Barry Callebaut AG (OTCPK:BYCBF) Q2 2022 Earnings Conference Call April 13, 2022 4:00 AM ET
Company Participants
Claudia Pedretti – Head, IR
Peter Boone – CEO
Ben De Schryver – CFO
Conference Call Participants
Pascal Boll – Stifel
Joern Iffert – UBS
Christoph Gretler – Credit Suisse
Jon Cox – Kepler
Andreas von Arx – Baader
Alex Sloane – Barclays
Operator
[Operator Instructions].
Claudia Pedretti
[Multiple Speakers] Please be reminded that the information given during this call contains forward-looking statements, which reflect the best of current knowledge, while actual results may be different. Furthermore, we would like to inform you that this webcast is being recorded.
This is our agenda for today. Peter will present to you the highlights of the half year, followed by Ben’s update you on the financial results. Peter will then give you remarks on strategy and ESG before sharing the outlook with you. We will finish the webcast with a question-and-answer session. Please be reminded that dial in by phone to ask a live question. You will get instructions from the operator once more at the end of this presentation.
And with that, I hand over to Peter.
Peter Boone
Thank you, Claudia. So good morning, ladies and gentlemen, and welcome to our half year 2021/2022 Results Conference. Easter is around the corner. And as you know, and it’s a very busy time for many of our customers, but also, of course, a great moment to talk about cocoa and chocolates.
First and foremost, I’m happy to share a strong set of numbers for the first six months of the fiscal year. We are very pleased to see strong volume growth, solid profitability and continued good cash generation. Sales volume increased by 8.7%, driven by an outstanding chocolate performance of 9.9%.
Operating profit recurring of CHF 318 million shows a solid 8% increase. In the actual inflatory environment, this profit performance is of course a testimony to the strength of our cost plus model.
EBIT reported up 12.3% in local currencies held by a onetime Brazilian tax benefit. And last but not least, we continue to strengthen our balance sheet with an adjusted free cash flow of CHF 167 million. Ben will share later in more detail on how we have achieved those strong results. But before I do that, I think it’s right to first take a little bit of time to reflect on the situation in Russia and Ukraine.
Let me be clear. Like everyone, I have been profoundly impacted by the images of people having to relieve behind their homes, family and friends due to the war in Ukraine. We have put our first focus, rightfully so, on keeping up people safe. And offering help to those who are forced to flee their homes. Of course, we can never, never ever do enough. But I’m proud to how the body call about community, my colleagues and the executive committee is showing their heart for those in the spare, some examples are mentioned on the slide.
And the question then, of course, is asked and rightfully so, whether we should continue to stay in Russia. Questions raised by many internally as well as externally. And as CEO and also as an executive leadership team of Barry Callebaut, where he first and foremost for employees. Will depend to us for their work and hence for taking care of their families.
I love working for Barry Callebaut, because it feels, as I’ve said many times before, it feels like working for a family. It works and it feels like a family company. And this family also includes 500 colleagues in Russia. Supporting it is at the heart of Barry Callebaut. This is expressed on the one hand, through our efforts to support Ukrainian refugees, but also through our efforts to keep our factories running and the jobs of our colleagues secured in Russia.
I cannot stress enough the war in Russia, the war in Ukraine by Russia was started by the Russian government, not by the Russian people. This is a distinction we have kept in mind in taking these difficult decisions. Furthermore, we are a company that will support its customers. You know customer focus is one of our values.
Our customers bring daily food to consumers in all kind of shapes and forms. It was called essential during the pandemic for a region and is regarded as part of the daily diet of many, pulling away from our customers and leaving them without a possibility to bring their products to consumers, we have not asked for this war does not feel right to us. This is why we continue to be present in Russia.
We have no direct presence in Ukraine and three factories in Russia, which are producing for the local Russian market. So we have mainly a local for local operation. The exposure is in the low single digits, so less than 5%. And in a global company, we are, therefore, an exposure we can manage.
We have suspended new capital investments in Russia, and we are continuously checking our business partners to ensure we are compliant with international trade. Based on the increases of perceived default ratios, we have made an impairment of financial assets of CHF 5 million, which is reflected in our results.
We will continue to monitor closely and assess the situation as circumstances evolve. Let me close by saying, and I hope, I really hope so that the piece for settlement will soon be fund.
All right. Let me go back then to our strong numbers for the first half. You are familiar with this graph. We are consistently showing it. And you see, of course, reflected on this chart, the volume development per quarter for cocoa and chocolate. They added one bar to really see the impact in the first half.
Reflected in these bars is that you see our continued strong volume growth, driven by an outstanding chocolate business growing 9.9% in the first half, 5 times more than the underlying chocolate and confectionery markets. We always say we have to grow faster than the market 5 times is a lot. And volume is surpassing the pre-pandemic levels of fiscal year 2018 and ’19. We are really in that sense, are back and a bigger company than before the pandemic.
In Global Cocoa volume was back to positive growth of 4%. Let’s have a closer look at our key growth drivers on the next slide, which all contributed to the good results. Outsourcing, a very important one for us, increased by 7.3%, in this time, mainly driven by the ramp-up of contracts in Eastern Europe.
Total growth of 8.7% in emerging markets is a good achievement and driven by very important markets like Mexico, India and China. And thanks to our strong teams in the shale business model for our Gourmet business, our Gourmet Specialty business continued its strong volume growth far beyond the recovery, and clearly above pre-COVID volume levels.
You can see from this slide that we are not short of important milestones in the first six months. This illustrated the healthy growth path, the group and we as a company are on.
In October, we opened the chocolate box in Loca, Belgium. The world’s largest and most sustainable chocolate distribution center. With this, we are further building our cost leadership and accelerating our customer service. Also enlarge our geographic and customer footprint in Serbia and Australia.
We extended two strategic supply agreements and asserted ourselves as the long-term partner of choice for leading confectionary players like Hershey and Grupo Bimbo. I’m also extremely proud of Barry Callebaut is being recognized by CDP as global climate leader.
Of course, especially for me always is innovation, one of our four pillars of our strategy, and we continue to ride the ways which are out there, and create ways if we think they are relevant for our customers and our consumers. With Callebaut next, a range of dark and milky tasting chocolates for chefs and artisans we cater to the growing consumer demand for plant-based alternatives. Callebaut NXT is exclusively produced in our first fully dairy-free chocolate factory in Norderstedt close to Amberg.
In our recent innovation, Elix and Evocao which we have presented before, were both nominated for the World Innovation Award. I’m very happy to share that Evocao which is a unique chocolate made from 100% pure cocoafruit brought home in the end a trophy for best artisan product. Do not miss the opportunity to take some of the creations with Evocao after this presentation.
And with that, I hand over to Ben, who will introduce you to the key figures.
Ben De Schryver
Thank you, Peter. Good morning, ladies and gentlemen. It is my pleasure to walk you through the financial review. Let me explain to you first, the nonrecurring parts of this half year results. As in the following slides, I will always refer to the recurring results.
The recent decision by the Brazilian Supreme Court, which is applicable to all taxpayers led to a positive effect related to the recovery of indirect tax credits for prior fiscal year periods. Affecting our operating profit, EBIT in Global Cocoa, Region Americas as well as our group’s net profit for the period. Our recurring numbers, therefore, excludes the positive effect of CHF 12.8 million on EBIT and CHF 12.7 million on net profit. Please note that the negative effect of the impairment of financial assets is part of the recurring results.
Now let’s have a look at the details. As highlighted by Peter before, we achieved a strong volume growth of 8.7%. Our sales revenue amounted to CHF 4 billion, up 16.5% in local currencies. The increase was impacted by the overall inflationary environment, which we managed through our cost-plus pricing model for the majority of our business.
We reported a solid operating profit EBIT recurring of CHF 318.1 million, up 8% in local currencies. As indicated by Peter, the amount was achieved despite the impairment of financial assets. Excluding this negative effect, EBIT growth in local currencies would have been above our volume growth.
Net profit for the period amounted to CHF 212.1 million, up 3.6% in local currencies. As we saw continued good cash generation with an adjusted free cash flow of CHF 167 million. We will get into more details in the coming slides. But first, let’s have a look at the recent performance on Slide 13.
Our strong volume growth was broad-based in the regions and ahead of the underlying chocolate confectionary markets. Region EMEA reported strong volume growth of 11.6% or excluding the first-time consolidation of ECC at 10.3% organic, substantially ahead of a flat underlying chocolate confectionary market according to Nielsen.
Food manufacturers reported healthy growth in Western Europe and a strong ramp-up of outsourcing in double EMEA. Gourmet & Specialties volumes continue to be overall strong. Our EBIT in local currencies growing in line with volume growth reflects a solid profitability. Despite the impairment of the financial assets in Russia and investments for future growth.
Region Americas reported accelerated volume growth of 6.3%, twice as fast as the underlying market. The strong growth was supported by both food manufacturers and Gourmet across this region. The goods growth, in particular with specialty chocolates products and Gourmet is also reflected in the strong profitability with an EBIT recurring, up 14% in local currencies. Testimony to our acceleration of the value ladder.
The vibrant volume growth continued in region, Asia Pacific with 13.7%. The underlying market growth according to Nielsen shows a similar growth number. However, this does not include the Australian market, which was still suffering from COVID-19 restrictions.
Our Food Manufacturers business continued to grow double digits, supported by key markets like China, India and Japan. Fiber volume growth continued also there in Gourmet & Specialties. Due to upfront investments in growth, mainly in Australia, EBIT growth remains behind volume growth in the first six months under review. However, the regional profitability remains well ahead of the group’s average.
Volume growth in Global Cocoa normalized during the second quarter, leading to a 4% increase in the first six months. The operating profit recurring declined 16.5%, as anticipated, the impact of the imbalance cocoa market has bottomed out, which is reflected in the EBIT per tonne, which is at a stable level compared to the second half of prior year.
Going back at the group level now. And let’s have a look at the gross profit bridge. We are pleased with the positive contribution from volume and mix. As expected, Cocoa had a negative impact and year content for an impairment of financial assets in Russia related to an increase of the received default ratios. Overall, our gross profit increased by CHF 41 million or 7.2% in local currencies.
The cocoa combined ratio shows as you know, the relationship between market prices of cocoa butter and powder in relation to the underlying cocoa bean price. This is a forward-looking cost result of normalcy over a six to nine-months period. This is also the European ratio, which is the most relevant. We run a global business. And as you know, the combined ratio gives only a broad indication on industry’s profitability, but it does not reflect some important variables such as country differentials and living income differentials.
The ripple effects of COVID-19 led to an imbalance cocoa market, which, however, seems to have bottomed out, reflected in a stable combined ratio of 3.4 times. The smart growth execution and our improved position, thanks to the Cocoa Leadership project helps us absorb market fluctuations better, while we are, of course, not immune to it.
Next slide, please. Let’s move on operating Profit Bridge on Slide 16. As just explained, thanks to the positive volume and mix effect, gross profit contributed to an additional CHF 41 million, including the aforementioned impairment of financial assets.
As business activities further normalized post COVID-19, SG&A costs increased by CHF 17 million in the first half of 2021, 2022 However, in line or even at a slower pace than volume growth attributed to sound cost management. This resulted in an operating profit EBIT recurring increase of 8% in local currencies.
Currencies only had a minor impact leading to an EBIT recurring of CHF 318.1 million. The reported EBIT amounted to CHF 330.9 million.
The next bridge shows you the development from EBITDA to net profit recurring for the half year. Financial items increased to CHF 59 million on the back of higher interest — benchmark interest rates and impairments on cash in emerging markets, mainly Russia. Income taxes amounted to CHF 47.1 million, corresponding to a stable effective tax rate of 17.4%. The recurring tax rate, i.e., excluding the positive effect of the indirect tax credit recovery in Brazil was at 17.7%, in line with our expectations. Resulting in a net profit recurring increase of 3.6% to CHF 213 million.
On Slide 18, you can see the long-term development of our key raw materials. Thanks to our cost plus model used in the majority of our business, fluctuations of raw materials are passed to on and do not have an effect on our profitability. However, it has an impact on our working capital.
During the first six months of 2021, 2022, the terminal market price of cocoa beans fluctuated between GBP 1,636 and GBP 1,877 per tonne and closed at GBP 1,690. This corresponds to a small increase of 2.9% compared to prior year period average price.
Sugar prices in Europe increased on average by 31.6% in the period under review, mainly due to historically low stocks and the resumption of demand. The world market price for sugar increased on average with 23.3% on the back of substantially lower Brazilian crop and a macro environment driven by high energy prices and record freight costs.
The strongest increase was recorded for dairy prices, up 46% compared to the average price in the prior year period. While demand remained dynamic, global milk supply declined sharply as the rising inflation squeezed farmer profits, which resulted in a strong price rally.
I’m pleased with the continued strong cash generation, which resulted in a strong adjusted free cash flow of CHF 167 million. Let’s look at the details on this page.
Working capital increased, however, at a slower pace than the group’s volume growth, receivables increased in line with the strong business momentum amidst the global supply chain constraints, inventory was higher to ensure product availability. These effects, however, were largely offset by higher payables. Interest and income taxes paid amounted to CHF 68 million, up CHF 59 million in the prior year period due to the higher benchmark interest rates.
We continue to invest in our capabilities, which enables our future growth. Capital expenditure of CHF 104 million was lower compared to prior year, which included the greenfield investments of Serbia and India.
The reported free cash flow amounted to negative CHF 133 million, adjusted for the effect of cocoa-beans regarded as readily marketable inventories, RMI, the adjusted free cash flow was as strong as in the prior year period at CHF 167 million.
Our net debt was further reduced by CHF 159 million. Considering the cocoa beans and inventory as readily marketable inventories, RMI, the adjusted net debt decreased by CHF 101 million with CHF 561 million at the end of February 2022. The good progress on debt reduction is even more obvious when separating the portion of debt related to IFRS 16 leases, which have increased in the first half year, mainly due to the opening of our global distribution centers in local.
At the end of the financial review, let’s have a look at the key balance sheet numbers and ratios on Slide 21. Our net working capital only slightly increased to CHF 1.599 billion from CHF 1.579 billion in February 2021. Thanks to overall good working capital management.
Our ROIC and ROE substantially increased with ROIC up 250 basis points to 11.7% and ROE up 280 basis points to 15.6% compared to February 2021. As mentioned before, net debt was further reduced, leading to a low adjusted net debt-to-EBITDA ratio of 0.7 times compared to 1.1 times in prior year.
And with that, I hand over back to you, Peter.
Peter Boone
Thank you, Ben. So let’s now have a look at our long-term strategy and how we want to continue on a healthy and, I think, exciting growth path. You’ve seen this slide already several times and today will not be my last time, I’m afraid. It’s a solid strategy. It brought us a lot, and we are consistently executing this. Barry Callebaut has been and will be consistent with our long-term strategy. We continue to focus on the four strategic pillars, expansion, innovation, cost leadership and sustainability with a smart execution and focus on return on cash generation.
As shared with you before, Smart the general direction is on accelerating up the value ladder. — it’s smart growth, but we believe there’s a huge opportunity to further accelerate up the value ladder and see us making good progression on that gives me a lot of confidence.
If you look at the different pillars on expansion, let’s start there in Gourmet. We have sharpened our business model by broadening our customer footprint, both in segment and geography. You see Africa, Africa often displayed in previous times, as an origin for cocoa. It’s now also markets which we are opening for our Gourmet business, which is very, very exciting.
Innovation, we will continue to leverage our global scale and roll out innovation solutions from things in the origins like Caramel and dark to healthy indulgence like sugar reduced.
As the largest producer of sugar-reduced chocolate products in the world, we can offer our customers a wide range of exciting solutions. Cost leadership, we will continue to improve our operational efficiency, as always, and invest in the modernization of our factory footprint as is exemplified by our recent decision to start a consultation on the potential closure of our Moreton factory in the U.K.
And as you know, sustainability is at the heart of our long-term strategy and it’s great to see that the management of environmental, social and governance risks is appreciated by the market. To illustrate, since 2017, we have been consistently rated AA MSCI, and top rated by Sustainalytics since 2019.
Great to have this third-party appreciation, but rest assured, we will not become complacent and continue to make sustainable chocolate the norm as we have captured and expressed in Forever Chocolate.
Ladies and gentlemen, let me summarize. We have a solid strategy if we execute successfully. With our world-class team of over 30,000 employees and colleagues around the globe. This makes us confident that we can deliver on our midterm guidance.
And finally, I look forward to see some of you again in as little as a month at our new headquarter office here in Zurich on May 11 on Capital Market Day.
And with this, ladies and gentlemen, I conclude this presentation, and I would like to open up the floor for questions.
Question-and-Answer Session
Q – Unidentified Analyst
Good morning. I would have two questions. Maybe first on cocoa profitability was clearly lower than last year. Could you elaborate a little bit on the cocoa business mix effects? Also what you mean with bottoming out of the market.
And a second one on general cost, I can imagine costs everywhere goes through the roof. How much is really in your cost plus model? And what do you expect looking forward?
Peter Boone
Yes. So on cocoa side, what we mean by bottom up. So when you look at our profitability, second half of last year was quite affected. And when you look also profitability per metric ton. So it has bottomed out. So our profitability is now in line with our second half of last year. But of course, when you compare it with the first half of last year, you see a dilutive effect.
While that this is the effect that we have been talking about before, the imbalance of the cocoa market supply and demand. So there was definitely a depression on the cocoa butter share prices. Cocoa powder prices were quite stable, but cocoa butter prices were over quite low because that mainly consumed in Western Europe and in North America. So there was a demand that was affected supply was there. So that created more pricing pressure.
In the meantime, also the transport costs went up in the second half of last year as well. So that’s now bottomed out. That’s where we feel very confident that we have a business model as well focusing on premium cocoa powders that we have seen the worst of that storm. Of course, you see it also in the chocolate numbers. Chocolate numbers are increasing. So you see it in the new term numbers as well, so which is a normalization of the imbalance that you have seen before as well.
So on cocoa, that’s the situation. We mentioned that a little bit in the last quarter as well that, we are not out of the storm yet, but it was already normalizing them.
When you look at the overall inflation side, first of all, indeed, our cost plus is protecting us very well on the inflation side, I feel very proud on the efforts that the teams have done. You see that very clearly is that our revenue went up, of course, up much faster at the 16.5%. You see the cost being reflected there of dairy prices and just labor market energy prices, so we’re passing it on to our customers.
So in that sense, when you look at overall costs, more than 70% is in raw materials, where it’s quite normal. You see increases, you see decreases. Our customers are quite use to that. Then you had the second part of it, which is about 10% is on the freight cost. That’s something you saw last fiscal year. There’s certainly a strong increase. It took us some time to pass it on because you — especially when you have contracts where you have CIF or DDP freight rates that is already negotiated, of course, it takes some time. That has already taken into effect. That’s quite stable. The freight cost, they have not decreased significantly, but they have not increased further as well.
And then the last part, which is also less than 10%. We’re talking about manufacturing cost, manufacturing cost, labor cost energy cost as well. There we see, of course, also big increases. But of course, when you look at the overall cost, that’s less than 10% of our overall cost base.
There, the name of the game is making sure that we pass it on as fast as we can to our clients as well, also having for size on inflation rates going forward. Especially when you’re pricing your chocolate business out in the next three months, the next six months, so you need to make sure that you take that into account. But I can tell you that it is in our cost plus model as well.
So overall, it is a very good business to be a good model to be in, in a very high inflation environment. Having said this, pricing is not the only thing. So of course, we — as a CFO and the finance community, we need to make sure that we pass it on. But we, of course, have to help our customers as well. The price of chocolate is only one thing. The total cost is always very important, making sure that chocolate is available close to our customers.
Having a global footprint, of course, helps us tremendously as well that we don’t have to ship it around the world. We are very close to our customers. We are, of course, helping our customers as well in terms of making sure that there is also innovation, innovation not always in a sense to the outside world, but innovation also in terms of the cost of use, making sure that they can use chocolate in a most efficient way, also reformulations and so on as well. So we are helping you for sure our B2B customers to be successful in the market as well.
Ben De Schryver
You’re right. It’s Ben, it’s not the first time we see inflation. We are aware both worked in markets whereas a lot of inflation as well. And yes, the cost plus model helps us. But at the same moment, we partner with our customers. And we try, of course, to support the managing the impact on their business.
Unidentified Analyst
[Indiscernible] from Reuters. You mentioned you gave us this update on Russia, and you mentioned internal and external pressures to maybe withdraw from Russia or take further steps. Can you say a bit more about that? I was wondering who is putting pressure on you? Is it maybe also investors? Is it staff? Is it customers. Can you say just anything else?
Ben De Schryver
Even my kids. So of course, it’s a discussion, which we all are in — and these are the right questions to raise. And therefore, we have Peter, CEO of Barry Callebaut, but also as an executive committee. We just have reflected what is the best thing for us to respond to this situation. And for us, as I reflected before, we have traded off just what the company we are, and we are a company that wants to stay with these employees want to support its customers, and we believe that’s the best decision to take at this moment.
So if you talk about pressures, you see other companies taking other decisions. But that’s their trade-off in that sense, we can only look at our situation and what is the best for us and our people and our customers in it.
Pascal Boll
Pascal Boll from Stifel. Good morning. A few questions from my side. Coming back to the combined ratio, if I look at the chart you show in your presentation. I see that the combined ratio stabilized but not really improved by much. So should we — I mean, you mentioned an improvement for the profitability in H2, but based on this combined ratio, it doesn’t look that we should expect much of a tailwind? Or do I miss it in the practice?
My second question on Russia. Do you face there any supply chain issues? We also read in the newspaper that are the companies face problems to source inputs into the country because they cannot manage the logistics. Insurance companies are not willing to ensure the transportations. Any comments on this?
And then also on your business outlook, I mean you confirm time and time again, your confidence into reaching the midterm targets. However, now the situation in Russia changed. It’s less than 5% of your volumes, but it clearly should have an impact on your volumes. So what is your best guess here also for the next financial year? Thank you.
Peter Boone
Okay. So let me answer first on the combined ratio as well. Yes, indeed, it has stabilized. By the way, when you look at the historical graph and so on, it’s not like it’s stabilized at the lower level as well. The one part of it that is still affected at this moment is a cocoa butter. You see the cocoa butter has taken quite a bit. It took some time for the cocoa powder to normalize as well because that’s the two was communicating vessels. So you have one product, cocoa beans that are then being transformed into powders and to butter.
So now you see the demand of cocoa powder is still very strong. Cocoa powder goes into a lot of applications as well. As a butter was under pressure, it took some time, but the powder has called up and that is helping, of course, our confidence in the future as well. As you know, we keep on focusing coming out of our cocoa leadership on the premium cocoa powders. That’s really where we want to be. We want to add value on the powder side with our brands of brands. And already one-third of our overall powder volumes is actually in premium cocoa powders.
And so that’s something that we want to focus on. So that’s why we are more confident as well. That’s where we can add value. That’s what where we want to be in as well. Of course, when you sell cocoa power, you also have to sell cocoa butter as well. So that’s something that we have, of course, as an integrated player compared to pure processes. We have, of course, a big outlet in chocolate business as well. Cocoa butter being at the lower end, does help our chocolate business to grow as well.
Cocoa butter being affordable means that the chocolate overall is still quite affordable from the Cocoa component as well. So that keeps everything in balance as well. I always refer Pascal to the past — all of our business units have to work very closely with each other. So more cocoa, more chocolate as well. And here, you see it as well that actually our chocolate business is benefiting from that cocoa butter prices at the moment? You want to second Ben?
Ben De Schryver
So let me reflect on the question on Russia. Of course, a lot of disturbances of supply chains, in general, we have flows coming also from abroad. But as you know, the food system is not sanctioned. So those flows still can still come in. In the first couple of weeks, we saw a lot of problems to get the transport. But at this moment, that pressure is a little bit less. So at this moment, we can still support our local-for-local business and keep our factories running.
So we have seen the last couple of years, quite some issues with supply chains. It requires a lot of flexibility. We have a daily crisis management, just we are reviewing every day how we will make this happen. But until today, that operation is still running as it should.
If you then look at the outlook, yes, as I said, low single digit. That’s the kind of exposure we have of Russia. First, let’s see, we cannot predict how this will pan out, but we look at that day by day. The beauty, of course, of a global business in the end that we — through our portfolio of markets, we are a little bit protected. And therefore, we are still confident, otherwise, we have carefully chosen that word to born indeed just confirm again, omni-term guidance of 5% to 7%.
So although Russia is there, and we know there is a risk that’s also wide as the impairment taken for defaulting customers as a risk. We believe on a total business, we can manage. And to be honest, I didn’t see any half in my 10 years in Barry Callebaut, we didn’t have markets going down or businesses are going down. So in that sense, we are used to that.
Joern Iffert
Joern from UBS. Thanks for taking my questions. The first one would be please on your gourmet business. Do you currently see the benefits of the return of consumer street traffic? Or is it more a balance between your different channels you have won in the last 12 months that there may be is less traffic QCR going now more to the restaurants, to the classical restaurants. So just get a feeling about the Gourmet momentum going to the second half, if there is a benefit from the opening?
The second question would be, please, you also highlighted that you want to go into many new regions to drive your business, not only in Gourmet, also in outsourcing. At the same time, your marketing expense in the first half were down around CHF 7 million versus 2020. So do you have new sources, new channels for marketing, which is making this more efficient structurally? Or should we expect a ramping up of the SG&A cost base in the next 12 months?
And the last question, if I may ask, on the outsourcing trend. Do you see the priority and visibility that the cost pressure many consumer companies have at the moment that the interest for outsourcing and clarity to sign more deals is really increasing or not? Thank you.
Peter Boone
Thank you, Joern. So let me take the question on Gourmet. We have seen, of course, already for quite some months and quarters good growth in Gourmet. And of course, we came from far because the pandemic has definitely its impact and broke down some of our channels where we were selling our Gourmet products.
It also helped us to reflect on our route to market and to identify opportunities in channels which we were not that strong in the past. And I’ve referred to bakery as a segment. We were much more focused on confectionery on Phase 3, the kind of bakery segment, which held itself pretty strong through the pandemic, was clearly an area where we were underrepresented where we could fight for more share. And therefore, we have been driving our route to market in those areas.
And QSR another where we normally, we are not very strong. So if you see the strong results in Gourmet & Specialties, I believe, yes, there’s absolutely still markets coming back. Hey, there’s even markets still in lockdown, as you know. But it’s really a structural kind of better penetrating the market getting more reach, getting more end users, reaching them. And therefore, I think that’s a very healthy and stable and sustainable way to drive the Gourmet business. And we hope that — and we expect that this kind of strong momentum will continue in the second half.
I will take the question about the spend for marketing. It’s not like we are less focused on marketing, absolutely on the contrary. But you do see a shift a bit in terms of where marketing is being spent — we have much more churn now on the digital front, which is, of course, quite a bit in our CapEx expenditure as well, but also using or you see it in your G&A cost more in IM/IT, where we’re spending more on more money as well. So it’s — we still want to do a lot of physical events — and of course, in the first six months, not all physical events were still happening yet as well.
For example, when you look at Asia Pacific, not that people could not travel freely between the different countries, so we did not do a lot of efforts in terms of trade shows. But we did focus quite a bit on the use of Salesforce and our digital push and pull. That is actually going to help us tremendously in the future. And actually, this is going to be further intensified over the coming years as well. That physical presence together with the digital presence, that’s actually our way of working going forward.
Yes, we always reported the amount of kind of people we train. On an annual basis. And you saw through the pandemic enormous rise of people we reached instead of the 120,000, 130,000, 150,000 per year. We certainly went to 340,000, and that is the power of digital, because we have learned that we can create that pool. So to really get end users pulling our products through the distribution, we can activate that very well in a digital way. And the tools available in that respect are only getting more powerful.
So and then on outsourcing, we love outsourcing, as you know, we have been driving our growth has been driven for a significant part over the years through outsourcing. We still have a kind of 30,000 to 40,000 tonnes per annum, which we want to add in that way. The health of the market is still captive. So we believe there are many, many opportunities still out there. We will go after them.
It’s always a little bit unpredictable when they’ve come through, but what gives us, of course, very — a lot of confidence is that Bimbo and a Hershey both renew their contracts. So that shows that the model is right. And economically, it’s interesting to work with us, partner with us to outsource to us. But it sometimes is more an emotional decision, and that takes time for a lot of customers, and we therefore we always say it will come a crisis absolutely at a moment to reevaluate outsourcing again for our customers.
And I therefore, expect more opportunities to come and we can present in the years to come.
Joern Iffert
I’d like to know about the price increase of inflation are a major worry for the consumers. What I’d like to know is if the price of sugar increased by 31.6% and dairy by 46%, how much of that extra does that represent for your customers — and — while in the short term, the cost plus model protects you against the inflation, what is the — will there be an impact in your view on the volumes down the line?
And my second question would be on your projections for raw materials. At the moment, much of the focus of the markets on grains, but there could be some other potential side effects on the price of animal feed or. And so what are your — how do you see the potential impact of the war in Ukraine on your material specifically, what are the impact on dairy and sugar?
Peter Boone
Yes. First of all, I don’t have the exact formula because different chocolate recipes, different percentages of sugar, different percentages of dairy as well. Of course, dark chocolates, white chocolate, milk chocolate as well. So Sugar is the cheapest ingredient overall in chocolate. So it’s between 40% to 50% of the overall recipe. But even if the price goes up at 30%, it’s not going to drive hugely, the chocolate price up as well. The same actually for dairy, because dairy has a lower percentage in the overall product. Depends on how milkier chocolate is as well. But it does have an impact. And that’s the beauty of like you alluded to as well here, cost plus, we are in the first place passed on to our B2B customers.
But indeed, over time as well, it’s chocolate becoming too expensive. I don’t think so, to be honest. Because when you look at the basket of products, when you go to the supermarket as well, because of the cocoa prices, which is the biggest impact on the price, actually, chocolate and you see it at other products in your basket, they have gone up much higher than the chocolate item.
As such, it’s — yes, it’s becoming more expensive, but it’s not like what we have seen in the past, when there was a crisis on the cocoa bean, cocoa beans, which was doubled in implies at a certain point because of civil war in IV cost. That was only linked to the chocolate products. And even then, we saw sub-products still being consumed, and we didn’t see a decrease in the market. So overall, I’m very confident.
Second proof that I want to bring, even though the underlying market itself is not growing or it’s muted growth, Barry Callebaut has a very strong track record in beating those numbers. You saw it on the chocolate result in the first six months, 9.9% chocolate growth, underlying confection market 2%. So we have been always beating that market as well. There’s plenty of applications that we can sell our products in. But it’s not only chocolate confectionary, could be a chocolate in an ice cream, chocolate in bakery items and so on as well, which reflect, of course, the price in a less speed than a full chocolate bar.
So overall, as such, I feel very strong that we will continue to see growth numbers. And again, as Peter mentioned, is more than 50% of the market is still captive. There are not customers of Barry Callebaut yet. And that’s a target that we set ourselves for our team as well.
Ben De Schryver
And I want to stress again the enormous power, a little bit more on your second question. The enormous power we have in R&D in reformulation. It’s important just to help our customers out. How to deal with inflation and how to deal with the increasing prices, but it also helps when some of the raw materials are under pressure.
So less oils [ph] are lot used in our compounds. Some of them will be less available, but our R&D teams have already worked on replacing them and making sure it will, therefore, have a limited impact on our business.
Christoph Gretler
As Chris Gretler from Credit Suisse. I just wanted to come back on this cost-plus model. Actually, you mentioned that the majority of your business is actually protected that way. Could you maybe discuss what is not now sold under the cost plus model in your business?
Peter Boone
So it’s part of our Gourmet business that is on price lift being sold. But even there, on price list, we do a sort of cost plus as well, but it’s, of course, the price list is a little bit of a time lag. Typically, we do a six-month pricing as well. But that we, of course, want to always price ahead of increases as well when we have foresight we, of course, want to price it in as well.
So in terms of the majority of our volume is food manufacturers. Is cocoa. That’s all on a contract basis, part of our Gourmet business is on prices. That’s where you have a slightly different way of working. But at the end, the result is the same.
Christoph Gretler
And just on the food manufacturing business, is this basically kind of a real-time pass on of the cost? Or is there also some time lag in there?
Peter Boone
There’s a real-time pass on. First of all, on the raw materials, where I said it is more than 70% of the cost on the freight — there could be a little bit of time lag and that only has an effect. And suddenly, you see a spike of freight rates going up very high, which you saw in the second half of last year — or last fiscal year. Then, of course, if you already have negotiated a chocolate contract for the next three months delivery, that is the undelivered terms, then you — of course, you have to eat that increase.
Now that’s being — the prices of freight have stabilized. So that’s already now, of course, priced in. I’m an optimistic person. At the end when it goes down, it should be positively reflected in the future as well.
Unidentified Analyst
Management thanks for taking my questions. [Indiscernible] from AWP. First, a very recent topic, of course, for you, it’s already almost over the Easter business, but can you be a little — can you talk a little bit about if you see a lot of recovery effects there? And just how the Easter business is going in general.
And I would also like to know if you could be a little bit — if you could give more information about these impairment losses on in emerging markets, in particular in Russia. Can you quantify them and give a little more information about it? And also the factory in the U.K. that you are planning to maybe close. Can you just give an overall view of your business in the U.K.? How many factories do you have total and how many employees? What’s the exposure there? Thank you.
Peter Boone
Okay. Let me start with the Easter season. I think we are getting more and more out of lockdowns. So I hope people can really come together with their families with their friends and that leads to good chocolate consumption. And that’s in the end to fill out of the products our customers have already made two, three months ago. So — it should — if there’s still an Easter effect, it should be in the early months of this first half, because we really often get the products hold for five months in advance. But my sense is, I still see a lot of customers. I’ve seen many acts over the last couple of weeks, and I really hope therefore that is a good Easter for our customers.
Ben De Schryver
I will take the second question on impairment losses, some more details there. So — the impairment, first of all, above EBIT, the impact is linked to Russia, it’s about CHF 5 million. Why that is a perceived default ratio of our clients or basically the counterparty risk, of course, when the war started, so the perceived default ratios have increased. So it’s in terms of good accounting practices, we need to make sure that we reflect that in an impairment as well.
It’s — I want to stress that it’s not, of course, a cash item as such is that customers have defaulted, but it’s just about a good accounting practice to reflect that in your results. CHF 5 million is above EBIT. Financial items, there are also some more aspects as well. That’s more related to the cash balances in ruble and so on as well. It is broader than just Russia, of course, you have other countries like Turkey and so on as well as the affected. I don’t have a specific number on that, but on EBIT is a CHF 5 million impact.
Peter Boone
So we have three sites in the U.K. Our biggest site is Banbury. But when we had the outsourcing deal signed three years ago, of course, hey, that was a great deal, good business for us. The Moreton site only has 45 people. And what we — just in the last three years, found out is that it’s optimal to keep producing out of that site. Maybe we better integrate that volume into our site in Banbury. So, as you know, we have started the concentration process. It still will take a little bit of time. We want to take good care of our colleagues and bring that hopefully to a closure, in the future. But we are still in the middle of the consultation.
Unidentified Analyst
[Indiscernible].
Ben De Schryver
They are more, say, close to Liverpool, and that is 200 kilometers away from Banbury. So if you look at all options and hopefully, as we really care for our people, and we will also taking good care of our colleagues in Moreton. But at times, it’s painful. But at times, it’s just we need to be competitive. We need to look continuously, as it’s one of our pillars also cost leadership. You need to look at that we are efficiently set up and in that sense, scale helps in factories.
Claudia Pedretti
We also have questions on the phone and on the chat, I just take one from the line, please operator.
Operator
The first question from the phone comes from Jon Cox from Kepler. Please go ahead.
Jon Cox
Yes, good morning guys, Ben, Peter, Claudia. Congratulations on the strong figures, we saw this morning on the top line, certainly, just a questions around Russia again. Am I right to assume that profitability in Russia is actually below the group given, I guess, you’re probably more exposed either into cocoa and less exposed into the Gourmet business. That’s the first question.
Second question, just wondering where the assets are in Russia, i.e., what’s the book value of the net assets left in Russia, just a rough figure. I presume it’s less than CHF 100 million, but if you could confirm that. That would be pretty useful.
And then maybe one for Peter. Obviously, at the Capital Markets Day coming up, the big strategy. You’ve seen to have said today, we don’t expect any change in the strategy in terms of the smart growth. Just wondering on the top line because, obviously, you had this sort of step up to 5% to 7% volume growth, EBIT growth post COVID, reflecting the sort of rebound, which obviously is coming through in various parts of your business. Just wondering after the FY24 whether you assume then it would be more prudent to go back to your previous 4% to 6%. Or do you think momentum is so strong with the business this sort of 5% to 7% range can be sustain for a couple more years. Thank you.
Peter Boone
Thanks, Jon. So on the first question, in terms of Russia profitability, first, the bigger picture is less than 5% of our overall Barry Callebaut volume. On the profitability side, it is not that materially different compared to our typical mix, what we see in emerging markets as well. So there is nothing that to read through. Of course, in these markets, it is — it’s not only chocolate, but we also sell quite a bit of compound products that is going in a lot of biscuits and ice cream and so on as well. But I would not read too much in terms of the — hey, is it more dilutive or not.
On the asset side, you called out a number very good that you mentioned CHF 100 million, indeed less than CHF 100 million in terms of assets when you add everything up from — you’ve seen it from the past as well, the investments we have done, that’s a fair assessment on the overall case. But at the moment, we are operating our three facilities, that’s not even a question at this point. But yes, when you look at the bigger picture and so on, that’s the overall asset value.
Ben De Schryver
Okay. And Jon, I have to see the capable market there, of course, and we have enough time there to go more into depth about how we look at our markets and our position. I don’t expect for me right now to give you a kind of new guidance. That’s not the time yet. But yes, I’m quite optimistic about the demand. We see a lot of customers who are eager to work with us.
Our 4-pillar strategy is clearly what differentiates us well in this market. And therefore, we also need to take into consideration how much can you execute? If you just look at this first half, we do 93,000 tons of product in addition or on top of last year. You just need to try to pay out 93 million-kilo of product. That’s a lot to execute.
And in that sense that is what we have to start to trade off in going into the detail, what is the right guidance going forward is absolutely, hey, what is the demand, but also what can we execute because in our business, a promise is a promise. And we need to make sure that we keep our execution in excellence state.
Jon Cox
Maybe just a bit of an add-on just in terms of momentum then going into shorter term into the second half. Clearly, you’re very strong print, I think it was over 10% when just looking at your chocolate business in Q2. The — your guidance is on average 5% to 7%, but you would imagine it’s not impossible to think that maybe your volume growth this year will be above that 7% because of the momentum we’ve seen in H1, notwithstanding, of course, the comparable get a little bit difficult in H2. What are your thoughts on that?
Peter Boone
Yes, of course, there we cannot say too much and we don’t give half year or annual kind of guidance. You just here in my words, but also in what we have brought out this morning, the confidence that we will deliver. And you know that the first periods were a little bit below that guidance. So we need to see an acceleration and we see that locally in this first half of this year. We see good momentum in the business. And therefore, with confidence, we are confirming just the midterm guidance.
Jon Cox
Great. Congratulations again.
Operator
The next question comes from Andreas von Arx from Baader Healvea. Please go ahead.
Andreas von Arx
Can you hear me sorry, Hello?
Peter Boone
Yes, we can hear you.
Andreas von Arx
Yes. Great. Thank you. First, I have quick ones for Ben. Could you elaborate in the cash flow statement on the other noncash effective items, which have moved from positive 15% to negative 23%? Just wondering what is that apart from the CHF 5 million you mentioned what is the other drivers here of the minus CHF 23 million?
And then the CapEx also looks a bit low compared to the trend. Is that just a timing issue? Or is there a change in what to expect, let’s say, for midterm?
And then I have a question for Peter. If I look at the half year, I mean, in the half year, your volume growth was faster than the recurring EBIT growth. That’s, of course, not what your guidance is. Are you confident enough to say that this will turn in the second half? So that we can now finally see a faster profitability growth, maybe also given the recovery is being left. And if you would have to name three main drivers or elements that will be the key drivers of your smart growth going forward? I mean that’s just practical examples that you’re rolling out in the company. What would be that three elements that are driving the faster profitability growth and volume growth midterm. Thank you very much.
Peter Boone
Thank you, Andreas. So first of all, I don’t have the exact data here in front of me, what you’re referring to, but I can definitely get back on it. But first of all, on the free cash flow. I feel very strong about these results. First of all, on the adjusted free cash flow, it’s about the same level as last year, but we have grown our business significantly. We have grown our value-added business significantly as well. We have actually — when you look at our revenue as well, revenue went up by 16.5%.
Also that’s something that you carry more on your balance sheet as well. So our invoice prices went up as part of our cost plus as well. So it has — I feel very strong about the results because when you look at that our payables have really compensated that part and our overall net working capital actually did not increase that much.
Taking into account as well that the raw material prices have increased as well on average. We talked about sugar, we talked about dairy prices. Cocoa itself has been quite okay, but still a small increase as well. That’s also on your balance sheet as well. And despite of that, we actually generated quite good adjusted free cash flow. When you look at reported, it’s even stronger, but I don’t want you to focus too much on that as well because we have to be fair, cocoa beans, I see the pure sense of cash, you heard me before. It’s when we have more cocoa beans in stock when the crop is a little bit earlier or a little bit later, see that effect, of course, passing through to our balance sheet quite nicely.
That’s something you see very clearly the reported cash flow. Cost started a little bit later, so price effect was slightly negative, but overall, that we have benefited from this first year, first half year, second half of the year, that could be slightly different. But again, these are the purest sense of cash. We can always turn that immediately to cash when you turn it to the stock market as well.
So overall, I don’t, I agree with a view that there was a weak performance actually was a very strong performance in the first half.
Andreas von Arx
All right. And then on smart growth, absolutely is what we are driving, and I see it across our business. Of course, then sometimes it doesn’t fully come out in the overall numbers. We have always talked about the cocoa business. You see that business, of course, has been impacted by the disbalance in the market out there, and therefore, the performance is dragging down a little bit the overall profit numbers.
But then if you go to the regions, the chocolate regions, you see smart growth coming through very successfully. So you see it, of course, very strongly in Americas, but you see it also in EMEA because there, you should remember that we took this impairment for financial assets in Russia. So that we took CHF5 million out of the recurring results. If you would bring that back into the EMEA business, you will also see a very good growth of our EBIT over their volume growth.
Peter Boone
How are we going to drive smart growth examples, first and foremost, we talk a lot about Gourmet, driving custom mix is always good. So we know that smaller customers have a higher profitability than the bigger customers. So managing your customer mix seeing the acceleration now in Gourmet is absolutely one of the way to drive smart growth. We personally — now I started as Head of Innovation in Barry Callebaut about 10 years ago. It has a big heart there, and I’m very happy to see that specialty compounds, specialty chocolates are a huge driver of the smart growth. And you see our Barry Callebaut NXT, which is launched here in Europe, but you see a huge kind of acceleration of sugar-reduced, sugar-free plant-based, all these kind of solutions driving the numbers in Americas and in Europe.
If you then look at Asia, Asia is a little bit — that’s an emerging market. That’s where we are investing a lot that sometimes where we still have to make sure that we invest into our footprint, to claim market leadership, to be the heart and engine of the cocoa and chocolate industry in the future.
And as we have reported, we did the GKC acquisition in Australia, just to get a footprint there. We had a plan. And I have to be honest, also through supply chains through suppliers, we cannot always deliver the equipment exactly on the moment that you need it. You had a little bit of delay that has brought the numbers down for Australia and therefore direct the profit number is also a little bit down for Asia.
But in general, even in Asia, we always say, hey, try to look at your customer mix, try to look at your product mix. And then you asked a three-year Andrea. So let me give a third one. The moment you are done selling specialty chocolates and compounds, it’s often for our salespeople is an easier thing to do.
We, of course, say, hey, guys, this is just a start of the discussion. You talk with ice crew players, you talk with bakeries, we talk pastry chefs, chocolate is just one or compounds or cocoa powder. It’s just one of the ingredients for them to start to innovate and respond to market trends. And that’s where our whole decorations and inclusions business, which is significant which I think we can still do much more in rolling all those solutions out across our network and into our customers is another driver of smart growth.
So is there still a lot of work, absolutely. Do I see us having a success with the model? I think, yes. And therefore, I’m pretty confident that you will see structurally an acceleration of the value ladder over the coming years. I hope that answers your questions Andreas.
Andreas von Arx
Yes, just quickly on the CapEx, I mean, which was a bit lower, that there’s nothing here to be rather a detailed look at that.
Ben De Schryver
No, no, CapEx indeed was a little bit lower, but it’s more related to the timing. We had some big greenfield investments in last year. There will be always a timing difference on quarter-to-quarter as well. There is still plenty of opportunities to invest in. And you’ve seen us doing quite good in terms of doing the right trades between inorganic growth and organic growth. And we see plenty of organic growth opportunities still going forward. And we will put CapEx against it as well. We’re not afraid of doing it. It is the right thing to do. We’re always very careful look at how much cost we have to pay for the company.
And over and over, we come to the conclusion that for our core business, it does make sense to invest organically. But having said this, when there is an opportunity in terms of inorganic growth, also in terms of adjacencies, Spac and Decker and so on we have seen with ECC, la Morella [ph], D’Orsogna in the past as well, [indiscernible] in the U.S. We will do that as well because as Peter mentioned, that’s exactly adding to our portfolio, to our power and what we can sell to our customers as well. Then of course, inorganic growth will make a lot of sense. Having said this, at the end, we will look at everything that’s out there, and we will put it through our own internal thresholds, making sure that we’re doing the right investment choices.
Andreas von Arx
Great. Thank you very much.
Operator
The next question comes from Alex Sloane from Barclays. Please go ahead.
Alex Sloane
Yes, good morning. Two quick ones for me. Just going back to the Asia Pacific profitability. Thanks for the color there. I mean, is it fair to assume that sort of upfront cost impact in Australia is now sort of largely in the base. And from here, we should see volume and EBIT growth kind of growing more in line? Or could there be some residual impact in the second half? That’s the first one.
The second one, just on the combined ratio, obviously, cocoa butter has come down through the pandemic. I mean I’m slightly struck by the fact that over that period, vegetable oils, there’s been really, really very significant inflation. So I’m wondering how that dynamic works? I mean could this move up in vegetable oils ultimately create some incremental demand for Cocoa butter from reformulation, maybe using more butter rather than palm oil? Or are the price differentials still such that reformulation doesn’t really happen? Thanks.
Ben De Schryver
I would take the first, knowing a little bit about Asia in my past as well. I would say, indeed, as Peter mentioned, put some extra color on — we did the acquisition of a small company GKC, which was still the right choice because we needed to create a footprint for years. We have been supplying Australia but not really being locally present and there was a huge part of the market that we are not addressing. From there, we’ve invested — we invested in more capabilities. And indeed, there were some delays there as well and we expect now in the second half that’s behind us as well.
I’m optimistic about the Australian market as other was very restricted still in terms of COVID. There were no visitors — a lot, there was no tourism there. That affected also our Gourmet business. We have a very vibrant Gourmet there as well, which is partly counting on tourism as well. So that gives me quite a bit of confidence on the Australian market as such.
But when you look at the overall Asian market, I mean even more optimistic there. So that’s still going to be the growth driver for us for the next years to come. You see us still consistently reaching double-digit growth numbers there. You see the appetite for Chocolate products still growing in every single market.
India, we made a conscious decision to put a greenfield factory there, and it’s going very well, and it will continue to grow. I don’t think that we will stop investing in Asia. Our footprint there as well is also not complete. So when you look at the geography, look at the distances, you just to be practical, out of one factory in China to supply the whole market is of course, something that would not be wise to do for a longer term as well.
India as well out of two factories there in West India. So the name of the game that is about acceleration. We want to also in a lot of markets be first. Be first also with Gourmet items than doing outsourcing than with customers as well. So a lot of positive momentum in Asia Pacific still.
Peter Boone
You raised an interesting question, Alex, on the combined ratio. So absolutely. So we see better ratios being still low power ratios, which is also good for us, of course, being higher. But please remember that the ratio particularly low in Asia. If you look at butter ratios in Europe and North America, they are already much, much better. But to reflect to your question, indeed, vegetables and coke better are getting quite close, which we don’t see so often. We are global leaders in compounds, we are global leaders in chocolate, but still, we are a chocolate company.
So you can maybe see some pressure on cocoa butter prices because the vegetable oil prices are very high. We also look at it in a different way, hey, this is the moment to convert compound buyers into chocolate, because the prices are now so close that we see customers being interested to say, hey, now it doesn’t make a difference anymore, could we buy chocolate as well.
So I don’t think this is a long-term trend. It’s very specific. It’s still coming out of these disbalance of the cocoa market, where it was very difficult to ship the cocoa butter out of Asia. There will be a moment that we see already the rate of containers going down. So there is a moment that we get out of it. And I think you will see cocoa butter restoring itself again.
Alex Sloane
Very helpful. Thanks.
Operator
I think it was the last question.
Peter Boone
Okay. Then thanks for being here. Thanks for those on the line to listening to our presentation of the half year results, we think, a strong set of numbers. But of course, we are fully focused now in closing the year and being back here in a couple of months. Thank you. Wish you a good day. And hopefully, we can see you downstairs for the apparel. Thank you.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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