Kri Kri Milk Industry SA

ATHEX:KRI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Konstantinos Sarmadakis, executive]

Hello again and welcome to this webcast. I'm Kostas Sarmadakis, Kri-Kri's CFO. In this session, we will discuss in detail our performance in the first half of 2024 and I will give you an update on the business for the current year. After a short presentation, Q&A will follow. You can post your questions using the chat tool.

Now let's have a first look at our P&L statement. Sales show an increase of 15.8% exceeding EUR 130.8 million. Overall, this 15.8% total sales value increase, 19.3% is attributed to higher selling quantities and minus 3.5% is attributed to lower selling price.

Gross profit margin reached 34.6%. This is about 4 percentage points lower than that of 2023.

EBIT was EUR 26.9 million with a margin of 20.7%.

Finally, EBITDA stood at EUR 29.4 million with a margin of 22.5%.

It should be noted that profit after had a benefit of EUR 5.3 million that relates to a tax relief asset state subsidy for completed CapEx projects. So this explains the low effective tax rate of the current period.

Moving on, you can see the sales bridge. As I said before, sales show an increase of 15.8% exceeding EUR 130 million. As per segment, this is analyzed as follows. Total ice cream sales increased by EUR 4.9 million or by [Audio Gap] percent year-on-year. EUR 3.9 million extra sales came from higher volumes, that is 16.5%, and a [ Indiscernible ] higher price level.

In ice cream, during the current period, we had a hit with a steep rise of price of cocoa and chocolate, so this increased cost will have passed it on selling prices.

On the other hand, total yogurt sales show an increase of EUR 12.8 million, or by 19.7%. Increased volumes contribute for EUR 17.7 million, but lower price level trims the sales by EUR 4.9 million. That is on average 5% lower price level.

On the next page you can see the gross profit bridge. Starting at the gross profit of -- for the first half of 2023, there was an increase of EUR 8 million coming from increased sales quantities. On the other hand, the lower price level drives gross profit down by EUR 3.9 million.

Raw materials price level was substantially stable and production expenses effect was immaterial. Therefore, the gross profit for the first half 2024 went to EUR 45.2 million. The current gross profit margin is 34.6%, and that is 2 percentage point lower than that of 2023.

On the next page, you can see the EBIT bridge. Starting at the EBIT of the first half 2023, increased gross profit adds EUR 3.9 million. Increased OpEx, on the other hand, reduced EBIT by EUR 3.3 million, leading to a final EBIT figure of EUR 26.9 million. The current EBIT margin is 20.6%, and that is 2.7 percentage points lower than of 2023, so although gross margin is 2 percentage points lower, the EBIT margin drop further. This further erosion in the EBIT margin of 0.7 percentage point is attributed mostly to increased transportation costs, and it is explained because of the change in sales mix. For example, UK sales, one of our most distant export destination have increased by 42%, and this drives higher the average transport cost per pallet.

Moving on to segment review, yogurt export sales show a strong double-digit growth of 27.8%, exceeding EUR 63.5 million. It is worth mentioning that yogurt export sales make up to 62.8% of total yogurt sales. Also, there is a strong boost in our sales contributed by the major markets of UK and Italy, as well as from our entrance in new markets such as France. Recently, in March, we launched high-protein yogurts in France, as it was scheduled. The initial indications are that sales will be above our budget.

Moving on, in the domestic market, yogurt sales exceeded EUR 37.8 million, decreased by 2.4% in value, but increased by 4.8% in volume. In the current inflationary environment, we kept our prices at a low competitive level, but that had a negative impact on the value of our sales and at the same time it adds pressure on our profit margins. As far as the market condition is concerned, the strong shift of consumers to private label yogurt continues because of their choices for value-for-money products. As a result, private label yogurt market share increased by 1.4 percentage points in volume, applying pressure on branded yogurts. That pressure has led Kri-Kri branded yogurts to a market share loss of 1 percentage point in value, reaching 15.4% of market share and establishing our position as the second supplier in the market. In general, Kri-Kri seems to benefit from those market developments since we are the largest supplier of private label yogurts in the domestic market.

In the ice cream segment in the domestic market, our sales show a strong double-digit increase of 21.7%. The favorable weather conditions for the ice cream sales during the first months of summer, May and June, the expansion of our sales network and our products portfolio, combined with the increased inflow of tourists in Greece, resulted in this double-digit growth. For the remaining of the season, however, and because mostly of very hard comparatives last year of July, ice cream sales growth has slowed down. Our ice cream market share increased only marginally in value.

For this segment, a big bet for us is the launch of Greek frozen yogurt series in USA. At the beginning of September, we have launched it in Texas with 6 different flavors in a variety of packages. This is an important milestone for us as it opens a large and promising market.

Let me now move on to our updated estimates for 2024. Although the comparatives of 2023 are very tough, we believe that we can show a good performance in this year also. We have based our initial guidance on assumptions of more pressure of competition that will be pushing prices further down. This now seems that we have avoided it. Therefore, we restate our guidance with increased sales of EUR 245 million at 13% higher year-on-year. Also, we seem the EBIT margin a little higher at an area of 16%.

Finally, the shareholder structure. Tsinavos family holds 72.8%. Domestic institutional investors at 10.6%. Institutional investors abroad, 9.7%, and retail, 6.8%.

We will now stop for 5 minutes so you can post your questions in the Chat tool. And then I will try to answer as much as possible. Thank you. [Audio Gap]

[Konstantinos Sarmadakis, executive]

Thank you all for posting your questions. Let me read it and answer as much as possible.

The first question about the PDF on the Investor Relations website. We will upload it right after the finish of this webcast.

A question about sponsorship of a soccer team or any special event. Unfortunately, this is not something that I decide. It's our marketing department, so I'm not very aware of what's happening there.

Flavor of the outlook of milk prices, we see that milk prices are stable at the current level. You have seen that also in the gross profit bridge where raw material prices didn't affect materially the gross margin. However, we expect some bearish movement in the next months because of much lower animal feed costs and animal feed accounts of nearly 75% of raw milk production cost.

Question about strategic partnership in the U.S. The launch in the U.S. with Greek frozen yogurt, we don't expect to have any material impact this year. We expect next year to see some figures, but it is still too early to say something more.

Same question about U.S. ice cream sales. About margin in the U.S. market, the price structure is such that allow us to have higher margins that the current ice cream business now.

Question about working capital. Yes, we haven't seen any substantial difference in [ our ] working capital and it relates to normal growth of business.

Another question about raw material prices. I think I have answered this.

CapEx in the second half and 2024. I think that means 2025. We expect this year total CapEx between EUR 21 million to EUR 25 million, and for next year to be at around EUR 22 million as we are running project to increase the capacity mainly of our yogurt production plant and secondary of our some production lines in ice cream in order to cope with increased demand from U.S.

A question about the contribution of different export markets, especially France. The major market of us is UK and Italy. Both saw very high growth during the first half of the year and we expect to continue at a similar growth pace. France is a new market for us. Our estimate of annual sales is EUR 4 million. So for this year we expect its contribution to our total sales to be low.

A question about hedging euro to USD. Yes, this is something that we will consider when sales and our cash flows will become substantial.

Question about the main drivers for growth in the coming years. We expect the key growth driver for us to be the markets abroad, both in yogurt with expanding our geographical reach, and expanding our customer base in countries that we are already present. And also with ice cream, the bet for us is the U.S. market.

Question about dividend. Yes, that's true. We have a solid and healthy balance sheet. And we believe that after financing our CapEx projects, we can have higher payouts in dividends over the coming years.

For OpEx, a question about increasing headcount. Yes, we have increased headcount and also, we have increased our -- the salaries. This is in order to preserve our good workforce and be able to keep with rising demand.

Successful plans for the CEO? Yes, there are successful plans for all members of the Board of Directors. Of course, the CEO's role is critical, but there is no rush for such a succession. Mr. Tsinavos runs the company and we'll -- the plan is to run for the coming years also to keep up on the same position. His son has the role of Deputy CEO. So there is a plan of success on that way.

Another question about USA. I think I've covered this also.

For U.S., we have started the launching -- the launch of Greek frozen yogurt in Texas, in some local supermarkets there, and we are in advanced discussions with some major U.S. retailers for private label, but this is too early to say anything more.

Question about biogas production plant. With this CapEx project that we have in place, because increased capacity and increased yogurt production will also make more wastewater. We need to expand the biogas plant also. And this is included in this CapEx project.

Question about the tax relief. The tax relief is a percentage of state subsidy on a capital -- on a CapEx project. This state subsidy is 35% on this specific project that we have applied for. We expect this tax relief on this year on this EUR 5.3 million as a one-off figure, but we have also other projects that are eligible for state subsidy and this we expect to mature on the coming years.

A question about the cap of our domestic gross margin in yogurt segment. Yes, this is still in effect, so we cannot sell with a gross margin higher than that of 2021.

A question about the success of UK and Italy. Yes, the growth of sales in Greek yogurt in UK was a surprise for us and also our customers in UK this year. I think this shows that the trend to more healthy diet is still on and also it has to do with some restructuring of the market. What I mean by that is that most retailers used to have 3 different series of private label products. The essential which was included the low-priced products, a medium series and a premium series. Our yogurt was put in the premium series. And recently this medium series of private label products, they try to make it less effective, so this makes room for more premium products to have higher sales in volumes.

Question about exporting products to U.S. For U.S., we can export ice cream in an economical way. To transport yogurt, because of the short shelf life of 55 days, it is -- it doesn't work because you need to travel it by aeroplane so the cost is very high. However, ice cream, because the shelf life is 2 years, we can easily travel it by ship and have a low transport cost.

Current capacity utilization rate. In the yogurt it is very high and in some production lines it exceeds 90%, so we have experiencing some problems that we cannot cover demand in full, so it is urgent to proceed to this CapEx plan and increase our capacity.

Which yogurt brand is the main competitor in Italy? If you refer to our Greek competitors, FAGE has long presence in the Italian market. And it is our major competitor there with Greek yogurts.

How much revenue we are making in Italy? I think Italy accounts for nearly 35% of our yogurt export sales. So I think this answers your question.

And if this is possible to have such a level in France? I think it is, but it needs time for sales to develop there.

What do you think the growth of sales -- sales will come -- will be for the coming years? We expect double-digit sales growth for the next 3 years. This is our plan. But this is something that we will have to elaborate each year and give updated guidance.

And the final question about private label and branded products. In general, we try to develop our sales where we see opportunity. Private label have many positive aspects of course there is a risk along with expanding the business there and in that respect we try to capture growth but to mitigate the risk.

I think this is all. Again, thank you all for joining this call. Have a nice day. Goodbye.