Orior AG

SIX:ORON

Earnings Call Transcript 2022-Q2

[Milena Mathiuet, executive]

Good afternoon, together. This is ORIOR. We welcome you to the presentation to the half year result 2022.

And with this [indiscernible], I hand over to Daniel, CEO of ORIOR.

[Daniel Lutz, executive]

Thank you very much, Milena. Ladies and gentlemen, I would like to welcome you to today's analyst and investor call that will report on ORIOR's 2022 half year results. With me here in Zurich, I welcome Mr. Andreas Lindner, CFO of ORIOR Group; and Ms. Milena Mathiuet, Chief Corporate Affairs Officer. I will start with the CEO statement on Page #4. In the overall context of the global economic situation and the reporting period, which continues to be influenced by corona we can look back on what I consider a really good first half of 2022. This exceeded achieving strong organic growth of 7.7%. Well over half of this volume -- of this growth is volume growth. This applies across the entire group, but also to each individual segment. Correspondingly, growth from price increases is significantly smaller, which has to do, in particular, with the delayed gradual adjustment of prices.

First and foremost, the International segment delivered a convincing performance with above average growth at Culinor and the further very encouraging return of Casualfood. As [indiscernible] the continuing positive performance of the Convenience segment. The Refining segment fell just short of the previous year's results.

Excluding business with foreign customers, especially in France, within Switzerland, the Refinement segment also posted growth.

In this context, it's also worth mentioning our decision to sustain exports to Russia in the annualized amount of around CHF 2 million.

In Foodservice, we recorded a good recovery compared to the previous year, which was heavily impacted by corona. The retail business continues to normalize, especially in Switzerland.

The strong CHF led to an exchange rate effect of minus 1.8% on the top line.

EBITDA reached a solid CHF 30.2 million corresponding to an EBITDA margin of 9.8%. Particularly noteworthy here is the significant lower corona-related support services compared to the previous year. In part, massively higher input costs were and are challenging.

Thanks to growth with high-margin product categories. Thanks to forward-looking purchasing management and responsible gradual price adjustments from spring '22, we were able to compensate part of it.

In the first half of 2022, we were able to successfully advance various important group projects and initiatives. I would like to mention some of them. We continue to work consistently on the implementation of our ORIOR Strategy 2025, and we have initiated an important long-term strategic project with the digitalization project called [ Startrek ].

Within ORIOR New Normal and the planned development, we successfully started up the new plant-based production capacities of wet extrusion technology at the operating sales side. In addition, as planned and already communicated, we closed 2 smaller production sites and transferred the corresponding product ranges to the main plants of Rapelli and Le Patron. These plant development projects will further strengthen our profitability and efficiency. And they will also make a significant contribution to our sustainability goals. For example, thanks to improved processes, fewer logistics transport costs and lower energy consumption.

And that brings us straight to the topic in the area of sustainability or ESG. At the beginning of the year, ORIOR communicated its new [ 3 ] step climate target. Since January, the entire or ORIOR Switzerland has been converted to climate-neutral organization, which means that the first stage has been realized. The second stage, and this stage is climate neutral operations for the entire group. And the third stage is our ambition to be net zero, a climate-neutral company by 2050.

At the same time, we are working to further reduce our emissions in our plant development projects in our processes via investment in optimized buildings, et cetera.

With the [indiscernible] of Casualfood sustainability concept at the beginning of this year all ORIOR competence centers has now introduced sustainability management. This was an important step in laying the formulation for consolidated data collection and recording across the group.

Also in view of the preparatory work around the new legal requirements for non-financial reporting. The intense work and efforts around ESG are also reflected in various upgrades from external sustainability ratings such as MSCI, ISS, ESG, Inrate, which is very encouraging to us.

We turn to Page #5, please. We take note of the tense global economic situation is the accumulation of challenging framework conditions with great respect. And we address these challenges proactively and at an early stage, also in our specialist teams in the various ORIOR Champion Groups.

In the following, I would like to discuss some important influences from this situation. A significant share of electricity required was locked in early on in several tranches and the fixed prices. Durum wheat, which is a very important raw material for us in terms of volume and which as is well known, has undergone massive price increases was also locked in early for the first half of the year. Pork and beef are 2 important raw materials for ORIOR Switzerland in terms of value.

Price fluctuations of these 2 raw materials are regulated by a price adjustment mechanism consisting of markups and markdowns between the industry and the trade. This means that no special negotiation are required. We proactively addressed price increases for all other raw materials such as poultry, eggs, plastics for packaging, et cetera, both with our suppliers and with our customers. Negotiations are challenging, especially mentioned due to high inflation.

The main objectives are to find solutions in a spirit of partnership and to pass on the effectively higher costs in a responsible length. Corresponding price adjustments to pass on the cost has been and will continue to be conducted on an ongoing basis. The price adjustments agreed so far can be implemented step-by-step since spring.

Cost increases for transportation and other logistical price increases cannot be passed on or only to a small extent. Corresponding efficiency advancing measures have been initiated.

Casualfood with its business-to-consumer business model can adjust its selling prices itself immediately. In addition, Casuals operates to a large extent in the airside area of airports, their price sensitivity is generally lower. Accordingly, Casualfood is probably equally affected by the higher input costs, but can [indiscernible] them much more easily at least in the current framework.

We go down to Page #6, please. This revenue curve shows the organic growth of the ORIOR group compared to the first half of 2021. It is important to note that last year started with a lockdown on the catering industry, mainly in Switzerland until April and then Germany and Belgium until May.

Our sales developed very positively from the beginning with the exception of March to the shift of the Easter business to April. Since April, we have witnessed a strong upswing in [indiscernible] and Casualfood segments, while the retail business continued to normalize.

The food service business performed well over the most part throughout the half year despite staffing challenges. In particular, the event and catering business, which has been massively hammered during corona picked up again encouragingly.

In total, organic growth of plus 7.7% was achieved in the first half of this year.

We go now to Page #7, please. Our setup is characterized by the decentralized, competence-center philosophy, which is supported by autonomous and regionally anchored companies with their own product and brand [indiscernible]. This creates proximity to the market that makes the individual competence centers which specialize in their product categories fast and agile.

The key strategic initiatives, ORIOR New Normal, the ORIOR Champion Model and ORIOR Bridging allow us to tap into new revenue potential work consistently on efficiency improvements as well as targeted cost optimization.

Our [indiscernible] and diversification in categories, sales channels, customer portfolio and geographic market coverage makes us resilient and gives us stability. We were able to underline this once again with our half year results. All our diversificationary features are further strengthened and contributed to the good results.

In this context, sales to customers outside Switzerland were also increased to over 30% for the first time in line with our strategy. We are convinced of this positioning and the strength that comes through it because it forms the basis for the successful further development of the ORIOR Groups in the coming years.

We move to Page #8. ESG or better said Sustainability continues to grow in importance. Systematic sustainability management also forms an important basis with regards to the new legal requirements for non-financial reporting.

At the same time, the aspect of sustainability is now incorporated into basically all of our decisions and actions. The longer this goes on, the more sense evident it becomes. For me personally, this is the greatest success of the last 2 years of hard work in this area because real progress is not achieved by reporting green progresses achieved by driving sustainability forward.

Some examples from sustainability are presented on Page #8. Detailed information can be found in the sustainability report which has been made available since May this year.

I would particularly like to highlight our decision to put our climate targets on a scientific basis over the next 2 years by joining the Science-Based Target Initiative. This is a major and important decision that will also enable us to include Scope 3, meaning the effect of the upstream and downstream value chain in our efforts.

Go to Page #9. We have made further progress along the strategic cornerstone, We are ORIOR. On the one hand, we conducted the second part of the comprehensive data training on project management with 6 workshops in Switzerland, Germany and Belgium. In the process, we honed their skills in planning and implementing projects with over 100 key employees and introduce them to our specially developed project management dashboard.

On the other hand, systematic tenant management was established across the group. The aim is to [ methodologically ] plan further development steps for key employees. On the one hand, to retain and to promote them, on the other hand, to think about possible succession planning at an early stage. We will do the annual update next spring.

I will now hand over to Andreas Lindner, CFO, for the financial report. Please, Andreas.

[Andreas Lindner, executive]

Thank you very much, Daniel. Ladies and gentlemen, I would also like to welcome you to this call, and I'm happy to guide you through the financial results of the first half of 2022.

I will start my review of the first 6 months with the Convenience segment on Page 10. Our 4 convenience competence centers showed continued good growth and increased sales despite a sales reclassification and the corresponding loss of CHF 2.2 million by 1.6% to CHF 109.8 million in the first half. They thus accounted for over 35% of group's total sales.

Despite a slight decline in the retail channel due to a further normalization of consumer habits and thanks to the revival of the food service channel, the convenience companies were able to grow. This was mainly due to the trend categories organic, regional and vegetarian. This helped especially Biotta and Fredag.

The classic gastronomy and hotel industry is currently suffering from an acute shortage of staff. At the same time, the events and catering sector is experiencing a real [indiscernible]. System gastronomy also recorded a nice growth.

With the successful commissioning of the new extrusion line, we have created additional production capacity, which will also enable us to achieve future growth in Switzerland and abroad with exports. Another extrusion line is currently being installed and will then go into operation in fall.

As previously communicated, we closed a small convenience plant in H1 as part of our strategic plan development and transferred the volumes and lines to Le Patron and to Rapelli in the main plants. The concentration of production allows us to realize additional efficiencies, minimize logistic costs and significantly improve our footprint in terms of sustainability.

Due to the product transfer, there will be a slight shift of sales from Convenience to the Refinement segment as of May. In the first half, this amounted to a little more than CHF 0.5 million. This will be relevant mainly for the second half of the year. We expect a little over CHF 4 million transfer from the Convenience to the Refinement segment for the full year.

An additional effect relates to the reclassification of Convenience logistics sales. Individual products are now sold on an agent basis, which means that instead of the gross recognition of revenue up until now, now the net recognition of sales is now applied based on IFRS 15 or Swiss GAAP FER 3. This reduces half year sales by CHF 2.2 million compared to the previous year. For the full year, we expect an effect of around CHF 4 million.

Taking these 2 effects into account, Convenience sales growth in the first half of the year would have been 4.1%. For the full year 2022, we expect an effect of around CHF 8 million for those 2 effects of sales reclassification and sales relocation to the Refinement segment.

I switch to the Refinement segment on Page 11. The Refinement segment developed in line with our expectations and just barely missed the previous year's result by 0.4%. The segment realized sales of CHF 124.7 million and thus contributed 36.5% of group sales. All competent centers were able to grow in the Swiss market.

The minus in the segment stems from the intercompany business with [ PS Europe ], which is currently under pressure due to inflation in France as well as from the suspended deliveries to Russia. As of the half year, this corresponds to around CHF 750,000 and the full -- for the full year, -- we expect an effect of around CHF 2 million. Excluding the Russian business, we would have had a slight sales growth of 0.2%.

The normalization of the retail channel is also noticeable in the Refinement segment. Added to this, a renewed increase in shopping tourism in the border region and excaberated also by the strong CHF.

In Refinement also, we closed a small plant in the Ticino in favor of efficiency and sustainability gains and integrated the corresponding volumes into the main Rapelli plant.

The raw material situation is still challenging and availabilities, especially for Switzerland and for [ Bio meat ] are very scarce. The prices for beef and poultry are high even with the rise in tendency. This is especially relevant for the Convenience segment. Since the fourth quarter of last year, the pork cycle has been easing, leading to a temporary oversupply and lower prices.

Another positive side is the successful expansion of the pure nature line under the Albert Spiess brand, this should be mentioned.

I will now turn to the International segment on Page 12. Our foreign competence centers achieved sales of CHF 88.9 million, that is a growth of 19% compared to 2021. Thus, the share of the International segment amount to 28.3% of group sales.

Organic growth amounted to a pleasing 26.2% after a negative 2.9% in the previous year due to the corona effect. The foreign exchange effect amounted to a considerable minus 7.2% in the first half due to the strong euro devaluation.

Culinor achieved double-digit growth, thanks to new listings and innovations. The expansion of the consumer base and new listings of fresh menus are developing very positively. Casualfoods has returned to growth and is seeing very good sales as its 42 open locations. Even though not all of the 60 outlets are open yet, we have noticed that the cash receipts are currently higher on average even compared to pre-corona levels. This is certainly also attributable to the long waiting times at the airports and correspondingly and more time spent in the outlets.

We are also pleased with the setup and the launch at the new Berlin BER Airport, where Casualfood is represented with its new concepts, some of which have been especially created for Berlin. With 19 outlets, Casualfood is the largest SMB provider on-site and the Terminal 2 at the Berlin Airport was also recently opened.

The Smartseller flagship store in Ljubljana is developing well. The integrated concept introduced in the joint venture with Heinemann combines food and beverage, convenience and the duty-free world. This concept, especially developed for small airports in Europe has interesting growth potential.

Gesa is still doing well in the B2B business. The products are in the organic trend category, which generally performs well. Our French sales platform, Spiess Europe is, as mentioned earlier, feeling the impact of the currently very high inflation rates in France and is currently on the corresponding pressure with its high-quality premium products.

On Page 13, we see the details of the sales development. The increase in sales of 5.9% is made up as follows: First of all, we had no acquisition effect in the reporting period. Organic sales growth amounted to a good 7.7% and was, as mentioned, driven by the continued good performance of the Convenience segment and the very good growth of International.

More than half of the sales growth came from the increase in volumes. The exchange rate effect was strongly influenced by the significant euro devaluation and amounted to minus 1.8%, which corresponds to CHF 5.3 million.

We turn to the consolidated income statement up to EBIT level on Page 14. ORIOR Group generated net sales of CHF 309.2 million in the first half of 2022, an increase of 5.9% year-on-year. Absolute gross profit increased by 8.7%, mainly driven by the comeback of Casualfood and overall growth of the group.

Gross margin increased by 118 basis points to 45.7% and again, driven by growth in Casualfood with a gross margin well above the group average as well as additional growth with high-margin products.

In view of the sharp increase in import costs, price adjustments are also essential. Negotiations with our customers are conducted on an ongoing basis and due to the extraordinary situation at a higher rate. Step-by-step, price adjustments have been agreed since May.

In total, a good part of the negative cost drivers could be compensated. EBITDA and EBITDA margin was slightly below the previous year at CHF 30.2 million or 9.8%. One reason was the significantly lower corona-related support and aid payments from the German government, including the short-term work compensation.

In H1 last year, we received a total of CHF 7.9 million compared to CHF 2.5 million this year. So we have a gap of CHF 5.4 million. Another reason was the situation around the massive increase in input costs, especially Culinor in Belgium was very hard hit. And also the foreign exchange, the weak [ ORIOR ] has also a small negative impact.

Due to lower depreciation and amortization, EBIT amounted to CHF 17.5 million compared to CHF 17.1 million in the previous year, that means an increase of 2%. Accordingly, the EBIT margin was at 5.6% versus 5.9% in the previous year.

I now go to Page 15. Here, we see the schematic representation of the main influencers on EBITDA. In the first half of 2020, we had to accept a margin decline to 8.2% due to corona. In H1 '21, we were able to increase the EBITDA margin to 10.6%, above the pre-corona level.

In addition to growth with high-margin product ranges, the main driver of this improvement but the retail overperformance and the corona-related support and aid payments from the German government, including short-time working compensations.

Negative drivers last year were, on the one hand, the situation in the traditional gastronomy which recovered only very hesitantly, the very subdued situation in the airline industry and also in the airline in the travel catering. However, EBITDA in the previous year was also adversely affected by the significantly higher absent rates due to the corona.

In H1 this year, we recorded significantly higher input costs, that means raw material, energy, transport and so on. On the one hand and significantly lower economic support payments in Germany, on the other hand, as the main negative drivers.

Positive drivers include, on the one hand, the return of Casualfood to the growth path and secondly, growth with high-margin product ranges and also the increase in the selling prices. The ongoing fitness program with cost and process flexibilization also helped significantly.

I now turn to Page 16 and thus to the consolidated state -- income statement below EBIT. Financial expenses increased mainly due to the weakening of the euro against the swiss franc that is higher exchange rate losses.

At CHF 15.5 million Group profit before taxes was slightly below the previous year's figures of CHF 15.9 million. Income taxes changed only insignificantly. The tax rate was 16.1%, slightly above the previous year's level of 15.3%, but within the midterm range of between 15% and 19%. The minority interest relates to Casualfood that is the share that is not allocated to ORIOR. Net income attributable to the ORIOR shareholders amount to CHF 13 million compared to CHF 13.5 million in the previous year.

Page 17 shows the consolidated balance sheet according to Swiss GAAP FER. There were actually no particular changes in the balance sheet compared with the previous year. We recorded a temporary increase in working capital due to the strategic buildup of inventories in connection with the effects of the Ukraine crisis.

The equity ratio at the end of June was 20.2%, which is above the 20% threshold that is important for us. The equity ratio according to the shadow calculation that is taking goodwill into account was at 36.6%.

I now turn to Page 18. Here, we see the development of the debt ratio since 2013. Until 2019, the leverage ratio always remained below 2.5x despite various acquisitions. Due to corona-related effects, the leverage ratio was higher in the short-term at 2.87x in 2020, but was then reduced again to 2.44x as of the first half of 2021.

Now as of mid 2022, we were able to achieve a leverage ratio of 2.14x due to the good operating performance. In September, we will acquire the fourth and last stake of Casualfood of 11%. This will slightly increase the ratio in the short-term, but it will still remain below 2.5x, and we will continue to pursue a consistent deleveraging policy. The declared target of our leverage ratio is clearly below 2.5x.

I turn to cash flow and dividends on Page 19. Cash flow from operating activities reached CHF 26 million in the first half of the year, virtually at the same level as in the previous year. Cash conversion was at a good 88.5%. As far as dividend is concerned, a slightly higher distribution of CHF 2.40 per share was again approved this year. This is also in line with the attractive dividend policy, which provides for a steady increase in absolute dividends.

Since the IPO in 2010, ORIOR has always slightly increased the dividend in absolute terms. We have also committed ourselves to this attractive dividend policy for the future as part of our Strategy 2025. We are proud of our shareholder base, which is characterized by long-term oriented and solid investors.

With these words, I give back to Daniel.

[Daniel Lutz, executive]

Thank you very much, Andreas. We now turn to Page #20 for the outlook. We expect the broad-based organic growth to continue. In the second half of the year, this will be somewhat more strongly supported by the price increases gradually implemented in spring. However, we also expect volume growth to continue.

The situation with regards to input costs is slightly reversing further, especially for energy and certain raw materials. And this also applies to inflation-related changes in consumer spending. At the same time, the event and catering industry is experiencing a new high since corona.

Current gastronomy has made a successful start into the second half of this year and is expected to be able to contribute this trend. The Retail segment is increasingly leveling off at the pre-corona levels.

Being on the good sales growth in H1 and the positive outlook for H2, sales guidance is increased to CHF 645 million to CHF 660 million.

Page 21. Operating profitability in H2 will continue to be impacted by the cumulative [indiscernible] for the total effect of the challenging environment. Thanks to good performance with higher margin categories and the sustained flexibilization of cost structures as part of the ORIOR New Normal initiatives, the EBITDA guidance at 10% to 10.3% for 2022 is confirmed.

We expect the tax rates to remain within the expected medium range of 15% to 19%. We also confirm the guidance of CHF 29 million to CHF 30 million for capital expenditure. Our estimates are based on the assumption that the overall corona situation will not change significantly again and that the global economic situation and energy supply will not deteriorate further compared to the current situation.

We go now to a quick outlook of the segments. We go to Page 22 on the Convenience segment. I would like to mention a few points. First, as Andreas mentioned before, we should not -- we should take into consideration that CHF 4 million of sales will move in the second half of this year to Rapelli from the Convenience into the Refinement segment. Then we have an additional CHF 1.8 million sales that will reduce because of the reclassification mentioned by Andreas, then it will be completed.

A very good news is about the catering event area, we got the order and got the contract to cater SwissnSkills. SwissSkills is the Central Swiss vocational championship in Durham, and we expect there within 3 days around 12,000 meals to be served from Le Patron.

Another point, Happy Vegi Butcher, our vegan meat replacement brand has found its way to Elvetino. Elvetino is the restaurant of our railway performance with Swiss railway system. And there, you can now enjoy throughout all Switzerland, a very nice weekend meal is Happy Vegi Butcher and the logo also printed on the menu.

Let's move to Page 23 on to Refinement segment. Two highlights here. One is definitely the Rapelli Go-live with 2 e-commerce platforms, one is a B2B where we serve our B2B customers and the second one is B2C for the consumers. And again, here, the mentioning that the Refinement segment made profit from additional CHF 4 million sales that they had taken from the Convenience because of the closure of the advanced convenience factory and the movement of the product ranges to Rapelli.

We go on to Page 24 and the International segments and the things that we have mentioned before, we are very proud of the current development of Casualfood and especially the situation of -- in the Berlin Airport. They are definitely -- that was just opened 2 months ago, the second Terminal and there you just after past control and security check, you will come into, we call it, Casualfood hall because in this big hall, there are 3 main concepts from us where we cater to the public. One is a Goodman & Filippo, the other one is Hermann's that is focused on sausages and the third one is Beans & Barley for good, excellent coffee and beer. So if you are in Berlin, try to get through on Terminal 2 and enjoy a good time at one of our nice Casualfood outlets over there.

Good. This brings me to the end of the presentation. One additional word. 30 years ago, ORIOR was founded in Zurich with the strategic mission to focus the business on the production of high-quality niche food and beverage products. The road has not always been easy.

In addition to many successes, ORIOR also had to overcome setbacks, a moving and really remarkable story. We are celebrating our unique ORIOR in the context of a big food festival here in Zurich at the location of PULS 5 from August 30 to the 1st of September. All our competence centers will be represented there and they will offer their specialties for tasting.

We cordially invite you to participate and to dive into multifaced world of ORIOR. In case you have not yet being invited or we have not yet applied for the invitation, please just contact Milena Mathiuet without any complications, we will invite you with pleasure.

Therefore, we are looking forward to your visit to our 30-year ORIOR Food Festival here in Zurich. This is the end. Thank you very much for your attention, and we are happy to answer any questions from you. Milena, please.

[Milena Mathiuet, executive]

Okay. Thank you, Daniel. [Operator Instructions] There is no question at the moment. I can see no one raising their hand. And I also have no questions in the chat at the moment. [indiscernible] moment. Yes.

Well, I think there are no questions. So I hand back to Daniel for the closing words.

[Daniel Lutz, executive]

Thank you very much, Milena. So I would like to thank all of you for your time spending with us going fast through the half year results. And I said, if you want to enjoy one very decent and a huge variety of food. Please join us in our food festival, just send email to Milena. If that's the case, in that spirit, thank you very much. We would be happy to see you here in Zurich, otherwise take care, stay healthy and all the best. Buh-bye.

[Milena Mathiuet, executive]

Thank you very much. Buh-Bye.

[Andreas Lindner, executive]

Buh-Bye.