Company Reports

Barry Callebaut reported half-year fiscal 2024 results. Volumes were up 0.7% in the first half (up 1% in the second quarter) for the group and up 1% for the global chocolate business ahead of a challenging and, overall, declining chocolate confectionery market (down 2%, according to Nielsen). Volume growth was positive across most regions, with Western Europe (up 2.2%) compensating for lackluster performance in North America (down 1.9%) thanks to business coming from the consumer shift to private-label products and strong gourmet demand (volumes up single digits). Revenue was up 11.1% (up 19.6% in local currencies), driven by a significant increase in cocoa prices. Gross profit was flat, a testament to the group's resilience in inflationary environments due to its cost-plus pricing model. Operating profit was up 7.9% in local currencies (down 2.6% in CHF), well ahead of volume growth, but this was the result of a pass-through of higher financing costs that are offset below the EBIT line. Net profit for the period was up 0.8%, in line with volume growth, and reflects the group's ability to protect margins through its cost-plus model in times of inflationary pressures.

Barry Callebaut reported first-quarter fiscal 2024 results. Volumes were up 0.4% for the year, ahead of a challenging and overall, declining chocolate confectionery market (down 2.7%, according to Nielsen). Revenue in Swiss francs was up 6.2% at CHF 2.241 million. Performance in North America continues to be disappointing with weak trends in volumes continuing at down 4% versus down 6.6% for the underlying regional chocolate confectionery markets. On the contrary, performance in its Western Europe division and Central and Eastern Europe division was promising with volumes up 4.7% and 1.8% respectively, despite the declining regional chocolate confectionery market, but against the lower prior-year comparison base due to the Wieze, Belgium salmonella incident for the former. Sales volumes for both the Latin America and Asia, Middle East, and Africa divisions were down 1.3% and 1.5% respectively, broadly in line with underlying chocolate confectionery markets. All in all, although food manufacturers' sales volume was down 0.8% at the group level, gourmet and specialties' volume more than offset this weakness, growing by 9.1% against a soft comparison base in the prior year. Guidance for flat volume and EBIT for fiscal 2024 remains unchanged. The group expects long-term volume growth from fiscal 2026 onward of low single digits to midsingle digits and EBIT growth of midsingle digits to high single digits. Although our current estimates are close to the high end of new long-term guidance of 5% average volume growth and 7% EBIT growth, we expect a higher profitability base as a result of efficiency gains and cost-cutting to offset our adjustments to more modest growth expectations in the midterm. This leaves our CHF 1,910 fair value estimate for Barry Callebaut largely intact. We maintain our wide moat rating for the stock.

Barry Callebaut unveiled its turnaround plan along with fourth-quarter and fiscal 2023 results. Volumes were down 1.1% for the year, with trends in the fourth quarter turning positive (up 3.9%) partially due to an easy comparison base (volumes were down 2.4% in the fourth quarter last year). Revenue in Swiss francs was up 4.7% at CHF 8.470 billion versus CHF 8.370 billion in our model (up 9.7% in local currencies) driven by better-than-expected volumes (down 1.1% versus down 2.1% in our model). Performance in the Americas and Asia-Pacific continue to be disappointing with weak trends in volumes continuing (down 4.6% versus down 3.5% in our model in the Americas and down 2% versus down 1% in our model for Asia-Pacific). On the contrary, performance in Europe reversed in the second half, with volumes slightly down for the year (negative 0.4% versus our expectation of negative 3%). Operating profit came in higher at CHF 659 million versus CHF 641 million in our model. The new CEO provided a full strategic update with the publication of full-year results as previously announced. Within this, the group now expects long-term volume growth from fiscal 2026 onward of low single digits to midsingle digits and EBIT growth of midsingle digits to high single digits. This compares with Barry Callebaut's previous midterm guidance of an average of 4%-6% in volume growth and 8%-10% EBIT growth in local currencies with a further improvement in return on invested capital over the following three-year period to fiscal 2026. Although our current estimates are close to the high end of new long-term guidance (5% average volume growth and 7% EBIT growth, improving ROIC), we expect the higher profitability base (the result of efficiency gains and cost cuts) to offset our adjustments to more modest growth expectations in the midterm, leaving our CHF 1,910 fair value estimate for Barry Callebaut largely intact.

Barry Callebaut recently unveiled an ad hoc presentation detailing its revamped strategy and restructuring plan, BC Next Level. This plan necessitates an investment of CHF 500 million over the next two years, with CHF 290 million allocated to operating expenses and CHF 210 million dedicated to net capital investments. The company expects CHF 250 million in annual cost savings by 2026. While the net present value of the restructuring appears promising on paper, there's a lack of clarity on the impact on top-line growth in the coming years. Another aspect—not explicitly mentioned in the presentation but discussed during the call—is the strategy's inclusion of stock-keeping unit rationalization, which might result in a tangible impact on short-term volume.

We think Barry Callebaut's dominant position in the global chocolate industry affords the business significant cost advantages, making it one of the lowest-priced manufacturers and an important outsourcing partner for its customers. Outsourcing is a long-term trend, and it will likely continue to be a primary driver of above-average organic growth for the company in the years to come. We see a clear path to increased profitability through an improved customer and geographic mix over time.

We think Barry Callebaut's dominant position in the global chocolate industry affords the business significant cost advantages, making it one of the lowest-priced manufacturers and an important outsourcing partner for its customers. Outsourcing is a long-term trend, and it will likely continue to be a primary driver of above-average organic growth for the company in the years to come. We see a clear path to increased profitability through an improved customer and geographic mix over time.

Barry Callebaut released its 2023 nine-month trading update. Volumes were down 2.7%, slightly lower than company-compiled consensus (down 2.4%), due to weaker-than-expected demand across regions, with global cocoa surprising on the upside (up 1.6% versus 0.4% for consensus). Revenue in Swiss francs was broadly in line with expectations (up 3.6% versus 3.5% for company-compiled consensus). Performance in the Americas was particularly disappointing with weak trends in volumes continuing (down 4.6% versus down 0.9% for the chocolate confectionery market in the region) and the company calling out the soft market environment due to inflationary pressures in Mexico and gourmet and specialities in North America. Given this challenging market environment, and despite management's commentary "to work toward flat volume growth for full-year 2023" (having previously revised down fiscal 2023 volume growth guidance to flat/modest growth from around 8% implied previously), we expect to trim our fiscal 2023 volume growth numbers to slightly negative from 0.8% currently, but don't expect to materially change our GBX 2,330 fair value estimate for Barry Callebaut. The new CEO will provide a full strategic update with the publication of full-year results on Nov. 1. As a reminder, Barry Callebaut's midterm guidance calls for an average 4%-6% in volume growth and 8%-10% EBIT growth in local currencies with a further improvement in return on invested capital over the following three-year period to fiscal 2026, all broadly in line with our estimates (5% average volume growth and 7% EBIT growth, improving ROIC). Midterm guidance metrics are important drivers of our valuation, hence in case the strategic update results in a downgrade of midterm growth expectations, it would adversely affect our fair value estimate.

We think Barry Callebaut's dominant position in the global chocolate industry affords the business significant cost advantages, making it one of the lowest-priced manufacturers and an important outsourcing partner for its customers. Outsourcing is a long-term trend, and it will likely continue to be a primary driver of above-average organic growth for the company in the years to come. We see a clear path to increased profitability through an improved customer and geographic mix over time.

Barry Callebaut released its first-half 2023 results. Volumes were down 2.9%, slightly lower than company-compiled consensus (down 2.2%), due to weaker-than-expected demand in Asia-Pacific and the Americas. Performance in the Americas was particularly disappointing with sequential deterioration in volumes (down 2.4% in the first quarter and down 6.6% in the second versus improving trends across other segments) and the company calling out the soft market environment that led customers to prioritize destocking and continue to delay orders in the second quarter. On the flip side, profitability surprised on the upside (EBIT at CHF 348 million and EBITDA at CHF 467 million versus CHF 322 million and CHF 447 million for consensus, respectively), which was primarily driven by better mix and the global cocoa segment (tailwind from a better cocoa combined ratio). Given this challenging market environment, management revised down fiscal 2023 volume growth guidance to flat/modest growth (from around 8% implied previously) with continued strong operating profitability. Consequently, the company now expects to achieve average volume growth of below 5% and thus won't achieve its top-line midterm guidance (5%-7% volume growth over the fiscal 2021-23 period). Barry Callebaut confirmed midterm guidance for the following three-year period to fiscal 2026 for an average 4%-6% in volume growth and 8%-10% EBIT growth in local currencies with further improvement in return on invested capital, or ROIC, all broadly in line with our estimates (5% average volume growth and 7% EBIT growth, improving ROIC). We don't expect to materially change our CHF 2,400 fair value estimate as we update our model to account for weaker volume guidance. With the shares trading in 5-star territory, we think Barry Callebaut makes a compelling investment case for defensive long-term-oriented investors, and we would advice investors to take advantage of any weakness in the share price.

Barry Callebaut released its first-quarter 2023 trading update. Volume was down 5.1%, lower than company-compiled consensus (down 3.3%), due to the impact from the Wieze ramp-up and tough comparables. Within this, the key drivers were the gourmet and EMEA segments, both affected by the temporary closing of the Wieze factory, which has been fully operational since the end of October. Despite the slow start to the year, the company is committed to achieving its midterm guidance (5%-7% volume growth and EBIT above volume growth by fiscal 2023 versus 6.1% in our model), pointing to over 8% volume growth in the next three quarters of fiscal 2023. Management also introduced new midterm guidance for the three-year period to fiscal 2026 for an average 4%-6% in volume growth and 8%-10% EBIT growth in local currencies with further improvement in return on invested capital, all broadly in line with our estimates (5% average volume growth and 7% EBIT growth, improving ROIC). We maintain our CHF 2,400 fair value estimate. With the shares trading in 5-star territory, we think Barry Callebaut makes a compelling investment case for defensive long-term-oriented investors.

Wide-moat Barry Callebaut reported fiscal 2022 results, with group volumes up 5.3% (chocolate business up 4.5% excluding the European Chocolate Company acquisition), higher than company-compiled consensus (volume growth up 5%). Within this the key drivers were the gourmet and emerging-market segments, both continued strong recoveries (gourmet up 24.3% in the year), emerging markets also grew robustly by 7.9%, and outsourcing was up by 4.8%. We expect the fast recovery of the gourmet and emerging-market segments to continue to have a positive effect on margins, as these are more profitable than the rest of the group. The net one-off negative impact related to the salmonella incident at the Wieze factory was CHF 76.9 million on operating profit; excluding this, it comes in higher than consensus (recurring EBIT was CHF 624.7 million versus CHF 611 million expected). More importantly, despite the negative impact of the Wieze factory, management reiterated midterm guidance (5% to 7% volume growth and EBIT above volume growth by fiscal 2023 versus 6.1% in our model). We maintain our CHF 2,400 fair value estimate. With shares trading in 5-star territory, and the chocolate business' defensive characteristics (against inflation concerns and recessionary fears), we think Barry Callebaut makes a compelling investment case for defensive long-term-oriented investors.

We think Barry Callebaut's dominant position in the global chocolate industry affords the business significant cost advantages, making it one of the lowest-priced manufacturers and the outsourcing partner of choice for its customers. The outsourcing trend is here to stay, and it will likely continue to be a primary driver of above-average organic growth for the organization in the years to come. We see a clear path to increased profitability through an improved customer and geographic mix over time.

Wide-moat Barry Callebaut reported fiscal 2022 nine-month results, with group sales volumes up 7.9% (7.1% excluding the European Chocolate Company acquisition), higher than company-compiled consensus estimates. Within this, the key drivers were the gourmet and emerging-market segments—both continued strong recoveries in the third quarter (gourmet up 27.4%) and emerging markets also grew robustly by 8.7% and outsourcing was up by 6.9%. We expect the fast recovery of the gourmet and emerging-market segments to continue to have a positive effect on margins, as these are materially more profitable than the rest of the group. After the salmonella incident at the Wieze factory, Barry Callebaut now expects the first lines to restart production in early August 2022 with a gradual ramp-up to full capacity over the following weeks. The company is still unsure about the full financial impact, but does expect it to be notable in fourth-quarter results. Based on our analysis in our July 4 note, and assuming roughly two months of no- or undercapacity production activity, we would expect the impact to be no higher than 2% on the top line (on full-year numbers, hence the much higher fourth-quarter numbers). Management reiterated midterm guidance (5% to 7% volume growth and EBIT above volume growth by fiscal 2023 versus 6.1% in our model). We maintain our CHF 2,400 fair value estimate. With shares trading in 4-star territory, and the chocolate business' defensive characteristics (against inflation concerns and recessionary fears), we think Barry Callebaut makes a compelling investment case for the defensive long-term-oriented investor.

We think Barry Callebaut's dominant position in the global chocolate industry affords the business significant cost advantages, making it one of the lowest-priced manufacturers and the outsourcing partner of choice for its customers. The outsourcing trend is here to stay, and it will likely continue to be a primary driver of above-average organic growth for the organization in the years to come. We see a clear path to increased profitability through an improved customer and geographic mix over time.

On June 30, Barry Callebaut stopped producing all chocolate food at its factory in Wieze, Belgium after detecting a batch of salmonella-positive products. The company has confirmed that no chocolate products that were affected by salmonella entered the retail food chain. The Wieze factory is one of Barry Callebaut's largest and accounts for 10% to 15% of total annual volume production (about 300,000-350,000 metric tons per year). As there is still uncertainty about the timing of starting production at the site, we see downside risks to our fiscal 2023 forecasts. Assuming a one-to-one margin drop-through and homogeneous production cadence across the year, we expect a roughly 100-basis-point margin impact for every month the factory remains closed. However, we do not anticipate a negative long-term impact on the company's client relationships and as such, we maintain our wide moat rating and CHF 2,400 fair value estimate for Barry Callebaut.

On May 11, wide-moat Barry Callebaut hosted a capital markets day highlighting the growth opportunities ahead (emerging markets, outsourcing, Gourmet & Specialties), cost leadership credentials, examples of innovations across the different functions of the group, and various sustainability solutions and initiatives, all in-line with our thesis and outlook. The company also had an opportunity to showcase the strong financial performance achieved over the last decade (5.7% 10-year average volume growth vs. 0.6% for the underlying market and a corresponding 8.2% average EBIT growth over the same period, solid balance sheet with a Net Debt to EBITDA at 1.7 times). Importantly, management reiterated mid-term guidance (5% to 7% volume growth versus 6.1% in our model, and EBIT above volume growth by fiscal 2023 ). We expect the fast recovery of the gourmet and emerging-market segments to continue to positively affect margins, as these are materially more profitable than the rest of the group. We do not expect to materially alter our CHF 2,400 fair value estimate for the firm. With shares trading at a 10% discount to our fair value estimate, and the chocolate business' defensive characteristics (both against inflation concerns and recessionary fears), we think Barry Callebaut makes a compelling investment case for the long-term-oriented investor.

Wide-moat Barry Callebaut reported fiscal 2022 half-year results, with group sales volumes up 8.7% (7.9% excluding the European Chocolate Company, or ECC, acquisition), higher than company-compiled consensus estimates (around 8.2%). Within this, the key drivers of top- and bottom-line growth—the gourmet and emerging-market segments—continued their strong recovery in the second quarter (gourmet up 29.5% partly due to the ECC acquisition) with emerging markets also growing robustly by 8.7%. Recurring operating profit was in line with company-compiled consensus (CHF 318.1 million versus CHF 319.2 million for consensus). We expect the fast recovery of the gourmet and emerging-market segments to continue to have a positive effect on margins, as these are materially more profitable than the rest of the group. Management reiterated midterm guidance (5% to 7% volume growth and EBIT above volume growth by fiscal 2023 versus 6.1% in our model). We do not expect to materially alter our CHF 2,400 fair value estimate for the firm. With shares trading at more than a 10% discount to our fair value estimate, and the chocolate business' defensive characteristics (both against inflation concerns and recessionary fears), we think Barry Callebaut makes a compelling investment case for the long-term-oriented investor.

We don't expect to change our fair value estimates for our European food value chain coverage list due to the recent Russia-Ukraine conflict.

Wide-moat Barry Callebaut reported its first-quarter fiscal 2022 trading update, with group sales volumes up 8.9% (8.1% excluding the European Chocolate Company, or ECC, acquisition), higher than company-compiled consensus estimates (close to 8%). Within this, the key drivers of top- and bottom-line growth, the gourmet and emerging-market segments continued their strong recovery in the first quarter (gourmet up 33.8% partly due to the ECC acquisition) with emerging markets also growing robustly by 11%. We expect the fast recovery of the gourmet and emerging-market segments to continue to have a positive impact on margins, as these are materially more profitable than the rest of the group. Management reiterated midterm guidance (5% to 7% volume growth and EBIT above volume growth by fiscal 2023 versus 6.1% in our model). We do not expect to materially alter our CHF 2,400 fair value estimate for the firm. With shares trading at a 10% discount to our fair value estimate, and chocolate business' defensive characteristics (both against inflation concerns and recessionary fears), we think Barry Callebaut makes a compelling investment case for the long-term-oriented investor.

After taking a fresh look at the company’s business model, its evolution in recent years, and the industrial chocolate market structure, we upgrade our moat rating for Barry Callebaut to wide from none. We also increase our fair value estimate to CHF 2,400 from CHF 1,640, a function of our moat upgrade and a lower weighted average cost of capital (due to a reduction in the uncertainty rating to medium from high). Our fair value estimate implies a 2023 price/earnings ratio of 28 times and an enterprise value/adjusted EBITDA multiple of 16 times, which is in line with wide-moat peers of similar growth profile in the broad food ingredient space.