Ebro Foods SA

MAD:EBRO

Earnings Call Transcript 2019-Q1

[Antonio Hernández Callejas, Chairman of the Board & CEO]

[Interpreted] Well, thank you very much for coming before [indiscernible] a day ahead. I support all of you, this is not a very good timing to come this time of the year. But this is [indiscernible] by our Board of Directors meeting next year, hope you will try to do things [indiscernible] much better timing.I'm going to walk you through the first quarter's results for the different divisions. We got over as you can see on the screen. I'd like to verify all the topics one by one so that our questions puts, first and foremost, with our objectives for this year is to recover the profitability of our [indiscernible] following the difficulty we experienced last year.And today that we have a very satisfactory result and to take the situation throughput and the rest of the American business are very affected. In [indiscernible] we have started to regain ground following the loss of contribution in 2018 as a consequence [indiscernible] in relation to transport and logistics packaging containers and other secondary materials. And the prices for raw materials remain high [indiscernible], following the price rise remains stable, and we anticipate it to continue this way for the rest of the yearIn January, the EU approved its safeguarding mechanism on rice imports in Cambodia and Myanmar countries as a consequence of European farmers for several years claiming that they led [indiscernible] to in the summer rice prices. Although these countries, they also undergo prices because [indiscernible] because of practices. So far they have lost ground because they have [indiscernible] to park [indiscernible] like the expensive [indiscernible] although they have a [indiscernible] number of for the purchase prices. Because of the imports from these countries, it has been imported from other countries and as a consequence, there are some contingency plans. I'm not sure you understand these properly, but [indiscernible] that for all these countries [indiscernible] will come through summer. For [ 2 years ], we've imported quantity in the previous quarter with [ 200 ] between [ 40 and 45], it is between 200 and 300. And if it was above 300, then [indiscernible] would be up to 65%, [ these ] are accurate figures. So when the imports disappeared from the [ EBA ] countries, people were importing with normal [indiscernible] and importing more limits.If under the first of [indiscernible] was 30 years. Today, it is 65, that's a very [indiscernible] uptick of EUR 35. And as a consequence of our lost imports, [indiscernible] right at 65. This means the activation of the European market of its performance because they have less competition from Cambodia and Myanmar are very cheap prices because of the tariff policy. And most of the industry, they were importing white grains in [indiscernible] and [indiscernible]. Therefore, this is basic grains industry to process wherein the work is distributed [indiscernible] in Europe. So it has some positive and also negative effects.[indiscernible] because of in order to be competitive, we have to pay higher prices to the European importers. [ Half ] of the industry because you have greater quantities of [ grains ] to be processed in your facility because processed rice are greatest [indiscernible] a fee of 170 -- with a tariff of 170, I don't know if you understood this. But basically the uptick in price basically means that we're purchasing very little from these Asian countries, although we have a whole facility in Cambodia for our varieties. But we are going to work on this and because this hasn't been announced today at this [indiscernible]. Most players were fully prepared, they really knew the system would be discontinued from the 1st of January onwards.As a consequence, in Europe, the prices to farmers going up. We are paying a little bit more for the [indiscernible] there's been a higher [indiscernible]. And this is going to be [indiscernible] throughout the whole year, and it isn't a source of concern to [indiscernible] at the moment because we've act properly. And although when we say that for long rice varieties, we have on average [ 20 years ] to the European farmers, mainly that Spanish farmers. And we are leading [indiscernible] and like the mixed cereals, quinoa, ancient grains and vegetables and pulses.The first quarter results clearly a healthy growth in sales, up to EUR 386 million in turnover, which is 11% higher, relatively turn remains at 13% once the various cost have been transferred to tariff. However, absolute return in terms of EBITDA grew 12% up to [ EUR 50 million ]. The exchange rate have a positive impact of EUR 2 million and IFRS 16 has a positive impact of EUR 1 million.And honestly, last year was a very good quarter in the United States. And this year, we are improving it substantially. So this recovery is right on track. Last year, we have a very few quarters [ above ] EUR 10 million in EBITDA. And so every single quarter, we are exceeding this EUR 10 million. So we can just think that the main problem for last year has been corrected.As far as the operating profit is concerned, the decline price [ declined by 7.8% ] to EUR 39.2 million, primarily due to the lack of significant extraordinary income. Last year, we sold the SOS or SOS brand in Mexico, which created a capital gain of EUR 6.8 million. By and large, a very good month for rice, excellent sales in Europe, the high profitability levels in the years and a cyclical situation in Spain because of the tariff increase from the Asian countries, but this measure is going to be diluted for the rest of the year.The durum wheat market has remained stable in spite of decreased planting in Europe. All the operators have extensive hedges and high quality inventories in place. This allowed for very good mixes, so there's very high stock price.In the United States, our main goal is the improvement of our contribution. Last year, we were affected by certain logistics and operational costs and also lack of headcount.The market in Pasta remains flat and the promotional activity is very high. There's also a high seasonality because the second half is more active in sales than the first half.In Canada, we have very strong positions. We have recovered of profitability of the top years, the Gluten Free and the Supergreens are partly recovering from the losses of other products that are outdated like whole grains that are at least [indiscernible] are outdated in Canada.In the U.S., instead of replacing them with the higher value products, they are being replaced by core products or basic commodities so to speak.In Europe, the most complicated factor during the quarter were the difficult negotiations with retailers that placed for the first half of the year. And these negotiations are always very tough because of the concentration levels, which is not really beneficial to us.The [ by products ] are experiencing double-digit growth. In France, we are focused on making Roland Monterrat profitable again [ with ] EUR 100 million in EBITDA, that is right on track to recover as far as the productivity is concerned.Garofalo continues to grow with excellent results on the previous year, with a premium positioning in all of them. And we are [ gaining on markets ] in like Spain, France and Switzerland and we are also launching our Fresh Pasta, the Garofalo Fresh Pasta soon in Spain and we're going to launch the Fresh Pasta by Garofalo. Turnover for the Pasta division grew 11 point -- well, 11% or 10.7% up to EUR 327 million. Likely, thanks to the [ timing ] and organic rate stands at 2.0%. Advertising investment increased by 2% to EUR 16.3 million, more in line after actually.The division's EBITDA grew by 10% up to EUR 38.2 million, with an 11% margin. The positive currency contribution in EBITDA was EUR 0.2 million. However, the new accounting treatment leases, the IFRS changes contributed positively with the EUR 1.9 million.Therefore, the new IFRS 16 increased amortization meaning, EBIT remained stable, flat.Consolidated group results -- the consolidated figures grew 11%, reaching EUR 700 million. Advertising investment grew by [ about 15% ] up to [ EUR 4.2 million ]. EBITDA grew by 8% up to EUR 85.4 million -- EUR 85.3 million rather. Cost inflation has been passed [ through ], but continue [indiscernible] the exchange rate with a positive effect of EUR 2.3 million, and the IFRS 16 adding EUR 3.2 million. And the operating profit declined by 10% because of the lack of the Mexican EBITDA.Net profit for the same reason fell by [ 15% ], reaching close to EUR 37 million. We are on the right to recovery but with clear positive signs in the core markets.As far as the leverage is concerned, our net debt stand at EUR 793 million. This increase, which is roughly EUR 88 million higher than year-end of 2018, is comprehensive because of the IFRS 16 standards. So we need to take into consideration the EUR 84.5 million that have been capitalized in the [indiscernible] of factories leases. We had major organic growth for these first half of the year, in line of in [indiscernible] in Canada, and for the second half of the year, both the extensions in Thailand, India and Memphis as well as the investment in Cambodia, which is less relevant at the moment because of the tariff issue I mentioned before. But it is important to us because those competition that's [indiscernible] cheap prices, we tend to focus on special premium aromatic rises with our interesting profitability. Therefore, CapEx in the quarter rose to [ EUR 27.5 million ] and our working capital grew to EUR 49 million due to the positions taken in raw materials. So we've fully hedged the cost part for the year and also rice has been hedged almost entirely for the year in Europe and almost in the United States.By conclusion, we are very pleased with the positive sales growth and most importantly, because of the take-up of new products. We have stockpiled raw materials, and we are well-positioned for the whole year. We are currently investing in organic growth currently, obviously that's accounting different options, the timing is now fully integrated, and we're now introducing premium fresh pasta in Italy, France, Switzerland, Sweden and in soon in summer in Spain.And 2019 to be on -- has started in a very positive note. To me, the most important thing is we've been shifting gears in the United States as doing on our work [indiscernible] in the U.S. last week, and I was very pleased to everything we have accomplished. All of the inefficiencies that we were suffering are fully under control at the moment and being fixed, but this is not going to be done overnight. Please note, that we have undergone several organizational changes, headcount, a lot of streamlining has been done. And everything that wasn't working properly before is right on track and soon to be solved.As I mentioned on the previous presentation, sometimes having [ no down year ] is not that bad in order to see that the good results are hiding things that, well, you were making so much money that you couldn't really see the inefficiencies, and they are now fully detected and being amended because of the better organizational changes. [indiscernible] our new COO appointed, major cost saving policies, there has been also the major generational change, changes in marketing, the head of production in Freeport has led to senior people from other departments. We were also very happy with them. Well, they also left, as well as a new President for Logistics and Programming. There's been a thorough change, which really shows that we've been very agile in hitting relevant changes. That's the most important. We have issues that can have an impact in the quarter, looking to farmers in Spain [indiscernible], with the negotiations in France [indiscernible] are fixing our results, but these are minor issues or day-to-day housekeeping issues. These are not major structural issues that can affect us tremendously. So [indiscernible] living a very positive situation despite the existing difficulties in the markets where we have a footprint because of the harsh negotiations with the retailers. We are living a very optimistic situation compared to last year, that's the key takeaway.Thank you very much, indeed. And now if you'll agree, we will jump to Q&A. Is there anything you want to ask?

[Unknown Analyst]

It's going to be a very, very easy question indeed. First and foremost, you have talked to us about a couple of things here. You said that you have done with [indiscernible] in France in pasta. How do you expect prices evolving? I mean, you've talked about price increases in Europe. Are you going to be able to process a lot to retailers? Can you elaborate a little bit on [indiscernible] inflation and logistics in the United States? Would you perhaps [ take ] increase prices after you've initially considered the business of [indiscernible] measure for the rest of the year? It's a little bit late, but did you comment on the Freeport situation and the EBITDA contribution? And the question were as follows, can you give as an estimate of CapEx for the rest of the year?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

Well, as far as the prices are concerned, I said we are fully hedged for the year for durum wheat in Europe and in the United States. We are hedged at prices of wheat we think are [indiscernible], otherwise we will not [ reach ]. We do not see any potential upside and we don't see any [indiscernible] in the market. So until the first half of 2020, we believe there's going to be less harvest [ in the ] year because we are going to have less planting area [indiscernible] in North America, but we have historically high stock pricing and very good quality stock price. Everything help somewhat [indiscernible] market. I don't know if it's going to happen in 2019. However, in 2019, [ we're ] all done in terms durum wheat.As far as our own takeaways is concerned, we've been fully hedged everything related to our [indiscernible]. In the United States as I said before, is a relatively calm, stable market, we're not too worried about it. Its [ piles ] increased to [ 4 to 5 ] years. Obviously, if you compare it to the import [ life ] I must say, hey, hang on. It's more expensive now than the import spread. So the [indiscernible] correction is 20 years, that's going to be corrected for the whole year, not abruptly in the first quarter. So honestly, I think that this is the quarter we are going to be more heavily affected in our European prices because [indiscernible] some of the farmers. Farmers [indiscernible] rate and the month of [indiscernible], with the farmer prices, everything we put this year is EUR 20 more expensive than the previous year. And, therefore, there's an inflation of cost that, look, 20 years, this is not the end of the world. [indiscernible] and we will carry out less promotions or increase prices [indiscernible].We also took our best sellers of the logistics headcount, salaries in the United States can easily lead to pricing increases. [indiscernible] and we have seen sudden stiffness and rigidity, but we are protecting ourselves in terms of salaries and the demands to those we are hiring and [indiscernible] very [ inflexible ]. I'm going to give you an example. For instance, we are making first to our [indiscernible] test. So we didn't have to put signs in English and Spanish in all our [indiscernible] factory, most of them are were Spanish speakers and they did not pass the English test. So I wouldn't expect in electricity rather than logistics.So now this English test is no longer valid. Please do not include this in your analyst reports, [indiscernible] it's just an example to explain that sometimes why we are too rigid, [indiscernible] too rigid and you are working with consolidating firms, you end up complicating their lives.All I want is to [indiscernible] the machines not [indiscernible] telling in time. So we have unnecessary budget policies that are unnecessary. So this is what you do sometimes when you have this kind of organizations? I mean it didn't make sense from a practical standpoint. [indiscernible] personal problems are less. We got [indiscernible] country head for Mexico, Puerto Rico and he is now leading the [indiscernible] and he has envisaged some improvement. I feel very optimistic about our [indiscernible] despite the [indiscernible] we are making enough money. So now he continue with this very strict policies. Will we end up having great [indiscernible], and that's regulated at Freeport.Since the 1st of January, we have a new streamlined structure, the whole organizational change is [indiscernible] for it. We have no longer production problems. And just to give you an idea, we've got more than [ EUR 4 million ] -- [ $3 million or pounds ] because of service. So service levels are back to 98% because as you know, we are undergoing a very bad situation. So service levels are now at 98%. So $3 million [indiscernible] by delivering purchase orders in time, [indiscernible], this is very important. What a pity that I have to [indiscernible]. And undoubtedly, on the flip side, on a positive note, we can see a lot of potential for upside. And first you asked the question about CapEx this year, this is higher than [ 27.4 ], but [ they present ] delays and maybe it being 27 times 4, it really depends on the timing. 27 times 4, roughly.

[Unknown Analyst]

I have a very quick question please if you can please clarify the following [indiscernible] is contributing this year [indiscernible] by EUR 3 million, EUR 2.5 million you say, plus [indiscernible]. It is worth breaking. I mean, the last [ 3 years ] are very positive and [indiscernible], slight delay because of this problem we suffered with prices, and the problem in France with the negative contribution from [indiscernible]. That is my question precisely. Yes, that was precisely my question with regards to this.

[Antonio Hernández Callejas, Chairman of the Board & CEO]

This is going to be misleading, don't get to the wrong conclusions, [indiscernible] much better than the previous year, much better by and large. And you talked about the hard negotiations with retailers, were they better or worse than expected, better than expected. You even though it's just like going on a bull fighting ring and it hits you once, you thought it was going to kill you, you have [indiscernible] you end up dying because of this. It's not an easy answer because [indiscernible] with retailers are unending because they are complicated. And honestly this year, we have had some very, very hard negotiations in the Netherlands, for instance, in Germany as well and in France with one of our top retailers there.So as a consequence, there are some qualities among retailers in ourselves. But the brand [indiscernible] out of our shelves so they are and because of the same negotiations and the competition we have raised [indiscernible] out of the shelves for 5 months. So this is where the situation we are leading over the past [indiscernible] consumers. This year's negotiations, we are trying to take [indiscernible] of the category. You are talking to me about France, is the EGA low in France? [indiscernible] have to decrease apparently. The retailers may not sell with a margin that is less than 10%. Usually this strap translate into an important turnover and less sales of brands. But the brands are competing among themselves, have a profitability of less than 10% because they are fighting for the key SKU of olive oil here, for instance, in Spain and they make money, no single [indiscernible] with an SKU of olive oil. And in spaghetti, for instance, it may be up even [ 3% ]. So this is affecting [indiscernible] brands. This is even worst for because it is private label sales. So negotiations are hard. Retailers tend to think that the U.S. selling cheap to our competitors and also those are very complicated in some way. If you're asking there's [indiscernible] in negotiations, that is never easy. It's not that big really. I mean, there's no way with the quarter [indiscernible], but there's always something, there's always something in Spain.

[Unknown Analyst]

My question is with regards to the reorganization changes in the United States. Can you tell us a little bit about the following, where do you think the biggest improvement are going to take place in terms of logistics or production? Or when do you envisage these changes being fully operational? And do you think there are other areas in the organization like for instance the pasta business in the United States, you made the changes led the rise in the [indiscernible]?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

It's mainly in the United States. [indiscernible] basically implemented by year end and the end of June. The idea is to make this company less bureaucratic to being [indiscernible] honestly and less bureaucratic. But it's not going to affect the other companies in the Netherlands, France, Europe or Asia, it's -- they're not going to be affected. The more local issue, we are trying to improve the cost you may say in each area in those 2, production and planning. You [indiscernible] obviously.

[Unknown Analyst]

[indiscernible] also question with regards to the [indiscernible] business in Canada. You can see some of your improvement. Are these market related in terms of the [ category ]? Or perhaps you're going to carry out some [indiscernible] to improve this situation?

[Antonio Hernández Callejas, Chairman of the Board & CEO]

In Canada, that is [indiscernible] situation of [indiscernible] and the negative impact in the United States because of the decreases in the other sectors, there are some of division category, we have such impact in Canada. In the United States, the whole grains and pasta was one of the leading drivers behind profitability and sales [indiscernible]. And the whole [indiscernible] is now updated. And it's not that we are going to start buying a bit perhaps of health and wellness, like [indiscernible] free or pasta with cauliflower. In the U.S. basically, they were back to basics just eating plain pasta. That hasn't happened in Europe or Canada. In Europe, it was quite contrary. These whole grains products are straight. In the U.S., we are only going whole grain rise. But the whole grain category for part of the reason, no, these are no longer popular to consumers, amongst consumers.Any further questions? So I wish you all an excellent week, holidays. Don't eat too much. If you ate, eat rice and pasta, you'll be completely [indiscernible]. Thank you very much, indeed.