Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Good to hear. I mean historically, outsourcing was a big growth pillar and part of the strategy for Barry Callebaut. It didn't make as much a feature in your focus for growth strategy perhaps because of where we are with the service level side. But thinking long term, maybe beyond focus for growth, is outsourcing still material opportunity for Barry Callebaut as the industry may change as how it thinks about [indiscernible]?

It's a very good point. And if you -- I mean, many of the companies that are here. So I want to be quite straight and direct. So if you take our global top 7 customers, okay, they are chocolate volume, okay? And what we've said is they have -- because of the last couple, not just because of service levels, but because category was under pressure, they lost volume and the utilization in the factories came down, and therefore, they have been sourced. So that's happening. And I said, therefore, that is the group who of companies who can actually insource is the scale. And I said, look, that will bottom out in '27 because once the capacities are filled and/or when the category is coming back, will they then invest in complete new factories for in-sourcing? I don't think so. We are better placed and we can -- we have those conversations. And therefore, I think we assume and I believe we will grow after 2027 with them. So that's comment number one. Then two, obviously, we're working a lot with the regional players -- regional companies. There are so many of them. And they are either taking share or retail private label share. They are not outsourcing. So that's -- they rely on us to do what we need to do. So I think outsourcing in a way is natural for them. And obviously, we will grow with them going forward. So -- and I believe the large ones, if we innovate and come up with solutions that are outside of the basic products that they have, they will also -- we're seeing that already now. They will also come to outsourcing with us. So it's probably not the growth engine with the large accounts for the next 12 to 18 months, hence, the lower volume projection, but for the company as a whole, but it will reignite behind innovation as well as production capacity after '27 on the big ones. And we will continue to grow with the regional players as well as through the Gourmet and the specialty sections that I already talked about.

Yes, make sense. And I want to stick on Gourmet because clearly, that's a big part of the strategy in terms of driving growth outperformance there. It's historically been very nicely margin accretive for Barry Callebaut as well. So I mean, part of the reset on profit outlook for '26, which came through sort of earlier this year, was sort of a miss, if I understood it correctly, a mismatch between selling prices from some of your competitors and a decline in cocoa input costs. So maybe you could sort of elaborate on that a little bit as to why you don't see that as a problem beyond this year?

Yes. So our Groumet business is critical. And we've said it's a priority. I was very clear -- I wanted to be very clear about it. What we've done in Q3 and what we've done in Q4 is -- and I think we announced that with focus for growth. We said, hey, we're investing a bit in margin because we saw that we had longer hedges out there than others. And I wanted to keep the customers with us. And that's what we've done, and that's what drove quite a bit of the growth in Q3. It will be an engine as well to some extent in Q4. But -- of course, our profitability is getting better when these hedges expire, and that's what we see happening. So I think that was a good decision that we took. I think when you look at the next year, first of all, Gourmet is all about availability. And I felt that the service level on that was too low. I talked about that. By now, the service level has increased substantially because we are treating it as a make-to-stock business and on the make-to-order business in order to make it make the stock, we've really worked hard with the team to get to a core SKU list of around 200 SKUs of Calabar brand and KakaBerri brands, the brands that we have for the B2B market. And that's working very successfully. We've also made very clear tiering we brought that back into the Gourmet business. So our Kakabary is for Chocolate case and Michelin star restaurants around 140 index -- 145 price index. The same for the signature collection of Callebaut. Then the Callebaut selection made in Belgium claim is around 125 price steering. And then we have our local regional brands like Van Houghton, we have many of those. And I think we've been very clear on price steering, very clear on the proposition and what they should bring. So I'm super excited about the reignition of that business. It's also a bit closer to where I come from. So that's working. Yes, and I think that should be a great engine for us in '27 as well as in '28 and beyond. Besides all of that, we now need to get the innovation engine going behind it. And therefore, we've launched 4 big , which I'm also excited about, and that is about taste. We're enhancing taste to fermentation and more to that to come in the course of the year. We're doing more on health and wellness with high flavorable solutions, which is working very well in Asia. We're working on cocoa replacement. That's a Jovia concept that we launched so that customers can actually they can choose between a cocoa solution as well as a non-cocoa solution. So yes, [indiscernible] segment is really from all cylinders, and that is where we are going to make a big difference.

Very clear. We haven't talked about cocoa prices yet. And obviously, part of your -- the focus for growth strategy, you have to make a planning assumption on cocoa prices. I think you talked about GBP 3,000 per tonne. Obviously, we are now sort of above that level and obviously, there are some concerns around supply again with El Nino. So I mean, has your view changed at all on kind of what constitutes a sort of a sustainable cocoa price in that environment? Or is GBP 3,000 still the right kind of level to plan for [indiscernible]?

I mean, first of all, where are we now? And if you sort of look short term, right? So the coke price is around GBP 4,500 today. And that is indeed based on quite a bit of news from about El Nino and that the crop will not be as good and so forth. I think the important thing to call out is globally, there is more than 500,000 tonnes surplus in the market. So even if the crop will not be that great, there's much more buffer than there was a couple of years ago when the coker crisis started. And this is the second consecutive year of surplus because last year, there was also some. So -- and that's still carried on by many players in the industry. So I believe there's quite a bit of buffer. I think that's number one. I think secondly, the reaction that we've seen to the cocoa price market is a bit more extreme than what you've seen in the past. So yes, there's obviously El Nino, if it's there. And if that really impacts the crop that will come in October, November, there could be something. But the reality is, we're not seeing that yet. So we're seeing quite extreme reactions in the market. And I think it will tend to that price corridor that what we talked about, which is about GBP 3,000 to GBP 5,000 in the medium term. that's what we believe, and that's what we're still backing. Maybe last word about cocoa price, and that's interesting. Many of our customers, they've taken positions at around and that has already been priced in the retail price, what I talked about earlier. So at the current levels, even while they are a little higher than what they were a couple of months ago -- it's not -- it will not translate into even higher retail prices. In fact, I see a little bit of a downward price decreases coming.

Yes. That is super interesting and perhaps slight mismatch between all of the noise around El Nina and what we're actually seeing in data.

We need to see what El Nino, what it does. I think for us, what we've done is we wanted to build a lot of resilience, right? Because it's not 1 size fits all. I mean a couple of years ago, it's super dependent, of course, on Ghana and Ivory Coast only. If you look now, whether it's West Africa, but we're expanding with larger scale farming in Brazil in Ecuador. So we more resilience in that -- in global sourcing. That's super important that we do that. The crop that we saw in June was equal to what it was last year. So there might be movements, and I'm not trying to underestimate it. Absolutely not, but I want to put a bit of nuance to sometimes quite extreme reactions that we're seeing in cocoa price volatility.

That's fair. And I mean somewhat related, obviously, profitability per tonne in terms of PBT per tonne, Barry has come under some pressure in recent years and the guidance for '26, you took it down a bit the other in part because of the Gourmet challenges that we talked about. But you've been quite clear that long term, you think profitability per tonne, PBT per tonne can go back to pre-Covid levels. So maybe you could speak to like what are the key drivers from getting to from where you end '26 to that [indiscernible]?

And yes, I'm not asking you for the frame -- because, I mean, of course, our year has ended a couple of days ago, so I have in a silent period. but a few building blocks. It's very important so for everyone that EBIT, you should always look at our EBIT in conjunction with profit before tax because in our EBIT, we have what we call finance charges that are related to the price of the cocoa that we pass on to customers. So if the prices of cocoa come down or if interest rates come down, we don't pass on so much. But of course, at the same time, we would have less interest cost. So that neutralizes on PBT. So we need to look at both, okay? Next year, we will definitely have much lower finance cost pass on. So our EBIT will be down from that, but it's compensated in our profit before tax. So that's number one. The second lever, obviously, for next year, if I talk the big building blocks, is I do expect a better margin from Gourmet and growth. I think that is a -- those are probably the 2 big levers down and end up.

Makes sense. In terms of that sort of movement in cocoa price, I mean 1 of the other knock-on impacts was clearly quite a big strain on Barry Callebaut's balance sheet if we rewind sort of 18 months ago at peak net debt to EBITDA 6. 5x I think, in April last year. You've done a great job actually proactively deleveraging and then the lower cocoa prices also helped, but how are you thinking as leverage does normalize between the balance of investing in the business and maybe pursuing any sort of bolt-on M&A or returning cash to shareholders?

Yes. So our leverage has come down and where we guided for the end of this year, and we haven't changed guidance. So again, without saying too much, I think we can say, around 3% is where we expect to end the year -- and I think it's important to point out, we said that at the time that the coco price was around GBP 3,000. Now it's trending around GBP 4,500. So we're sticking to that guidance, and it means we have become more resilient as a company in terms of leverage. So we've optimized working capital. We have shortened some of the hedging that we did. So they were closer to the market. And obviously, we've changed our financing structure to cope with potential volatility. So I've really focused in the last couple of months to make the company more resilient for that. Now back to your question, we will generate, obviously, quite some cash this year. what does that mean going forward? Well, first, I want to make sure that we invest in our own network behind the priorities, 10 countries, Gourmet specialties. That's it. I'll be very hard-pressed to do anything else. That's it. But we need to do that really well. Second, in the capital expenditure, the choice is ensuring absolutely strong fundamentals, no more quality problems. So that's number two. So call it -- so investments in our own network go first. Second, deleveraging, yes, but I would expect to end up between 2.5 and 3, that should be an ideal level. Depending on the coker price. If it goes up further, it will be at slightly north of that. But I don't have no intention to deleverage further, but that should be a good level for where we are. So that's two. Three, the dividend, it's now 30%. If we could do more, we can do more. But I would say for now, that's it, if there will be more cash generated, and that's where that will go. And then finally, it's opportunistic M&A -- and -- as you know, in our sector, we cannot do something transformative because we are an NS1. There's no company that is exactly like us. So if we were to do it, it will be built on, and we have a couple of opportunities that we're looking at, but I'm careful because I really want to create that replicable model first and then make an acquisition and do it really well.

Makes sense. And in terms of those investments in the network that you described, focused on the 10 key markets. Have those been -- I mean, does the scope of that change with Thomas coming on board? Or is kind of that.

He buys in to be last? Yes. I mean -- also in my previous companies where I worked, I want to -- you've got to be very, very clear and repeat, repeat, repeat. It's 10 markets, those segments. That is going to lead us to the profitable growth equation. And then it doesn't mean I say it very often. I mean many people ask me in the company say, "What should I stop?" I always say, I can't tell you what you need to store, but I can tell you what what's really important, and that's what we're -- that's really what we're going to do. And I think that's a good and exciting journey. I think the company in 1 or 2 years' time will be a different 1 than what it was a while ago. and it will -- I think it will strengthen. I feel very positive about the direction that we're taking, but it's not overnight.

Yes. That makes sense. So I'm conscious of time. I think 1 final question in before we go to the breakout, if there are more questions behind. As you met investors, customers, employees over the last 9 months that you've been in this sort CEO role at Barry, what do you think is sort of the biggest misconception about Barry Callebaut that you come across and that you maybe like to change?

I think -- well, I'm not sure if it's a misconception, but I think it's important, we are in what I call is N is one. There is no company that is the same as we are because we have that integrated chain, we've essentially resource about 1/4 of the world's cocoa, but it allows us to provide a availability; b, traceability; c, segregated streams for big concerns that are out there, whether it's child labor were deforestation, and rightly so -- and we are, I would say, spearheading things like diversifying sourcing. We are working with large farming solutions in Brazil. As I talked about, we have nurseries for seat links for cocoa seat links in Ecuador. So we're really developing that. And I think the future of the industry, I think we are playing a very important role in that. But by doing that extraordinarily well, I feel that the deep expertise that I detected in the company, if you go deeper on processing those beans from different locations, understanding what exactly that means and turning that into a final chocolate solution is pretty unparalleled. And yes, that makes us an S-1. That's always harder because what you could ask. What are your peers? What are your benchmarks? What is the comparable? I leave that very wisely to you. But what my job is to create the maximum value out of this uniqueness. And when you're unique, you're hard to replicate and where you're hard to replicate, that gives you a huge strategic benefit. And that's what I like.

Excellent. Well, we've hit the buzzer there, in. So thank you very much for your time and insights today and coming to Boston.

Pleasure. Thank you.