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Edited Transcript of BARN.S earnings conference call or presentation 6-Nov-19 10:30am GMT

Full Year 2019 Barry Callebaut AG Earnings Call

Zurich Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Barry Callebaut AG earnings conference call or presentation Wednesday, November 6, 2019 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antoine Bernard de Saint-Affrique

Barry Callebaut AG - CEO

* Claudia Pedretti

Barry Callebaut AG - Head of IR

* Remco Steenbergen

Barry Callebaut AG - CFO

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Conference Call Participants

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* Alain-Sebastian Oberhuber

MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD

* Andreas von Arx

Baader-Helvea Equity Research - Analyst

* Arthur John Reeves

Barclays Bank PLC, Research Division - Analyst

* John Mark Ennis

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jon Cox

Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the full year results of the 2018/'19 fiscal year analyst conference. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 6th of November, 2019.

And I would like to now turn the conference over to your speaker today, Claudia Pedretti, Head of Investor Relations. Please go ahead.

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Claudia Pedretti, Barry Callebaut AG - Head of IR [2]

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Good morning, ladies and gentlemen, in the room and on the webcast. Welcome to our full year results conference for the fiscal year 2018/'19, which ended on August 31. My name is Claudia Pedretti, and I'm Head of Investor Relations. I'm here today with our CEO, Antoine de Saint-Affrique; and our CFO, Remco Steenbergen, who will present the results to you.

Please be reminded that the information given during this conference contains some forward-looking statements, which reflects the best of our current knowledge. Actual results may be different. Furthermore, we would like to inform you that this conference is being recorded.

This is our agenda for today. Antoine will start with presenting you the highlights of the year, then Remco will lead you through the financial review. And after that, Antoine will share with you his remarks on strategy and outlook. We will finish the presentation with opening the floor for questions and answers.

And with that, I hand over to Antoine.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [3]

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Thank you, Claudia. Good morning, everyone, in the room and on the line. It's, as always, a huge pleasure to have all of you in our CHOCOLATE ACADEMY here in Zürich. But this time, it's a very special pleasure for 2 reasons: first, obviously because the results are very strong; but also because I remember, I was standing here 4 years ago giving a new guidance, and 4 years down the road, we have delivered in full on the guidance.

So as said, this year, again, we delivered a very strong set of results. Our sales grew in volume by 5.1%, well above the chocolate and confectionery market growth of 1.8%. Our growth was profitable, with strong growth of EBIT up 11.9% in local currency, and net profit, up 14.2%, if you exclude the onetime costs of bond repayments. We maintained a very good cash discipline, which resulted in a free cash flow of CHF 290 million. On the base of these strong results, we will propose to the shareholders a dividend of CHF 26 whilst we are already in the new guidance and entirely focused on further growing our company, and by the way, doing so profitably.

I thought it was worth taking a few minutes to reflect on how our smart growth agenda, which, as I said, we launched 4 years ago, has helped us deliver. The numbers speak by themselves, whether you look at the key growth drivers: Emerging Markets doubled its volume share, Outsourcing added over 150,000 tonnes, and Gourmet & Specialty grew over 8% per year; whether you look at our EBIT development: EBIT grew on average double-digit, 3x faster than volume growth; and of course, I'm sure all of you remember the R of smart growth, standing for returns. Our consistent focus on returns and cash is paying off. Net debt was substantially reduced, and return on invested capital increased to 13.2%.

Let's go back now to the yearly results. You're all familiar with this graph. It shows you the growth quarter-per-quarter for cocoa and chocolate. And it is a great illustration, if it was at all needed, to the fact that if we have quarter-by-quarter volatility, we have a great long-term consistency, which is why we have a midterm guidance not a quarter or a yearly guidance.

As anticipated, we had a strong back half of the year. Sales volume in the chocolate business continues to consistently outperform the market, delivering a strong volume growth of 5.9%. And after a slow start, Global Cocoa accelerated in the second half of the year, posting an average growth of 2.4%.

Our growth continued to be broad-based across all our strategic drivers. Emerging Markets grew at 9.7%, actually if you exclude cocoa, it grew at 12.7%, and makes up 35% of the total volume of the group. Long-term Partnerships and Outsourcing grew in line with the company at 5.2% in volume. Gourmet & Specialty, when you exclude Beverage, had another good year at 6.1% in volume. We had, as we anticipated, weak performance in Beverage, which we're addressing by bringing a number of changes to the business. We are confident it should be back on track in the second half of this year. Our Gourmet & Specialties, as you know, accounts for about 12% of our global volume, but is one of more value-accretive business.

This year was again a very rich and in some ways a transformative year for the business. Let me just highlight a few aspects of it. We continue to grow and expand -- laying the growth for the future across Emerging Markets with acquisitions like Inforum, with new factories, with capacity expansion like in Côte d'Ivoire or with new academies like the one in Beijing. But we also kept investing in our core markets with capacity expansion or with the building of a new global distribution center in Belgium.

We continued working on our costs and our financial drivers. As you know, we successfully placed EUR 600 million in Schuldschein, improving our debts and our liquidity structure. We are also extremely proud of our progress on sustainability and of the recognition it gets, although we know there is still plenty to be done. In July this year, Barry Callebaut was ranked by Sustainalytics #1 on sustainability out of 178 food companies. That's a great encouragement for us.

And of course, we continue to innovate. We launched Bensdorp Dark Natural. It's a great cocoa powder with a fantastic chocolate taste and a clean label. You will have the opportunity, for those that are here, to taste it next door. We launched in September our Cacaofruit Experience and Wholefruit Chocolate, a chocolate made out of 100% cacaofruit. You will have also the opportunity to experience it, and I'll talk a little bit more about it in the back half of the presentation.

And of course, I cannot talk to you without talking about Ruby chocolate, who keeps growing. It's now available in over 50 countries and in ever more applications. But rather than me talking about it, let me show you a quick movie.

(presentation)

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [4]

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It's a fantastic advertising. It is in Turkish intentionally because I wanted you to be able to count the number of times it says Ruby and Ruby cacao. And there is quite a bit of it. And you can guess that this kind of advertising will come in other language than Turkish sooner rather than later.

And on that, I hand over to Remco.

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Remco Steenbergen, Barry Callebaut AG - CFO [5]

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Thank you, Antoine. Ladies and gentlemen, also good morning to you from my end, and welcome to this full year results conference of Barry Callebaut here in Zürich. I am very, very happy to present to you today another fantastic set of numbers that was achieved during our last fiscal year. So let's have a look.

In fiscal year '18/'19, we again delivered consistently on our smart growth strategy from top to bottom line. Our volume growth of plus 5.1% was well above the underlying market growth of plus 1.8%. Our growth was broad-based across all regions and product groups, and it was also smart growth, driving gross profit up with further improved mix, and it included additional growth investments in our operations.

Our operating profit EBIT grew by plus 12% in local currency, more than double as fast as our volume growth, and reached CHF 601 million. Important to note is that the CHF 601 million EBIT included a strong headwind from currencies of minus CHF 19 million. So versus the prior year, you have to look at a number of CHF 620 million.

Net profit for the year, excluding the net effects of the early repayment of the EUR 250 million bond, increased by 14% in local currency. The reported net profit amounted to CHF 369 million.

We continued our focus on a strong balance sheet, generating a free cash flow of CHF 290 million, which includes the CHF 33 million one-off effect from the early bond repayment. Excluding this CHF 33 million, our cash flow was CHF 323 million, which is at the same level as in prior year, while it included about CHF 60 million more capital expenditure to cater for smartly targeted future growth. As before, we're also showing the free cash flow adjusted for readily marketable inventories.

Let's now look at the contribution from each of the regions. As mentioned before, the growth and improved profit was supported by all regions. Our biggest region, EMEA, showed a strong acceleration in volume growth in the second half of the year, reaching plus 6.1% for the full year. The consolidation of Inforum started in February and [continues] to increase. But even excluding this effect, the organic growth in EMEA was plus 3.9%, and therefore, 4x faster than the underlying chocolate confectionery market.

In Western Europe, food manufacturing continues its healthy volume growth, including the ramp-up for Burton's Biscuits in the United Kingdom. In Eastern Europe, organic volume growth continues to be double-digit, and Gourmet maintained its healthy growth. The operating profit EBIT in local currencies increased in line with volume growth despite the dilutive effect of the first-time consolidation of Inforum.

Region Americas delivered healthy growth and strong profitability. The volume growth reached plus 4.4%, again, well above the underlying markets, and was supported by both Food Manufacturers as well as Gourmet. Operating profit increased by plus 9% in local currencies, reflecting the healthy growth and improved product mix.

In the Region Asia-Pacific, the strong volume growth momentum continues. It is accelerated in the second half of last year and reached in the full year plus 12%, again, significantly ahead of the regional chocolate confectionery market. The volume growth was fueled by regional accounts in food manufacturing (sic) [Food Manufacturers], including the ramp-up for Garudafood. We have deepened our distribution footprint for Gourmet & Specialties in key countries like China, which will further drive future growth. The operating profit grew slightly ahead of volumes in local currencies.

In Global Cocoa, third-party volume grew at a healthy level of plus 2.4%, and operating profit further improved, supported by disciplined execution.

Going back to group level, let's now look at the gross profit bridge. The strong benefits of volume growth was also combined again with the strong positive mix effect, reflecting the continued execution of our smart growth strategy. The contribution from improvements in the cocoa business remained positive. During last year, we have also stepped up our investments in our operations to cater for future growth. Altogether, our gross profit increased by plus 5.1% in local currencies.

As you know, the combined ratio shows the relationship between market prices of cocoa butter and powder in relation to the underlying cocoa bean price. This is a forward-looking curve. Results are normally seen over a 6 to 9 months period. Note that this is only the European ratio, still the most relevant, but we run a global business. Having said that, the combined cocoa ratio, which gives an indication of the trend of the cocoa processing profitability, remains at a healthy level of 3.5x.

The Global cocoa market was balanced with supply and demand growing in parallel.

In July, 2019, Côte d'Ivoire and Ghana announced a living income differential of USD 400 per tonne of cocoa beans, effective with the '20/'21 crop. Other market variables such as the country differentials have increased in the second half of last year, partly anticipating on the introduction of the living incomes differential with the '20/'21 crop.

Let's now look at operating profit development of the year. On top of the record last year, we delivered a strong EBIT growth in local currencies of plus 12%, improving the EBIT to CHF 601 million. Again, this included a CHF 19 million negative currency impact. The focus on smart growth contributed with almost CHF 60 million additional gross profit. We continued to invest in R&D and in sales and marketing to support our innovations and margin-accretive businesses. Overall, we are able to leverage our SG&A expenses, contributing to our EBIT growth.

Our next bridge shows you the development from EBITDA to net profit for the full year '18/'19. Financial items amounted to CHF 148 million, an increase of CHF 47 million compared to last year. This increase can mainly be attributed to the one-off cost of CHF 33 million for the early repayment of the EUR 250 million euro bond in August 2019. The remaining increase was mainly related to the higher average net debt related to the adoption of IFRS 15 and the temporary overlap of the Schuldschein with the aforementioned bond. Excluding these elements, our underlying finance costs were around CHF 110 million.

Income taxes amounted to CHF 84 million with an effective tax rate of 18.6%, which is roughly in line with prior year. This resulted in a reported net profit for the year of CHF 369 million. This means that our net profit on a recurring basis increased by plus 14%.

Let's now go to the long-term development of our key raw material prices. The cocoa bean price, our most important raw material, continues to be volatile and fluctuated during the fiscal year between GBP 1,500 and GBP 1,900 per tonne. On average, the bean price increased by plus 4.5% compared to the prior year. Global demand and supply have been in balance. Sugar prices increased in Europe on average by plus 17% due to a disappointing crop. In contrast, the world market price for sugar declined by minus 3.7% on average due to a production surplus. Dairy prices increased during the fiscal year on average by plus 29% due to deteriorating production conditions and increased demand.

Based on the cost-plus model used in the majority of our business, the volatility of these raw material prices normally does not affect our profitability. However, it has an impact on our working capital.

As part of our smart growth strategy, we have continued to focus on improving our balance sheet and free cash flow generation. We also introduced the adjusted free cash flow in prior reporting as we strive to give you a better view of the underlying free cash flow generation. For your reminder, the adjustment is for cocoa bean components, which the group regards as a readily marketable inventory, and therefore, as cash equivalent.

Let's look at the bridge in a little more detail. Working capital decreased (sic) [increased] by CHF 33 million. That was the result of overall flat inventories. Lower bean inventories were offset by a slight increase in the rest of our inventories to cater for future growth, by stable level of payables and others and by good receivable management with a lower ending balance than last year.

The amount for interest and income tax paid was inflated, mainly due to the one-off costs for the early bond repayment, as mentioned before. As indicated, our capital expenditure increased to CHF 280 million. The increase amount is to cater for future organic growth while the group maintains its focus on investments, the best-supported strategy of smart growth, by selectively approving capital expenditure with a high-return on investments.

We also did step up our investments in IT to further strengthen our backbone, and we invested in the upgrade of existing factories as well as new factories. This has resulted in a free cash flow of CHF 290 million. We believe that this is an excellent achievement, which is also visible in an even stronger balance sheet.

Our net debt further decreased by more than CHF 100 million to CHF 1.3 billion at the end of August 2019. Taking into consideration the cocoa beans and inventory as readily marketable inventories, adjusted net debt amounted to CHF 612 million, a similar level as last year, while having further invested in the growth of the company.

Due to the first-time adoption of IFRS 15, we had to recognize cocoa beans at an earlier stage in the value chain, which led to an adjustment in the opening balance which is reflected in the pro forma numbers.

With that, let's have a look at the numbers and the ratios, which we have again been able to improve. Our net working capital decreased to CHF 1,363 billion from CHF 1,403 billion in the prior period, thanks to good working capital management. Our net debt-to-EBITDA ratio went significantly down from 1.9 to 1.5 due to both higher EBITDA and lower net debt. And the adjusted net debt-to-EBITDA ratio remains at a very low 0.8. As a result, our return on invested capital further increased by 100 basis points to 13.2%. And the return on equity, adjusted for the one-off effects from the early bond repayment, also improved by 80 basis points to 16.5%. Based on these strong results, which we have achieved last year, we will propose to the annual meeting of shareholders a dividend of CHF 26 per share. This is an increase of 8.3% and equals a payout ratio of 39% based on the reported net profit.

And with this, I give the word back to Antoine.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [6]

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Thank you, Remco. Good. Before I move to the outlook, let me say just a few words about our governance.

As you will have seen this morning in the press release, there are 2 important changes to our Board with 2 of our long-standing members stepping down. Jakob Baer is the Vice Chairman. He has been a Board member since 2010, and he's the Chairman of the Audit, Finance, Risk, Quality & Compliance Committee, the AFRQCC Committee. Jakob has been bringing extraordinary value to the company and to the management over his many years of service, and we are all immensely grateful to him. Markus Neuhaus will be proposed to the Board as Vice Chairman and Chairman of the AFRQCC.

Juergen Steinemann, as you know, he is my predecessor and has been a Board member since 2014. He's a member of the Nomination & Compensation Committee. We're all building on his legacy. Juergen has been, since moving from being the leader of the company to being a Board member, extraordinarily supportive of our growth and our people agenda. So a big, big thank you, Juergen, as well.

So to both, on behalf of the Board of Directors, on behalf of the company, and obviously, on my personal behalf, I would like to express our thanks, our deep gratitude for the wisdom, for the support during a phase of very fast growth and global expansion for Barry Callebaut. All the other Board members will stand for reelection for another term of office of 1 year.

And now before opening the floor to questions, let me say a few words of the strategy and on the outlook. As you well know and as we shared with those of you that joined our Investor Day in Wieze, we tried to be extremely consistent in our strategy whilst evolving our execution to try and stay ahead of the curve. I hope therefore that the chart that is on the screen will not come to a surprise to any of you.

We will continue to focus on our 4 pillars of expansion, innovation, cost leadership and sustainability, and we will continue to execute this strategy through the lens of smart growth, which we introduced 4 years ago, aiming at the right balance between volume growth, profit growth and free cash flow delivery.

Looking forward, we see a vast amount of growth opportunities, obviously in Emerging Markets, and Russia is a great example of that. Inforum is totally complementary to our existing business from a technology standpoint, from a footprint standpoint, from a customer standpoint and offers all kinds of opportunities. India is a place where we are barely scratching the surface, and is a chocolate country. Our new factory there will help us to unlock new opportunities. We see the same happening recently in Indonesia. But there are also ample opportunities in developed markets, as we have proven year after year, and which is why we will keep investing there.

Our growth in both volume and profitability is very much supported by our capacity to innovate, to read the trends and to act on them. This is what we are doing every day with our dairy-free range, with our vegan range, with our sugar-reduced solution, with our clean labels solution. And we do that obviously with cocoa and with chocolate. And we also make sure that we do not only innovate at the periphery but also on the very core of our business. This is obviously the logic behind Ruby, which I mentioned earlier, or behind Gold or behind Dark Natural, which I mentioned as well and you'll be able to taste. But we are also obviously looking at what is next, so at ways of reinventing our cocoa and chocolate.

This is what we have just done with our Cacaofruit Experience. Cacao actually is the only fruit in the world where you take the seeds and you throw away the fruit. It didn't make any sense to me, so we tried to look at that. And we realized that there were actually plenty of business opportunities in there in chocolate, and you'll taste Wholefruit Chocolate in a moment for those that are in Zürich, but also with other cocoa-based product. Actually, one of our large customer is selling some of those products already in the U.S. and seems to be happy with that. It's only the beginning. It's the start of a new journey, but it's an exciting one. And rather than me talking at length about it, let me show you what we did for the launch of it.

(presentation)

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [7]

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So the start of an exciting journey. And for those in Zürich, you have the opportunity to taste some of the products. It's -- I love them. Actually, my -- Wholefruit Chocolate is now my favorite chocolate, I must say.

Whilst we drive our expansion and innovation, we are also extraordinarily focused on our cost leadership. Cost leadership is what makes us a preferred outsourcing partner. And the focus is showing at all levels: obviously, in the way we are refinancing our company, but also with a number of structural changes we make step-by-step in the background, almost by stealth, to ensure that we remain cost-competitive: be it in completing our SAP coverage, be it in streamlining or automating some of our processes.

And as you know, we believe that sustainability is a strategic [stake] and one that is core to our business model. Whilst we are proud of the progress we made, we need to keep moving at pace and keep strengthening the impact we have. We try to do so on the ground by leveraging our technology, working with farmers, working with a number of partners, governments, universities, NGOs to develop models that have a real positive impact. We also work at a more innovation-driven level, trying to find new and better ways, for instance, to track and monitor our carbon footprint. I guess that for more on the topic, you'll have to wait for the 4th of December, which is the launch of our third Forever Chocolate report.

So with the proper execution of 4 pillars, we believe there is still a world of opportunities ahead of us and one where we can add value to our customers every step of the way. From cocoa sourcing and cocoa transformation to our chocolate offering, reaching to chefs, local [coffee shops,] to gourmet customers, to manufacturers of all size with great products, with value-adding innovation and services. And there, as I said, we are only at the start of the journey, and we find it a very exciting one.

So the name of the game for us is one of consistency and one of discipline: be consistent with our strategy, be obsessive with our execution whilst permanently reinventing our business model touch by touch.

I couldn't close without mentioning and thinking again the people at Barry Callebaut. Our employees, our 12,000 employees, are at the very heart of every success we have. You simply cannot imagine the energy that Remco and I get when we are in our local operations, and we are there literally all the time, from the passion we see, from the [indiscernible] we see, from the enormous drive you find at absolutely every level of the company. Whilst being now a very large company, Barry Callebaut has managed to retain the culture, the energy, the drive, the simplicity of a small company. We still have progress to make. We can be better on fronts like diversity, but our culture has so many good things that it is just amazing and it's something that fills us with energy every day. This kind of miracle has all to do with the teams, with their passion for cocoa, chocolate, for the customers and for innovation. So big, big, big thank you to the teams.

And it is, in some way, the strength of the team and the breadth of opportunities we see in front of us, which led us a few months ago to renew our midterm guidance for the coming 3 years. You're all familiar with it. It's really consistent with our prior midterm guidance and consists of an average growth of 4% to 6% in volume, an EBIT growth on average above volume growth in local currencies, and obviously, barring any major unforeseen events. We think that the combination of good growth momentum, strong innovation portfolio and continued discipline in execution, what we call actually our smart growth, makes us confident to deliver on it.

And on this, ladies and gentlemen, I conclude this presentation, and I'm going to open the floor and the line for question.

Operator, could you please instruct the participants on the phone? And once you've done that, we'll take some questions in the room first.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [2]

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So let's start in the room.

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Unidentified Company Representative, [3]

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Jon?

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [4]

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Jon Cox, Kepler Cheuvreux. A couple of questions for you. A very solid set of figures, but there was a deceleration in Q4 and North America was sort of pretty much flat. I wondered if you could just sort of talk a little bit about that, what may be behind it. Also the finished goods inventory, obviously, rose quite strongly. I'm just wondering, is that a sign of better business to come in the new financial year?

And then a question on the combined ratio, which obviously is not as strong as it was. What should we think about your cocoa units' profitability? Will it continue to improve EBIT per tonne? Or is there a risk with the combined ratio maybe being slightly lower than it was?

And then just on the growth of the cocoa. Should we assume that, that will continue to grow less than the rest of the business, 1% or 2% volume versus whatever it may be elsewhere?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [5]

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So we'll do a double act. Well, I mean, 5.3% in the quarter is not really a deceleration. Yes, it comes from 10% but, as you know, there is lots and lots of volatility quarter-to-quarter, but it is a number we're actually extremely happy with.

The North America, you have cycles. But there too, we have absolutely no worries, we're not looking quarter-by-quarter. As we say, the long-term performance is much more consistent and predictable than the very short one.

On the finished goods inventories, and I'll leave the other 2 questions to Remco, we made a very, very intentional choice. We've managed our inventories of cocoa beans and cocoa products very, very tightly, but we also made a choice of creating a bit of space for our finished goods inventories to cater for better service to our customers, and growth that will continue.

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Remco Steenbergen, Barry Callebaut AG - CFO [6]

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And let me take on the growth of the cocoa business. As we have said before, the aim is not a target. We don't have a midterm guidance on individual growth, but a low single-digit growth for cocoa is something we aim for and we expect to continue.

On the combined ratio, as you know, Jon, that takes some elements of our cost price into account, but it doesn't take other elements of the cost price into account like a country differential or in the future, a LID is not in the combined ratio where it's still a cost element that we have to consider.

So over time, we would expect the combined ratio to go further up, also with our cost-plus model with cost coming in, and that is similar throughout the industry. But of course, with the LID coming in, there might be some volatility. Again, you have to understand it in the context of the CHF 600 million EBIT where these fluctuations are a small part of that -- the total number. So we would expect to just a continuation of the operation, in line with the midterm guidance we have given.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [7]

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Alain Oberhuber, MainFirst. I have 3 questions. The first is regarding gourmet specialty. What are your intentions to do in order to accelerate growth again after the loss of these 2 Beverage contracts we've seen?

The second is regarding CapEx. What do you expect this year? And could you give us a little bit more details about these factories you are going to open or will be opening soon in Serbia as well as in India?

And then I have a question regarding FX, the actual rates we have today. What could be the impact for 2020 on EBIT?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [8]

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Good. So let me start with Gourmet & Specialties. As we said, I mean we have a very, very solid Gourmet business, which is faring very nicely, which by the way, we keep reinventing all the time. We just changed our distributor network in China to get a deeper reach. We are doing the same or a similar things in India. So we keep building on it each and every time.

We didn't do a good job in Beverage to be honest, which is a small part of our business. We intentionally didn't renew 2 important contracts, but we are too slow in refilling the customer pipeline. So it is very much about a commercial focus. It is very much about broadening our base of customer. It is very much about opening new markets. We have a pretty exciting test that is going on for the last couple of months in U.K. and is looking very promising. So there a good decision, which was not to renew contracts, which frankly speaking, were not bringing enough profitability, but too slow on the boat to refill the customer pipeline.

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Remco Steenbergen, Barry Callebaut AG - CFO [9]

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If you look at the CapEx, [and as you have] CHF 280 million, step up of CHF 60 million, you have to see that in a context when we evaluate for growth. We have business plans, which are underlying these CapEx plans. So we look at the value-creation opportunity, and in that sense, we do invest, right?

We also invest for IT. We have step -- of the CHF 60 million, there's about CHF 15 million more in IT because of the backbone of the organization is strengthening also with the benefit case in terms of leverage.

The growth and the investment in CapEx we do throughout the regions. So we invest indeed in Asia Pacific, like with India, which will be the coming years with the new site. In Europe, as well with the new sites in the Balkans, but also in other places in Europe, in the U.S. as well and in South America. So it's across the board, but it's really value-driven.

I'm personally very, very proud that Barry Callebaut can grow organically on these levels and has so many opportunities for growth and opportunity for value-creation. Where many companies need to do M&A to grow, we can do it ourselves. And, of course, a return when you can have your own investments for growth, your return will come faster and is often better.

So we really focus on top line EBIT but also the ROIC in EBIT. And we keep seeing an ROIC going up by 100 basis points and then ROE going by 80 basis points. That is the game we want to play, and I think it's a very, very good performance we have been doing.

If you think about the FX for the coming year, no one can look in the crystal ball, because it can still fluctuate. As we know, it was down also last year where the FX was actually slightly more than we thought. Some of you might say, "Hey, this CHF 601 million is disappointing," but I want to remind you again, there's CHF 19 million FX in there, if you would look at that CHF 620 million. I think many of the analyst have put in here a number, which is much lower in the FX.

And if the FX would have been different, our EBIT would be more in the range of CHF 605 million to CHF 610 million, so that to keep in mind. Now if you come to the coming year, if you look at the current FX, there's an impact of between CHF 5 million and CHF 10 million for the coming year. But again, it's a crystal ball.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [10]

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Just to complete the answer on CapEx, because you're asking specifics on Serbia and India. India historically, we came very early in India with a relatively small factory. We acquired a tiny factory when we acquired Gertrude Hawk. We are building a factory that will help us cater to a market that is growing very, very fast. So we have plenty of opportunities. The factory will be full actually pretty rapidly, but we have also the opportunity to expand it over time. Same logic for Southeastern Europe.

Serbia is extremely well located from a logistic standpoint. It's a place where -- which is also very favorable for investment. And as you know, we generally tend to build factory when we have already some visibility on how to fill it. So it's an exciting growth prospect.

Yes, and then we'll take one on the line.

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Unidentified Analyst, [11]

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Just 2 follow-up questions, please. The first one is on Gourmet. You said you are confident you have solved the Beverage issue in the second half 2020. You also just mentioned you have projects in the U.K. And so can we expect that you can deliver, including the Beverage business, again, 5% plus volume growth? And can you please just elaborate a bit more how good your visibility is in second half? You will see a turnaround, so do you already discuss new contracts, et cetera?

And the second question is please coming back to the CapEx and also the gross profit impact by CHF 40 million for new growth projects. I remember that 2 years ago, on the [Vito], the CapEx guide was CHF 180 million, CHF 200 million for the next couple of years. Now we are more speaking about CHF 250 million, CHF 300 million. And is the Outsourcing pipeline now looking stronger? Is it better? Which is giving you confidence or is it also the rising complexity you have with all the smaller customers that the growth is becoming more capital intensive?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [12]

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Okay. So let me take the Gourmet and Beverage one. As you know, we don't give quarterly or yearly guidance by -- for the company or by division or even by bits of division like Beverage. We are, I mean, we are confident that what we have taken, will turnaround Beverage. The rest -- I mean, Gourmet is faring very well. I mean, we've seen 6% in the year. We've seen an average of 8% over the many years. So I have no worries there, and I think we should be keeping at a bit, that is the bit we expect.

Beverage, it will take until the second half of the year. We have a number of things that are extremely complex. So we've had some changes within the Beverage operations. We have launched a whole new range of our customers. We have actually launched new types of [products,] new types of distribution in the U.K. Actually, the U.K. has reached already their yearly goal there. I mean, it's a small market, with a view to expand it to the rest of the world on a relatively fast pace. So we will see the turnaround in the back half of the year on Beverage, specifically.

Gourmet, I'm not worried. We do a very systematic job. The -- consistently, we have been growing, as usual, with variation from quarter-to-quarter, but we are renewing the -- or deepening the distribution network in China. We're doing the same in India. So we're doing some fundamental things to prepare also for the next generation of growth.

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Remco Steenbergen, Barry Callebaut AG - CFO [13]

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In terms of the CapEx, yes, since a couple of years ago, of course, the company has become bigger. The organic growth, as you have seen over the last years, has been substantial. We expect also the organic growth to continue, hence, the midterm guidance. So we have CHF 280 million. We would expect this to steadily further increase in the coming years with our midterm guidance. But again, we will look at investments clearly from a value creation opportunity.

I don't think the capacity expansion is so much linked to the diversity of our product portfolio. It is more linked to a putting a complete new factory up like we do in Balkans or India, where we put new lines in. And of course, there are some complexity, but that is minor compared to the amount. So there's leverage on the mix, if that is what you're looking for.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [14]

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And maybe one point of context related to the past, I mean, we announced 200 - 4 years ago when I came in at a point in time where we wanted to refocus on cash and deleverage the company, which we have done. The company has now changed [scales, which goes through] -- and significantly deleveraged, which brings us to a model that is a much more [virtuous] model.

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Remco Steenbergen, Barry Callebaut AG - CFO [15]

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Because just look, our total invested capital is in the CHF 4 billion range, correct? So even CHF 40 million is 1% out of this, right? So the value driving also in ROIC or on ROE return, the CHF 20 million, CHF 30 million or CHF 40 million CapEx will not make a difference. It is more that it is the right investment for the right thing for the growth and the invested capital will not be much impact. It enhanced also the value creation that we can really drive ROIC and ROE up.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [16]

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Operator, any question on the line?

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Operator [17]

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We do have 2 questions on the line.

The first question comes from the line of John Ennis from Goldman Sachs.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]

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A couple of questions from me, please. Just to come back to the Gourmet division. The growth did deteriorate again throughout the course of the year. And of course, you talked all about the issues around the Beverage contracts. But even excluding the Beverage component, that segment performance is well below prior year levels. I guess, could you just give us a bit more color around the drivers of the weakness in the Gourmet division? Outside of the Beverage issues, what's deteriorated there?

And then related to that, is it fair to assume that there is a positive margin mix component from those lost Beverage customers? Or is that margin mix benefit been reinvested to try and stimulate growth, again, for the Gourmet division?

And then my second question is on the free cash flow outlook for next year. You talked about high CapEx. You talked also about an expectation of higher cocoa prices going into next year. Is it fair to assume that you're effectively expecting free cash flow trajectory next year to deteriorate year-on-year? Or is there something else that you can do to help offset that?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [19]

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Good. Let me start with Gourmet. 6% our growth in Gourmet is very good growth to be honest, and we've always said that the -- we would expect Gourmet to fare mid to high-single digit, which we have been our -- consistently delivering. So I'm not -- to be honest, I don't see as a degradation or as a decline there. There is an issue, as we said, in Beverage, which we are tackling. Indeed, we are also reinvesting some of the money to expand into new markets or new customers. But I would say there, it is about keeping the good discipline in Gourmet and turning around Beverage. Nothing new up or down in Gourmet, and a real focus on Beverage.

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Remco Steenbergen, Barry Callebaut AG - CFO [20]

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On the -- John, the margin for Beverage, the choice at that point in time for the 2 customers, because we felt the margin is insufficient, so in that sense, we made a very conscious choice. The volume growth didn't come back as fast as we thought and of course, that also impacts the EBIT. But again, look at the total EBIT generation of the company going from CHF 554 million to CHF 620 million in comparable currency. I mean, a Beverage element of that in terms of EBIT is not material.

In terms of free cash flow, we don't give, again, an outlook on free cash flow going forward. What we have though tried to do is to come up with the adjusted free cash flow, so the cash flow adjusted to bean component because any fluctuation in the bean component comes back in the cost-plus pricing. So that is the starting point we will look at in terms of driving the underlying operating cash flow. You have seen that number to being CHF 257 million last year and that is the basis of also, which we will look on forward.

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John Mark Ennis, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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Can I just quickly come back to Gourmet? In the sense that the 6% growth you cited, I suppose, is more for the full year, but growth, I suppose, did decelerate throughout the year. Are you not worried about the sequential change in the pace of Gourmet growth? Or is that just quarterly volatility that we shouldn't worry about?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [22]

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I would -- I mean, as for all of our business, I wouldn't look at quarterly results. I mean, you have huge volatility from quarter-to-quarter. There are some quarters that are extraordinarily strong, some quarters that are weaker. So I'd look at the rolling 12 months and see how it fares.

We will have -- or I would take an example of a few years ago. Chinese New Year was moving from one time to the other with an amazing quarter here and a weak quarter there and vice versa. So I'd rather -- I mean I'd rather look at longer-term trends there, with an ambition that remains by the way, for us to be mid- to high-single digit -- not a guidance, but an ambition.

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Operator [23]

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We do have 2 further questions. Your next question comes from the line of Andreas von Arx of Baader-Helvea.

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Andreas von Arx, Baader-Helvea Equity Research - Analyst [24]

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First one is, could you give a rough estimate how big your co-creation business is, let's say, the ones you do with Ruby or when you do Magnum ice cream? How much is that in percentage of sales? Is that somewhere between 5% to 10% or higher? And is the growth rate there -- how much significantly higher is it compared to the group? I mean, it's a very high double-digit or any indication would be helpful.

Then with regards to your introduced adjusted net debt metric, I mean, can I here ask if you -- can you tell me what other of your competitors are using such a metric? Just that we get a feeling that it's not very company-specific.

Then I have a third question, might take a second to explain that. But when I look at the 9 months result in food manufacturing, your growth rate was around 6% and the growth rate in Outsourcing as well 6%. So I would assume the growth rate in non-Outsourcing was also 6%. If I look at the fourth quarter, the growth rate in food manufacturing was around 7%.

If I look at the numbers you give for Outsourcing, I get to a growth rate, which is significantly down compared to the previous quarter, let's say, 3%, and the growth rate for the non-Outsourcing part, which is significantly up around -- let's say, around 9%. Is that the market dynamic that you have experienced that, let's say, the non-Outsourcing part in food manufacturing is significantly higher in growth than the quarters before?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [25]

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So let me maybe take the first, and we'll do a duet on the last and the adjusted net debt, Remco will take it.

It's extraordinarily difficult to tell you which part of the business is coming from co-creation or not. The reality is co-creation is at the very heart of the way we work with our customers, we sit everyday with our -- literally everyday with our customers, we co-create their innovation funnel for the future. But we also work with them on how do we add value, how do we get them to express their product with the next promotional event. We see that with the new variants of ice cream, which is seasonal or by adding chocolate prints or adding decorations to their product.

So isolating what is coming from that, from what is the rest is quasi-impossible. And in some ways, it is intentional. The value we are bringing to the customers is not only the fact that we are producing for them in a very, very competitive way. But that we keep feeding them all the time with new concepts, new ideas, because we have the finger on the pulse of the market with our Gourmet, with our chefs, and we keep helping them on the sustainability front. So I would be incapable of answering your questions [straight] there, simply because we don't measure it as a separate activity, because it's at the heart of our business model, which is all the time add value and deepen the relationship with our customers.

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Remco Steenbergen, Barry Callebaut AG - CFO [26]

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Let me take the one on that. You could get me really going on that one.

Competitor, let's take Cocoa Olam. Olam is considered a trading company by the rating agencies, and therefore, readily marketable inventories are deducted to a certain extent from that when all the metrics are being calculated. Cargill is also considered in this overall context as being a trading company. We understand -- or through their private company that some similar benefits are being given. We believe personally that our business model is actually stronger than being only in cocoa or compares to [Cargill.] And we don't get that benefit, because we are placed in a box, which is [cased off] a producer. We don't think that is right. We also don't think that is right because in our P&L, it's a cost-plus model, and it's a working capital element. It's not a P&L element. So we believe that our competitors get an advantage when they go to the market to get bond borrowing and get a rating, which we do not get. So I am protesting against that treatment probably they're on the phone. I apologize to be that vocal about it, but it's not a secret that I have this opinion.

I also believe that in that respect, in the whole Schuldschein, which we have been issued during the last year, we got a more favorable treatment than the bond markets would have given us, and this is also one of the underlying reasons in my personal opinion. So in that sense, I think we are fully in our right, I think, to also show you next to the gross debt competitors also show you adjusted so you can make up your mind as well for yourself.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [27]

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Remco, by the way, correct me if I'm wrong, but we are taking a very conservative approach, we show only the beans. We have plenty of other readily marketable inventory that we don't count in, and some other people count in and be it the -- be it the dairy, be it the sugar, be it the finished cocoa products, all of which have a daily market price.

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Remco Steenbergen, Barry Callebaut AG - CFO [28]

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Then I think the last question, Andreas, you asked was about FM and the part which is Outsourcing and the part which is non-Outsourcing growth. As I could quickly follow your math, I think your math is 100% correct. But of course, it doesn't work that way. Our Outsourcing comes with peaks, and it comes with lows. If you look at last year, I think our Outsourcing volume for the full year was 36,000 tonnes, our additional outsourcing. We aim between 30,000 and 40,000 tonnes of outsourcing, on average, per year over our guidance period, and I think we hit that number last year. If you're going to compare Q1 versus Q2 versus Q3, Q4, that mathematically is correct, but it doesn't work in terms of the business cycle.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [29]

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Plus the question is well, if you had a big outsourcing that came a year ago, and you come into a comparator that lapses in quarter 4, and you don't have the same sequence of outsourcing, the math will show something, but it doesn't say so much.

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Andreas von Arx, Baader-Helvea Equity Research - Analyst [30]

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All right. I was more wondering about the non-Outsourcing part, where the growth rates changed so significantly. I mean, on the Outsourcing, it's clear.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [31]

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To be very honest, we look at the -- we look at our chocolate FM business altogether end-to-end. We look at our pipeline of Outsourcing, but we don't really look at the anniversaries of our various outsourcings. So I wouldn't be able to tell you. But we will revert back to you on that, because I don't have the numbers top of my head there.

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Operator [32]

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Your last question comes from the line of Arthur Reeves from Barclays.

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Arthur John Reeves, Barclays Bank PLC, Research Division - Analyst [33]

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Arthur Reeves from Barclays here. You haven't talked that much today about traceability in the supply chain. I know it's important to you. I think it's increasingly important to your customers. Can you just give a quick update on where you are with that? Are more customers being interested in what you can offer? And is that going to be a driver of growth next year?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [34]

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So we -- I mean we do work obviously with traceability. Traceability is a big buzzword because I mean at which level do you define traceability? So do you define it at SKU level? Which ingredients, to which [desk?] So depending on the needs of the customer, depending on the willingness to pay also of the customer because there is a cost to very, very, very detailed traceability. We can offer all kinds of degrees of traceability. We go to the end degrees with some customers. We do what is market practice on a number of things, which is mass balance with a number of other ones, and we have some that are, frankly speaking -- think that this is something for tomorrow not for today.

We are [traded] in traceability in cocoa and in particular, in cocoa in Africa. We are, and I'll say it in advance of the sustainability report, so I have to ask for forgiveness, but we have mapped now to the n degree, 170 -- almost 7,000 farms where we have geolocalization, where we have the age of the trees, where we have the -- I mean the people that are living on the farm, so that we can have a clear understanding of what they are capable of producing. And therefore, if they produce more than what they are capable of producing, what does it say? Are they taking cocoa from the forest? Are they using people they shouldn't be using?

So we are -- and we can, by the way, apply to the database artificial intelligence or deep statistics, so we are moving pretty fast there.

We've mapped what we think -- all the farms we could found within 25 kilometers of our protective forest in Côte d'Ivoire as part of our commitment of Cocoa and Forests Initiative, so it's about 43,000 farms.

I cannot promise it's all the farms, but it's all the farms we can find, so it's as close as 100% as we can prove. Same story to be able to say well, we don't source for those -- I mean, from those people, because we don't want our cocoa that is coming from the forest. So we are going actually quite a long way, of also in a very, very systematic way to traceability.

Good. Any question on the room? Yes?

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Unidentified Analyst, [35]

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The question -- because Remco mentioned the severe increase in the price of milk. What are the real issues there? And are they recurring?

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Remco Steenbergen, Barry Callebaut AG - CFO [36]

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If you look at the milk market, it's quite a regional market, correct? You have quite a European market. U.S. is separate, you have New Zealand. If you look at the European market, not in the last year, but the year before, the quota system from the EU was dismantled. And in that sense, the prices was freed up. The volume went up and the prices went down to a very, very low level. And that you see in this year coming up, but you have to compare that with an extremely low level the year before. So in that sense, it's not I think an alarming thing in the overall context.

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Unidentified Analyst, [37]

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[So it's kind of exactly the same] as sugar?

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Remco Steenbergen, Barry Callebaut AG - CFO [38]

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Yes. Yes.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [39]

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Jon?

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Jon Cox, Kepler Cheuvreux, Research Division - Head of Swiss Equities and Head of European Consumer Equities [40]

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Yes, just a couple of follow up questions. Any best guess for your net interest charge this year? Because you've obviously done a lot of work in refinancing at a lower rate et cetera.

Second question is just on the cash and dividend. Your payout ratio is slightly improving. Should we see that continuing to improve? Your balance sheet is improving. Any thoughts on what you want to do with the balance sheet, M&A, anything like that?

And then just the last one, a bit of a cheeky one. You mentioned over the last midterm plan, 4 years, you've been doubling your EBIT or even tripling your EBIT growth compared to your volume growth. Is that the ambition in the current plan?

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Remco Steenbergen, Barry Callebaut AG - CFO [41]

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Let me start with the first, the interest, which is what said as well in my speech that the underlying financing costs were about CHF 110 million. But we've all also said that with the prepayment of the bond and Schuldschein coming in, our average interest cost would come down by CHF 10 million. So in the math of those 2, you can make an estimate for going forward, of course, also depending working capital development.

In terms of value creation, what we really want to do as a company is to grow and to bring ROIC and ROE up over time. So in that [context,] you have to see a strong balance sheet, because that has to remain underlying. Now what could influence that? If there would be M&A, [we could do and goodwill,] et cetera, it could have a dip on the short term, but it would always have the purpose within the longer term we want to create the value.

We're very clear on managing a solid balance sheet. It's important for us, because when commodity prices go up, we want to be able to finance that in a very efficient way because it's not impacting our underlying profitability with, again, with the cost-plus model. So in that sense, we want to remain with a solid balance sheet. But depending on opportunities, we will keep on investing to drive further value creation.

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [42]

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Let me take the last 2 questions, including the cheeky one.

I mean, the payout ratio, if you look at our dividend policy, payout ratio has been very stable over the last couple of years. So we have been hovering around 39%, there was 1 year at 37%, but over the last 4 years, we have been pretty consistent, and we see no reason to change it.

We think it's a good balance between returning our dividend to the shareholder, also investing into the company and therefore, increasing the value of the company and therefore, returning also value to the shareholders. So we think we have a good balance as a growth company.

As to the cheeky question, Jon, we have given a very clear guidance. We have no intent 6 months into the guidance to change the guidance. Obviously, we will do our best to positively surprise and consistently deliver, but the guidance is the guidance, if I may say.

Yes, [John]?

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Unidentified Analyst, [43]

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It's a question on the living income differential in Ghana and the Ivory Coast. And in theory, the global market price should deteriorate by $400. Now you can buy futures already I think for 2021. I mean, are you already doing this because the customers want this? Are you waiting that the global bean prices coming down? How are you dealing with the situation? What kind of support are you seeing from your customers that they are willing to accept the price increase on the living income differential?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [44]

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What we can do -- the living income difference is a fact. It's in place. By the way, we are supporting it, and we are buying, as do the other players in the market. So it's there, and I see no reason why it shouldn't stay. Okay, so it's just a fact.

How the markets react to that. I mean, actually you've seen places where the living income differential doesn't exist, actually adjusting upwards, so you see the differentials going up.

So for the moment, the adjustment is not downwards. The adjustments is rather upwards on the market.

How the markets will play in the very long term. I mean, if it was all rational, well crop was good, we expect a balanced crop, so we see no reason for major inflation in the market or major collapse in the market, which as you well know, there are a number of people that are actually active in the market, which is not necessarily linked to the fundamentals.

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Unidentified Analyst, [45]

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But when you speak to your customers on the cost-plus approach, you already agreed with them that you can pass on the full $400. Or do they want you to digest something of this?

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Antoine Bernard de Saint-Affrique, Barry Callebaut AG - CEO [46]

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Listen, we are working on a cost-plus model, and the cost-plus model is a -- I mean is a cost-plus model for the majority of our customers. So it is there. It is in some ways a number that have been put there for the government. It's a fact. It's now part of the -- or will be part of the price in the coming year. What you'll see on the way to the -- to there, because it's for the 2021 crop is you'll see quite a bit of volatility. As people are managing their exposure to the market, so you'll see some people trying to do [indiscernible]. So you're going to see a bit of activity in the market. But in the long-term, it stabilizes the market at a slightly different level.

Good. If there are no more questions, thank you for those that were on the line. For those that are in Zürich, I invite you to go next door to taste all kinds of great products, be it Ruby, be it Wholefruit Chocolate, but also plenty of other specialties and for that, thanks a lot for being there this morning.

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Operator [47]

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That does conclude our conference for today. Thank you for participating. You may all now disconnect.