Newlat Food SpA

MIL:NWL

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Benedetta Mastrolia, executive]

So good morning, everyone. Thank you for joining today's call on Newlat Food Q1 2024 results. Joining me today to discuss our results are Angelo Mastrolia, our Chairman; Giuseppe Mastrolia, CEO and Chief Commercial Officer, Rocco Sergi, CFO; and Fabio Fazzari, Group Financial Director.

Before commenting our results, I would like to remind you that this presentation may contain certain forward-looking statements that reflect the company's management's current views with respect to future events and financial and operational performance of the company and its subsidiaries.

These forward-looking statements are based on Newlat Foods' current expectations and projections about future events. And any reference to past performance of Newlat Foods shall not be taken as a presentation or an indication that such performance will continue in the future. This is also not an offer or a [indiscernible] of an offer to buy Newlat securities.

We can move directly to the presentation at Page 7, where we have our key financial highlights for the period. In general, we can say that the first quarter of the year was pretty positive. We had a general increase in volumes, albeit it was partially offset by a lower average selling price following the deflation that has been occurring for the past months.

In terms of revenues, of consolidated revenues, had EUR 199.6 million as opposed to EUR 207.3 million last year, which marks a decrease of 3.7% as opposed to last year. In general, we can say that we had a positive performance in all the main business units that has -- that is to say, Pasta, milk, dairy and bakery.

In particular, in Pasta, we had an increase of 25% in terms of volume. And in terms of revenue, we had an increase of 2.3%. In terms of dairy performance as well, we had an increase of 23.5% in volume and 2.5% in terms of revenue, but even the other 2 categories that I just mentioned had a very good performance in terms of volume growth.

This period was still characterized by a negative effect of special products segment because of the ongoing renovations and investments taking place at the Ozzano Taro factory. These renovations are aimed at completely renewing the factory. So this has haulted production because of safety reasons as well as having to basically dis-install and reinstall some new lines.

We had a very positive performance in Germany in terms of volumes but also in terms of revenue where we had an increase of 1.2% despite the very challenging comparison base. [indiscernible] last year, we had an increase of almost 20% in the first quarter of 2023 in Germany.

Moving on to EBITDA. We can say that in general, we had a very good performance at margin level. So EBITDA was EUR 18.9 million, which is an increase of almost 5% as opposed to last year. when we add EUR 18.2 million in the first quarter, and we had an adjusted EBITDA margin of 9.5% as opposed to 8.8%. So this is to show again that slightly lower sales. We also had a very good product mix and also a good strategy at choosing and picking the right contracts added value to our business.

Now we look at EBIT. So for EBIT, we had an increase as opposed to last year, we are looking at an adjusted basis. So we are looking at the EBIT last year, minus EUR 2.2 million, which is -- which came from income from business combination from the [indiscernible] Foods acquisition. So on this basis, we had an increase of 12.5% as opposed to last year. The same principle plus the net income, where we had an increase of 25.4%. So we had a net income of EUR 5.2 million.

In terms of cash generation, we had a very positive cash generation. with over EUR 10 million. So EUR 8.5 million -- sorry, EUR 10.5 million of free cash flow generated in the first quarter, well above Q1 where we had roughly EUR 3 million less than this year. Well, this is also more than half of our recorded EBITDA. We also had a very positive cash conversion of 85%, which is again above last year's level of 79%.

In terms of debt, Net debt, we had a very positive performance once again, thanks to our very healthy cash generation. If we look at net debt, excluding IFRS 16, we had a net debt position of EUR 22.3 million as opposed to EUR 29.5 million at the end 2023. The same applies to our net debt, including IFRS 16, where we had a very good improvement, going from EUR 74.3 million at the end of the year to EUR 66 million at the end of the first quarter.

Now we move directly to the sales breakdown and analysis. In terms of performance, as we just said, we had a pretty positive performance which was unfortunately impacted by the investments in the Ozzano Taro factory. However, if we do look at the sales excluding special products, we can actually see that we had an improvement of [ 0.2% ] which includes, again, a combination of higher volumes and lowering average prices because of deflation. So in general, we can say that the performance, even looking at our peers in the market was very, very positive.

Again, we had a very good performance in EBITDA and cash generation and net debt and in particular, the investments that took place in Ozzano Taro include a new baking line as well as packaging lines for baking and infant and adult liquid milk. Which we'll see -- we will see more about in the next slides.

These works are aimed at enhancing the new plants position as one of the leading centers for Specialized Nutrition -- [ Nutrition ] in Europe and potentially worldwide seeing the last developments we've had with some new clients coming in.

So this is more of an overview of what we've done. We can see some of the machines that have been installed recently and some of the products we've been working on. So in terms of the general investments -- the general outlook of these investments, as I just said, it is an investment -- a long-term investment, which will put the Ozzano Taro plant at the forefront of Specialized Nutrition. So we will have a variety of different productions, which were already present, but will enhanced capacity as well as enhanced types of products that can be produced with a wide variety of packaging solutions as well.

So we are working both at product level, in terms of quality, in terms of efficiency as well, but also in terms of what we can offer to our customers in terms of packaging, so different packaging, EU regulation-compliant packaging as well, single portion packaging for milk and for -- sorry, for bakery and for [indiscernible] you can see there. And this will also help us get into new markets. So at the -- up until last year, we only produced special biscuits or special bread substitutes in this plant.

However, starting from this year, we will be able to produce -- as you can see on the right-hand side here, new biscuits, for example, breakfast biscuits, which is a very big market in Italy, especially but not so not just in Italy but also in other European countries. So we will be able to produce those on guten rich level. So we can do both gluten and gluten-free again, which is something we already did. However, this new machines will help us have new shapes of biscuits, as well as the possibility to add on, for example, sugar and things that weren't being weren't possible in the -- with the initial -- with the old packaging.

We are also entering with this new oven and this new line in the bakery line -- the Bakery segment. The [indiscernible] that is to say, some type of puffed flat bread crackers like the ones you see here. So we are ready to launch these SKUs in Italy, but we're also working to launch this worldwide. These are very well perceived both by Italian retailers but also abroad. We've had some clients recently [indiscernible] and say that this is something that even outside of Italy, they would eat very very much like. So this is something we've been working on.

And in general, with the new oven, we have a state-of-the-art oven. That means that we have increased efficiency of production, and we can be very flexible in terms of the types of products that we can produce.

Moving on to the -- more about beverage, milk and liquid milk part of the investment. We had, in terms of infant and adult milk, we've invested in a new -- completely new packaging line. As you can see here, it is a completely automatized packaging line at TetraPak, which will allow for us to have a single portion drinks in these packages that you can see there. which have a lower environmental impact as well as the EU compliant cap attached to the bottle.

We are also working on new product development. And we're also in the process of considering installing a new spray [indiscernible] , which will basically double our offering in terms of colder milk, both for babies, but also for adults. So we're not just restricting the current offering in the Ozzano Taro to infants, but we're also expanding it to other nutritional needs, for example, with people that higher protein content or what specific [ that we ] need basically.

In the same context, we're also exploring new functional beverages. Which will take into consideration different types of needs. For example, meal replacements, isotonic drinks, announced waters, energy drinks. As well as post biotic products. We are currently working with some companies to find postbiotics that could be used in our beverages, not just milk. And these are aimed at promoting [ adjusted ] immunometabolic systems, and there will be a package in our single portion bottles that I just mentioned. So very [ practical ] to take with you and very easy to sell because it's not just something that you buy and you keep it on, but you can -- you can take it with you wherever you go. So this is something that will help us open the doors to new markets in the health and wellness business.

So in general, we can say that these investments, although they're having an impact at the moment on the business, we can say that these long-term investments are aimed at increasing our exposure to health and wellness. To some trends that we expect will continue to take place in the next years and we can be at the forefront of this, and we can offer to both our customers in terms of large retailers, but also B2B customers, different solutions. And the -- one of the key centers for specialized nutrition at [indiscernible] level basically.

Moving on to the next slide. We have more of a breakdown of the different business units. So as I mentioned at the beginning, we had a positive contribution of most of the business lines, at least from the key business lines of Pasta, milk, bakery and dairy.

In this sense, we had as -- as we already said, over 25% increase in volumes in pasta and dairy. And we also had a very good increase in bakery of 12.4% in terms of volumes. And in milk of 4.5% in terms of volume. And in general, this was also shown in a positive contribution in terms of revenue.

If we look at ready meal, so mostly in [indiscernible] mixes, we have a slight contraction of 2.6%, which is the result of lowering prices in this particular segment with basically stable volumes or even slightly higher volumes.

In the Specialty Products segment, as I just mentioned, we had a significant contraction, which we expect, however, to be able to go back to the original levels at least by the end of the year. And in particular, with this long-term strategic outlook, we expect to really be able to increase our exposure to special products in the next few years.

Maybe just worth mentioning that Special Products business at the moment is not one of our key categories in terms of weight. But we definitely do think that this segment has great potential to grow. So that's the reason for the investment and for the current situation.

Moving on to the distribution channels. We have -- we've had a pretty stable position in terms of distribution channels with very light contractions in our key channel of large retailers, mostly driven by lower sales prices.

We are the most -- the highest contraction, the highest decrease in B2B partners because this is influenced by special products as our special product business is mainly driven by B2B contracts. However, we had some good performance, for example, in normal trade where we had an increase, both in terms of -- sorry, in terms of volumes in the milk segment.

Moving on to geography. We -- so the main geographies of Italy, Germany and U.K. had -- I would say, again, a flat or a good performance overall. Considering Italy, we had a contraction of 6.2%. Again, this is mainly driven by the slow down production in special products. So that is the reason why we had the decrease in this particular segment, in particular -- sorry, geography.

For Germany, as we already mentioned, we had an increase of 1.2% year-on-year. This is mainly driven by our increase in sales volumes in the pasta business, which proves our position as one of the market leaders in Pasta sales in Germany and being one of the main suppliers to German retailers for Pasta in the country. So our sales team has been really, really successful in implementing a strategy that is long term that is being also approved and recognized by retailers, which keep having us and keep confirming our products or even increasing our presence in their shelves.

In the U.K. instead we had a slight decline of 2.6%, which is related to the instant noodles decline we talked about earlier, which is mainly following a lower average selling price. At the moment, we are exploring different -- with different opportunities, both with the current infrastructure with the current reduction we have. So we have some talks with some retailers in the U.K. at the moment for the second quarter or third quarter of the year to be able to launch new products into the market.

And at the moment, we are also currently analyzing the potential to invest in new plants in the U.K. as well to be able to improve even more product quality as well as offer differ packaging solutions for -- mainly our instant noodles in the market and be -- really one of the leaders in terms of technology in the market.

Moving on to EBITDA. We have an overview our EBITDA performance in the last in last quarter as opposed to the first quarter of 2023. As can be seen, we had a very good performance in terms of EBITDA and EBITDA margin. As we said, the overall EBITDA level -- EBITDA margin level reached 9.5% as opposed to 8.8%. In general, we had a very good performance in all of our business units in terms of EBITDA and EBITDA margin. In particular, we had an increase in pasta, instant noodles and in special products in terms of margins. And in general, we've had a double-digit margin in bakery, dairy and special Products and a high single-digit margin in pasta, milk and instant noodles.

It's particularly interesting to see how we've actually been able to increase slowly our EBITDA margin of pasta in the last years to reach 9.2%. As you can be -- seeing here even last year, we had 8.1%. So it's been really important work that our sales team has done in terms of really increasing our margins despite the lower prices at the moment in this -- in general in the business.

In -- now we move to the next slide, with free cash flow. So in terms of free cash flow, as we mentioned, we have free cash flow generation of EUR 10.4 million, which compares to EUR 7.2 million last year, so well above last year's level despite the lower sales. This is mainly due to a very good performance in adjusted EBITDA and also a small -- very small let's say, effect of net interest costs and taxes and net working capital, which did not affect our cash generation from operations as we came to generate almost EUR 16 million of cash from operations.

In terms of cash conversion, as we already said, we had a very positive cash conversion of 85% in the period as opposed to 79% last year.

We're moving on to the next slide, where we have our for outlook for the period where we are basically reconfirming what we said in the last call during our full year results. For this period, our management is committed to having a positive organic growth, especially in terms of volume, thanks to the expansion in different European markets as well as international markets. We are really keen to work with new partners in the next months. So we expect to increase our position even more in these coming months. And we do expect the special products will start to recover volumes by the second half of the year.

In terms of innovation and investments, as you just saw, we've had a long list of investments that have been done. And these investments, together with our product innovation taking place at our different plants in different R&D centers would definitely lead the way to to very [ propitious ] contribution in the second half year from these new products and these new product launches that we are currently working on.

In terms of M&A, as we mentioned last time, we're still working on 4 targets at the moment, which are being analyzed and being discussed with our team. In terms of exports, as we said, we have been increasing our exposure to international markets. We, at the moment, are also working to be present at different trade shows in all over the world, basically with our expert team to be able to really meet new customers from different countries and be able to export as much as possible as we think exports is one of the most important ways to grow organically in this business.

And lastly, in terms of margins, as we can see from the data that was shown today, we've had a very good performance in terms of margin dynamics, and we expect these dynamics continue coming in the next quarters despite, of course, the inflation and potential further reduction in prices in 2024.

So in general, we can say that our outlook is very positive for this year, and we do not expect there to be anything to worry about. But actually, we think this year will be extremely interesting in terms of new product innovation as well as new opportunities that we will have with new partners and new customers worldwide.

Now we can move on to the Q&A. As always, you can either mute yourself or you can ask the question directly in the chat, and we will answer all of your questions. Thank you.

[Benedetta Mastrolia, executive]

I think Arianna has a question.

[Arianna Terazzi, analyst]

[indiscernible] ,we saw that you were able to slightly improve your margins despite this scenario with decrease in average selling prices in most categories, which was somehow anticipated during latest conference call. But I would appreciate if you could elaborate more on selling prices and input cost with reference to current trading in the different geographies to allow us better understand the driver as of today, behind your confidence on 2024 outlook you provided?

[Fabio Fazzari, executive]

Thank you, Ariana. But generally speaking, we are experiencing some deflation movement in all the regions. And this is the reason behind the fact that also on the pricing side, we start to have some impact. But this is, as we already explained several times, neutral on our profitability because it's totally linked to substantially an equal movement between input costs and pricing.

What is important to highlight to give more color about this very strong performance in terms of profitability is the fact that we are starting getting some results about several actions that we put in place in the past years, in particular, at the beginning of the inflation wave that we experienced starting from the summer of 2021. We put in place some action on the procurement side in terms of organization and in terms of negotiation and rationalization of the supplier. We put in place several investments in the reorganization and the rationalization of some plants and production of Ozzano Taro is one of the most visible and important actions, but we also made other investments in U.K., for example, also to improve the automation profile of some plants.

So all these actions together are allowing us today to reach this level of profitability that -- we believe it's a very strong result considering also the environment in which we got this improvement. So with a top line that is already experiencing some adjustment in terms of pricing. Despite that, we got this strong improvement versus the profitability of last year.

[Arianna Terazzi, analyst]

And if I may add another question. In terms of CapEx, during the latest conference call, you spoke about 2.5% of revenues for the next couple of years. Can we consider comprehensive on the U.K. investments you mentioned during the presentation? Can we consider...

[Fabio Fazzari, executive]

I can tell you that if we want to speak about CapEx in absolute terms to avoid -- to create confusion. I can tell you that also for this year, we can have something between EUR 18 million and EUR 20 million. Obviously, as you already saw in -- considering the results of the Q1 is not equally split among the quarters, but it would be probably another acceleration in the latest quarter also this year.

[Benedetta Mastrolia, executive]

Yes, Paola, you have a question please go ahead.

[Paola Carboni, analyst]

So I have a few questions. If you can come back on the dynamics in the Special Products segment. about your indication of a gradual recovery over the year. So I was wondering if you can share with us what we can expect for the year in terms of contribution of this segment. And whether there is any other underlying dynamic of limitation to operations linked to investments. Remember, you spoke last time about [ installation ] contracts. So there is anything has to be aware of, which is maybe -- are underway on top of the limitations you have. [indiscernible] able to do investments.

And also still on this, if you are experiencing any issue with your B2B clients and with the temporary disruptions, for these investments and you are having at Ozzano Taro or we should expect the business to come back exactly where it was? And also then growing in the longer term, but in the short term coming back exactly where it was? Or should we assume any possible disruptions due to the to the limits we are having now for -- on the the business.

Another point started was on the evolution of prices. You said that you expect this discretionary trend to continue. So I was wondering if you can share with us any possible expectation in terms of the foreseeable pricing -- negative pricing and impact we might have in the next few quarters compared to Q1.

And to what extent this is just pricing or if you're still seeing a kind of promotion from higher commercial pressures as experienced in Q4. And very quickly, just to clarify your target in terms of EBITDA margin last time we spoke was for flat EBITDA for the year. Whilst the Q1 was more positive over the 60 basis point margin improvement. So should we assume this [indiscernible] to have a better evolution of EBITDA margin over the year, but mainly offset by a weaker [indiscernible] due to the discretionary pressures we are seeing? So just if you can comment on these drivers. Thank you very much.

[Fabio Fazzari, executive]

Okay. Thank you, Paula. About Ozzano Taro, we expect considering the development of the implementations that we have today, considering the status we expect in the second half substantially to have most of the recovery in terms of volumes. And so we believe that for the end of the year, probably not all the volume loss, but most of that would be recovered entering into 2025 with substantially a normal situation for the plant.

It's true that we got this, I would say, opportunity in this case to rationalize also some of the contracts that we have in this plan and some contract, honestly, very few, not a lot of contract will be are renegotiated or in any case, we will substitute these productions with another one that is for us more profitable. We avoid to use the capacity for production that are less remunerative versus other opportunity that we are collecting today.

And for this reason, we don't expect to have any kind of disruption, but we expect to have a plant that will be more flexible in terms of production, as Benedetta explained, especially on the decay side. And this will allow us to continue to diversify the offer and to have the opportunity to do a lot of new launches with a positive impact in terms of mix on our top line.

The other question was related about -- yes, about the price trend. It's clear that after 2 years in which we implemented a lot of price increase. We got 2 years of double-digit revenue growth with 70% roughly of contributions coming from a price increase. It's clear that if the deflation trend will continue or will accelerate the price adjustment will follow this for sure because the retailers are [ still not ] ready to ask about this price reduction, but this is something that we follow as I would say, as an adjustment, but with no impact expected on our profitability.

The 9.5% that we reached is something that in this scenario is absolutely sustainable even if we are going to face other adjustment in price because they are directly linked to an adjustment in input cost. So we are not going to put pressure on our profitability and considering the initiatives that Benedetta mentioned in terms of new product launches and efficiency in the plant, thanks to the new investments, we expect to have from the mix and from better efficiency, maybe contributions that could mitigate also part of these price adjustments that we expect.

Our guidance in terms of EBITDA margin is honestly conservative because our aim -- our internal aim is to try to get a better situation versus last year, also because we are doing these investments not for nothing but to get more efficiency and better profitability. But it's clear that the situation is still volatile. The visibility is not so longer because in the market, a lot of things are moving. We are playing very well at the moment.

But just to be conservative, we got what is the minimum level that we are sure to to get, so to maintain the margin in line with last year despite the price adjustment. If the situation continue to go on like what we experienced in the Q1, probably we -- we'll be able to achieve also a better level of profitability.

[Angelo Mastrolia, executive]

Yes. So [indiscernible] -- maybe I can add something more just to give a bit more clarity on the commercial side. So -- the real good thing is that the whole group are considered in Germany, Italy, U.K. we have been able to already close and confirm all the contracts and the prices already in the beginning of Q1. So we have already a coverage that is around 90% of our contract with retailer have already confirmed. So not the least thing or not problematic concerning the customer. This is a really good sign. It was done at the right time with the right prices.

For sure, as what Fabio said, we need to be on the market, so we cannot -- so we need to be and to promote the product to be on the market than to be purchased by the final consumer. So for sure, promotional activity will be something that in the next months, we will need to continue our performance of sales.

We continue a lot on business development. This is one of our main key activities in our group. So we are enlarging the number of markets in which we are in -- and now we are entering in all the different segments with new products and entering into new markets. Thanks to the really good [ editors ] of our brands. We are entering, for example, with Delverde in a premium level in all new emerging markets.

For example, we see a lot of new potentiality in order, Middle East, North African market, exceptionally in Dubai. Now it's becoming more and more attractive. We have the area of Saudi in which we are developing more and more business. But for sure, Europe means for us our core market in which, once again, I say we closed on the contract, and we see that the retailers are really keen to work with us despite even compared with other competitors.

[Benedetta Mastrolia, executive]

I think there is a question coming from [indiscernible] about our participation in [indiscernible]. So they want to have some more color about our increasing participation. .

[Fabio Fazzari, executive]

But the participation is not for Newlat Foods'. It's not from Newlat Foods, is something related to the activity of the holding company. So we have nothing to comment about.