Barry Callebaut AG

Good morning, ladies and gentlemen, and welcome to Barry Callebaut's half-year results 2022-23. It's a pleasure to welcome you here at the sixth convention point. Given the change in management which you have seen this morning, we have slightly changed the setting for today. So the meeting today will be hosted by Bender Shriver, our CFO, but we will also have our new CEO, Peter Felt, here who will quickly talk to you on stage in a few minutes. Let me just quickly do the housekeeping before we go on. So please be reminded that the information given during this call conference contains some forward-looking statements which reflect the best of our current knowledge. Actual results may be different. Furthermore, we would like to inform you that the webcast and the conference is being recorded. As said, we have a slightly changed agenda for today, which is also slightly shorter, and will all be presented by Bender Schreiber. But before we start with the half-year results, we have Peter Felt, our new CEO here, who wants to say a few words to you. Thank you.

Thank you, Claudia. Good morning, everybody. It's a great pleasure being here with you, and so allow me to say a few words given the just-announced changes. Over the past few weeks, starting as the CEO of the Jacobs Holding, I had the chance to learn about Barry Kalibao and also met several of the board of directors of Barry Kalibao. And so when Peter Boone announced that he would want to step back and focus on his family life for personal reasons, the board of directors approached me to consider assuming the baton from Peter, which I happily do. For me, joining Barrikalibau is coming full circle. Fifty years ago, I had my grandmom run her hustle store in Germany, in our hometown in Gummersbach in Germany. Since that time and throughout my career, I had the opportunity to work on many food and beverage brands. During that time, I also worked on several and with several of Barik Kalibao's customers and their diverse consumer base around the world. I sorely enjoyed during that time working with natural food products, oranges in the beginning of my career, coffee that went through various stages and now chocolate. Across all of these businesses, developing the brand and their relevance to our customers was absolutely key. As you will have seen in the announcement, in my previous CEO roles, the past two steps that I had in my career, both were KKR-backed companies, we managed to step-change sustainable growth and lifted both companies onto their next lifecycle. Barry Kalibaugh is the heart and the engine of the chocolate and the cocoa industry. That is a fantastic and very powerful purpose statement for us as an organization. It gives us guidance and direction to deliver sustainable growth for all of our stakeholders. So joining Barri Kalibao is really close to my heart. It's a great honor and I truly look forward shaping the next chapter with all of our employees at Barri Kalibao. Over the next weeks, I'm looking forward to meeting all of the people that are making it happen, from cocoa sourcing all the way to servicing our customers. I'm keen to learn about our culture, what works well, and what we can improve. So naturally, you will have questions to me today, but I do hope that you understand that I first want to spend time with my organization and the team at Barik Kalibao and learn about us as an organization, as a company. So thank you very much. Over to you.

Thank you, Peter. Dear ladies and gentlemen, welcome to our half-year results 2022-2033 presentation. Let's talk about the results. In the first six months of the fiscal year, we delivered strong profitability, reflecting the strength of our business model which includes continued cost leadership in a highly inflationary environment and good product mix. Sales volume recovered progressively in the second quarter, limiting the overall volume decline for the half year to minus 2.9%. Volume recovery was slower than expected, due to the temporary limited availability of our global brands in the first quarter and weaker than expected customer demand in high inflationary environment in the second quarter. Operating profit was strong and increased by 11% in local currencies and net profit increased by 10.4% in local currencies compared to the prior year recurring numbers. Cash flow generation remains solid despite increasing raw material prices and adjusted free cash flow amounted to 71.2 million Swiss francs. I will share with you some details in a few minutes, but let's look first at the highlights. You will be very familiar in the way we present our volume growth on a quarterly basis for cocoa and chocolate. As set in chocolate against a high competitor, we witnessed gradually recovering volume growth, albeit slower than expected in the second quarter. For the half year excluding the wheezy ramp-up effect, our chocolate volume performance was in line with the underlying chocolate confectionery market, according to Nielsen. Volume of global cocoa was back at normalized level in the second quarter, leading to about flat volumes for the first half year. Now let's have a closer look at our key growth drivers on the next slide. All key growth drivers supported the volume improvement in the second quarter. After a flat volume in the first quarter, outsourcing volumes grew by plus 3% in the second quarter. Emerging markets volume also turned positive in the second quarter, limiting the volume decline after six months to minus 1%. And Gourmet volume growth in the first quarter suffered from the limited availability of our global brands as an aftermath of the VISA ramp-up. The second quarter, however, showed a clear improvement against a strong competitor in prior year. Let me now share with you some words on the outlook. For the second half of the year, we are confident to deliver continued strong operating profit. Due to the delayed volume growth, we now forecast the volume to be flat to modest growth for the full year 2022-2023. We now expect average volumes growth for the three years prior to land below 5%, with an EBIT strongly outperforming. At Barry Callebaut, we have been and will remain very consistent on our long-term strategy, which is based upon our four strategic pillars, which you are very familiar with. We confirmed today our new mid-term guidance for the three-year period 2023-2024 to 2025-2026. Now let's have a look at the financial results for the half-year in a little bit more detail. In the first half-year, we see a mixed picture in the different regions. In region EMEA, volume in the first quarter was impacted by the residual effect of the VISA ramp-up, In the second quarter, we have seen volume picking up well ahead of the declining underlying chocolate confectionery market, in particular in gourmet and specialties. This was thanks to better availability of products and supported by growth in Western and Eastern Europe against a double-digit competitor in prior year quarter. Operating profits EBIT has been strong, up 10% in local currencies. Volume in region Americas continued to decline in the second quarter in an overall soft market environment, and against high competitors of the prior year. Food manufacturers was impacted by a more cautious environment, leading customers to prioritize destocking, in particular in the first quarter, and continued to delay orders, which led to lower than expected volume in the second quarter, particularly in the first quarter. While volume was negative, we continued to focus on the value-adding mix, supporting the strong profitability. Volume in Asia-Pacific remained about flat during the first six months of the year against a challenging competitor and a difficult economic environment. We continue to see positive volume growth in food manufacturers, however. Gourmet and specialty volumes steadily improved in the second quarter, limiting the decline in the first six months to mid-single digits, supported by the growth of local brands in markets like India and Indonesia. The ripple effects of COVID still weighed on China. As a major market for gourmet in general, EBIT improved substantially, benefiting from a more favorable market. still led to a negative volume effect in a half-year gross profit. However, this was more than compensated by the strong product mix effect and the positive contribution from our cocoa business. The strong positive mix effect was supported across all regions and was the result of successfully passing on inflationary price environment in the industrial business as well as in the gourmet price list. At the same time, we continue to focus on value-adding mix and focus on the most profitable volumes in FM. Overall, gross profit increased by 11.4% in local currencies, while currencies had a negative effect of minus 11 million Swiss francs. I know we have some issues with the slides, but let me take a look now at the key raw material prices and the combined ratio. Here we have the slide. As you know, the combined ratio shows the relationship between the market prices of cocoa butter and cocoa powder in relation to the underlying cocoa bean price. It is a forward-looking curve. Results are normally seen over a six to nine months period. Please be reminded, that the combined ratio only gives a broad indication for the industry. It does not reflect many variables such as the terminal market structure, price differentials, including the living income differential, and the forward pricing structure and customer coverage. Having said that, the combined ratio remained fairly stable at 3.5 times the market, compared to 3.4 times in prior year. This was a result of rising cocoa butter prices, while the cocoa butter prices are somewhat lower. Looking at the price developments of our key raw materials, you can see that the cocoa bean prices have recently started to increase and closed on February 28, 2023, at 2,129 British pounds per ton. Sugar prices in the EU continued to do a strong increase with 83.4%, while the world market price for sugar was more range-bound with an increase of 5.3%. Dairy prices, on the other hand, corrected, showing an average decline of minus 6.1% compared to the prior half-year period. Thanks to our cost-plus model used in the majority of our business, the volatility of the raw material prices normally does not affect our profitability. However, it has an impact on our working capital, and we will get back on that later on. Now, let's take a look at the operating profit bridge on this slide. We delivered a strong EBIT increase of 11% in local currencies compared to the prior year EBIT recurring. Gross profit contributed an additional 69 million Swiss francs, while SG&E and others increased by minus 34 million Swiss francs. As we have gone through an increasingly inflationary environment that on the one hand we can pass on as part of our cost plus, but is still visible in our overall cost structure. Compared to a year ago, when we were just coming out of COVID, we also have increased our promotional brand activities like the World Chocolate Masters and a lot of travel activities. Currencies had a small negative impact of minus 5 million Swiss francs, leading to an EBIT reported of 348 million Swiss francs. The next bridge shows the development of EBITDA to net profit for the half year. Financial items were somewhat higher at minus 60 million Swiss francs due to higher benchmark interest rates. Income tax expenses increased to minus 54 million Swiss francs, corresponding to an effective tax rate of 18.7%. The increase in effective tax rate was mainly driven by less favorable geographic mix of profit before taxes, resulting in a net profit increase of 10.4% in local currencies compared to the prior year recurring. I am pleased with the continued solid cash generation, despite the impact of price inflation on the working capital. Working capital increased by 100 million Swiss francs as a result of higher receivables and inventories amidst the raw material price inflation. Inventories in addition increased due to the early harvest of main cocoa bean crop. The effects were partially offset by higher payables. Interest and income taxes paid amounted to minus 88 million Swiss francs, up from minus 68 million in the prior year period, due to higher benchmark rates and increased taxes. We continue to invest in our capabilities, which enabled future growth. However, we also chose a prudent approach in the current market environment, reflecting a slightly lower capex of minus 96 million Swiss francs. The reported free cash flow amounted to minus 188 million Swiss francs, while adjusted for the effect of cocoa beans regarded as RMI, the adjusted free cash flow continued to be selled at plus 71 million. Net debt, compared to the prior year February, remained about stable at 1 billion 581 million Swiss francs. Looking at the adjusted net debt, considering the cocoa beans in inventory as RMI, the level was further reduced by minus 193 million to 368 million Swiss francs. Let me finish the financial review with some of the key ratios. Our ROE improved compared to February 2022 with 130 basis points to 12.7% on the recurring view. On the ROE recurring, we improved our ROE to 16.1% with 100 basis points. And with that, ladies and gentlemen, I conclude this presentation. And I would like to open the floor for questions. Operators, please instruct the participants accordingly.