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Edited Transcript of STRS.TA earnings conference call or presentation 13-Aug-19 12:30pm GMT

Q2 2019 Strauss Group Ltd Earnings Call

Petach Tikva Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Strauss Group Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 12:30:00pm 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 Second Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Tuesday, August 13, 2019.

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, including 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 on the line today are Mr. Giora Bardea, CEO of Strauss Group; Mr. Ariel Chetrit, CFO; and Ms. Daniella Finn, Director of Investor Relations. Mr. Bardea, please, go ahead.

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

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Hello. Good morning and good afternoon to everyone, and thank you for joining us for this conference call to discuss Strauss Group second quarter 2019 results. We are very happy to announce another great quarter, which is part of the momentum of the last couple of years that we are achieving great results. I will start with a quick nutshell, a couple of topics about the company and the business units, and then Ariel Chetrit, the CFO of the group, will drill down more financial numbers.

Q2 2019, we achieved sales of ILS 2 billion more -- a little bit more than ILS 2 billion. Growth, we are minus 1.4%. Organic growth, excluding the foreign currencies, we are plus 1.7%. Later on, we'll talk about the fundamentals that are behind this number.

We are very happy about the gross margin. This is another quarter of improving the profit, the profitability in all the P&L lines. Gross margin improved to 39.6% which is almost 1% above or more than a year ago. EBIT and EBIT margin, we are improving the EBIT in the ILS 227 million and the EBIT margin is 11%, which is a little bit more than 1% better than the year ago.

Net income margin -- and margin was -- net income is ILS 121 million, and the margin is almost 6%. All in all, great results and we can see how the EPS of the company, which is ILS 1.06 this quarter. And if we look year-to-date, the first half of the year, it's -- the EPS is ILS 2.54.

Let's point on some focus and special areas in our 4 business. Let's start with Israel, please. Israel is growing at 3.3%, more than the Israel food and beverage market. The market share of Strauss Israel in Israel is almost 12% from the food and beverage. During this period of time, because of a lot of productivity, better mix and a lot of other operational improvement, we improved our gross profit as well as operating profit in Israel.

Mainly the focus for the next half year will be improving our digital capabilities in our -- in the, what we call, the e-tail, the platform that we have in Israel, the retail at the conservative or traditional retailers. Second, to continue the innovation activity. We understood it more and more, our consumers are having a different segmentation, different needs, different expectation from a company like us that's leading the market in Israel, so we invest a lot of money in innovation for better-for-you products and to find and to meet special needs of special segments of the operations. And later, if you ask questions about it, we can give you some examples from the past and talk a bit about the future, and this is mainly about Israel.

Strauss Coffee, a bit more complicated, again, great in results. We are, in the top line, in local currencies, we are doing good in -- almost in all geographies. In East Europe, a little bit different. Israel and Brazil, doing great in quantity and in market share. In Brazil, we are 28.4% market share, which is the highest share ever.

East Europe, we'll talk later about the currency and competition, but in terms of market share and our competitive position, we're doing very good in all geographies except Romania, where we have kind of a small decline in our market share.

So the main challenge for the next quarter, for the future to come is to strengthen our brands in East Europe, mainly East Europe, and to manage the Brazilian fundamentals of the raw material decrease -- sorry, the price of green coffee and how to manage the consumer price and the market share in a clever way with how we did it till now.

Sabra, Obela, United States and global, we're having almost 7% -- 6.8%, top line organic growth. Sabra improving market share to 61.6% and improving dramatically the profit and the profitability. Obela growing 7.7%. Obela, as you remember, it's out of the U.S. It's Australia, New Zealand, Mexico and West Europe. The main challenge for the future in this category and this business unit is how to grow the category, the hummus category in the U.S. As the leader of the category, as I said, 60%, maybe almost 62%, our challenge and responsibility is to grow the category, and the team, they're working and trying to be more effective on household penetration, consumption per capita. And we believe soon, we will win.

Strauss Water, same phenomena. Nice growth, both in Israel and in China. Israel -- Strauss Water in Israel is 6%; China, 5.7%. In both of the territories, improving our profit and profitability, and we feel very comfortable with our journey both in Israel and in China. Main focus or challenge in the future is innovation, both in Israel and in China, in order to gain, mainly in China, more market share and to drive faster the growth in China. Our partner, Haier, is doing extremely great job together with our team there, and we believe that this is -- the future is really great there in China.

This is the main focus on our 4 businesses, and now I will hand over to Ariel to deep dive on numbers in the financial results.

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

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Thank you very much, Giora. Good morning and good afternoon to everybody on the line. I will go through the main topics of this quarter in our results.

First of all, we can see that the major trends that we spoke about in Q1 2019 continue to be with us in the second quarter of this year. The first trend is the strengthening of the local currency, Israeli shekel, with relation to our different geographies and activities in local currencies, which had a quite a big effect of ILS 54 million on the top line, a negative translation effect, and on the EBIT line of ILS 5 million.

We have the green coffee dynamics of a sixth quarter -- consecutive quarter of declining green coffee prices, that in some markets also affect the selling prices of the coffee, which also affects our top line in the coffee activity.

We have a very nice growth rate in local currencies in all of our different businesses and activities. And as Giora said, we're gaining market share in Q2 in most of our businesses, categories and activities. And we have the trend of productivity, a big momentum of productivity going through the first half of 2019 and bringing us a great momentum to the bottom line of the group.

If we look at the sales of the group in Slide 8 and Slide 9, we can see that organically, without translation effect, we grew by 1.7%. We can see that we grow in local currencies in all of our activities, except Strauss Coffee. Strauss Coffee, we see a minus 1.4%, excluding FX organic growth, and the main reason for this negative growth in sales in Strauss Coffee is due to our activity in Central and Eastern Europe.

If we go to deep dive into Brazil in Slide #16, we can see that in this quarter, Brazil grew in local currency by 1.9%. Brazil also grew in gross profit by 2.4%, and also EBIT in Brazil is quite surely been impressive this quarter with quite high results in a historic perspective. We should all remind ourselves, and we spoke about it also in the previous quarter, that the first half of 2019 was exceptionally good and high in the performance of Strauss Coffee due to the decline of green coffee prices from one hand, and on the other hand, the selling prices of coffee to retailers were not adjusted until the second half of 2019. Therefore, the comparable numbers are not very -- are very high, and we should consider these numbers of Q2 2019 as a quite strong and solid taking this into consideration.

If we look at the EBIT profit in pages 12 and -- Slide 12 and 13, we can see that EBIT grew very nicely in all of our operations. In Strauss Israel, the growth of the EBIT was due to a very nice growth in top line, in volume and also a better mix of product and innovation in this quarter and also productivity activities that helped us very much.

In Sabra, we see a growth in the EBIT line, which is due to the divestment of salsa, the salsa activity last year, and the improvement of our margin due to this divestment and also productivity activities all through the line, the P&L lines of the Sabra and the price increase that was performed in the fourth quarter of 2018.

And in Strauss Water, we see an improvement in the EBIT results due to a nice growth in Strauss Water Israel sales, in volume and also great productivity increases in this quarter that contributed to the bottom line.

Strauss Water China in terms of sales grew by 5.7% in local currency and half -- first half, 16.6%. And bottom line is quite solid in Strauss Water China. The net profit there is around 11% profitability and remained stable through the first half of this year.

Net profit grew by 9.5%. The growth is a bit lower than the growth in EBIT, mainly due to the increase in finance expenses relative to the second quarter of 2018. This increase is due to hedging of FX procurement deal. And having said that, we should remember that the regular finance expenses on our debt are very stable during the past year.

I will end with this with your permission, and we will continue to 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 Chris Reimer of Barclays.

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

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Can you elaborate a little more on the digital capabilities and the e-tail platform you mentioned in your opening comments? And what areas of the business would those initiatives impact?

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Giora Bardea, Strauss Group Ltd. - President & CEO [3]

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Yes. Thank you for the question. We understand that as a food and beverage, at this stage, we stay B2B company. And as long as we are B2B, we need to develop capabilities, platforms, people, relationships with the existing retailers all over the world in order to be better on their shelf with their platform. So we are having a lot of relationship with the existing one, like -- in Israel, like Walmart, Costco and all of those in the U.S., and Amazon as well, because we believe that the situation of using or leveraging their digital shelf will stay for the next couple of years.

At the same time, we understand that we should develop capabilities of B2C, not in the main categories and the main revenue, but for special products, like we do with capsules in Poland and Romania, like we do with water machine in China, like we do with water machine in Israel, to develop technology and the right capability skill in order one day to enlarge, to expand the business of B2C.

First, the platform is how to collect better data. We can now talk a little bit, we developed here in Israel a great platform. It is our pattern in Strauss, to collect data on consumers not via the retailers, to leverage other public data and then to try to understand better our consumers, their habits, what they buy, how they buy, what they use. And altogether, we believe we'll be much, much better ready for the future competition or ecosystem.

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

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I understand. That was helpful. Also, if you could comment on -- it was mentioned in the presentation, I think, that your Strauss Water is expanding into point of entry solutions in China. Could you give some color on what the opportunity is there? And what kind of interest, if any, that you've seen?

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Giora Bardea, Strauss Group Ltd. - President & CEO [5]

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Yes. We started journey in China to develop what we call point of use. It means that we develop systems. For the moment, the people need to use their water. It's mainly in the kitchen, sometimes it's in the living room in the China, but all in all, we talk about the amount of used water. Down the road, we understood, together with Haier, there is large need for, what we call or what they call in China, point of entry. It means that to take care of and filterize and treat the water at the entrance of the apartment or the building with some softener and filter. So it means that they need some treatment for the water not just for the drinking, they need to treat their -- to take care of the water that's either used for the washing machine, for the dishing machine or even taking a bath. So the system -- the new system will take care when they enter in the apartment.

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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 in 2 hours. In Israel, please call +03-925-5928. Internationally, call +972-3-925-5928. A replay of this call will also 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, please. So thank you very much for joining us, and hopefully, we'll meet you face-to-face either in Israel and our visits. And we'll come with better and better results of the company in the future. So thank you very much, and have a great day.

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Operator [8]

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Thank you. This concludes the Strauss Group Second Quarter 2019 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.