condensed quarterly reports 2nd quarter€¦ · Web viewCONVENIENCE TRANSLATION. The Hebrew version is the binding version. November 26th, 2013: Appendix to Strauss Group Press

Convenience Translation from Hebrew

CONVENIENCE TRANSLATIONThe Hebrew version is the binding version

November 26 th , 2013: Appendix to Strauss Group Press Release Regarding Third Quarter and Nine Months 2013 Results

(Selected sections from the MD&A Report)

ANALYSIS OF THE BUSINESS RESULTS OF THE GROUP

General

Strauss Group has posted a consistent improvement in the non-GAAP results of operations in the quarter, for the fifth time in succession. The results reflect the continued growing strength of the Group's international operation coupled with improved results in Strauss Israel, innovation in selected categories, and continued streamlining processes.

The Group's sales decreased in the first nine months of 2013 by 0.2% compared to the corresponding period last year. Organic growth excluding the impact of changes in currency exchange rates in the first nine months of the year amounted to 4.7%. The gross profit and operating profit (non-GAAP) increased by 8.6% and 30.7%, respectively.

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Sales – non-GAAP

First Nine Months Third Quarter2013 2012 2013 2012

Sales 6,069 6,079 2,040 2,078Growth (0.2%) 8.0% (1.9%) 3.1%Organic growth excluding currency impact 4.7% 8.7% 5.7% 4.4%

In the first nine months and the third quarter of 2013 the Group's sales decreased by NIS 10 million and NIS 38 million, respectively. Following are the components of the change in sales in these periods and the rates of increase (decrease), according to the Company's major activity sectors:

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The Group's sales in the first nine months of 2013, and particularly sales by Strauss Coffee, were impacted by differences arising from translation into Shekels, which amounted to approximately NIS 279 million for the Group. Most of these differences are due to the erosion of average rate of the Brazilian Real versus the Shekel (approximately 14.3% compared to the average rate of the Real in the corresponding period last year). The erosion led to a decrease of approximately NIS 188 million in the Group's share of the sales of Três Corações in the first nine months of 2013, which are presented by the Group in Shekels. Excluding the currency impact, the Group's sales grew by approximately NIS 269 compared to the corresponding period last year. In the third quarter, the impact of translation differences on the level of the Group amounted to approximately NIS 144 million, of which NIS 89 million are due to the erosion of the average rate of the Brazilian Real versus the Shekel (20.2% erosion compared to the average exchange rate of the Brazilian Real in the corresponding period last year).

Further explanations on the Group's sales are included in the chapter "Analysis of the Business Results of the Group's Major Business Units".

Gross Profit – Non-GAAP

First Nine Months Third Quarter2013 2012 % Chg 2013 2012 % Chg

Gross profit 2,316 2,133 8.6% 798 737 8.1%Gross profit margin 38.2% 35.1% 39.1% 35.5%

The Group's non-GAAP gross profit in the first nine months of 2013 grew by approximately NIS 183 million compared to the corresponding period last year as a result of the growth in the gross profit of the coffee business (an increase of approximately NIS 116 million). This is explained mainly by an improvement in the gross profit of Três Corações (see Três Corações' condensed consolidated interim financial statements, which are attached to the financial statements of the Group). Additionally, the gross profit of the Israel sector increased by approximately NIS 40 million, mainly as a result of sales growth, and also thanks to continued streamlining processes in production and an improvement in the Company's product mix. The remainder of the growth (approximately NIS 27 million) is explained by an increase in the aggregate gross profit of the International Dips and Spreads activity (see Note 7 to the financial statements) and of the "Other" segment.

The Group's non-GAAP gross profit in the third quarter of 2013 grew by approximately NIS 61 million compared to the corresponding quarter last year. The change is the result of the growth in the gross

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profit of the coffee operation (approximately NIS 28 million), which is explained mainly by an improvement in the gross profit of Três Corações (see Três Corações' condensed consolidated interim financial statements, which are attached to the financial statements of the Group); growth in the gross profit of Strauss Israel (approximately NIS 23 million), primarily as a result of sales growth, and also thanks to continued streamlining processes in production and an improvement in the Company's product mix. The rest of the growth (approximately NIS 10 million) is explained by an increase in the aggregate gross profit of the International Dips and Spreads activity (see Note 7 to the financial statements) and of the "Other" segment.

Further explanations on the Group's gross profit are included in the chapter "Analysis of the Business Results of the Group's Major Business Units". Operating Profit before Other Income (Expenses) – Non-GAAP


Operating profit 611 468 30.7% 212 175 21.4%Operating profit margin 10.1% 7.7% 10.4% 8.4%

The non-GAAP operating profit in the first nine months and third quarter of 2013 grew by approximately NIS 143 million and NIS 37 million, respectively. Growth is evident in all of the Company's activity sectors. Following are the components of the change in the operating profit compared to the corresponding period last year, according to the Company's major activity sectors:

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The increase in the Group's operating profit in the first nine months and the third quarter of 2013 is evident in all areas of the Group's activity. Most of the growth is the result of the improvement in the operating profit in Brazil (see Três Corações' condensed consolidated interim financial statements, which are attached to the financial statements of the Group). In the "Other" segment, the growth in the operating profit is due to an improvement in the results of operations in Strauss Water's new activities in China and the UK. The improvement in the operating profit of Strauss Israel and the International Dips and Spreads Activity is the result of sales growth along with various continued streamlining processes in production. Further explanations on the Group's operating profit in the reported period are included in the chapter "Analysis of the Business Results of the Group's Major Business Units".

Financing Expenses, Net – Non-GAAP

Net financing expenses in the first nine months of 2013 totaled NIS 102 million, similar to the corresponding period last year.

Net financing expenses in the third quarter totaled NIS 40 million compared to expenses of NIS 34 million in the corresponding quarter last year. Most of the increase in financing expenses in the third quarter is the result of a 1.3% increase in the Consumer Price Index this year compared to a 0.9% increase in the corresponding quarter last year (approximately NIS 6 million).

Net credit (according to the proportionate consolidation method) as at September 30, 2013 totaled NIS 1,357 million compared to NIS 1,623 million on September 30, 2012 and NIS 1,422 million on December 31, 2012.

Net credit (according to the equity method) as at September 30, 2013 totaled NIS 1,197 million compared to NIS 1,345 million on September 30, 2012 and NIS 1,199 million on December 31, 2012.

Taxes on Income – Non-GAAP

In the first nine months taxes on income (non-GAAP) amounted to NIS 164 million, reflecting an effective tax rate of 32.1%, whereas last year taxes on income amounted to NIS 129 million and the effective tax rate was 35.1%.

In the third quarter taxes on income (non-GAAP) amounted to NIS 61 million, reflecting an effective tax rate of 34.8%, whereas last year taxes on income amounted to NIS 46 million and the effective tax rate was 31.7%.

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The decrease in the effective tax rate in the first nine months is mainly the result of a decrease in losses in existing businesses in which respect no deferred taxes were created, and in the profit mix for tax purposes between the companies in the different countries. The increase in the effective tax rate in the third quarter is primarily due to an increase in deferred tax expenses following the raise in the corporate tax rate commencing in January 2014.

Income for the Period Attributable to the Company's Shareholders – Non-GAAP


Income attributable to the Company's shareholders 259 170 53.0% 81 69 17.1%

% of sales 4.3% 2.8% 4.0% 3.3%

Non-GAAP income attributable to the Company's shareholders in the first nine months of 2013 increased by approximately NIS 89 million compared to the corresponding period last year. The increase in non-GAAP income attributable to the Company's shareholders was the result of the increase in the Group's non-GAAP operating profit (NIS 143 million), which was offset in part as a result of the increase in the Group's tax expenses (NIS 35 million), and by the increase in income attributable to the non-controlling interest (NIS 19 million).

Non-GAAP income attributable to the Company's shareholders in the third quarter of 2013 increased by approximately NIS 12 million compared to the corresponding period last year. The increase in non-GAAP income attributable to the Company's shareholders was the result of the increase in the Group's non-GAAP operating profit (NIS 37 million); by contrast, financing expenses increased (NIS 6 million), as did tax expenses (NIS 15 million) and income attributable to the non-controlling interest (NIS 4 million).

Comprehensive Income for the Period (according to the GAAP report)

The other comprehensive income includes profit or loss items carried directly to equity, particularly differences arising from the translation of foreign currency in respect of investment in investee companies abroad and the revaluation of securities available for sale. The GAAP other comprehensive income in the first nine months amounted to approximately NIS 80 million, compared to other comprehensive income of NIS 302 million in the corresponding period last year. In the reported period losses in respect of translation differences, which are the main component of the other comprehensive income, amounted to NIS 212 million compared to a profit of NIS 33 million arising from translation differences in the corresponding period last year. The translation differences are the result of the weakening of part of the Group's operating currencies abroad in relation to the Shekel, which was expressed in the movement in the foreign currency translation reserve in the period.

The GAAP other comprehensive income in the third quarter amounted to approximately NIS 65 million, compared to other comprehensive income of NIS 206 million in the corresponding period last year. In the reported period losses in respect of translation differences, which are the main component of the other comprehensive income, amounted to NIS 24 million compared to a profit of NIS 77 million arising from translation differences in the corresponding quarter last year. The translation differences are the result of the weakening of part of the Group's operating currencies abroad in relation to the Shekel, which was expressed in the quarterly movement in the foreign currency translation reserve.

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LIQUIDITY, SOURCES OF FINANCE AND FINANCIAL CONDITION (ACCORDING TO THE GAAP REPORT)

In the first nine months of 2013

Cash flows provided by operating activities in the first nine months of 2013 amounted to a positive cash flow of NIS 260 million, compared to a positive cash flow of NIS 296 million in the corresponding period last year. The decrease in cash flows from operating activities is due to a change in working capital in the current period versus the corresponding period, and an increase in net interest payments in the period versus last year.

Cash flows used in investing activities in the first nine months amounted to a negative cash flow of NIS 186 million compared to a negative cash flow of NIS 502 million last year. Most of the change is due to the transaction involving the operation of the freeze-dried coffee production site in Germany, which occurred in the corresponding period, following which long-term loans were granted; additionally, investments were made with deferred expenses. Furthermore, during the period a dividend of NIS 56 million from an investee was received.

Cash flows provided by (used in) financing activities in the first nine months of 2013 amounted to a negative cash flow of NIS 14 million compared to a positive cash flow of NIS 176 million provided by financing activities in the corresponding period last year. Most of the change is due to the issue of debentures in the amount of NIS 247 million in the current period, versus the receipt of long-term loans of approximately NIS 424 in the corresponding period last year. Furthermore, during the period down payments were made on account of the acquisition of a non-controlling interest in a subsidiary, totaling NIS 47 million.

In the third quarter of 2013

Cash flows provided by operating activities in the third quarter amounted to a positive cash flow of NIS 131 million, compared to a positive cash flow of NIS 206 million in the corresponding quarter last year. The decrease in cash flows from operating activities is mainly due to changes in working capital in the reported period compared to the corresponding period last year.

Cash flows provided by (used in) investing activities amounted to a positive cash flow of NIS 14 million compared to a negative cash flow of NIS 182 million in the corresponding quarter last year. Most of the change is due to the large-scale exercise of securities and deposits in the period as opposed to the acquisition of securities in the corresponding period in 2012. Additionally, in the third quarter a dividend of NIS 33 million was received from an included company.

Cash flows used in financing activities amounted to a negative cash flow of NIS 55 million compared to a negative cash flow of NIS 2 million provided by financing activities in the corresponding period last year. The change is mainly due to payments on account of the acquisition of a non-controlling interest in a subsidiary totaling NIS 37 million, which were made in the current quarter.

The Company’s cash and cash equivalents as at September 30, 2013 totaled NIS 787 million, compared to NIS 735 million on December 31, 2012. In accordance with Company policy, these assets are invested mainly in deposits (most of them in Shekels and Dollars). Additionally, the Company has short-term investments in securities (financial funds, government bonds and highly rated corporate debentures).

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The Company’s liquidity ratio as at September 30, 2013 is 1.73 compared to 1.67 on December 31, 2012. On September 30, 2013 liabilities in respect of long-term loans and credit (including current maturities) amounted to NIS 2,220 million compared to NIS 2,146 million on December 31, 2012. On September 30, 2013 short-term credit (excluding current maturities) amounted to NIS 13 million compared to NIS 4 million on December 31, 2012. On September 30, 2013 supplier credit totaled NIS 716 million, compared to NIS 727 million on December 31, 2012.

Total assets in the Company's Consolidated Statement of Financial Condition as at September 30, 2013 amounted to NIS 6,593 million, compared to NIS 6,512 million on December 31, 2012.

Reportable credit – further to Note 22.3 to the Periodic Report – Financial Criteria – the ratio of equity attributable to the Company's shareholders to total assets in the Company's Consolidated Statement of Financial Condition as at September 30, 2013 is 29.1%, compared to 29.0% on December 31, 2012. The net financial debt-to-EBITDA ratio as at September 30, 2013 and December 31, 2012 is 1.8. The Company is in compliance with the required financial criteria.

Following IFRS 11 becoming effective, the Company elected to include a number of relevant data that correspond to the GAAP reporting method in practice prior thereto. The data below are in the proportionate consolidation method (as reported by the Company up to and including 2012). The Company reserves the right not to include this information in the future.

First Nine Months Third QuarterYear Ended

December 312013 2012 2013 2012 2012

Cash flow provided by operating activities (in the proportionate consolidation method) 439 404 205 171 663

Depreciation and amortization (in the proportionate consolidation method) 167 169 55 57 228

Acquisition of fixed assets and investment in intangible assets and deferred expenses (in the proportionate consolidation method) 318 329 123 116 408

Net debt balance (in the proportionate consolidation method) as at the report date 1,357 1,623 1,357 1,623 1,422

In the first nine months of the year, the Group's EBITDA totaled approximately NIS 778 million in the proportionate consolidation method, compared to approximately NIS 637 million in the corresponding period last year – an increase of 22.3%.

In the third quarter of 2013 the Group's EBITDA totaled approximately NIS 269 million in the proportionate consolidation method, compared to approximately NIS 232 million in the corresponding quarter last year – an increase of 15.4%.

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ANALYSIS OF THE BUSINESS RESULTS OF THE GROUP'S MAJOR BUSINESS UNITS

Strauss Coffee

In the global coffee operation the Group focuses on the development, manufacture, marketing and sale, mainly of branded coffee products, in Brazil (through Três Corações), Russia, Israel, Poland, Romania, Serbia and Ukraine. This area of activity is divided into two activity segments: Israel Coffee and International Coffee.

On July 4, 2013 the Company announced that a review was being conducted in conjunction with TPG Capital, the minority shareholder in Strauss Coffee, to examine options for TPG's exit from Strauss Coffee. No decision has as yet been made regarding the options for TPG's exit, and no agreements have been signed.

Following are the condensed results of business operations based on non-GAAP management reports of the Coffee Company by reported segments for the quarters ended September 30, 2013 and 2012 (in NIS millions):


Israel CoffeeNet sales 530 538 (1.5) 168 172 (2.3)Operating profit 76 64 18.2 22 20 8.8% operating profit 14.3% 11.9% 12.9% 12.2%International CoffeeNet sales 2,405 2,543 (5.4) 786 877 (10.3)Operating profit 242 157 53.9 86 66 30.5% operating profit 10.0% 6.2% 10.9% 7.5%Total Strauss CoffeeNet sales 2,935 3,081 (4.7) 954 1,049 (9.0)Organic growth excluding impact of exchange

rate differentials 3.7% 13.4% 3.5% 6.3%Gross profit 996 880 13.2 338 310 8.8% gross profit 33.9% 28.6% 35.4% 29.6%Operating profit 318 221 43.6 108 86 24.0% operating profit 10.8% 7.2% 11.3% 8.3%

Sales

In the first nine months of 2013 Strauss Coffee's sales decreased by approximately NIS 146 million compared to the corresponding period last year. Differences arising from translation into Shekels amounted to NIS 250 million in the period, of which approximately NIS 188 million were the result of the erosion of the average exchange rate of the Brazilian Real versus the Shekel (an erosion of approximately 14.3% compared to the average exchange rate of the Brazilian Real in the corresponding period last year). Additionally, green coffee export sales from Brazil by Três Corações decreased (approximately NIS 46 million, reflecting Strauss Coffee's share – 50%). Excluding the currency impact and the decrease in green coffee sales in Brazil, Strauss Coffee's sales grew overall by 4.4%.

In the third quarter Strauss Coffee's sales decreased by approximately NIS 95 million. Differences arising from translation into Shekels amounted to NIS 127 million in the period, of which approximately NIS 89 million were the result of the erosion of the average exchange rate of the Brazilian Real versus the Shekel (an erosion of approximately 20.2% compared to the average exchange rate of the Brazilian Real in the corresponding quarter last year). Additionally, green coffee export sales from Brazil by Três

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Corações decreased (approximately NIS 8 million, reflecting Strauss Coffee's share – 50%). Excluding the currency impact and the decrease in green coffee sales in Brazil, Strauss Coffee's sales grew overall by 3.0%.

Gross profit

In the first nine months of 2013 the gross profit in the coffee business grew by NIS 116 million compared to the corresponding period last year, mainly as a result of the improvement in Três Corações' gross profit. In 2012 the Company implemented a price increase in all countries where Strauss Coffee is active, excluding Israel. The cost of sales was positively influenced by the decrease in green coffee prices compared to the corresponding period last year, and in some countries, also as a result of the erosion of the average exchange rate of the Dollar in the first nine months versus the local currency compared to the corresponding period last year (for example, Shekel: approximately -5.7%; Romanian Lei: -3.4%; Serbian Dinar: -3.0%; Polish Zloty: -2.9%). In addition, the cost of sales continued to decrease as a result of an improvement in the freeze-dried instant coffee supply chain and thanks to an improvement in the roast and ground (R&G) supply chain in Russia. Conversely, the growth in gross profit was partly offset by price erosion in most CEE countries due to the sharply growing competition. In total, these influences amounted to an increase of 5.4% in the gross profit margin, which in the first nine months of 2013 was 33.9%.

In the third quarter the gross profit increased by approximately NIS 28 million compared to the corresponding quarter last year. The gross profit margin improved by approximately 5.8% and amounted to 35.4% in the quarter. The factors that influenced the first nine months of the year, as described above, also contributed to the improvement in gross profit in the third quarter of 2013.

Operating profit

In the first nine months of 2013 the operating profit increased by NIS 97 million compared to the corresponding period last year. The operating profit margin improved by 3.6% and amounted to 10.8%.

In the third quarter the operating profit of the coffee operation increased by NIS 22 million. The operating profit margin improved by 3.0% and amounted to 11.3%.

The growth in the operating profit in the first nine months and the third quarter was mainly the result of the increase in Três Corações' gross profit, which was offset in part by the increase in marketing expenses in all coffee companies.

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Strauss Coffee sales by major geographical regions

Following is the scope of sales of the coffee business in the major geographical regions (not including intercompany sales), and growth rates for the quarters ended September 30, 2013 and 2012 (in NIS millions):

First Nine Months Third Quarter

Geographical region 2013 2012 % chg

% change in local

currency* 2013 2012 % chg

% changein local

currency*Israel Coffee 530 538 (1.5) 168 172 (2.3)International Coffee3C (Brazil) (1) (2) (3) 1,290 1,295 (0.4) 16.6 416 438 (5.1) 19.0Former USSR countries 512 608 (15.8) (9.0) 172 210 (18.1) (6.0)Poland 280 301 (6.8) (3.9) 92 108 (14.4) (7.8)Romania 170 189 (10.2) (8.0) 56 65 (13.9) (11.2)Serbia 153 150 1.9 4.5 50 56 (10.4) (8.1)Total International Coffee 2,405 2,543 (5.4) 4.9 786 877 (10.3) 4.8Total Coffee 2,935 3,081 (4.7) 3.7 954 1,049 (9.0) 3.5

* The growth rate in the local currency neutralizes the impact of changes in exchange rates in the different countries versus the Shekel on the growth in the countries' sales.

(1) Brazil sales in the first nine months of 2013 include sales amounting to NIS 191 million of green coffee and NIS 53 million of corn. In the first nine months of 2012 sales of green coffee amounting to NIS 237 million and corn amounting to NIS 52 million were included.

(2) Brazil sales in the third quarter of 2013 include sales amounting to NIS 58 million of green coffee and NIS 17 million of corn. In the third quarter of 2012 sales of green coffee amounting to NIS 66 million and corn amounting to NIS 17 million were included.

(3) Brazil (Três Corações) – a company jointly held by the Group (50%) and by a local holding company, São Miguel Holding e Investimentos S.A. (50%) (data reflect Strauss Coffee's share (50%))

Distribution of coffee sales by geographical region in the first half of 2013 and 2012:

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3C – Brazil (Três Corações) – a company jointly held by the Group (50%) and by a local holding group, São Miguel Holding e Investimentos S.A. (50%) (data reflect Strauss Coffee's share (50%))

Três Corações' average market share in roast and ground (R&G) coffee in the first nine months of 2013 reached 21.4% (value market share according to A.C. Nielsen), compared to 20.7% in the corresponding period last year.

In February 2013 Três Corações signed a distribution agreement and a joint venture agreement with Caffitaly S.p.A, following which Três Corações is to become active in the single portion coffee ("capsules") segment and other beverages in South America. Sales in accordance with the abovementioned agreements were not yet initiated in the first nine months.

Três Corações' sales in local currency increased in the first nine months by 16.6% and by 19.0% in the third quarter. In the first quarter of 2013 the Brazilian government eliminated a tax similar to VAT (PIS-Cofins) on the basic food product basket, including coffee, with the aim of eradicating the high inflation rate in the country. As a result of the abovementioned tax reduction, the retail price of part of Três Corações' products dropped.

The impact of the erosion of the average exchange rate of the Brazilian Real versus the Shekel on sales in the first nine months and third quarter of 2013 totaled NIS 188 million and NIS 89 million, respectively (14.3% and 20.2% erosion compared to the average exchange rate in the corresponding nine months and quarter last year, respectively).

Following the continued focus placed by management on improving R&G margins in Brazil, the drop in prices of the raw material, green coffee, and as a result of the continued volume increase in sales, Três Corações' gross profit improved considerably compared to the corresponding period last year (see Três Corações' financial statements, which this quarter are attached to the financial statements of the Group). The improvement in R&G margins in Brazil commencing in the fourth quarter of 2012 also contributed to growth in Três Corações' operating profit.

The former USSR countries

The Company's sales in the region decreased by NIS 96 million and NIS 38 million in the first nine months and third quarter of 2013, respectively, compared to the corresponding periods last year. Excluding differences arising from translation into Shekels, the decrease amounted to NIS 54 million and NIS 26 million in the nine months and quarter, respectively (7.3% and 12.4% erosion compared to the average exchange rate of the Ruble in the corresponding periods last year, respectively). The decrease in sales was also influenced by the erosion of prices, especially in the Russian coffee market, as a result of the increasing competition compared to the corresponding period last year, and by a drop in freeze-dried instant coffee sales volumes in Russia.

Poland

The Company's sales in Poland decreased by approximately NIS 21 million and NIS 16 million in the first nine months and third quarter of 2013, respectively, compared to the corresponding periods last year. Sales were influenced by an intensified competitive dynamic and by the erosion of the average exchange rate of the Zloty versus the Shekel in the first nine months and third quarter of the year (2.9% and 7.2% erosion compared to the average exchange rate of the Zloty in the corresponding periods last year, respectively).

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Romania

The Company's sales in Romania decreased by NIS 19 million and NIS 9 million in the first nine months and third quarter of 2013, respectively, compared to the corresponding periods last year. Sales were influenced by the intensifying competition compared to last year and by the erosion of the average exchange rate of the Romanian Lei in the nine months and quarter (2.4% and 3.0% erosion compared to the average exchange rate of the Lei in the corresponding periods last year, respectively).

Serbia

The Company's sales in Serbia increased by NIS 3 million in the first nine months compared to the corresponding period last year. Sales growth was offset by a 2.8% erosion of the average exchange rate of the Serbian Dinar in the first nine months compared to 2012. In the third quarter of 2013 sales decreased by NIS 6 million compared to the corresponding quarter last year. Part of the decrease was the result of the erosion of the Serbian Dinar versus the Shekel (2.5% compared to the corresponding quarter in 2012).

Following the shift to distribution and sales services by the Company (replacing the use of outside services), which began in 2012, in the first nine months of 2013 distribution costs decreased and the effectiveness of these services grew. Additionally, in the third quarter of 2012 the Company raised its prices.

Israel

In November 2013 the Company restructured the instant coffee production operation, and in this context production was relocated from the site in Safed to two sites which serve Strauss Coffee. The process is expected to be completed in several months' time.

The Company's sales in Israel decreased by NIS 8 million and NIS 4 million in the first nine months and third quarter of 2013, respectively, compared to the corresponding periods last year, mainly as a result of the sales mix, a certain decrease in volumes and a reduction in effective prices.

The operating profit of Israel Coffee grew by NIS 12 million and NIS 2 million in the first nine months and third quarter of the year, respectively, compared to the corresponding periods last year. The growth in profit in the nine months and in the quarter was due to the sales mix, the erosion of the exchange rate of the Dollar compared to its average exchange rate in the corresponding periods last year and a decrease in the cost of Arabica compared to last year.

The Group's Activity in Israel

Strauss Group is the second-largest company in the Israeli food industry, and in the first nine months of 2013 according to StoreNext figures held an 11.7% share of the total retail domestic food and beverage market in value terms (similar to the first nine months of 2012). The Israeli market is the Group's home market, where it is active in various categories. According to StoreNext, in the first nine months of 2013 the Israeli food and beverage market grew by 3.4% in financial value.

Sales by the entire activity of Strauss Group in Israel include sales by the Health & Wellness and Fun & Indulgence divisions, the coffee operation in Israel, Max Brenner in Israel and Strauss Water Israel (Tami 4).

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In the first nine months sales by Strauss Group's entire operation in Israel totaled NIS 3,102 million compared to NIS 3,065 million last year, an increase of 1.1%. In the third quarter of the year Israel sales totaled NIS 1,053 million versus NIS 1,031 million last year, an increase of 2.2%.

Strauss Israel

The Group develops, manufactures, sells, markets and distributes a broad variety of branded food and beverage products in Israel. In line with the Group's focus on the development of products and solutions preferred by the consumer, the Group's products in Israel center on providing a response to two leading consumption trends, "Health & Wellness" and "Fun & Indulgence". This structure supports the Company in contending with the challenges in the business environment.

Following are the condensed results of business operations based on non-GAAP management reports of Strauss Israel by activity segments, for the quarters ended September 30, 2013 and 2012 (in NIS millions):


Health & Wellness segmentNet sales 1,488 1,453 2.4 530 511 3.8Operating profit 149 142 5.0 63 56 12.6% operating profit 10.0% 9.8% 11.9% 11.0%Fun & Indulgence segmentNet sales 766 745 2.8 241 232 4.1Operating profit 99 89 11.0 23 20 16.2% operating profit 12.9% 12.0% 9.7% 8.7%Total Strauss IsraelNet sales 2,254 2,198 2.6 771 743 3.9Gross profit 904 864 4.7 313 290 8.2% gross profit 40.1% 39.3% 40.6% 39.0%Operating profit 248 231 7.3 86 76 13.5% operating profit 11.0% 10.5% 11.2% 10.3%

In the first nine months Strauss Israel posted a growth in sales coupled with an improvement in gross and operating profit margins, attributed mainly to the implementation of streamlining processes, product innovation and an improvement in the sales mix.

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Sales

In the first nine months of 2013 Strauss Israel's sales increased by approximately NIS 56 million compared to the corresponding period last year. The sales growth is explained by an increase of NIS 35 million in the Health & Wellness segment and of NIS 21 million in the Fun & Indulgence segment.

In the third quarter Strauss Israel's sales grew by NIS 28 million, up by 3.8% in the Health & Wellness segment (approximately NIS 19 million) and 4.1% in the Fun & Indulgence segment (NIS 9 million).

Gross profit

In the first nine months of 2013 Strauss Israel's gross profit increased by approximately NIS 40 million, with a 0.8% improvement in the gross profit margin, compared to the corresponding period last year. In the third quarter, Strauss Israel's gross profit increased by NIS 23 million, with a 1.6% improvement in the gross profit margin compared to last year.

The improvement in the gross profit margin reflects the continued streamlining processes implemented in production and an improvement in the Company's product mix. The improvement in the profit margin was achieved in spite of the rise in the prices of energy and raw milk, the average price of which was about 15 agorot higher (approximately 7%) compared to last year. These increases were offset in part by a revision of prices in a number of dairy categories by an average of 2.5% in the fourth quarter of 2012. Prices were updated against the backdrop of the rise in energy and raw milk prices, by a lower rate than the latter. Additionally, at the start of the third quarter of 2013 the Company lowered the price of cottage cheese (approximately 4.8%) and white cheese (approximately 2.9%).

Operating profit

In the first nine months of 2013 Strauss Israel's operating profit increased by approximately NIS 17 million and the operating profit margin improved by about 0.5% and amounted to 11.0% of sales. In the third quarter Strauss Israel's operating profit increased by approximately NIS 10 million and the operating profit margin improved by about 1.0%, amounting to 11.2% of sales. The improvement in the operating profit margin is due to the improvement in the gross profit margin, and was offset in part by an increase in marketing expenses and royalty expenses.

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The International Dips and Spreads Activity

The Group develops, manufactures, sells, markets and distributes dips and spreads through Sabra in the USA and Canada, and through Obela in Mexico and Australia. The activities of Sabra and Obela are each carried out through joint ventures between the Group and PepsiCo (each party holds 50%). The Group's holdings in Sabra and Obela are treated in the equity method.

Sabra

Following are selected financial data on Sabra's activity (reflecting 100%):

First Nine Months Third Quarter2013 2012 2013 2012

Sales 857 751 303 273Growth 14.1% 30.5% 11.1% 34.2%Organic growth excluding currency impact 21.5% 18.9% 23.8% 19.6%Operating profit 119 98 51 47% operating profit 13.9% 13.1% 16.9% 17.1%

According to IRI, Sabra's market share in the 12 weeks ended on October 6, 2013 was 28.8% of the total refrigerated flavored spreads category (Number 1 in the market), compared to 25.2% in the corresponding period last year. Sabra's value market share of the hummus category in the same period was 63.4%, compared to 60.6% last year. In the third quarter of 2013 IRI changed its market share calculation method, and the comparative figures were amended accordingly.

Since the end of 2010, according to IRI, Sabra has led approximately 55% of the growth of the refrigerated flavored spreads category and 82% of the growth of the hummus category.

Sales

Sabra's sales grew by approximately NIS 106 million in the first nine months of 2013 compared to the corresponding period last year. In the third quarter sales grew by NIS 30 compared to the third quarter last year. Most of the growth in sales was due to significant volume growth in hummus sales. Strong growth was also posted in sales of guacamole. By contrast, sales in Shekels were adversely impacted by the erosion of the average exchange rate of the US Dollar in the first nine months and the third quarter versus the Shekel (5.7% and 10.1%, respectively).

Operating profit

In the first nine months the operating profit increased by NIS 21 million, with a 0.8% improvement in the operating profit margin compared to the corresponding period last year. In the third quarter the operating profit grew by NIS 4 million, with a 0.2% erosion in the operating profit margin compared to last year. The growth in the operating profit is explained by the growth in sales and is also the result of various continued streamlining processes in production.

Obela

Obela is active in Mexico and Australia and is expected to expand into additional countries in the future. Obela's sales were initiated in the second quarter of 2012. The company's operations were launched in June 2012 with the opening of a new production facility in Mexico, to which the production lines from Sabra's previous salad factory in Astoria, New York, were transferred.

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In the second quarter of 2012 Obela acquired an existing refrigerated salads business in Australia from PepsiCo. In the third quarter of 2012 expansion in Australia continued through the acquisition of the Australian company Copperpot, which specializes in refrigerated salads. In the third quarter Obela Australia launched the Obela hummus brand in the country's three leading chains. Following are selected financial data on Obela's activity (reflecting 100%):

Obela's sales in the first nine months of 2013 amounted to NIS 47 million compared to NIS 15 million in the corresponding period last year, due to the start of sales by the company in the second quarter last year. The non-GAAP operating loss totaled NIS 27 million in the first nine months, compared to NIS 28 million in the corresponding period in 2012.

In the third quarter Obela's sales amounted to NIS 15 million compared to NIS 8 million in the corresponding quarter last year. The non-GAAP operating loss in the quarter totaled NIS 8 million, compared to NIS 10 in the corresponding quarter in 2012.

Other Operations

The Group has activities which are included in the financial statements as the "Other Operations" segment. The main activities in this segment are Strauss Water and Max Brenner.

Strauss Water

Strauss Water engages in the development, manufacture, marketing and sale of systems for the purification, filtration, heating and cooling of drinking water for the home market and away-from-home consumption, on the basis of a long-term commitment to its customers. Strauss Water developed the Maze technology, a breakthrough in the purification and treatment of water. Strauss Water is active in Israel through the Tami4 brand; in the UK through a joint venture with the Virgin Group under the Virgin Pure brand; and in China through a joint venture active in water solutions for the home between Strauss Water and the Chinese consumer electronics and home appliances giant, Haier Group, which operates under the brand Haier Strauss Water. As at the date of this report, the company sells Strauss Water products in fourteen cities in China, including Beijing, Shanghai, Qingdao, Shenzhen and Taiyuan.

In January 2013 a new water purifier, the WaterMaker Young, was launched in China, joining the WaterMaker Premium already sold in that country. The new appliance does not require a connection to the water line, is sold at a lower price than the WaterMaker Premium, and is available in two versions: hot water/cold water or hot water/water at room temperature. At the date of publication of this report, Haier Strauss Water has signed an agreement with China Telecom, according to which the company will place thousands of its water purifiers in China Telecom's service centers, which will help expose the company's products to hundreds of thousands of Chinese consumers visiting China Telecom's centers throughout the country. After the date of the Statement of Financial Condition, a new, basic water purifier (the V3) was launched in China.

After balance sheet date Strauss Water announced the launch of another innovative appliance in the local market, the Tami4 Bubble Bar, which, besides hot and cold water, also dispenses carbonated water. The appliance is a technological breakthrough in the water bar category and is the only one of its kind which dispenses a single-press serving of carbonated water. In the first quarter of 2013 Strauss Water launched the Tami4 Touch water bar, which has a new, colorful and convenient user interface based on quantity dispensing buttons and enhanced functionality offering the user a variety of dispensing options.

In the first nine months of 2013 Strauss Water's sales amounted to NIS 344 million compared to NIS 314 million in the corresponding period last year, an increase of 9.6%.

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In the third quarter Strauss Water's sales amounted to NIS 126 million compared to NIS 112 million in the corresponding quarter, an increase of 13.2%.

Max Brenner

Max Brenner applies an operating model that combines branches operated under franchise with branches owned by the Company. At the date of this report, forty-eight Max Brenner Chocolate Bars are in operation in Israel and around the world: forty-three under franchise and five owned by the Company (in the USA: New York, Philadelphia, Las Vegas, Boston and Maryland). The Max Brenner branches are spread throughout Australia (33), Israel (6), the USA (5), Singapore (3) and the Philippines (1). Max Brenner continues to invest in the development of infrastructure required to support the company's operating model and is expected to continue to expand into additional countries.

In the first nine months of 2013 Max Brenner's sales totaled NIS 86 million compared to NIS 103 million last year, a decrease of 17.4%. Excluding the impact of the exchange rate and the sale of the five branches in Israel to a franchisee, sales in the nine months grew by 5.4%.

In the third quarter Max Brenner's sales totaled NIS 30 million compared to NIS 35 million last year, a decrease of 14.2%. Excluding the exchange rate impact and the sale of the five branches in Israel to a franchisee, sales in the quarter grew by 7.7%.

For further information:

Talia SesslerDirector of Investor RelationsStrauss Group [email protected]

Osnat GolanVP Communications & Digital, SpokespersonStrauss Group Ltd.972-52-8288111972-3-6752281OrGil MessingExternal Communications DirectorStrauss Group Ltd.972-54-2525272

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Documents

condensed quarterly reports 2nd quarter€¦ · Web viewCONVENIENCE TRANSLATION. The Hebrew version is the binding version. November 26th, 2013: Appendix to Strauss Group Press