Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Hello, and welcome to the Barry Callebaut Conference Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Sophie Lang to begin. Please go ahead.

Good morning, everyone, and welcome to Barry Callebaut's 3-month key sales figures conference call for 2024, 2025. I'm Sophie Lang, Head of Investor Relations. And today, the meeting will be hosted by our CEO, Peter Feld; and our CFO, Peter Vanneste. This is our first time doing a Q1 conference call, and we'll have a presentation followed by a short Q&A session for analysts and investors. I'd like to remind you that today's session is focused on our volume and sales update. We will keep the Q&A session focused on discussion on those key figures. Finally, please limit yourself to no more than two questions in the Q&A session . Before we start, please take note that the disclaimer on Slide 2, and I would also like to inform you that the webcast and conference call is being recorded. And with that, I hand you over to our CEO, Peter Feld.

Thank you, Sophie. Good morning, everybody, also from my side. The current disruption creates significant opportunities for Barry Callebaut to win in the market and emerge far stronger. We're here clearly to play to win. It also reinforces the rationale for Barry Callebaut next level investment, which is future-proofing our business and will be creating a far improved customer experience, that are value, service, sustainability and quality for our customers. When we spoke to you at our fiscal full year results early November, we have said that we expect a soft start into the fiscal year driven by the spring price increases that we saw in the cocoa markets and the bean markets. Since then, we'd seen a new major acceleration in excess of 70% in cocoa, bean prices, which obviously creates a further impact and disruption on market pricing and demand. In this environment, our volumes declined, down 2.7% in quarter 1, in line with the market, which was down minus 2.6% mainly impacted by customer retail price negotiation, delayed orders and a bit of SKU rationalization as we guided to in the November discussion. When it comes to the full year '24, '25 outlook, we are confirming our double-digit EBIT, recurring growth in constant currency. At the same time, given the impact of future market volatility, we lower our volume guidance to low single-digit decrease. In light of the bean price explosion, which was clearly accelerated by hedge fund activity, we have secured additional liquidity, including the recent Swiss bond with CHF 300 million. We are also planning additional actions to increase returns on the higher capital base. While we welcome recent interventions from the [indiscernible], the terminal markets we do think that we will be in a more volatile environment for longer. In terms of crop, overall supply is expected to be well ahead of '23 '24, but still below the year before that. Given that at the same time, we expect to see short-term demand softness from higher prices, we are expecting a slight surplus in the bean market at '24, '25. As such, the current environment underpins our next level investment strategy. In quarter 1, we can make further relevant progress on implementing BC Next Level, including the important completion of all social plants in Belgium, progress in our negotiation regarding our site closure in Intra, Italy. The launch of our new R&D headquarter for compounds in Singapore, progress on establishing our end-to-end planning excellence and further relevant improvements regarding our quality systems and culture. With that, let me hand over to Peter, our CFO.

Thank you, Peter, and good morning, everyone. Given this bean price development since the start of the fiscal year, the industry has seen a further impact on working capital requirements. We therefore secured additional liquidity to address this in addition to the financing actions we took already proactively last year, specifically a successful Swiss bond launch of CHF 300 million last week, a EUR 1 billion bridge term loan and an additional revolving credit facility of EUR 620 million. . Now given the higher level of working capital that's our entire industry is now working with, we see it as extremely important that we act to drive returns on the higher capital base that we now have. Specifically, we're planning on how we can adapt our pricing and commercial strategies, and we hope to be able to update you on our plans here in more detail in a few months. Similarly, we're also looking at how we can adjust and optimize the long inventory cycle we have. And of course, we will also benefit from the EBIT and cash step-up that comes from our BC Next Level actions, as already announced. Now what we are seeing in the market at the moment is a short-term pressure on demands with a deterioration in the most recent Nielsen data to minus 2.6% compare that to a minus 1% over the past year. This decrease comes as customers increase their prices to retailers by about 10% year-over-year in relation, of course, to the cocoa bean price acceleration we saw several months ago. Mainstream players came under most volume pressure, while premium brands gained share. The recent bean price spike means that further pricing will be taken in the chocolate market. With that, customer retailer negotiations have sometimes been challenging, which in some cases, resulted in two products temporarily unavailable on the shelf, meaning consumers could not purchase them. In some cases, also, there has been some shift in promotion plans to temporarily focus on non-chocolate categories. The other important trends we see is customers delaying ordering from us in anticipation of lower prices. But importantly, everything I just talked about is short term. Mix and long term, we are as confident as ever in the attractive growth opportunities for the resilient chocolate category. And to resume the growth we've seen of our many details, driven by emerging markets, increased chocolate applications and demand for innovation and specialties. Now going into the quarter 1 results in more detail with volume growth by product group. You see that in our largest segment, with food manufacturers, customer retailer pricing negotiations, some short-term consumer reaction to higher prices and SKU rationalization impacted growth. As I also just mentioned, customers have been delaying orders, which has a knock on impact. Gourmet has seen a small volume decrease impacted by two factors. Firstly, product availability in North America was somewhat limited due to prioritization following the Mexico quality intervention and secondly, the effects of our next level SKU rationalization as we anticipated. We reached the final stages of this important SKU reduction project, and obviously that also played a role on this category, particularly in Western Europe. Switching to Global cocoa, the demand for cocoa powder remains robust, and the business was able to capture some customer opportunities, cocoa liquor continued to be impacted by the supply constrained environment that we're all operating in. Now looking at chocolate regions now. Volume development in Western Europe was partly impacted by the high base of comparison with a large one-off contracts in the prior year same quarter. Excluding this, the decrease was more in line with the decline in markets impacted here by customer retailer negotiations and the effect of SKU rationalization, as I talked about in general terms before. Central and Eastern Europe has seen negative growth given lower volumes for large global and regional food manufacturer customers, especially in Turkey. Volume in North America has decreased by much less than the overall market contraction. So while we've seen weak consumer demands impacting food manufacturers in the regions, our regional accounts have performed well. Latin-America saw a strong volume growth at 13.2% up. Brazil was a key contributor to this growth with particularly strong momentum in Gourmet. And volume growth in Asia, Middle East and Africa was plus 6.4%. Again, also here, well ahead of a declining market. Growth is actually double digits when you exclude Greater China, as Greater China remains challenged due to the overall economic slowdown, which puts pressure on large food manufacturers in several categories. The cocoa bean price acceleration since the start of our fiscal year is creating a further temporary impact of market pricing and market demands. And in that context, we have revised our sales volume guidance for this fiscal year, which is now expected to see a low single-digit decrease. At the same time, we reiterate guidance for double-digit EBIT growth on a recurring basis in constant currency. And on that note, I will hand that over to Peter to conclude.

Thank you Vanneste. While we focus with Barry Callebaut on the short-term operational priorities and delivery of our next level investment program in the current environments, we see significant opportunities to unlock sustainable profitable growth and value creation in the future. Midterm and long term, we are as confident as ever in the attractive growth opportunities for the resilient chocolate solutions category, driven by emerging markets, increased chocolate applications and demand for innovation and specialties. The current environment underpins our strategy for Barry Callebaut and while we clearly see some disruption right now, we are playing to win and setting BC up well for the future. That concludes our presentation, and we will now move to the Q&A session. I'll hand back to the moderator.

[Operator Instructions] Our first question for today comes from Alex Sloane of Barclays.

I've got two, please. The first one just on the guidance. Could you give some context on what market volume you're assuming in your updated guidance of low single-digit decline in volumes for Barry and on the unchanged EBIT guide, is there any phasing we should be aware of the H1 versus H2? And I guess, the lack of any change on the EBIT guide. Is that reflecting the fact that you had some buffer in the initial guide? Or is this higher tailwind from finance cost pass-through. So that's the first one on guidance. Second one liquid on leverage. Have you got sufficient liquidity in terms of cash flow post the recent issuance if bean prices stayed where they are today? And could you give us an update on where you see free cash flow for the year if bean prices stayed where they are. That was my question.

Thank you very much, Alex. Let me start off, maybe, Peter, if that's okay. Just on your question, Alex, on market volume expectations. Look, at this moment, obviously, we are literally two months after the explosion of the bean price that started in the beginning of November. And obviously, the entire market is looking at that and starting to appreciate that, that will result in further price increases to consumers that will have to be taken at one point in time. So we do think that Barry Callebaut is setting ourselves up well for gaining more market share going into this environment, that's the play that we have said we want to aim at. But we obviously have to cycle through these increases that have occurred in the beginning of November lasting until today.

Yes. Maybe shifting over to the second piece of your guidance question on EBIT. So we need to reiterate the double-digit EBIT growth for the full year, as we have guided in the beginning of the year already. Obviously, to your question, there's a few moving parts within that. We have adjusted our volume guidance, as you know, which, of course, has a knock-on effect also on the EBIT side. So that's one evolution, of course. We do see within that context, as I mentioned, customer orders delays as they wait for better prices. The cost savings on the BC Next Level, we are on track. And as we said all the time, already, they are a bit more -- that they are more H2 focus than they are H1 amongst others, and especially also because we finished now most of the -- almost all of the social dialogue, especially the very big one in Belgium, which we're now executing at full speed and pace. So that is obviously a factor that is materializing, but especially in H2, and for sure, also there's likely to be an effect also on the invest side because with the increasing bean price, our working capital requirements are higher. We are adding additional liquidity which basically, of course, also means that the cost of debt will be a bit higher, which will be another factor impacting the guidance that we made. So that's on the EBIT side. You asked about liquidity or -- I think the second part of your question was on liquidity. I mean we have been adding, as I mentioned in the presentation, a number of additional liquidity elements with the last one, the Swiss bonds CHF 300 million last week. We obviously it's -- we will do, as we've done last year, right? We track and we have been proactive. We have -- we take a very prudent financial policy, especially in the current volatility that we see in the market. So we take a prudent policy on that, and we track and monitor, and we'll be adding if and when needed, we will. But of course, again, given that the bean price has such a direct impact on, I would say debt, but especially the value of our inventories because that's where it sits, we obviously will adjust as we go forward as per our prudent policy.

Our next question comes from Jon Cox of Kepler. .

Just to come back to the free cash flow, you seem to maybe you've dumped the question a little bit. If cocoa prices remain where they are, where do you see your free cash flow for the year? Maybe a different way to ask is, is it as simple as looking at where the cocoa price for the spot market was at the end of August and then looking at where it is today. And then assuming every GBP 100 move in the cocoa price is adding GBP 70 million to GBP 80 million to your negative working capital? That's the first question. And then just added to that on the sort of margin requirements and all of that type of stuff and the financing line this year -- is that financing line this year likely to be closer to CHF 300 million versus the CHF 210-odd million we saw last year.

Okay. Thank you, Jon. I'll take that. I was trying to touch the question. I got a bit lost in the number of components on the previous question. Yes, free cash -- of course, I mean, as you mentioned, we see a very direct and immediate impact on free cash, and that's that we need based on the bean price. You know the dynamics, right? There's margin cost immediately from the terminal market that we fulfill. And that means that we immediately see that impact even before it hits our inventory which is why we are proactive and we go fast. Now it's important, again, I don't want to reiterate that. The impact we do see is an increase of the value of our inventory. You've seen that last year, the total debt increase has been more than explained by the increased value of our inventories, inventory of our beans, inventory of our intermediate products, the inventory of our finished products. Now given the increase that we've seen in the last weeks, obviously, we are more negative on our free cash flow outlook than we have in the year-end closing in November. That's pretty obvious, especially also because the spike happened in the largest bean buying period, which is the main harvest period that we're now trailing out of. We're not guiding at this point. We're not reporting at this point, as you know, on free cash flow, obviously come back a lot on that in the H1 reporting, well, of course, will be defined, especially for H2 on how the bean price will normalize over the next weeks. We do expect the normalization down. But again, this market is very unpredictable. We've seen a normalization in April. We'll see what happens now. That will be determined for a long shot, the actual cash out and that's in H2. But you answered part of your question yourself. I mean, I think it's indeed very practical to refer back to the rule of thumb to have an idea. Already right now, you mentioned this GBP 70 million or GBP 80 million rule of thumb. It's not that simple, but it gives a good indication. There's additional margins to go on top of that. We will be making some benefits on next level capital benefits as well. But of course, at these kind of shifts of the bean price, that's a very dominant factor in how our debt and free cash evolves. And then you had -- and then you had a second. Margin requirements. Yes, margin requirements and financing costs, right? You will remember that in November, we said we expect about CHF 230 million net interest costs, which would be about CHF 50 million higher than what we've seen last year. So CHF 50 million increase of the interest costs. We will -- again, we have some outlooks and forecasts. We're not going to elaborate on this volume decreasing right now, but it's reasonable to assume that it will be higher than we just communicated. How much higher, again, is going to depend on where the bean price is going to evolve, especially for the second half of the year, of course, but yes, you can safely assume there's going to be a higher number than the CHF 50 million that we have communicated -- the CHF 50 million increase that we have communicated in November.

Okay. I just -- just to add, if the cocoa prices stay where they are -- do you have sufficient financing now that everything you've done? Or do you need to come back and maybe issue more bonds or go back to the banks? That's the first question. Second one, actually, just more on operations. You seem to allude to more savings coming through than you've announced of the 250 and 3/4 those are the bottom line. You seem to be saying you're looking for more. Can you give us some indication on that as well? .

Okay. The first part liquidity. Yes. I mean, again, as I mentioned before, we are covering ourselves. We're taking a prudent policy to liquidity, and we're adding as we have done with the bridge of the CHF 1 billion that I talked about, the CHF 300 million bonds, increase in our RCF, all of that in the course of the first quarter. We continue to monitor bean prices as they move. And as per the policy, yes, it could be -- but again, it depends on the bean price evolution. It could be that we address other sources as well. But at this point, I'm not going to comment more on that. Apart from that, we will be proactive in doing so when we see the needs.

And for BC Next Level, we continue to commit to the numbers that we have given to you. a CHF 250 million of that 80% to the bottom line, 75% to the bottom line, 80% realized by the end of this fiscal year. We do see, and that's what you probably referred to, Jon. We do see opportunities through the end-to-end supply chain setup that we're now creating for the first time in the company to further improve on our days inventory health. That becomes obvious, and we will communicate when it is possible, but we're not changing the commitments we currently have. The same is true for savings and synergies that are a result of the digitization of the company that we also have in discussion, but again, I mean, we're not changing here the program on the next level of commitments that we've given you earlier.

Okay. Sorry, I'm just going to just quickly jump in for another bite of the cherry. Just in terms of more current trading, we obviously saw what happened in your Q1, which was to the end of November. We're a good -- almost 2 months into your second quarter. Has there been any discernible changes in the volume trends at all? Has that improved? Or is it still a similar sort of weakness we're seeing.

Well Jon, I think the bean price carrying -- the bean prices increase carried through until the end of December, as you've seen, it's still going up and down as we speak. And obviously, the industry is carefully looking at that right now. We are in close discussions with our customers because we obviously have demand by consumers, but the retail discussions that they have that Peter was talking about earlier in the results carries on and so we will continue to monitor that closely and adapt our strategies to that.