Giora Bardea: Strauss Group delivered strong performance in the quarter, growing sales and maintaining profit stability, while, like the rest of the world, having to cope with the effects of COVID-19. The Group has focused its efforts on protecting its people’s health, maintaining business continuity and stability and providing a response to demand, supported by financial management that will allow for flexibility and preparation for a new reality that will be accompanying us in coming months. The diversified structure of the Group’s business promotes resilience but also creates challenges, including the impact volatile exchange rates and restarting businesses harmed by the pandemic. The Group continues to invest in its employees, to build closer relationships with suppliers and retailers, to invest in developing its brands and to reinforce its partnerships, while reviewing various business opportunities and making advance preparations for the challenges that lie ahead.
Strauss Group (TASE: STRS) has wrapped up the first quarter of 2020, which was marked by conflicting effects as a result of the coronavirus pandemic. The company’s income in the quarter was NIS 2.17 billion, reflecting organic growth – excluding foreign currency effects – of approximately 8.1% compared to the Group’s income in the corresponding period last year and attesting to impressive growth in the demand for its products. However, the effect of changes in exchange rates, notably in the coffee company, eroded income so in shekels, quarterly growth was approximately 3.0%.
According to Strauss Group CEO Giora Bardea: “We are today announcing our results for the first quarter, part of which was impacted by the outbreak of COVID-19, impacts which will continue to accompany us at least until the end of the year. As a socially responsible business company, we first and foremost took steps to maintain our production activities, while granting uncompromising priority to the health and safety of our people and the safety of the products we manufacture.
“These times have uniquely enhanced the role of food in people’s lives. The pandemic reminded everyone how vital it is to cultivate a local food industry that is connected to local agriculture, not only in Israel but everywhere in the world. These times emphasize the advantages of being close to your raw materials, and how crucial it is to maintain transportation and supply capabilities for raw materials and food to supermarkets and homes.
“In the first quarter we felt the impact of the coronavirus outbreak in our business in China during most of the period, whereas in other countries of operations the effect was mainly in March, but continued into April and May – months in which most of the countries in the world experienced extended lockdowns. Nevertheless, ultimately we are today announcing an excellent quarter that attests to the Group’s business and financial robustness.
“The Group has assigned dedicated funds as part of its social plan to support those who faced the front line of this crisis, including the company’s front line employees, helping suppliers and regularly supplying food packages to senior citizens and medical teams. These activities were implemented across a number of geographies. The key challenge now is to optimally manage the day after the crisis and to prepare for a potential second outbreak of the virus should it occur, in accordance with our strategy for the following years.”
Revenue growth is primarily the result of growth in Strauss’s sales in Israel, as well as growth in Sabra’s sales in the US in March; this sharp increase in sales had a significant effect on the entire quarter. However, several activities, such as sales to the institutional market and food services mainly by the coffee company and Strauss Israel and the closure of the Elite Café chain, had a negative effect on our results. The income of HSW in Chinadropped by 31.2% in the first quarter, while the income of the coffee business, notably in Brazil, was materially affected by negative translation differences – an effect that has continued, and even intensified, in the second quarter. Exchange rate differences throughout the entire quarter lowered the company’s revenues by approximately NIS 100 million (of which approximately NIS 77 million are due to the depreciation of the Brazilian real against the shekel). This currency erosion is the main reason for the difference in sales growth in local currency and in shekels.
The Group’s non-GAAP gross profit margin in the first quarter of 2020 was NIS 878 million, up 3.9% compared to the corresponding period last year, gross profit margin was 40.5%, an improvement compared to the gross profit margin in the corresponding period, which was 40.1%. The improvement is primarily the result of impressive growth in volumes sold in most of the company’s areas of activity. The company’s non-GAAP operating profit in the quarter was NIS 268 million, down by 0.5% compared to the corresponding period last year. The currency depreciation eroded NIS 8 million from the company’s EBIT of these the BRL eroded NIS 5 million. The main reason for the drop is an increase in marketing and selling expenses and a drop in the profits of HSW in China as a result of COVID-19. Net profit attributable to the shareholders of the company was NIS 171 million – a decrease of 0.3% compared to the corresponding period last year – due to increased tax expenses.
Strauss Israel’s business in the first quarter was split between two periods: January-February, in which company sales grew substantially, and March, when extraordinary growth rates were recorded due to Passover and the coronavirus outbreak in Israel. The company applied significant operational measures to enable it to continue to manufacture enough food and deliver it to retailers before and during the lockdown, while granting top priority to the safety and hygiene of its people at the various sites, during their transportation to and from work and in the offices, as well as to the safety of the food it manufactures.
In the first quarter Strauss Israel’s sales grew by 12.1% to NIS 983 million. With signs of the decision to impose a lockdown emerging in early March and the ensuing stocking up on food products, in addition to Passover sales, in March the company’s sales grew by approximately 22.8% compared to the corresponding period last year. Sales grew across all categories and divisions. The nature of sales and the sales mix changed, such that there was an increase in sales by the food chains, supermarkets and neighborhood grocery stores, while in parallel impulse (on-the-go) consumption, mainly at convenience stores, and the away-from-home (AFH) market, particularly sales to the institutional market – restaurants, hotels, etc., decreased significantly. In 2019, total sales to the institutional and AFH markets accounted for less than 10% of the Group’s sales turnover.
Sales of the Health & Wellness segment (which mainly includes the Dairy division and Fresh Foods) in the quarter amounted to NIS 617 million, reflecting 14.5% growth compared to the corresponding period last year. The Fun & Indulgence segment (which mainly includes the Confectionery and Salty Snacks divisions) grew 8.3% in the quarter, with sales amounting to NIS 366 million. Growth is the result of consumers stocking up in preparation for the lockdown as well as the timing of Passover.
Strauss Israel’s gross profit in the quarter was NIS 396 million, reflecting 13.1% growth compared to the corresponding period last year, and the operating profit grew by 11.3% to NIS 124 million.
Strauss Coffee’s business in the first quarter was affected by different, opposing effects. Coffee sales in Israel in the first quarter amounted to NIS 235 million, up 6.1% compared to the corresponding period. Sales growth is the result of increased demand due to the impacts of COVID-19; however, this growth was offset by the discontinuation of sales to the institutional market (hotels, restaurants, etc.) and by the discontinuation of the operation of the Elite Café chain.
In the international coffee business there are opposite effects as well. For example, the company’s share of sales in Brazil in local currency rose by 3.0% in the past quarter and amounted to NIS 343 million. The increase in local currency sales is the result of growth in volumes by the company, which is the leader of the coffee market in Brazil with a market share of approximately 28.2%. The company estimates that growth will continue and will intensify if the Mitsui transaction, signed during the first quarter, is approved. However, the economic situation in Brazil and the impacts of the global pandemic have led to significant erosion of the Brazilian Real against the shekel (an average of 18.5% in the quarter). This erosion has reduced the company’s revenues by approximately NIS 77 million, meaning that in shekels, income in the quarter was 16.4% lower than in the corresponding period last year, and the company’s EBIT by NIS 5 million.
The outbreak of COVID-19 in Brazil is expected to mainly affect business in the second quarter, as the pandemic reached the country relatively late compared to Israel and Europe. As at the middle of the second quarter, the devaluation of the real versus the shekel has continued and even intensified, and is presently approximately 31.1% compared to the average exchange rate in the second quarter of 2019, which is expected to have a greater impact on the company’s second quarter results.
In February 2020 the Três Corações joint venture in Brazil established a joint venture with Positive Brands, that manufactures and sells mainly dairy substitute products (plant-based, mainly cashews), with an investment of approximately BRL 39 million (for 50% participation in the JV).
In Russia, Ukraine and Poland sales growth in local currency was recorded, among other things as a result of the impacts of COVID-19, but in Romaniaand Serbia sales dropped due to intensified competition, which led to a decline in sales prices. Due to the effect of changes in the exchange rate of the shekel against the company’s functional currencies in Eastern Europe, with the exception of Russia and Ukraine, in all countries the company recorded a drop in income in shekels compared to the corresponding period last year.
Sabra and Obela
The company’s chilled dips and spreads business delivered 8.8% sales growth in local currency by Sabra, which is active in the US and Canada. The main reason for the increase is the rise in food consumption in the US in general, particularly plant-based products, among other things as a result of the effects of the COVID-19 pandemic in March. The company’s sales in the first quarter amounted to NIS 355 million (reflecting 100%), but following the depreciation of the US dollar against the shekel by an average of 4.1% during the quarter, growth in shekels was approximately 4.4%.
Sabra’s operating profit (reflecting 100%) amounted to NIS 39 million in the quarter compared to NIS 54 million in the corresponding period last year, following a sharp increase in one-time marketing expenses following the advertisement in the American Super Bowl, which took place in early February, as opposed to last year, when marketing expenses were mainly spent in the second half of the year. Obela, which is active in Australia, Mexico, New Zealand and Western Germany, recorded sales of NIS 40 million up 0.9% excluding foreign currency effects, compared to a drop of 9.7% in sales in shekels.
In the first quarter of 2020 sales by Strauss Water (which mainly include sales by Strauss Water Israel) amounted to NIS 144 million, an increase of 0.4% despite the effects of COVID-19, which led to a drop in sales of new machines, mainly during March. Strauss Water’s operating profit was NIS 15 million in the quarter compared to NIS 16 million in the corresponding period last year, mainly as a result of additional costs related to the coronavirus outbreak, as well as a drop in the profits of Strauss Water in China.
The company’s operation in China through the joint venture with Chinese household appliance giant Haier, Haier Strauss Water (HSW), was materially affected by COVID-19, which shut down a significant part of business operations in China for the entire first quarter. The company’s sales in the quarter (reflecting 100%) were NIS 106 million compared to sales of NIS 155 million in the corresponding period – a decrease of 31.2%; however, as a result of the impact of the shekel/yuan exchange rate, in local currency the decrease was 26.4%. The company took advantage of the crisis to further strnegthen its online sales operation in China, with ecommerce sales offsetting the negative impact of the shutdown of sales centers in China during most of the first quarter. As a result of these efforts, the company’s online market share positioning rose to first place.