Tel Aviv, May 29 - Strauss Group's Chairperson, Ofra Strauss, and Erez Vigodman, President & CEO, announced today the results for the first quarter of 2008, presenting accelerated growth and continued global growth and expansion.
These results were achieved at a time of significant price rises of raw materials, and particularly green coffee which affected coffee operations that account for more than 48% of Group activities, the strengthening of the Shekel against most currencies in our countries of operation, and the shifting of Passover Holiday sales to the Second Quarter in 2008, compared to the First Quarter in 2007 which did include Passover sales.
Ofra Strauss, Chairperson of the Strauss Group, said today that the Group continues to grow and expand, handling well all big challenges currently set by the global food world.
Erez Vigodman, President and CEO of the Strauss Group, said today that results in the First Quarter were achieved while facing significant price increases of raw materials particularly green coffee, the strengthening of the Shekel against most currencies in our countries of operation, and the shifting of Passover Holiday sales to the Second Quarter in 2008, compared to the First Quarter in 2007. These results attest to the Group's ability to handle the big challenges in the food industry today while pursuing further growth, tapping more opportunities and continuing to build infrastructures that will facilitate further international expansion.
Financial Review: Sales In the first quarter of 2008, the company continued to grow and its sales totaled NIS 1,504.1 million, compared to NIS 1,392.6 million last year, a growth rate of 8.0%. Growth after neutralizing the effects of exchange rate fluctuations in the quarter totaled 8.3%. The company's coffee activities continued to grow, and in Q1 grew by 15.2%, neutralizing the effects of exchange rate fluctuations, coffee activities grew by 14%.
In Israel, sales grew by 1.7% in the first quarter, sales in Israel including coffee operations in Israel, grew by 2.1%. Neutralizing industrial operations sold in January 2008, sales in Israel grew by 4.4% in the quarter. Growth in the Health and Wellness division stems mainly from growing activity in the dairies and Yad Mordechai. Most Passover sales occurred in the second quarter this year compared to the First Quarter in 2007.
Sabra operations in North America during Q1 grew at a rate of 7.1%, and neutralizing exchange rate fluctuations, grew by 23.1%.
Max Brenner sales in Q1 declined at a rate of 4.7% due to the revaluation of the NIS against the dollar, the timing of the Passover holiday, and non-opening of new branches in recent months. Neutralizing the effects of the exchange rate, Max Brenner activities grew by 1.2% in the first quarter of the year.
The company's international activities constituted approximately 43.4% of the company's total activities, compared to 40.1% in 2007.
After the end of the quarter the company announced that Texas Pacific Group (henceforth TPG), one of the world's leading private equity firms, was about to enter into a 25 percent partnership agreement with Strauss' coffee company. This translates into an expected investment by TPG of US$288 million in the coffee company. The value of the coffee company's business (enterprise value) was valuated, for the purpose of this deal, at US$1,005 million before the investment (US$1,293 million after the investment). After offsetting financial undertakings that the parties decided to leave with the coffee company, the equity value of the coffee company before investment is US$865 million, and following the investment will be US$1,153 million.
In addition, TPG was granted a two year option to purchase an additional 10% of coffee company shares, based on the company value during the current deal, with the addition of 6% per annum. Upon completion of the deal, the company is expected to record a capital gain of US$85 million.
Operating Profit
The pro-forma operating profit before other income (expenses) in the first quarter was NIS 136.7 million compared to NIS 136.3 last year, a 0.3% increase. The operating profit was affected by sharp price increases of raw materials, particularly green coffee. This affected coffee operations, which account for 48% of Group activities. This impact was manifested mainly in Group activity in Brazil. Further impact was caused by the strengthening of the Shekel against most currencies in the Groups of operation, mainly the Romanian Lei and the dollar, as well as the shifting of Passover Holiday sales to the Second Quarter in 2008, compared to the First Quarter in 2007 which included Passover sales.
Net Profit
The pro-forma net profit for the quarter attributed to shareholders totaled NIS 65.2 million compared to NIS 79.5 million during the corresponding quarter last year, a decline of 18%.
Activity in Israel
In this market, the Group develops, manufactures, markets and distributes in Israel a wide range of branded food products and beverages. In light of the Group's focus on developing products and solutions based on consumer preferences, the Group's products are focused on addressing two leading consumption trends: Health and Wellness, and Fun & Indulgence.
In Q1 of 2008, Strauss Israel's operations grew by 1.7% and sales totaled NIS 679.8 million, compared to NIS 668.5 last year. Overall sales of Strauss activity in Israel, including coffee activity, totaled NIS 838.4 million compared to NIS 820.9 million last year, a 2.1% growth. In January 2008, the company sold its industrial activity (sale of raw materials and intermediate products to the food industry in Israel), in order to focus on core activities. Neutralizing the industrial operations sold in January 2008, the company's sales in Israel grew at a rate of 4.4%, and Strauss sales in Israel, including the coffee activity, grew by 4.4%.
Some of the financial growth in the quarter is attributable to price increases that the company initiated in order to offset the steep rise in raw material and energy prices in recent quarters.
The operating profit before other income (expenses) of activities in Israel grew in Q1 by 9.6%. The increase in operating profits in Israel was due to a more profitable mix of products, and implementation of efficiency improvement measures, while managing to offset the price increases in raw materials. The operational profitability in Israel during Q1 also improved, and totaled 10.4% compared to 9.7% in the corresponding quarter last year.
Coffee Activity
Strauss' coffee operations in the first quarter grew by 15.2%, and totaled 729.6 million NIS. Growth after neutralizing the impact of exchange differentials, due to different currency activities abroad, totaled 14%. Growth in activities was evident in most of the divisions, with particularly high growth in the company's operations in Brazil, Poland and CIS countries. Strong growth was recorded for AFH (Away From Home) activity in all countries of operation.
AFH activity grew by a rate of 12% during Q1. After the end of the quarter, the company announced the signing of an agreement for the acquisition of Cosant Enterprises' coffee brands companies in CIS countries. The main instant coffee and roasted and ground coffee brands that were purchased, including brands Chornaya Karta and Kaffa, will be fully integrated into Strauss Group's coffee activities in CIS countries.
The scope of the deal was $93 million, and it more than doubles the volume of Strauss' activities in this market, with the sales turnover of the business that was purchased in CIS countries totaling US$70 million in 2007, and Strauss' 2007 coffee activities in CIS countries totaling US$50 million.
Strauss Coffee plans to merge the marketing and sales activities of the purchased brands into its existing infrastructure in CIS countries, and to maximize the synergies with existing coffee activities in the coffee market in Eastern and Central Europe. This acquisition will enable Strauss Coffee to rapidly expand its presence in the CIS region. Following the sale, Strauss Coffee will be one of the two leading players in the roasted coffee market in Russia, with a fiscal market share of approximately 20%. It will also be one of the three leading players in the instant and freeze dried coffee market in Russia, with a market share of 13.7%.
The products marketed under the brands that were acquired will, in part, be manufactured in Strauss' existing production plants in the region, and in part will be manufactured through outsourcing.
In addition, the company has announced the signing of an agreement between the Strauss Group, through Strauss Coffee, and Don Cafe company of Italy, for the purchase of its coffee activities in Albania, Kosovo and Macedonia, as well as for licensing rights to the Don Cafe brand registered in several EU countries and in Central and Eastern Europe. The sales turnover of the purchased brands totaled EUR4.5 million in 2007, with espresso products under the Don Cafe brand being responsible for the vast majority of sales.
The scope of the transaction includes, in addition to activities and brands, fixed assets, inventory and operating capital, totaling EUR7.5 million. This acquisition completes and complements Strauss Group activities in the states of the former Yugoslavia and supports continued expansion in this region, which has a high growth potential.
The operating profit of coffee activities in Q1 totaled NIS 64.3 million compared to NIS 67.2 million last year, a 4.3% decline.
The operating profit was affected by growth and increases in retail prices that were offset by continued increases in the prices of raw materials and energy. The decrease in operating profit is also due to a decline in the operating profit in Romania resulting from a 9% devaluation of the local currency (Lei) versus the NIS, as well as a decline in profitability in Brazil, stemming from sharp increases in green coffee prices, which was partly offset this quarter by increases in selling prices.
Due to the above, to the moderate increase in retail prices compared to the steep increase in the price of raw materials, and to the significant growth in the scope of activities in Brazil that is characterized by lower than average profit rates, the operating profit rate of coffee activities decreased from 10.6% in Q1 of 2007 to 8.6% in Q1 of 2008.
Sabra's Refrigerated Spreads Activities in the U.S.
Sabra's activities in Q1 grew by 7.1%, and totaled NIS 72.6 million, compared to NIS 67.8 million last year. After neutralizing the effects of the decline of the dollar versus the NIS, growth in Q1 totaled 23.1%.
Sabra continues to maintain its positioning as the number one brand in the Refrigerated Flavored Spreads category. The average market share for Sabra in the first quarter was 27.4%, compared to 24.2% in the first quarter last year (according to IRI data published on March 23 2008).
During the first quarter, the company announced the completion of the partnership agreement with the international PepsiCo Group for the development, production and sale of refrigerated flavored spreads in the US and Canada through Sabra in the US. Sabra's partnership with PepsiCo in the US and Canada is a strategic step of great importance for the Group's business development outside Israel in general, and in the US in particular, and for the Group's value creation processes. As a result of the transaction, the company recorded capital gains of 27.3 million NIS. In addition, the deal resulted in recognition of a loss due to a decline in inventory value totaling 2.3 million NIS.
As of the second quarter this year, the company is expected to merge Sabra's activities on a proportional basis (50%) according to its holding percentage, after execution of the deal with PepsiCo.
Max Brenner Operations
In the first quarter, Max Brenner sales totaled NIS 22.0 million, compared to NIS 23.1 million last year, a decrease of 4.7%. After neutralizing the effects of the erosion of the dollar versus NIS, growth in Q1 totaled 1.2%. Max Brenner sales were also affected by the timing of the Passover holiday (in 2007 most of the Passover sales occurred during the first quarter, while in 2008 most of the sales occurred during the second quarter). In 2008 the company plans to focus on identifying new locations in the US and opening additional Max Brenner branches. The company has forecast that new branches may be opened by the end of 2008 and beginning of 2009.
Analysis of the Company's Financial Accounting Results
Sales
The company's consolidated sales turnover in the first quarter totaled NIS 1,504.1 million, compared to NIS 1,392.6 million last year, an increase of 8.0%. Improvement in sales was achieved mainly due to significant growth in the company's coffee activities, as well as due to growth in Israel, particularly in the Health and Wellness unit.
Gross Profit
The Company's consolidated gross profit for the report period totaled NIS 545.8 million (36.3% from sales), compared to NIS 524.1 million (37.6% from sales) in the corresponding period last year - an increase of 14.9%.
During the report period, a decline was recorded in the Group's gross profit rate that was due to the increase in prices of raw materials and energy, as well as to the growth in the volume of coffee activities.
Operating Profit Before Other Income (Expenses)
The Group's consolidated operating profit before other income (expenses) during the report period totaled NIS 126 million (8.3% from sales), compared to NIS 123.4 million (8.9% from sales) in the corresponding quarter of 2007, a 1% increase.
Following are details relating to changes that occurred in the operating profit before other income (expenses):
Sales and marketing expenses totaled NIS 332.0 million (22.1% from sales) compared to NIS 317.2 million (22.8% from sales) in the corresponding quarter last year.
Management expenses totaled NIS 89.2 million (5.9% from sales) compared to NIS 83.5 million (6.0% from sales) last year.
Profit for the Period, Attributed to the Company's Majority Shareholders
The profit for this period attributed to the company's majority shareholders totaled NIS 84.2 million, compared to NIS 67.6 million last year, a 24.6% increase.