost behavior. And therefore, it is very hard to explain the quarter in, let's say, to summarize it in one line. But we gave you a lot of additional materials this quarter in our financial statements and in our quarterly report and also in this investor presentation, so you can dive into them and feel free to call us and ask us further questions as you dive into the details.

So I'll start with Slide #17, just to see the general picture. As we see, Strauss grew 3% in ILS terms this quarter versus previous quarter. Organically, we grew 8.1%. As Giora said, we had a very material impact of translation effect because of the strong Israeli shekel and the strength of the dollar also in this quarter due to the COVID crisis. We've seen the dollar strengthening dramatically, mostly relative to emerging market currencies. And for us, it meant a strong dollar versus the Brazilian real and versus the Russian ruble. And therefore, we've seen ILS 100 million translation effect on the top line and 800 -- sorry, ILS 8 million translation effect on the EBIT line.

Organically speaking, as I said, we grew 8.1%. Obviously, some of this growth is due to the third month of the quarter, which was driven by corona behavior, as I will explain shortly. In our gross margins, we improved our gross margins, and you can see that our gross profit also grew by around 8% organically. So our gross profit grew pretty much the same as our sales grew.

In our EBIT and net profit lines, we see stability, approximately the same profit as last quarter, as the first quarter of 2019. And this is due to 2 main reasons that affected our OpEx in this quarter. The first reason is the timing of marketing expenses in Sabra's activity. I want to remind you that the first quarter last year was almost market less in terms of marketing expenses, and we spoke about it a lot last year. Most of the marketing expenses were made in the second half of 2019. Compared to that, the first quarter of 2020 was high record ever of marketing expenses in Sabra due to all the campaign relating to the Super Bowl in the U.S. And therefore, we had a very big mismatch in timing of marketing expenses in this quarter with relation to the first quarter of 2019. The second explanation for the OpEx increase is coronavirus special expenses. As Giora explained previously, we had to increase our cost in order to maintain our supply chain activity to give some incentives to first-line employees and to make sure that all the hygiene measures are in order. And therefore, we had a slight increase in our OpEx this quarter. And also, of course, in the second quarter, as you know, the coronavirus has been -- is still with us. So therefore, the stability in the profit in this quarter.

If I go on to Slide 23, we can see more details, the effect of the corona on the first quarter. Well, the first quarter is roughly divided into 2 sections in Strauss Group. The first section is January, February. In these months, the different companies and activities behaved pretty much the same, in the same trends as we've seen in the previous quarters in 2019. And the second part of the quarter was March, the month of March, where we've seen the first shock and the lockdown behaviors that we see in other CPG companies. We've seen them also here at our group in Strauss. If we look at the results, we can see that in March, our revenues grew organically 16%. 16% is also a mix of different trends that we've seen in March in the different companies. If we look at Strauss Israel, we can see an increase in revenue of 23.1%. The increase in retail sales was much higher than that, but it was decreased by a decrease in our AFH and on-the-go activities in the Israeli geography. And therefore, 23% is the net effect of the coronavirus. In Israel, it is also important to emphasize that we have the holiday timing. And therefore, the earlier holidays this year compared to last year also increased our March sales in Israel.

In Strauss Coffee, we can see an increase in organic sales of almost 9%. Again, the retail sales grew much more than that, but it was slightly decreased by the decrease in the away-from-home activity of the coffee company. We have away-from-home activity in Israel, in Coffee Israel, in Brazil, in Poland, in Romania, and these activities went very close to 0 in the March month.

In the Dips & Spreads activity, mainly Sabra, we've seen an increase of 33% in March. Again, the retail grew slightly more than that. But because of the decline of the away-from-home also in the Sabra activity, this is what was the net result. And Strauss Water behaves differently as an activity, as a category from the food and beverage categories. In Strauss Water, we've seen in March, a decline of 7% in our sales. We must remember that Strauss Water is an activity of putting machines and devices, water machines in households and in offices. And during, of course, the lockdown period, which was in March and also, as you all know, in April and part of May, it is very difficult to get into households and to make the service because of the distance regulations. And therefore, we had some decline in our sales. We still had a lot of new machine sales relatively to what we expected but still a decline. So this is Strauss Water. What you see here are the figures of Strauss Water Israel and also U.K., U.K. is very small. Just to remind you, Strauss Water China is part of our EBIT line, the net effect or our net share in their net profit and is not part of our sales.

If we go further to Slide #25 and 26, we can see the impact of our 2 -- the 2 parts of the quarter on the gross profit and on the EBIT. We can see again that the gross profit and profitability grew this quarter, but due to the effect that I mentioned earlier, the marketing expenses in Sabra and the extra COVID cost, we've seen stability in the EBIT line.

If we go specifically to see Sabra first quarter results in Slide #29, we can see that Sabra sales grew 8.8% in the quarter. As you heard before, March had a large contribution to this growth. And in the EBIT results and margins, as you can see, there is a great difference between this quarter and the previous first quarter of 2019. Again, marketing expenses timing, very low marketing in the first quarter of 2019 and the high record marketing expenses in the first quarter of 2020.

Net income in Slide 31, we can see again the stability going forward from the EBIT line, a slight decrease in finance expenses and a slight increase in taxes that led to this resource -- result.

In Slide 32, we can see our gearing and net debt. As you can all see, we have a very low gearing ratio at the end of March 2020 of 1.6 and only ILS 2 billion in net debt. As you all could have read in our reports, we secured ILS 600 million in credit lines during the past 2 months, between March and May. And we stand very strongly from a financial and liquidity standpoint as we might face more crisis phenomena in the future.

To say a few words about our outlook. We have mentioned some looking forward statements in our financial statements and in our MD&A. And I would like to go through just a few of them to emphasize some points. First of all, as Giora said, 93% of our activity is focused on retail, only 7% is away from home. Therefore, we are positioned very strongly to confront this crisis if we will face a potential second outbreak of the virus in a few countries. Having said that, we can see that the currency volatility and specifically the real, the Brazilian real weakness is continuing in the second quarter. And of course, we do not know, but it might continue to more quarters further along the year. And you have the details in the financial statements of the devaluation of the real after the financial report balance sheet date up until May because, obviously, it will affect negatively our translation effect in the second quarter.

As Giora said, we are facing the questioning marks of recessions in the different countries. Obviously, the food and beverage category is a more defensive category in such times, but we are planning the right adjustment to be made in order to confront this possible recession in the most successful way. And we will see a further softness in our away-from-home channel in -- especially in the second quarter. Just to remind you all, the most significant part of our lockdown period was in the second quarter in April and during the first half of May and in some countries, it even goes further into the second half of May and even June if we talk about Brazil and some parts of the U.S. Therefore, the large part of our -- of the hit on our AFH activity will be on the second quarter.

With this, I will finish my remarks and open the discussion for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Tavy Rosner of Barclays.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [2]

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This is Chris Reimer on for Tavy. In your prepared remarks, you talked about the decline in currencies and the expected impact on the financials. Can you remind me what is Strauss' approach to currency hedging?

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Ariel Chetrit, Strauss Group Ltd. - CFO [3]

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Sure, Chris. Thank you very much for the question. Well, we do not hedge accounting translation effects, meaning the translation of the P&L lines from foreign currencies to Israeli ILS and the translation of the balance sheet items to the balance sheet items in Israeli shekel, we do not hedge this translation effect as it is only an accounting effect. It's not a cash flow effect. And since, as you all know, we hold our investments for long term and we have no strategic meaning to exit those investments, we don't see any reason why to make such hedges to accounting translation effects.

As per cash flow effect, we do hedge our purchases and other cash flows in foreign currencies. Therefore, procurements in foreign currencies, dividends that are distributed from foreign activities to Israel are hedged -- are being hedged. And you can see the hedging effect of those transactions in our P&L.

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Chris Reimer, Barclays Bank PLC, Research Division - Analyst [4]

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Okay. Just following that, some companies have put their dividend on hold for a time in order to strengthen the balance sheet in this pandemic. What is your view on the topic?

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Ariel Chetrit, Strauss Group Ltd. - CFO [5]

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So as we said, while -- after we released our annual financial statements, as you all know, we distributed a dividend of ILS 180 million. We see ourselves in a strong position to make such a distribution. We still see it. We do not regret the distribution that we've made 1.5 months ago. But if you look at the dividend amount compared to previous years, we decreased a little bit the amount. In the previous year, we distributed ILS 200 million. This year, we decided to decrease a little bit the amount, but we did not see any need to stop or freeze our dividend distribution. Of course, we will see how things develop in the future, and I cannot say anything about our next year dividend distribution for now. But we do not see any problem or any cash flow problems -- free cash flow problems with the distribution that we have already made.

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Operator [6]

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(Operator Instructions) There are no further questions at this time. I would like to remind participants that a replay of this call will be available on the company's website at www.strauss-group.com. Mr. Bardea, would you like to make your concluding statement?

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Giora Bardea, Strauss Group Ltd. - President & CEO [7]

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Yes, thank you so much. So looking forward, we can be, we call it here, a little bit optimistic. We are in the right industry, the right category, channel, strong brands. As Ariel said before, very strong financial situation with the gearing and cash and resilient teams all over. So we believe that Strauss as a global group will get out of this crisis stronger. And hopefully, one day we will meet you all without the mask and all the measures of the corona. So thank you for joining us, and have a great day. Stay safe.

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Operator [8]

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Thank you. This concludes Strauss Group's First Quarter 2020 Results Conference Call. Thank you for your participation, you may go ahead and disconnect.