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Barry Callebaut shares hit all-time high, as cocoa price dip helps profits

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Shares in Barry Callebaut hit an all-time high after the chocolate giant unveiled better-than-expected earnings, besides a recovery in cocoa processing margins, which bodes well for profits ahead.

Shares in the Swiss-based group - which makes chocolate for the likes of Mondelez and Arcor, and processes one-quarter of the global cocoa crop – touched SFr1,353 before easing back to SFr1,345, a loss of 0.2% on the day.

The gain followed the release by the group of results showing earnings of SFr141.2m for the September-to-February half, a gain of 33% year on year, well ahead of the SFR121m result that investors had expected.

The increase came despite shrinkage of 2.1% in the world chocolate confectionery market during the period, according to data from analysis group Nielsen, with the North American market contracting by 3.4%.

"Markets are difficult everywhere, particularly in confectionery in the US," said Antoine de Saint-Affrique, the company's chief executive.

Margin growth

Barry Callebaut's sales by volume rose by 1.4% to 946,782 tonnes, helped by the acquisitions of a vending business from dairy giant FrieslandCampina, and a Belgian chocolate factory from Mondelez, which owns chocolate brands such as Milka and Cote d'Or.

Revenues gained 2.5% to SFr3.54bn as the impact of the extra volumes was enhanced by a "better product mix", while margins gained a boost from the results of a company shake-up which has seen it focus on more lucrative operations and contracts.

In the group's cocoa business, "the intentional phase-out of less profitable contracts has now been completed," helping the division achieve a 77% jump in operating profits to SFr19.7m, despite a drop of 5.0% to 217,975 tonnes in sales volumes.

Cocoa price 'collapse'

Barry Callebaut also highlighted the boost to cocoa processing margins from a "collapse" in bean prices, which last month touched $1,881 a tonne in New York, the lowest for a spot futures contract since October 2008.

"Fundamentally, the price drop reflects good weather conditions which will lead to a record crop in Ivory Coast and a big surplus in the 2016-17 cocoa season overall," the group said.

Marex Spectron this week estimated the world cocoa output surplus at an all-time high of 400,000 tonnes.

Processing profitability recovers

The drop in bean prices has supported grinding margins, a trend also enhanced by relatively tight market stocks of the processing products – cocoa butter and cocoa powder – after a spell of weak profitability discouraged activity.

The so-called "combined ratio", which compares the value of cocoa butter and powder with the cost of raw beans, "has further improved over the first half of the current fiscal year due to a tight product supply situation and lower cocoa bean prices", Barry Callebaut said.

Indeed, the margin recovered last month to a three-year high of 3.5, company data showed.

The comments came as the European Cocoa Association revealed that European cocoa processors ground 339,485 tonnes of cocoa beans in the January-to-March period, a rise of 1.1% year on year,

The figure tallied with market expectations of a small rise in volumes, although some commentators foresee bigger gains ahead as the impact of the recovery in the combined ratio feeds through.

Target maintained

Barry Callebaut added that it was standing by its mid-term guidance of raising volumes by 4-6% in the three years to 2017-18, growth which it pledges to exceed in raised operating profits.

"Whilst markets remain volatile, we have built a healthy chocolate portfolio and expect the good momentum to continue," Mr de Saint-Affrique said.

By Mike Verdin

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