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Elevated cocoa processing margins, near six-year high, buoy Barry Callebaut profits

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Barry Callebaut underlined the improved margins for cocoa processors, spurred by price weakness in the bean, as it unveiled a bigger-than-expected rise in profits, and extended a target for earnings and volume growth.

 

The world’s biggest chocolate maker, which manufactures for giants such as Kraft and Mondelez, unveiled earnings up 38% at SFr302.9m for the year to the end of August, ahead of the SFr293m figure that investors had expected.

 

The improvement reflected in part growth in sales volumes, which added 4.4% to 1.91m tonnes, “well above” expansion of 0.1% in the global confectionery market over the period, as reported by Nielsen.

 

The June-to-August quarter had seen “an acceleration”, to 9.2% in Barry Callebaut’s volume growth, the group said, reflecting an “improved market environment”, as well as a “strong performance” by all three of its regional operating divisions.

 

Over the year, the group’s Asian division reported particular expansion, with operating profits up 20% at SFr38.7m on sales up 13.4% at SFr347.9m, “fuelled by fast growth in countries such as China and Indonesia”.

 

‘Steep price erosion’

 

But the largest improvement was in the group’s commodity-focused global cocoa division, which saw earnings more than treble, to SFr64.9m, boosted by factors including the phasing out of less profitable contracts, and by “more favourable market conditions in the cocoa products market”.

 

Barry Callebaut highlighted that cocoa prices dropped 34% to £1,522 a tonne over the financial year, underpinned by boosts to production of the bean in Cote d’Ivoire and Ghana, the top growers, from “favourable weather conditions, and an increase in farmgate prices”.

 

“This led to an accelerated production and thus to the biggest surplus in the last six years, triggering a steep price erosion,” the group said, underlining that there was a “surplus” of beans “for the entire [2016-17] season”, which ended in September.

 

Elevated grinding margins

 

Meanwhile, values of cocoa processing products – powder, as used in the likes of chocolate biscuits and drinks, and butter, used largely in chocolate bars – remained supported by an uptick in demand at a time of weakened inventories.

 

The so-called “combined cocoa ratio” – the combined value of butter and powder compared with that of raw beans – “rebounded over the course of the fiscal year, due to a temporarily tight supply of cocoa products, low cocoa bean prices and slowly improving demand for chocolate products”, Barry Callebaut said.

 

Indeed, the combined ratio had topped 3.7 earlier in the autumn, the highest ion six years, before easing back to a current level of 3.6, with values of butter particularly buoyant.

 

Sugar forecasts

 

The group also noted falling values of another major raw material, sugar, which “tumbled by 40% in view”, undermined by the prospect of a return to a world production surplus in the sweetener.

 

Indeed, Barry Callebaut forecast “a potential surplus of 5m tonnes of sugar for 2017-18 compared to a deficit of 4.3m tonnes in 2016-17”.

 

Market estimates for the world sugar surplus in 2017-18 are showing marked variation, with Datagro on Tuesday cutting its forecast to 430,000 tonnes from 2.95m tonnes, while Louis Dreyfus forecast surpluses of about 3m tonnes for both this season and 2018-19.

 

Last week, Green Pool raised its forecast for the surplus by some 2.7m tonnes to 9.80m tonnes.

 

Group outlook

 

Antoine de Saint-Affrique, the Barry Callebaut chief executive, cited the “more supportive cocoa products market, besides “slightly improving global demand for chocolate”, in a decision to extend the group’s growth target for an extra year, into 2018-19.

 

The target is for operating profits to grow faster than volumes, which are – “barring any major unforeseen events” - seen averaging 4-6% a year from 2015-16.

 

Barry Callebaut shares eased 1.2% to SFr1545 in morning deals.

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