EU CONSUMER STAPLES: Barry Callebaut; 1H25 (to Feb) results
(BARY 29s; Baa3/BBB-; Stable) (Equities -12%)
Outside the sharper volume decline of -4.7% and FY revision down to MSD decrease in volumes (prev. LSD) not much else is unexpected in the 1H numbers. As we warned from primary day, it was never going to be a pretty on the WC swing (Cocoa has doubled yoy and it stocks most inventory in the 1H after the harvest period). It also pushed back the benefits of its cost saving programme by one year (was to be +CHF187.5m/yr bottom line benefit) - if equities price this out to the extent only 40% of it is achieved (the current run rate it is saving at) then we would expect a -22% slide in equities to CHF850 on pre-earnings 15x multiple (at CHF725/-33%). This is not say those savings are not a credit mover - they are - but more to show how sensitive/what equities may be moving on.
When it was in primary we modelled leverage and interest cover on a conservative (much lower than adj.) statutory EBIT and EBTIDA from last year. Statutory EBIT is up +66%yoy but below that net profits still more than halved on rising financing costs - again something we modelled to conservative CHF330m (+43%yoy). It saw CHF197m (+174%) - the rise is higher than we expected on rising margin costs on the exchange. But it says this will be less severe in 2H and sees FY costs around CHF350m.
We are not protesting credit moves and see very likely downgrade into HY. Co continuing to guide to dividend growth (paid CHF160m last year) will not help ratings - small in relative sense but we would have thought the it would show better governance after issuing €1.75b (CHF1.62b) on a 25bp/notch/agency to max 150bp steps (CHF8m/notch if raters move in sync).
Re. non-step 29s we got some heat for setting 28/31s FV in primary tight to it - 28s have gone from -19bps to -55bps inside it since. Metro 29/30 holders may learn something valuable from it in advance of a similar situation (30s there have a stronger step there as well).
Re. FV level here investors should focus on longer term trends - keeping in mind if Cocoa prices stay flat yoy (currently trending that way) WC will reverse to 0 and remove the largest drag of FCF. If it can remain competitive on the higher capital base (and assuming pass-through a more expensive service for its clients) is one question to consider - the reference to increased insourcing trend from clients is not nice to hear on that front but it played it down as temporary reaction. Re. medium term volume trends, the 6-9month delay between spot to shelf pricing means more pain may be ahead as consumers react to the Dec/Jan spike. Finally any renewed spot cocoa increases (yoy) should not be taken lightly here.
Mgmt has not responded to us in the past - but regardless we will try and circle back with some more detailed numbers for credit.
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US DATA: Airfares Lead Pullback In Supercore Services
The lower-than-expected core CPI reading of 0.23% M/M (0.27% MNI median, 0.45% prior) came with a modest upside surprise in core goods (0.22% M/M vs 0.16% expected, 0.28% prior), driven largely by used cars (0.88% vs 0.54% expected), while apparel also rebounded (+0.6% after -1.4%) and new cars were fairly steady (-0.1% after 0.0%).
- Core services were more benign however at 0.25% vs 0.31% expected (0.51% prior), with supercore as noted earlier slowing sharply.
- The main contributor in the services slowdown? Airfares, which was basically the only major category that analysts didn't expect pull back vs January - they fell 4.0% M/M for an 8-month low (after +1.2% in Jan. That alone shaved 0.05pp off core CPI.
- Though auto insurance was softer than expected as well at 0.3% (1.0% expected, 2.0% prior).
- Neither of those however are inputs into PCE so that may cast less of a dovish angle on the release.
US DATA: Housing Inflation Confirms Recent Moderation To Pre-Pandemic Trends
- The main rental inflation metrics were very close to expectations in February, with both OER and primary rents at 0.28% M/M vs average analyst estimates of 0.30%.
- The weighted average of these two series has in turn averaged 0.29% M/M for four months now, back to the 0.28% averaged in 2019 and 0.27% over a longer period of 2017-19.
UK: PM-Will Take 'Pragmatic' Approach To US Tariffs, 'All Options On Table'
Prime Minister Sir Keir Starmer has said that he is "disappointed to see global tariffs" on steel and aluminum from US President Donald Trump. Speaking at prime minister's questions, Starmer says, 'We will take a pragmatic approach... we're negotiating an economic deal... we will keep all options on the table'.
- In contrast to the EU, which imposed retaliatory countermeasures immediately following the US' imposition of its own tariffs, the UK has refrained from imposing its own trade levies in response to Trump's actions.
- As NYT notes, Starmer may view the potential of a trade deal with the US as a way to avoid future tariffs. Trump commended Starmer's efforts to avoid the imposition of tariffs on British exports during his late Feb White House visits, even though these exertions did not pay off in the short term.
- Starmer will also be looking to avoid confrontation with the US as he seeks to improve US-Ukraine relations and steer Washington towards ceasefire talks and an eventual deal that takes into account Ukrainian interests and ultimately ensures security guarantees for Kyiv.
- The lack of UK retaliation will be noted in Brussels and other EU capitals. Since coming to office in July, Starmer has sought to bolster post-Brexit ties with the EU. For some member states, the UK acting as a bridge between the US and EU could be seen as an economic threat over the medium term should the UK secure a trade deal.
