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Barry Callebaut shares tumble as cocoa margin squeeze tells

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Shares in Barry Callebaut tumbled after the chocolate giant unveiled below-forecast earnings and cut its profits target, citing the dent to cocoa processing margins from elevated bean prices and "low demand" for products.

Shares in the Swiss-based group, which manufactures chocolate for groups such as Kraft and Nestle, tumbled 7.9% in early deals to SFr1090, wiping more than $500m from its stockmarket value.

The stock in lunchtime deals had recovered some ground to stand at SFr1101, a fall of 7.0% on the day.

The decline followed the announcement by Antoine de Saint-Affrique, in his first high profile statement as Barry Callebaut chief executive, of a reduction in the group's longstanding, target to grow sales volumes by 6-8% a year.

The company will now, in a bid to boost margins, aim at average volume growth of 4-6% a year, for the period from the current financial year, which started in September, to 2017-18.

"We will strike a balance between volume growth and enhanced profitability," Mr de Saint-Affrique said.

The group also unveiled the closure of a cocoa grinding plant in Thailand by the end of January, and the "immediate reduction" of capacity at a factory in Malaysia, and a centralisation of powers over "key strategic activities" in processing.

Margin squeeze

The announcements came as Barry Callebaut unveiled earnings of SFr239.9m for the year to the end of August, a drop of 5.9% year on year, and below the SFr254.0m result that investors had expected.

While the group reported increased operating profits in its chocolate-making divisions in Europe and the Americas, and saw only a marginal decline in Asia, the result in the cocoa processing and trading division plunged by 42% to SFr47.2m.

Barry Callebaut said that the decline in cocoa profits reflected a "challenging market environment, characterised by a historically-low combined cocoa ratio" – the overall value of the main processing products, butter and powder, compared with the cost of raw beans.

Indeed, although cocoa prices rose over the year, the group's ability to pass on higher costs was curtailed by "overcapacity" in the world processing sector, and by "low demand for cocoa products".

The combined ratio, currently at about 3.0, fell recently to some 2.8, the lowest on records going back eight years.

'Challenging outlook'

Mr de Saint-Affrique, terming the cocoa products market "historically weak", forecast that the processing business would continue drag on group results.

"We foresee a challenging fiscal year 2015-16 due to the current cocoa products market, which will temporarily affect our profitability," he said.

Initiatives such as the capacity cuts were being taken to "fully leverage our global scale in cocoa, optimise our footprint and strengthen our profitability in the mid-term".

However, group-wide he saw "significant growth opportunities ahead", with the group "committed" to raising volumes ahead of the overall market, as it had done in the latest year, when sales volumes rose by 4.5% compared with a 2.7% decline in the world chocolate confectionery market.

The announcement of cuts in Malaysia represents a further blow to the country's processing industry, which is already suffering a switch by in capacity to Indonesia, a far bigger bean producer, amid a global shift in grinding towards origin countries.

Ivory Coast, the top cocoa producing country, has been a major beneficiary of this trend, emerging as a major grinding destination too.

By Agrimoney.com

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