Barry Callebaut AG (OTC:BYCBF)
2Q 2015 Earnings Conference Call
April 6, 2016 3:30 AM ET
Gaby Tschofen - Corporate Communications
Antoine de Saint-Affrique - Chief Executive Officer
Victor Balli - Chief Financial Officer
Petras Concilia - ATF
Andreas Von Arx - Helvea
Good, we are ready to go. Good morning ladies and gentlemen and thank you for your interest. Thank you for joining us to our Half-Year Results Conference for fiscal year 2015-2016. I would like to welcome everybody here in the room and it could be that we also have one of the other caller in the webcast.
My name is Gaby Tschofen on behalf of Corporate Communications and of course, I am not the only one here. I am joined by our CEO, Antoine de Saint-Affrique and our CFO, Victor Balli who will present to you our half-year results.
Please be reminded, as always that the information given during this conference contains some forward-looking statements which reflect the best of our knowledge. However, actual results might be differ. Furthermore, we would like to inform you that this conference is being recorded. This is the agenda for today. Antoine will start by presenting the highlights of the first six months of the current fiscal year, after which, Victor will guide you through the financial review in more detail and then Antoine will provide a brief strategy and business outlook. As usual, we will have a Q&A session afterwards. And with that, I would like to hand over to our CEO, Antoine de Saint-Affrique.
Antoine de Saint-Affrique
Thank you, Gaby. Good morning. It’s great to see you, great to see a full house and great to see so many familiar faces. So I am very – I am very happy to be here and to present the first six months of our current fiscal. I think last time, I presented to you, I was only 30 days in the job and in the industry. So it was all new news. All extremely exciting but obviously not so comfortable.
Now with a few more months under my belt, having visited by the way over a half of the sites of the company I must come first, it still feels extremely exciting but it does feel much more comfortable not only because I know significantly more about the company, and by the way everyday has confirmed to me how strong a company it is and a great people are.
But more importantly, because the smart growth agenda we have defined at the time is coming to life and is starting to bear fruits. So with this, let’s get into the results.
As probably well know from the various panels and from some of the confectionary players, market conditions have remained challenging albeit marginally better. Confectionary market only declined by 2.6% in volume over the last six months and once again, we have proven that we can defy the market trends and deliver solid and quality growth.
Let me quote a few figures there. In these declining markets we have been delivery a solid 4.5 volume growth in H1. What is important to us is not only the quantum of the growth, but how this growth was delivered.
Our volume growth was driven by a strong performance in chocolates business across all regions, particularly in the main regions of Europe, Middle East, Africa and the Americas. This gives us the space in our global cocoa business to start phasing our less profitable contracts intentionally reducing our third-party sales.
Importantly as well, all our key strategic growth drivers contributed positively to this performance. Gross margin improved by 4.7% in local currency which is in line with our volume growth. Our EBIT growth was more or less stable in local currency, only down when translating in Swiss Francs.
And finally, and key to our smart growth agenda, our focus on cash generation starts paying off. We reached a strong free cash flow of CHF220 million as a result of greater CapEx discipline, but also as we see the first impacts of our inventory reduction program which Victor will talk about later on. Our net working capital decreased by close to 12% despite our growth, driving our net debt down some 14%. So, smart growth is starting to get traction.
As I am sure you want to get into some more detail, let’s have a look at some of the components of our growth and compare them to the markets. In Europe, Middle East, Africa, we significantly outpaced the market with sales volume increasing by 6.5% while the market declined by 2.2%. We had a particularly strong performance in Eastern Europe and in the Middle East.
In Americas, we showed an outstanding 13.5% performance. In the confectionary market it was declining by 3.7%. Likewise, in Asia-Pacific, where the market was declining by 1.7%, we achieved a very strong sales volume growth of 12.6%.
All of these give us the space to start phasing out some of the less profitable cocoa activities leading to a global cocoa decline of 7.8% namely we didn’t extend some long-term ingredients agreements we had in light of a few challenging cocoa product markets and in light of our focus on working capital. It’s being said in order not to leave you with a public view of the confectionary market trends, we see that whilst the global markets is declining by 2.6% over the last six months.
Trends are improving quarter-on-quarter and market value is up 4.6%. So, as mentioned earlier, we didn’t only had a solid growth, but the right type of growth with all the growth drivers contributing positively to our performance, we achieved double-digit volume growth in emerging markets across all regions. This is very much in line with our ambition.
Outsourcing and strategic partnership virtues in particular by additional volume from world’s finest chocolates are core and another global player in an emerging market. It not only presents about one-third of our total volume. Our high margin Gourmet and Specialty business grew strongly by 7.5%.
It now makes up to 11% of the Group’s total sales volume. Besides the figures themselves, there are a number of activities which underpin our delivery and on which I would like to spend a few minutes.
First, let me start with our food manufacturers business. As I said, we had and it had a very strong start to the year. There are many reasons for this, but for time sake, let me just pick three of them.
First, and once again, we see the potential of outsourcing. We have signed recently two outsourcing agreements with local foods companies in Eastern Europe, namely one with Romega in Romania and another one which for confidentiality reason I cannot disclose the name and it is obviously not the end of what we are doing in outsourcing.
Then a word on specialty and decorations, as you know, it is a high technology, it is a high margin business where expertise such as the one we have in pricking and printing in making complex shavings or in making sophisticated cups, is making a real difference. It drives our loyalty and it drives margin by adding real value to our customers. Our decorations business is growing consistently at double-digit rates and there, we are only scratching the surface basically relatively modest player in that field.
And finally a few words on innovation. Those of you that were at the ISM in Cologne have seen our renewed focus on innovation with a number of products such as Caramel Doré you may have tried it, if you haven’t tried it, it is a fantastic product.
So you really should try to taste it, it’s just amazing or products like Acticoa, one of our Belgium customers Vandenbulcke just launched the first chocolate brand in Europe that makes health claim based on our EU approved claims for our Acticoa chocolate.
By the way Acticoa is also well analyzed in the US. So lots of good signs on that front.
We cannot talk of smart growth without spending a bit of time on Gourmet and Specialties. I think there too we had a good performance based on strong execution in sales and in marketing.
Our two global brands, Callebaut and Cacao Barry are growing around the world while maintaining their profitability. The rate of emerging markets keeps growing which is great. We saw very encouraging results, for instance in our China, also very, very strong performance in places like the US. Lots has to do with our better marketing and with keeping taking our mixes and our products further and higher and a great example of that is Cocoa Barry.
We have implemented a next generation of packaging and design. We are getting back to the roots of the brands a brand that was a brand of specialty, a brand of selection, a brand of origin and some of it’s here, you will see more of that. It looks absolutely great. We think it looks great, I mean our clients think it looks great and we see the impact on sales.
Once our core is chocolates we have also successfully broaden our offering to adjacent products such as nuts, decorations, beverage under the global premium brands.
Last, but not least and you’ve seen a bit of that next door, we are winning the hearts and minds of chefs with our strong global network of chocolate academy centers. This is absolutely fundamental obviously for our gourmet business, but it is also a formidable source of inspiration and creativity through the service of our food manufacturer customers.
On the acquisition front and as announced last month, we have successfully closed the acquisition of the beverage vending activity of FrieslandCampina Kievit. As a result, we are becoming a leading supplier of vending powder mixes in Europe and we can already see what we can add in terms of technical and innovation capabilities to what is a very, very strong business.
The acquired activity represents an additional sales volume of about 20,000 tonnes and an additional CHF55 million of sales revenue in full year. The transaction includes a long-term contract of manufacturing under which FrieslandCampina Kievit will continue to produce vending products for us at its production sites in Lippstadt-Germany. This is a great example of the type of business that you can expect us to acquire.
Specialty business, high added value products, bolt-on acquisition. When we met in November, we also discussed as part of our smart growth agenda. The fact that we are putting significant focus on bringing our cocoa business back to greatness through the cocoa leadership project.
As you know, this is a key and multi-year project with three key pillars to it, commercial leadership, operational leadership, and scale leverage. We are making good progress in all three areas.
But there is still long way to go. As indicated in November, material impact will only be visible as of next year. On the commercial leadership front, we are streamlining our portfolio and segmenting customers in order to better serve them. We put greater focus on high-end brands such as Bensdorp's. So I just put you a team of Bensdorp's for those that are in the room, it looks absolutely great, whilst phasing out less profitable ingredient confects. We are also implementing a more global and a more disciplined approach.
On the operations side, we completed on-time and in full the announced downsizing our cocoa processing capacity in Asia and we are successfully reducing the working capital through better product management and greater discipline.
Global leverage starts showing. Our central combined ratio team is up and running in Zurich and has started impacting our business. We also start becoming better at market intelligence. So good progress so far, but obviously we are only at the start of our three years journey.
So on that, let me hand over to Victor for a more detailed financial update.
Thank you, Antoine, and good morning, ladies and gentlemen after this I think pretty inspiring and exciting developments back to the heart facts of the first financial – half-year financial year of this year. Overall the results are very well within our expectations as you will hear from me when I go through the presentation.
Let’s start with our income statement. As Antoine mentioned, our sales volumes achieved 4.5% growth for the first half year, which is way above, as you heard the underlying market albeit with somewhat slowdown in the second quarter.
Due to our strong focus on margins and product mix the gross profits increased by almost 5% in local currencies, largely inline with our volume growth. The EBIT growth was almost flat in local currencies, this compared to strong base in February last year and net profit was down, again strongly impacted as most of the numbers by currency fluctuations.
Last time we announced that we will focus on cash and I am very pleased to see a significant improvement reaching a free cash flow for this first six months of 220 million, u p from a negative number last year. But let me discuss now these results in some more detail and I start with the regional performance, I guess you know we are managing our business in three chocolate regions and one global cocoa division.
In the region, Europe, Middle East, and Africa the volume increase you heard is already 6.5%, a remarkable growth in a still declining market. Western Europe had a very solid performance in both food manufacturers and Gourmet. In Eastern Europe, Middle East, Africa, the volumes grew even double-digits.
There was a strong improvement on margins based on our strategic focus on product and customer mix. However, this was offset by higher operational cost and importantly, by lower cocoa ingredients profitability contribution. Therefore, the EBIT in local currencies was only 1.3% of above prior year.
The region Americas continued like in many years to deliver a great performance as volumes went up by 13.4%, hugely above a rather challenging market. In North America, sales volumes were driven in food manufacturers with both smaller national but also larger global accounts but also from a fantastic Gourmet results. In South America we further expanded our business with double-digit growth both in Chile and Brazil.
The good volume in growth and the improving product mix was offset by investments in infrastructures particularly in Latin America, but again also by lower ingredient profit contributions. In the region Asia-Pacific, the volume rose by 12.6%, growth in food manufacture accelerated achieving a double-digit increase and we also achieved an even better double-digit growth in Gourmet.
This as a result from significant market opportunity as our market share is relatively low in many countries but also as a result of our continuous investments into these growth regions. EBIT grew by more than 20% in local currencies following a strong volume growth combined with the focus asset and margins and costs.
In global Cocoa, the volumes declined by 7.8%. This, as a result and Antoine mentioned from increased deliveries of our cocoa division to our internal chocolate needs but also because we intentionally phased out low profit contract including some long-term ingredient supply agreements with strategic partners.
As anticipated and announced, the challenging market environment with a historically low combined cocoa ratio has an important negative impact on our profitability. As a result, our EBIT in global cocoa decreased strongly, I will comment a bit more.
Here on the Group performance, back to the Group performance, the bridge for the gross profit as compared to prior year. We had a positive volume effect obviously, but much more important was the improvement from the product and customer mix for me. Our focus on margins continued in the food manufacture business across all regions and we saw continuous growth in gourmet and in particularly you heard it in specialties and decorations product while we maintain our already very high margins in that business.
As already mentioned, historically low combined ratio had a really negative impact on the cocoa processing activities, we anticipated earlier an impact of approximately minus 40 million for the first half year, but in reality the results was actually somewhat better and also supported by positive synergies from the Petra integration and first good impacts from the cocoa leadership project.
However, still overall, the cocoa processing had a negative impact of minus 21 million versus prior year. So for the entire Group and before currency translations, our gross profit improved by 4.7%, inline with our top-line growth in my view, a good result in line especially of this difficult cocoa market.
Here now the EBIT performance as compared with the prior year. We had a positive impact from the gross margin as just explained and we continue to invest into sales, marketing and structure to support and create the platform for our fast growth.
However, we try to do it in a very controlled way. We also incurred some one-off cost related to severance payments for the restructuring of our cocoa Asia footprint and also related to the start-up of our shared service center in Poland.
Overall, our EBIT was flat excluding the negative currency translation effect which again was very substantial with almost minus CHF18 million.
Let’s now review the performance between EBITDA and net profit. Our financial expenses were slightly above prior year, but mainly as a result of higher exchange rates losses related the way of hedging of our financing of the Brazilian and Latin American entities. We took corrective measures and we switched to financing from debt into equity so that means that this negative impact will not further occur in the future. The average tax rate went slightly up to 18.6% as predicted. I repeat what I said since quite a while that our average tax rate will gradually grow to a level towards 20%.
Finally, our net profit for the year was down by minus 12.5% in local currencies, certainly in order good results, but of course partly impacted by non-recurring effects and as a result of the cocoa situation.
Here and we are always interested in the long-term development of our key raw materials and as you know they are the most important driver of our costs. Last fiscal year, we continued to see volatility in the cocoa bean prices driven by difficulties in the financial markets along the cocoa price dropped steeply early in this calendar year to a level below 2000 pounds. But in the mean time, cocoa prices retracted based on a drought in Brazil and expected weaker mid-crops in Africa took rather levels again.
Sugar prices were low at the beginning of the fiscal year, however, there was a strong correction supported by tighter supply and some activities. Milk powder prices are at a six year low driven by the very strong production of milk combined with a rather sluggish demand, in particular in Asia.
As you know, due to our cost approach, we pass on the cost of these raw material to our customers. Therefore their price volatility does normally not significantly affect our profitability. As part of the smart growth, we have strengthened our focus on cash generation and as just mentioned we have seen some good signs of improvement on working capital, but also in CapEx.
Last year, for the first six months, we had a strong cash outflow of more than CHF200 million for working capital. This is mainly due to the increase in cocoa bean prices, but also seasonality effects a year ago. This year, we see a reverse trend and working capital decrease so generating cash despite we are at the moment being in the high season.
Our discipline on CapEx also starts to pay off and we see a significant reduction in cash out for investments compared to the prior year, very much in line with our target to limit the total year capital expenditures to maximum CHF200 million.
Overall, our free cash flow for the first six months amounted to plus CHF 220 million which compares very nicely to a negative free cash flow of CHF143 million in the prior year, but that said, we had also some favorable tailwinds for this period. So please do not expect these amounts to double for the full year.
Now to complete my presentation, let’s look briefly at some key financial ratios. As explained, our working capital was significantly lower despite the growth of our company and consequently this also translated into lower net debt.
The equity is slightly higher than prior year driven by the generated profit despite still negative currency effects. I am happy to see improvements in most of our ratios but they are clearly still below our own targets. I emphasize once again that improving our balance sheet and the ratios by putting more focus on cash generation and deleveraging the company remains a high priority for our Group.
And with this, I give the work back to Antoine.
Antoine de Saint-Affrique
Thank you, Victor. So, as you see, we have a solid half year results and we see the first signs of smart growth getting traction. What I like to do in the next few minutes is two things, getting back briefly on some aspects of smart growth and remind you of what we said in terms of outlook and guidance. I will not come back to our four pillar strategy. As you know, it’s based on expansion, innovation, cost leadership and sustainable cocoa. It has served us very well and it will remain unchanged.
What we said last time we met is that whilst the strategy is unchanged, and will remain unchanged, we said the execution of the strategy would evolve striving to find the right balance between volume growth, profitability and cash. You would remember we coined it as a smart growth. S standing for sustainable growth, M for margin accretive growth A for accelerated growth in Gourmet, specialties emerging markets, R for return on capital and greater focus on free cash flow and T for talents and team. You have seen in the past 30 minutes, the progress we are making on this agenda. I would like to spend the coming ones on two aspects of the agenda. One is, growth itself and the other one is talents on teams.
On growth first, as you know, we are a growth company. There we see a number of significant opportunities ahead. Let me quote a few. We tend to do more in emerging markets where we still have a small market share and where chocolate consumption per capita is low.
So, there, we expect significant growth over the long-term. There is also plenty of opportunity in outsourcing and strategic partnership. In emerging markets, 70% of production is still in-house. There, the know how we have but also our cost advantage are very strong assets.
Globally, the top five chocolate players currently outsource only 10% to 20% of their chocolate needs, which means our room to strengthen, our strategic partnership and of course, we have a unique strength in our ability to innovate and co-create with our customers leveraging our chef network, our ambassadors and our chocolate academy.
Last, but not least, we are only starting our journey in Gourmet. We have a global market share of about 20% so we still see plenty of opportunities. In emerging markets, in new products category, and in adjacent products such as fillings, nuts, or decoration.
To cater of the growth of today, but importantly the growth of tomorrow, talents and capabilities are an essential part. We have an extremely strong and diverse team today and have been meeting lots of them over the last six months.
But we want to keep continuously raising the bar. It’s is why I am delighted that we have our new Chief HR on board, so Carole who is here with me. Welcome, she joined yesterday and she is joining the executive committee, so that’s great. Carole comes with an enormous expertise and business experience and will definitely be a formidable asset to the company. With her, we will keep building an even stronger and more diverse talents pipeline.
Next to our talent pipeline, we already have an amazing wealth of capabilities. Our global customers are pushing us all the time to more creativity and to better performance and this on all fronts. Our chefs are at the forefront of trends and innovation.
So cost fertilization between our food manufacturer business, our Gourmet business and our cocoa business offers plenty of opportunity literally from the farm to the chef’s table. This is something we have done and this is something we will keep leveraging systematically.
Finally, we are also building our capabilities for the future, be it for instance digital marketing capabilities, opening new communication channels to all events and close to both our food manufacturers, our gourmet customers. Be it also in technical and technological capabilities such as for instance our 3D printing where we are starting to do things that are really fun and impressive. So, once we have a very strong team and a set of capabilities for today, we are starting to build the capabilities for the future.
More on this, obviously as time unfolds and in our upcoming meetings.
Now let me conclude with our outlook and guidance. While the current year will remain challenging from a profitability point of view, as we anticipated, we are obviously optimistic for our chocolate business where we expect to see continued above market growth.
We will continue to put our smart growth into action. We are pleased to see the start of it, but it’s only the start of the journey. We are confident we are on track to meet our mid-term financial targets and as you would recall, it’s on average 4% to 6% volume growth and EBIT at or above volume growth in local currency barring any major unforeseen events and obviously, a greater focus on free cash flow.
So, on that, ladies and gentlemen, thank you very much for your attention and interests and Victor and I would be delighted to take any question you may have.
Antoine de Saint-Affrique
Maybe we start here in the room?
Petras Concilia, ATF. Could you, Mr. Antoine de Saint-Affrique, briefly describe for non- [Indiscernible] what the – this cocoa situation is which is challenging you and how optimistic are you for that business?
Antoine de Saint-Affrique
So, and Victor will help me there. As you know, the cocoa markets or the profitability of the cocoa markets is defined by something which we call the combined ratio which is a bit technical but which is basically the relative pricing of the powder and the butter. This combined ratio is – I mean there has been historically above a level of three for the last many years. And last year, I think for the first time in 20 years or so, it got systematically below three at actually quite low level. So you had a fundamental degradation of the profitability conditions of the cocoa market which had an impact on the entire industry. We see this combined ratio coming back step-by-step. We have also on our side have taken some pretty drastic measures to be more independence from the combined ratio. So this is why basically you see the progress that we are making, but this is a long-term journey. I mean, so I had a crystal ball to predict to the last decimal the evolution of the combined ratio. I mean, we all would be extremely wealthy but I don’t have that ability to myself. Victor, anything?
Maybe just because you said you are non [Indiscernible] what was driving that was that kind of two, three, four years back it was a very profitable business, so lots of capacity were built up in particularly in Asia and at the same time the whole confectionary market started to slowdown in particular in Asia.
So yes, overcapacity, sluggish demand, classical drove down the prices, very undisciplined new players, now what has changed, so slowly we see a growth in the cocoa powder market. We have shutdown capacities. Orders have scaled down their production the smaller newcomers struggle financially.
So they have become either out of the market or very, very conservative in the market. So the whole market situation starts to gradually improve and become more disciplined, but it’s still certainly too early to say it’s all great. We are not back to the four, five years back level but the trend is the right direction.
[Indiscernible] There is one trend, because in the same subject manufacturing foods being produced in Asia, could you be more specific about what you did in Asia?
Antoine de Saint-Affrique
Yes, of course, as you probably recall, we announced at the earlier results that we would close our factory in Thailand and reduce off print in Malaysia by closing a line there. I mean, we’ve done that. So this restructuring is now complete and executed.
Maybe, just as an add-on, what we are almost unique in that on the street is, that the major part of what we process is actually used up internally to make our chocolate products, which most of our competitor doesn’t have that opportunity and because of the growth of our chocolate business which you’ve seen, we use more and more these products actually turn this, so we can be a bit more selective towards third-party sales and that’s one of the reason I have look you’ve seen in the numbers. So and that’s quite unique opportunity we have.
[Indiscernible] from Clipper Magazine. How do the sanctions in Russia affect your business? So, important into Russia and selling on the market?
Antoine de Saint-Affrique
We have a facility collection in Russia. So we produce locally for the local market and our performance at the start of the year is pretty good in Russia. So in that respect the sanction do not affect our business. Where it has an effect is on the overall market dynamics in Russia, because as there is less momentum on the streets as you saw less consumption, but our business in Russia is well and healthy.
Actually I was last week in – I was last week in Moscow visiting the team, visiting the factory. We have an amazing facility, we have a very young and very talented team which is really big and going for a market which is a traditional chocolate market and there is a huge passion for chocolates in Russia. So, beauty and chocolates are probably the last two things people look at in Russia even in time of crisis.
We are just at 6.3% positive, is that Russia or is that Romania?
Antoine de Saint-Affrique
No, I mean, it’s the largest regions of I mean, Eastern Europe, Middle East, Africa. So, it’s a broader region but the overall region is doing well.
Andreas Von Arx
Von Arx at Helvea. I got a question on the decrease of global cocoa volume. Victor you said, one reason is phasing out some of the contracts, same reason with somewhat internal relocation, was it exactly?
Yes, maybe I didn’t explain. We produce a certain amount, the company uses a certain amount of cocoa products, so we process beans and many of these cocoa products we actually need to make chocolates like cocoa liquor, like cocoa butter. So the more we sell chocolate products, we more – we need from our fifth division their products which are not available anymore for third-party sales.
So naturally by the growth of our cocoa business without investing further into capacity our third-party cocoa sales will decline which is at the – normally what the concern because we may not follow the markets, but now we are actually happy because we can become more selective.
Andreas Von Arx
I have a question about these contracts. What makes a contract more profitable and what are those contracts that you got out of now?
Antoine de Saint-Affrique
I think, if I may, there are two dimensions. One is, of course, in the whole cocoa portfolio have higher and lower profit contracts and in particular in Asia, loyalty is a very important point. So, we’ve seen there a number of contracts which simply did bring the profitability you need to run the business successfully.
But it’s a lot difficult to convince these people there due to their 20-year loyalty with the clients that maybe should reduce or even get out. And so which we now put some pressure on but also they saw it and we closed down factories so we have less capacity naturally in Asia.
So, we were able to gradually get out of lower profit contracts which we have especially in that region. The second point is, as we mentioned, we have some ingredient supply contracts for a strategic partner which are related to cocoa beans et cetera, which we – so they were still profitable, but didn’t really bring the return on capital we wanted but we never really focused on that in the past.
But these contractors are coming up for renewal and we said it’s not really attractive at the moment and so we said, look, either the price goes up significantly, and we would renew it as a part of license and we decided to get out of that country.
Andreas Von Arx
Why wasn’t it possible to increase the price?
Antoine de Saint-Affrique
Yes, because that way – the value-add in simply supply kind of ingredients is not a small trading business, it’s not so huge. So there is limitation on how much you can increase the prices.
[Indiscernible] Just have a question about the growth. How much of the growth is organic and how much is about acquisitions and will it be in future the same part?
Antoine de Saint-Affrique
We are in the – the growth is organic, the vast majority of the growth is organic, FrieslandCampina Kievit is the acquisition. We will only kick as part of the second half so you will see some of it, but the vast majority is organic. Some of it is the acquisition of new customers, so worlds finest was in there last year. This year, but that’s the normal process of acquiring customers and doing outsourcing deals. So our growth is fundamentally an organic growth and yes, we have bolt-on acquisitions. It’s a very healthy growth.
Could you tell us a bit how you try to convince the companies like Nestle or Herfy to outsouce their business? Are you in permanent negotiations with them? Or calling on and ask to do it or how does it work?
Antoine de Saint-Affrique
So this isn’t with our strategy - our customers, we have very, very long-term agreements and we have a deep, deep running relationship. So it’s not only a price or commercial relationship. We do things on the ground in terms of sustainability together. I mean, I was in Africa not long ago working together with some customers on our sustainability projects. We do lots of things on the fronts of innovations together. So we host regularly here on in our Chocolate Academy in Wieze co-creation sessions. So we have – and we work together on – these are 20 examples, where we have a deep running relationship at all levels. We are talk in permanence and so very, very close, deep and long-term relationships.
Your EBIT per tonne has come down quite significantly now in the last six months. And is the goal still valid that we want to improve it from – I think in average was 95 to 200, now it’s – I don’t quite understand now it’s, that’s 215, so it’s above that goal. Is that goal still valid and within what timeframe are you trying to achieve it?
Yes, the earlier guidance last year ago was to reach back to 256 EBIT per tonne which we have changed the guidance. So it’s not kind of a specific target anymore. But, let me comment a bit as follows, we have two elements, one is chocolate’s profitability if you would separate it out is going very much in the right direction over the last year.
It is stable with high growth or it’s even slightly increasing if you take the currency fluctuation. What we have seen is a steep drop in the profitability per tonne on the cocoa business, which we announced, so it’s not a surprise, but we also said you may remember six months ago that we want to go back to CHF200 a tonne on the cocoa profitability, which is slightly below the chocolate.
This target still sticks and we see that we are absolutely having the opportunity with all the cocoa leadership activity to get back there but as Antoine said, it takes a while. We also said that we should reach this 200 with a combined ratio of three. We are now at 2.95, so very close to that. But yes, we are sticking to that target that this will recover.
Where is the EBIT per tonne for cocoa now?
It’s around, you can calculate 50 or something like that, it’s quite low. So it’s very low, but it was – we announced that this was a particular low half year, because you know when you look at the combined ratio, I show it was actually down on the conference last fall, so October if I remember, we saw the worst situation in the market and that’s when you book the contract which are running through our business now. And the improved margin we see now are the contracts booked now you are looking six, seven, eight months down the road. So we now really see through our business going the worse situation.
And what about the timeframe, within what timeframe would you like to achieve that?
We said in three years.‘
Antoine de Saint-Affrique
We said the cocoa leadership, our project is a three years project. We said that this year, would be the year where we put in place the cocoa leadership, but where we have also a change in profitability because of the carryover effect that Victor was mentioning and then we would see a progress in our improvement. On the base once again of a three average combined ratio which is a important driver.
Do we have questions on the phone?
Certainly sir, we do have one question queuing at this stage. Please go ahead [Indiscernible] from Bloomberg.
Hi Victor, Hi Antoine, it’s [Indiscernible] from Bloomberg here. You are talking about the combined ratio is improving and how we are likely to see that in the next seven to eight months? First I wanted to get an outlook on the ratio from you guys, where do you see the ratio going and what’s driving this improved profitability on a combined ratio that we are seeing now? Second, you also mentioned profit in West Africa, weak mid crops how weak are the mid crops and how is that likely to impact the increase on the combined ratio that was seen so far and are you expecting a big or a small basket or what sort of basket are you expecting for the season?
Antoine de Saint-Affrique
So, let me take the last one and Victor will complete and take the first one. I mean, if you look at the overall picture from a supply standpoint, last year, we had a small exceedance. This year, we forecast a small deficit, but in a market whereas you seen the volumes almost increasing in a crazy way, actually they are still decreasing. So, we don’t foresee a major structural tension when it comes to supply. Once again, I mean, the deficit of this year is not going to be worse than the exceedance of last year. So it’s a pretty balanced situation if I may say.
Yes, on the ratio development, of course that’s a very, very difficult question. When you look at the fundamentals, most of the capacity, the overcapacity is still there. We are probably the most active company to cut capacity, others are just kind of letting not produce their lines, but they are basically still there, so that situation is not too much better.
The demand side we see improvements, we see an increasing in accelerating demand, so that helps. The good news is however that, as I said, some of the companies struggle a bit and also declines rather work with big guys than these small guys. So, I am cautiously confident that the combined ratio will not drop back to this low level, but I wouldn’t expect it to substantially go up near term either.
Having said that, and Antoine mentioned it, part of our corporate leadership program is really to get less dependent from the combined ratio. How? On one end we sell not an unsignificant amount of fixed combined ratio products. We have contracted our plants to making us independent from the volatility.
Point two is, this combined ratio we show on the chart normally is actually for standard products and we are departing more and more from standard products with the cocoa leadership project Antoine is showing here, Bensdorp is a premium powder which has total different profitability pattern independent from the combined ratio.
If we gradually bring up the share of these products and we do and we see actually quite a nice increase already in the last few months, we will not be that much dependent on the combined ratio.
And the very last point, Antoine is too technical, the combined ratio is different in Brazil than in North America, than in Europe and then Asia and if we manage it global which is although one part of the cocoa leadership project, we try to push the product into the market with the best performance and they exist. Not many companies can do that so easily as we can do. So we try together somewhat less dependent on that comparison.
And what the expectations are for the West African mid-crops?
Antoine de Saint-Affrique
South African or African?
The West African mid-crops?
Well, it’s in the – I mean, Ivory Coast is coming a bit low, Ghana is coming nicely. So, probably a small deficit, but not a drama. We have more questions?
We have no further questions on the line at this time.
Antoine de Saint-Affrique
Good, well, thank you then everyone. You are most welcome to enjoy some of the chocolate academy wonders next door if you wish so, our chefs have been working since the morning and will be working the whole day. So, thanks a lot for the questions. Thanks for the attention and obviously you know where to find us for additional questions if you have any.
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