JDE Peet's (AMS: JDEP), a global leader in coffee and tea, reported a strong financial performance for the year 2023, with significant strides in both profitability and sustainability. The company saw a 4.3% organic sales growth in the second half of the year and a 5.5% increase in adjusted EBIT. Notably, JDE Peet's achieved an investment-grade status and reduced its net debt, while also making significant advancements in sustainability practices, including a quadrupling of responsibly sourced green coffee and a 6% reduction in greenhouse gas emissions.
Key Takeaways
- Organic sales growth of 4.3% in H2 and a 5.5% increase in adjusted EBIT for JDE Peet's in 2023.
- Achieved investment-grade status and reduced net debt.
- Quadrupled responsibly sourced green coffee and reduced greenhouse gas emissions by 6%.
- Plans to complete two transactions in Q1 2024 and hold a Capital Markets Day in April.
- Maintains leadership in portioned espresso category and announced a new partnership with Costa Coffee.
- Over 1 million L'OR Barista espresso machines sold since 2021.
- Developed a CO2 emission measuring system per cup and is combating coffee-related deforestation.
- Organic sales growth driven by pricing, with volume mix close to flat.
- Forecast for 2024 includes organic sales growth at the lower end of 3-5%, mid-single-digit growth in adjusted EBIT, and net leverage around 3x.
Company Outlook
- Organic sales growth expected at the lower end of the 3-5% range in 2024.
- Mid-single-digit growth in adjusted EBIT anticipated.
- Net leverage projected to be around 3x.
- Free cash flow expected to be higher than in 2023, with a focus on reducing leverage.
- Gross margins expected to recover with the normalization of green coffee prices.
Bearish Highlights
- Supply chain issues in Europe, Asia, and the U.S. impacted segment costs.
- Unallocated EBITDA for 2023 was similar to previous years.
- The 4-year CAGR was less than 2%, with organic growth remaining flat.
- Russia profitability was weak, prompting a shift to a local portfolio strategy.
Bullish Highlights
- Strong performance in the portioned espresso category with double-digit compounded organic growth over the last 4 years.
- Successful launch of the L'OR Barista espresso appliance.
- Improved ESG ratings in 2023.
- Growth in aluminum capsule sales.
- New venture in the U.S. expected to have a higher gross profit margin.
Misses
- Full-year sales growth for 2023 was 2.4%, with H1 at -8.6% and H2 at 5.2%.
- SKU rationalization led to a 20% reduction in roast and ground products in Europe and Asia.
- Disinflation in COGS may lead to lower pricing in 2024.
Q&A Highlights
- Clarification needed on restated sales pace.
- The company is focused on absolute gross profit growth outpacing top-line growth.
- Post-pandemic adjustment in the in-home coffee category with a focus on premium offerings.
- The company is cautiously optimistic about future performance.
JDE Peet's has demonstrated resilience in a challenging market by focusing on profitability and sustainability. The company's outlook for 2024 reflects a conservative yet hopeful stance on growth, with plans to continue its focus on reducing leverage and improving gross margins. The proposed dividend of €0.70 per share underscores the company's commitment to shareholder remuneration, even as it navigates the complexities of the global coffee market. With a new venture in the U.S. and a strong position in the portioned espresso category, JDE Peet's is well-positioned for continued success.
InvestingPro Insights
In light of JDE Peet's recent financial performance and strategic initiatives, InvestingPro data presents a mixed picture that investors may find informative. The company's market capitalization stands at a robust $11.637 billion, reflecting its significant presence in the coffee and tea industry. However, the P/E ratio as of the last twelve months leading up to Q2 2023 is 23.31, which could suggest that the company's stock is valued relatively high compared to earnings. Interestingly, JDE Peet's is trading near its 52-week low, which, in conjunction with a PEG ratio of -0.49, might indicate potential for future growth if the company can capitalize on its strategies and market conditions improve.
One of the InvestingPro Tips highlights that JDE Peet's short-term obligations exceed its liquid assets. This could be a point of concern for investors considering the company's ability to meet its immediate financial obligations. On a more positive note, analysts predict the company will be profitable this year, and it has been profitable over the last twelve months. This aligns with the company's reported financial performance and suggests a level of resilience in its operations.
For investors seeking a deeper dive into JDE Peet's financial health and future prospects, there are additional InvestingPro Tips available. These tips provide a comprehensive analysis that could guide investment decisions. To access these insights and leverage the full suite of tools, visit https://www.investing.com/pro/JDEP and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Overall, JDE Peet's appears to be navigating the complexities of the global market while maintaining a focus on profitability and sustainability. The company's achievements in reducing greenhouse gas emissions and sourcing responsibly indicate a commitment to corporate responsibility, which is increasingly valued by consumers and investors alike. With a conservative yet optimistic outlook for 2024, JDE Peet's is positioning itself to continue its trajectory of success in the competitive coffee and tea market.
Full transcript - None (JDEPF) Q4 2023:
Operator: Good morning and thank you for joining JDE Peet’s Full Year 2023 Earnings Call. My name is Laura and I will be your operator for the call. [Operator Instructions] At this time, I would like to turn the call over to our first speaker, Robin Jansen, Director, Investor Relations for JDE Peet’s.
Robin Jansen: Thank you, Laura, and good morning, everyone, and welcome to JDE Peet’s earnings call related to our financial performance of 2023. With me are Fabien Simon, CEO, and Scott Gray, CFO. In a moment, Fabien will take you through the operational and financial highlights related to our business performance in 2023 followed by our outlook for full year 2024. After that, Scott will tell you more about the financial performance in 2023, and after that we will be happy to answer your questions. Our press release was published at 7:00 a.m. CET this morning. The release as well as the slide deck related to this call are also available for download from the Investors section on our website. A full transcript of this conference call will also be made available in that same section on our website as soon as possible after this call. Before I hand over to Fabien, I’d like to direct your attention to the disclaimer regarding non-IFRS measures and forward looking statements on Slide 3. We would kindly like to ask you to read this information carefully. And with that, I gladly hand over the call to you Fabien.
Fabien Simon: Thank you, Robin. Welcome, everyone, and thank you for joining the call today. Looking back at 2023, I am pleased with the progress we have made on many fronts and how we successfully navigated another dynamic environment. Our achievements in 2023 not only reflect our resilience and agility to perform in an increasingly complex world, but it reflects as well the positive results of the transformation we initiated at the backend of 2020 when we committed to profitable growth in a quality and sustainable way. Throughout the years, our people and partners across the globe worked tirelessly to pursue our company’s purpose, to unleash the possibilities of our category and the power of our brands. Their ongoing efforts and passion enabled us to deliver profitable growth while maintaining the high quality standards that consumers and customers expect from us. 2023 clearly marked an inflection point for JDE Peet’s. We closed the year with the strongest organic semester of the company since we became public. We delivered in H2 on organic sales growth of plus 4.3% on the back of positive volume momentum in H2 and the adjusted EBIT increased organically by 5.5%. We delivered well against the commitment we set at the start of the year, while coping with persistent high inflation and operating in an unusual declining category that was still adjusting globally following the pandemic. When taking a closer look at our financial results for the full year, you can see that our performance, excluding Russia, is now back to the long-term profitability algorithm that we committed to in 2021. In parallel, we remained very disciplined to deliver on the capital allocation priorities we set. We reduced further our net debt. And despite meaningful currency headwind this year, we achieved a net leverage of 2.7x, very close to our optimal leverage with €0.5 million free cash flow generated in H2 2023. I referred earlier to the transformation we started 3 years ago. Since then, we closed 5 operating facilities and we reduced our SKU by more than 20% and our workforce by 10% on a like-for-like basis. This was achieved while delivering our best customer service level, lowest consumer compliance and historical highest employee engagement in 2023. JDE became as well during this timeframe an investment-grade company with strengthened capital structure. This overall transformation enabled us to become simpler, more focused and to regain cost competitiveness, which was reinvested to fuel our long-term growth. We reinvested in working media that in 2023 almost doubled in absolute versus a low level of 2020. We invested in R&D, in product innovations, in coffee appliances and in sustainability. We as well built new capabilities like digital and e-commerce. With that, [indiscernible] agenda is now behind us. And we are very pleased to have become a leaner and well-invested company with brands and consumers at the higher end of our priorities. As a consequence, our competitiveness in the premium side of the coffee category increased greatly. I explained why in 2023 we are likely among the rare branded scale players in coffee, which can claim gaining market share globally in our geographies in single serve, in instant and in beans. At the same time that we strengthened the company fundamental, we step change our sustainability credentials and we are pleased to have turned an historical laggard company on sustainability into a recognized leading one. One of the latest recognition we received in 2023 is the inclusion into Dow Jones Sustainability Index, reached [indiscernible] puts JDE Peet’s as the only company operating at scale in coffee [indiscernible] globally in such of an important index. Because our organic core business was getting back in shape and supported by our robust capital structure, we could now amplify the company performance with disciplined inorganic moves. We are entering 2024 with 2 transactions to be completed in the first quarter. One we discussed in our previous earnings, which is Marata’s coffee and tea in Brazil. And the second that we announced in January of this year, which is a global CPG license of Caribou Coffee. And I will come back on those 2 later in my presentation. Finally, on the highlights, we want to share that we are planning a Capital Markets Day at the end of April in our aluminum capsule factory in France where we will zoom in on a number of interesting topics and development for JDE Peet’s. Let’s now move to the next slide to take a closer look at various elements of our operational performance of 2023. Over the course of 2023, we saw an improvement in our volume mix performance, resulting in plus 1.8% growth in H2 compared to minus 3.3% in H1. This was a result of recovery in Europe, probably one of the most attractive segments in Nielsen major channels and acceleration in some faster-growing channels that are either tracked or on track such as online, clubs [indiscernible]. As we expected, inflation persisted across a large part of our cost base throughout 2023, certain input costs such as green coffee, labor and freight actually witnessed further inflation. As a result, we saw a high single digit increase in our cost of good sold on top of the 30% cost inflation we had to deal with in 2022. But again, in 2023 we were disciplined in pricing for commodity inflation and in revenue management optimizations. Despite the negative category trend, we increased the absolute gross profit from strong efficiencies, simplifications and premiumizations. In H2 alone, our absolute gross profit increased by almost 5% versus year ago. And importantly, this was achieved without any compromise on the in-cup quality, which we know can be used in the industry by lower cheaper quality blend. And similarly, with self-funded additional investment in sustainability. And our compounded effort on sustainability in recent years are paying off. As you can see on the right-hand side of this slide, the part of the green coffee we buy today that is responsibly sourced, quadrupled over the last 3 years from 21% in 2020 to [indiscernible] in 2023, including 98% [indiscernible]. As part of this effort, we had 63 active projects at the end of 2023 through which we have reached more than 110,000 additional small order farmers during the year. And when it comes to reducing our greenhouse gas emissions, we have also made progress in ‘23 with a reduction of 6% in Scope 1 and 2 and 10% in Scope 3, which consolidated into 9.3% reductions for 2023 alone. And sustainability is embedded across all layers and function of the organizations and plays an integral part in innovations and new product introductions. One example I would like to call out here is the launch of a new breakthrough home recyclable paper pack for our soluble coffee range, which is the first of its kind in the coffee market. And this new packaging generates the lowest carbon footprint within our existing range and is aimed to foster a more sustainable ecosystem in the soluble coffee market. At the same time that we managed 2023 well operationally, we did not lose sight of our strategic imperatives to become more global, more digital and more sustainable. Let me now go to the next slide, Slide 7 to share a selection of the most important achievement there in 2023. First of all, we continue to morph into a more global enterprise. Although we hold ground in Europe and with a solid performance there in 2023, Europe now represent less than 50% of the total company volume, with a meaningfully lower weight of roast and ground than 2 years ago. In emerging markets, we continue to grow at a faster pace than in developed markets with a combination of market momentum, but more importantly this year, like last year on the back of market share gain in the last majority of our countries. In China, we keep growing double digit thanks to our premium portfolio. In the U.S. the category was softer in 2023, but we remain optimistic about its long-term growth prospect. This is why we set up a new venture there, which is the launch of L’OR brand and Barista appliance that I will cover in a minute. We also advanced in our aim to become more digital in an increasingly channel-blurring environment where consumer-facing relationships are key. Our targeted digitalization efforts and investment resulted again in double digit organic growth in e-commerce. And digital marketing now makes up about 40% of total working media spend. And to enable a true omni channel approach in Europe, like we already successfully applied in all other regions, we combined in 2023 our out-of-home and CPG Europe segment into 1 European segment. At first it enables simplifications and cost efficiency, but this is a wealth of growth agenda for our brand. And next to that we have initiated multiple automation and AI pilot in our supply chain, in marketing and across our back offices as part of our ongoing digitalization and efficiency ambitions. Third, when it comes to our long-term commitment to deliver sustainable growth that creates both shareholders return and societal value, we have made strong progress in ensuring our supply chain is inclusive, regenerative and authentic to our Common Grounds sustainability program. This year we unveiled our advanced carbon accounting tool that we developed in 2022 to measure automatically our CO2 emission per cup across the organization as an additional measure used on how we optimize our operations, prioritize our portfolio and drive innovation forward. Next to that, we are with the support of our partner and NGO [indiscernible] leading a global effort to fight coffee-related deforestations. We are leveraging a very unique combination of satellite imagery, artificial intelligence, and on-the-ground verification to measure the extent of coffee-related deforestations. This innovative new program, which is aligned with the EU’s regulation of deforestation-free product, will ensure continued access to the EU market for the millions of small order farmers we work with around the world. And as you can see on the next slide, Slide 8, the progress we’ve made in sustainability has not gone unnoticed by the ESG rators. Over the course of 2023, we received updated ESG rating from S&P Global, Sustainalytics and ISS. In all 3 cases, we improved our score and rankings, resulting in leading position in the respective categories and in special mentions by each rater that you can see on the right-hand side of the slide. Within the CSA rating of S&P Global, which is probably the most extensive ESG assessment that currently exists, we were called out as the biggest mover in the food product industry comprising of 260 companies. Let’s now go to the next slide, Slide 9, to provide you with some more color about our positions, initiatives, and achievements in the portioned espresso category that continues to offer long-term growth opportunities. Since we democratized the access to aluminum capsule in 2016 and ‘17, we became the undisputed leader in this segment in modern trade. But in 2020 there had been some external concern raised about the ability for JDE Peet’s to keep leadership and pace of growth given the new entrance of a well-known global coffee shop brand into modern trade. 4 years down the road, I would like to bring some data in light of JDE Peet’s performances. In 2023, our aluminum capsules grew by 10% with a high mid-single-digit growth in volume mix, and over the last 4 years we delivered a double-digit compounded organic growth. We kept as well our leadership in modern trade and our law brand is about 2x bigger than our next best competitor. This is a result of innovations, quality activations, and offering a portfolio of choices opening to consumers. And our capsule technology and variety of offering is well recognized and we continue to attract partner brands after [indiscernible]. We have now just announced last week a new partnership with Costa Coffee, the U.K.’s favorite coffee shop brand, whereby JDE Peet’s will manufacture, distribute, and sell Costa Coffee branded aluminum capsules in Great Britain from September October of this year. The other concern raised since 2020 was JDE Peet’s ability to keep operating an espresso park long-term, especially following a competitor move to a close system with a new net [indiscernible] compatible espresso appliance. And we worked diligently and with a great sense of urgency on this matter since H2 [indiscernible]. We innovated and invested behind a new proprietary espresso appliance L’OR Barista, with one of the variants you see on the left side of this slide. The consumer feedback went above our expectations. For obvious competitive and confidential reasons, I can’t disclose the exact number of L’OR Barista we sold since 2021. But I can mention that it is over 1 million machines. And in 2023, about 50% more L’OR Barista were purchased then in 2022, which was already a very good year. We launched now L’OR Barista in 40 markets. And in the latest consumer panel, L’OR Barista is reported to be the fastest-growing single-serve espresso appliance in 2023 in our core market outside of the U.S. That meaningful strategic evolution explains why we were successful to sustain our double-digit compounded growth rate for aluminum capsules. We believe that the category continues to offer long-term growth opportunity. Not only do we have the technology, brand portfolio and leadership in modern trade on the capsule side, but we now have as well a compelling coffee appliance platform for consumers. And over the last 3 years, we have regained our freedom to long-term growth in espresso and are now confident in our ability to capture our fair share in one of the fastest segments for in-home coffee consumption going forward. While we confirmed long-term freedom in our established espresso markets, we realized that there was a nascent but possibly a meaningful future espresso-based market, where law is not present, which is the U.S. We noted that the fastest-growing single-serve segment there is aluminum capsules. But we were realistic that entering there would require a new infrastructure go-to-market, brand equity and appliance capabilities. We therefore decided to set up a new venture in 2023 to test at scale the opportunity of L’OR Barista in the U.S. market online on both Amazon (NASDAQ:AMZN) and a dedicated new direct-to-consumer channel. And it’s fair to say there as well that we were quite positively surprised by the consumer response. Our L’OR Barista coffee appliance received the best seller badge during the important holiday season in December. And on the capsule side, JDE Peet’s reached a double-digit level of market share in 2023 on Amazon. And when we look at the month of January of this year, this continues to progress further. So next to those initiatives, we are amplifying growth and globalization inorganically as described on the following slides. As shared earlier, we have proceeded with 2 transactions, 1 in Brazil and 1 in the U.S., 2 very important markets for coffee, in cups and in value. In Brazil, the acquisition of Marata will enable JDE Peet’s to extend its footprint in the North and Northeast part of the country. We will become a stronger [indiscernible] player nationally in Brazil from below 22% – sorry, below 20% market share today to above 25% market share. And in addition, we are expecting synergies in the short-term and over time premiumization opportunities from category developments. And the transaction has been successfully closed in January. The second is a global CPG license agreement and the [indiscernible] acquisition of Caribou Coffee. Caribou Coffee is an iconic premium brand in the Midwest and it expanded its retail coffee store footprint in the U.S. and in the Middle East with more than 800 stores now, and store that will remain under Caribou’s leadership. 3 years ago, we declared the U.S. as a key priority for JDE Peet’s, and we are very excited about this transaction, which will expand further our portfolio of pure premium player in the U.S. with [indiscernible] as well as L’OR Barista we have just discussed. I do believe that we have now the perfect portfolio of premium brands and technologies in our hand to double the size of our U.S. business in the revenue organically in the next 5 to 6 years. Some additional financial detail on both transactions can be found on this slide and the purchase considerations can be found in the subsequent events of our financial statements. Before I hand over the call to Scott, I would like to share our outlook for 2024 with you. While we expect the environment in which we operate to remain complex and to continue to pose challenges, we have entered 2024 with both momentum and optimism as we believe the progress we have made over the last 3 years positions us well to deliver on our medium-term algorithm. We expect our organic sales growth to come in at the lower end of our medium-term target of 3% to 5%, with a mid-single-digit organic growth in adjusted EBIT, when excluding Russia’s performance. When also including Russia’s performance, we expect our organic adjusted EBIT to grow low single-digit in H1 and mid-single-digit in H2 as an ongoing trajectory forward. Our net leverage is expected to be around 3x at the end of 2024, taking into account the Marata and Caribou transactions and a free cash flow that is expected to exceed the level of 2023. Lastly, we continue to aim for a stable dividend. So with that, I will hand over the call to Scott, and I will be back when we start the Q&A.
Scott Gray: Thank you, Fabien, and good morning to all of you. Let’s go to Slide 13 to take you through the most important financial highlights of 2023. And after that, I will go, as usual, into a bit more detail on our sales, adjusted EBIT, the performance by segment, as well as our performance related to profit and cash, and then an update on the status of our balance sheet. I will then finish with a quick reminder of our capital allocation priorities and the Board’s dividend proposal. Our overall organic sales growth of 3.9%, as mentioned by Fabien and his business highlights, was driven by an organic sales growth of 3.3% in in-home and 6.4% in away-from-home. In terms of profitability at a total company level, our organic adjusted EBIT growth was plus 1.1% versus last year. If we were to exclude Russia from our performance, simply to isolate the impact on performance, the organic adjusted EBIT would have increased by more than 6%. For full year 2023, we delivered underlying earnings per share of €1.51. When it comes to cash and debt, we generated €522 million of free cash flow, and our net leverage stood at 2.73x. Let’s now move to Slide 14 to take a closer look at our sales. Our organic sales growth of 3.9% was driven by pricing of 4.7% as we continue to pass through the necessary pricing to offset incremental inflation, while volume mix was close to flat for the full year at minus 0.8%, with a strong improvement from a decline of 3.3% in H1 to a positive, positive 1.8% in H2. The organic sales growth was broad-based across geographies, brands and channels as you will see in a minute on the following slide. The negative foreign exchange impact of 3.7% was mainly driven by the depreciation of our main currencies versus the euro, such as the Russian ruble, the Turkish lira, the U.S. dollar, the Ukrainian hryvnia and the South African rand, which together with a minor change in scope, reduced our underlying sales growth and led to reported sales growth of 0.5% to €8.191 billion. Let’s now flip to Slide 15 to have a look at our sales performance by geography, channel, brand and category. Developed markets delivered 3.7% growth, while emerging markets grew at a higher rate with 4.6% organic sales growth. And channel-wise, our in-home channels grew sales by 3.3%, while our away-from-home channels increased sales by 6.4% organically, partially reflecting a normalization of the balance between in-home and away-from-home consumption in the aftermath of the pandemic, which, as you recall, had a bigger impact in H1. To put the normalization into context, in-home is still growing organically at a 4-year CAGR of more than 6%. Brand-wise, our global brands grew by 8.5%, while our regional and local brands together delivered 2.7% growth organically. And when looking at sales performance from a category point of view, sales of single-serve, beans and other premium categories like premium instant, together increased by 6.4%, while the rest of the brand portfolio grew by 1.1% organically as we continue to see premiumization across the business. Let’s now go to Slide 16 to look in more detail at our adjusted EBIT performance. Our organic adjusted EBIT increased by 1.1%. What you see in the bridge on this slide is that at total company level, we were able to increase the level of gross profit compared to last year despite continued inflation headwinds impacting our cost of goods sold. As noted by Fabien, we had a strong organic improvement of our absolute gross profit in H2 of almost 5%. As anticipated, total SG&A increased moderately, reflecting continued investments behind our strategic growth opportunities, such as our appliances and through working media, but also due to the ongoing effects of persistent broad-based inflation, which we continue to mitigate with a strong focus on cost control throughout the organization. Fluctuations in foreign exchange decreased adjusted EBIT by 4.1%, of which the majority was driven by the Russian ruble, but also by other currencies, mainly in the LARMEA segment, such as rand, hryvnia and Turkish lira, but also the Australian dollar. While changes in scope and other non-organic items, including M&A, divestitures and new business ventures, decreased adjusted EBIT by 5.1%, resulting in a reported adjusted EBIT growth of minus 8.1%. On the next slide, Slide 17, you see an overview of the organic sales and adjusted EBIT performance by segment. Looking at the performance per segment in 2023, you can see that all four segments delivered positive organic sales growth. When it comes to profitability, the picture is a bit more mixed with both Europe and APAC delivering strong organic growth, while Peet’s had a slight decline and LARMEA was down due to performance in Russia. When excluding the performance in Russia, the organic adjusted EBIT growth of LARMEA was positive. Let’s therefore now take a closer look at each segment one by one. Europe witnessed a strong sequential improvement in volume mix from minus 8.6% in H1 to a positive 5.2% in H2 in 2023 due to both better performance in the latter half and the difference in the comparative base of last year. The rebalancing between in-home and away-from-home consumption stabilized in H2 as we effectively exited the post-pandemic normalization period and most of the negative side effects of some of the intense price negotiations with retailers faded out. For the full year, Europe’s organic sales growth of 4% was driven by an increase in price of 4.6% and a decrease in volume mix of 2.4%, with strong performances delivered by countries such as France, Switzerland and most Eastern European markets and by brands, including L’OR, Jacobs and Senseo. The organic adjusted EBIT increased by 8.6% to just over €1 billion as a result of higher gross profit and efficiencies from the new omni-channel organization. On a 4-year CAGR, the organic adjusted EBIT declined by 2.7%. In LARMEA, organic sales growth of 4.7% consisted of 2.7% volume mix and 2% price growth. Most markets in LARMEA continued to perform well, which was partially offset by the brand transition of our main international brand in Russia to a local brand and by declining prices in Brazil due to lower green coffee prices. The adjusted EBIT of LARMEA decreased organically by 21.1% to €147 million, reflecting a high base of comparison, transactional ForEx impact and the brand transition in Russia. Excluding the performance in Russia, as I just mentioned, the organic adjusted EBIT growth was actually positive. And on a 4-year CAGR, the organic adjusted EBIT growth of LARMEA remains positive at 6%. In APAC, the organic sales growth of 2.1% was driven by a 4.9% increase in price and a 2.8% decline in volume mix. Within APAC, top line performance was geographically broad-based with notable strong performances in countries such as Malaysia, Thailand and New Zealand and from brands, including Campos and OldTown. The adjusted EBIT for APAC increased organically by 15.2% to €135 million in 2023, supported by supply chain efficiencies, less OpEx, including less A&P and SG&A, but also the impact from SKU rationalization. On a 4-year CAGR, the organic adjusted EBIT growth of APAC is 2.8%. At Peet’s, the away-from-home business continued to benefit from the ongoing rebound in away-from-home consumption with same-store sales and ticket size up in Peet’s U.S. coffee retail stores. And while the in-home category in the U.S. was softer, Peet’s CPG business held market share. In China, Peet’s continued to deliver strong double-digit organic sales growth. Peet’s adjusted EBIT declined organically by 1% to €141 million in 2023 as a result of relatively low volumes due to the rather soft overall performance of the category in the U.S. and due to higher A&P spend to support brand and product activations. Based on a 4-year CAGR, the organic adjusted EBIT growth at Peet’s was 11.3%. Let’s now take a look at our underlying profit in absolute terms and per share on the next slide, Slide 18. As you can see on this slide, our underlying earnings per share benefited from stronger organic operating performance in 2023, notably in H2, further supported by lower net financing costs and lower underlying taxes. Our adjusted net financing costs further improved by €27 million, mainly thanks to our active interest income management and the higher rate environment while keeping a low cost of servicing debt. Our stronger overall operational performance with a 7.8% improvement was however more than offset by the net effect of fair value changes of derivatives and gains and losses in FX, translational FX results and changes in scope. The fluctuating results from derivatives and FX revaluation naturally belongs to the P&L of each reporting period. As was the case in H1, those were net positive in 2022 and net negative in 2023, explaining the year-over-year negative impact on our EPS. The vast majority of the negative changes in the 2023 P&L are non-cash items. Let me now share a bit more detail on our free cash flow and net debt developments on Slide 19. In 2023, we generated €522 million free cash flow with a stronger H2 performance. This is a lower level compared to our rolling average levels on a full year basis and is primarily due to the normalization of working capital that we anticipated and already called out at the start of the year during our full year 2022 and H1 2023 results calls. As we explained before, our working capital has benefited in 2021 and 2022 from historically high levels of broad-based inflation across raw material inputs, including elevated coffee prices. Next to that, inventories also increased as a result of building higher safety stocks for business continuity and the delays in the supply chain, further benefiting payables due to the additional spend. As global supply chain dynamics improved during the latter part of 2022, we began gradually lowering our safety stocks and thus we have been buying less green coffee in 2023. This led to a net cash outflow from working capital as anticipated. We had a strong H2 free cash flow delivery despite the working capital impact and the seasonality of our free cash flow is generally more weighted to the second semester. When taking a multiyear view, as we always do, and averaging the last 12-month periods of free cash flow of the last 3 years, our average free cash flow conversion rate equals 71%. And looking at the net debt bridge on the right-hand side of this slide, it shows that our net debt position decreased by €160 million despite our working capital adjustment. We maintained discipline across all the lines while simultaneously continuing to invest behind our strategic growth priorities. On the next slide, Slide 20, you see the overview of our debt and leverage evolution. For the first time since the IPO, our net debt is below €4 billion. Also, despite the aforementioned currency headwinds, we finished the year with net leverage at 2.73x, which is slightly above our optimal leverage range. As explained by Fabien in our 2024 outlook, we project a net leverage of around 3x by the end of the year. For the first 6 months of the year, however, we obviously expect our reported leverage to stand higher than 3x. This is primarily because the full cash outflows related to the acquisition of Marata, which closed in January and Caribou, which is expected to close around the end of Q1, will fully be reflected in H1, while only a couple of months of EBITDA will be factored into our reported net leverage calculations. Secondly, because of the seasonality of cash flows as we often generate more free cash flow in the second half than in the first half, therefore our deleveraging expectation to around 3x by the end of the year will naturally be back-half loaded. Let’s now move to the next slide, Slide 21, and have a closer look at our debt maturity profile. Following our €1 billion bond issuance in November 2023, our cost of debt is 1.16%, which remains one of the most attractive cost of debt within the broader consumer sector, maintaining our competitive position in the high rate environment. Our total liquidity was €3.5 billion at the end of 2023, a higher number than usual given that the full net on proceeds conservatively remained on the balance sheet over year-end. Correcting for the bond proceeds, our year-end liquidity is €2.5 billion. Our committed and fully undrawn revolving credit facility of €1.5 billion does not mature until 2028. Before moving to Q&A, I’d like to briefly remind you of our capital allocation priorities, which remain unchanged and share the Board’s dividend proposal with you. Therefore, moving to Slide 22. Our capital allocation framework guides us as we create long-term value. Our first capital allocation priority is to reinvest in our brands and the growth opportunities within our business. Our second priority is to deleverage as we target an optimal leverage of around 2.5x. Our third priority is to continue to pursue inorganic growth opportunities, but always in-line with our highly selective business and financial criteria. Our fourth priority is to use excess cash to contribute to shareholder remuneration through stable dividend flows that we expect to sustainably grow over time. And while our leverage is above our optimal leverage of around 2.5x, we do not prioritize share repurchases. If you look at the actions we have taken over the last 3 years, you will see that they are very consistent with our capital allocation priorities. Lastly, based on our capital allocation priorities, our dividend policy and our financial performance in 2023, the Board will propose to the AGM in May to pay a dividend related to full year 2023 of €0.70 per share in cash to be paid similar to last year’s dividend in two installments of €0.35 each in July 2024 and January 2025. This brings me to the end of our prepared remarks. And with that, I will now turn it over to the operator so we can start the Q&A.
Operator: Thank you. [Operator Instructions] We will take our first question from Patrick Folan with Barclays. Please go ahead.
Patrick Folan: Hey, good morning, Fabien, Scott and Robin. My first question is just on the free cash flow guide. Can you give some color on what better – what the better than €522 million of this year means considering consensus way above that? Just good to get color there. And I think just on the follow-up, can you give some color maybe on where COGS could land next year, considering green coffee prices have gone up with robusta? How should we think about the COGS basket? Thank you.
Fabien Simon: Maybe, Patrick, good morning, I can start maybe with the second part of the question and Scott can take the first half related to inflation for next year. What we are seeing at this stage is a low single-digit COGS inflation for next year. I think low single digit, maybe mid-single digit. But we stay very vigilant. We know we are operating in a category where there are some volatility in the green coffee side, so of course, not much impacting us first half, but more the second part of the year. And when we look at the latest development of Arabica and Robusta, we are talking about 10% to 30% increase versus the back end of 2023. And if we see that confirmed, we will of course most likely do exactly what we have done in the past being very disciplined to price for this commodity inflation. We are entering some important season on the coffee side. That’s why it’s a bit too early to call out what the evolution will be – but other than that, for the rest of the portfolio, of course we have a good visibility. And today, a low single digit is what we are seeing, which confirm what we’ve said over the last couple of years, which is inflation was coming, will be sticky, and we are not yet in a deflationary environment, but more in a disinflationary environment that we see for 2024.
Scott Gray: Yes. Thanks. And I’ll take your first question, which was actually on the cash flow outlook. So yes, I mean, as we included in our ‘24 outlook, we do expect our free cash flow to be greater than 2023. We do have a bit lower coffee prices in H1. And so that also adds a bit to our seasonality. And we will start to return to a more normal cash conversion level. So that’s what we would expect. And it’s important. I mean, just like Fabien mentioned in terms of the COGS, we need to see how coffee prices also evolve for the latter part of the year. So that’s something we’re monitoring. And for 2024, we’d expect our free cash flow to certainly be higher than 2023 and it will definitely meaningfully contribute to our deleveraging around 3x, and that’s why we also guided that. So obviously, that’s going to be a strong contribution there. And going forward, we also have absolute confidence in our future cash conversion as we look at. And as you see in terms of the second half performance, we still had a drag from working capital. You can just see the amount of free cash flow that we naturally generate even in that environment. So we have absolute confidence in the cash conversion going forward. So I’ll leave it there. Thank you.
Operator: Thank you. We will now move on to our next question from Jon Cox with Kepler. Your line is open. Please go ahead.
Jon Cox: Yes. Good morning, guys. Sorry, I just want to come back to that free cash flow question. Are you still targeting a 70% conversion ratio? You seem to be avoiding mentioning that number. And I’m wondering how close you will be to it this year? And my second question is a follow-up, being a bit cheeky. The profitability of the Europe business, do you think we are now around ground zero because obviously that’s come back a long way over the last few years. Do you think now we are going to see more meaningful progression in that European margin going forward? Thank you.
Fabien Simon: Again, I can take the first one. Yes, thank you for highlighting the strong progress that we have been making in Europe. It’s something we have been committed to, and we are – that we have delivered. It has been the combination of one, our recovery in out-of-home. And we said back then, it’s going to take us 3 years to go back to the profitability we are in out-of-home. And the job is almost completed. We are almost back. It has been coming from the reset of the organization, quite aggressive on the cost side, but as well on the portfolio side. In H2, in Europe, we have had as well as, we are really seeing after a very difficult negotiation we have had on the back of 2022, and we are very disciplined in the participation in promotion of the execution in promotions to ensure we would really we have value accretion accretive agenda. But as well, we have continued to work on cost efficiency. We lately announced, for instance, our – the closure of our process factory in the UK, which helped to contribute on the cost side in Europe. And we have been – continued to gain market share on the most relevant category. And we like the starting point. And if you look on a 4-year basis, we are almost back to where we were. So, yes, what we see going forward is, as I have said, we are now back to our long-term agenda. The reset of the investment has been made, and we want, going forward, every segment to contribute to the company, generated the mid-single digit going forward, and Europe will be part of it. So, we indeed expect going forward further improvement from our European business.
Scott Gray: Yes. And thanks, John. And just to add a little bit to cash flow. So, the answer to your question is we are committed to the 70% cash conversion that we have as part of our long-term algorithm. And as you know, we look at that on a cycle of a few years average. So, our long-term algorithm remains unchanged, including on the cash conversion. Our cash conversion, best guess at this time will be below 70% in 2024, but higher than 2023 certainly. And again, the payables are just dependent on price and the level of coffee purchasing. So, that’s what we monitor, but we have confidence in our free cash flow conversion.
Jon Cox: Thank you.
Operator: Thank you. We will take our next question from Jeff Stent with BNP Paribas (OTC:BNPQY) Exane. Your line is open. Please go ahead.
Jeff Stent: Good morning. I have two questions, if I may. The first one, could you give us some guidance on the expected development of the new venture costs in 2024 and whether or not that will be a drag on profit year-on-year? And secondly, on gross margins, by my math, now about 600 basis points below pre-COVID levels. Is that something you ever expect to recover, and if yes, any guidance, and if not, why not? Thanks very much.
Fabien Simon: Good morning Jeff and thank you for your question. So, starting with the new venture, we have explained transparently what the new venture is about, which is in a simple term to replicate our successful aluminum capsule agenda in Europe, into the U.S. And we think it’s going to be a very exciting growth and profitability agenda going forward. Of course, when you enter in such of a large market where you have to set up everything, online platform, even go-to-market because unlike Europe where our partner affiliate is distributing, in the U.S. we have to do everything ourselves because we have no capability neither. We have to invest. When you invest, if you look at the history in a new appliance, the payback is about 10 years to 15 years. For us, it’s going to be a fraction of that, why, because we are leveraging on an existing technology and existing platform beyond which we have scaled already in other geographies. And the year one is a year where you have the biggest investment. So, we are really expecting that going forward to be lower and lower year-over-year. But we are expecting already next year, the – because it’s a premium approach, to have the gross profit margin on that product in the U.S. to be higher than total company. So, it’s really some phasing of investment, which had to be made as we place machine and build the equity of the brand. And we are very, very excited about that opportunity. Your second question is about gross margin. You know how much, in our industry gross margin can be a very misleading indicator when you have the volatility of green bean and pricing in the pass-through categories. So, I always try to stay away from it, at least on the short-term, that’s why we are really measuring our indicators in a very transparent way. We have been presenting today, for instance, our absolute gross profit, and you can see it’s growing at a higher pace than our top line in H2, which is the agenda we want to go after as we premiumize, as we get operational leverage back. And as far as percentage, we know it will come back, but it’s not in our control. The percentage will come back when green coffee will normalize. And we know it will. You can’t have forever Arabica in historical 20-year high. You can’t have forever – sorry, it was Robusta on 15-years high or on Arabica which have been cruising at a much higher than historical level. When it’s going to come back, we will be very disciplined on the way we will pass through. And then automatically the margin percentage will come back. And it has come back quickly and at a very high level. We have seen that in the history. And at the time, the company was private. It is exactly the same thing that we see happening going forward. So, we are absolutely not concerned about the percentage, which we know will come back.
Jeff Stent: Thank you.
Operator: Thank you. We will now take our next question from Bing Zhu with Redburn Atlantic. Please go ahead.
Bing Zhu: Hi. Thank you for taking my question. And I had a question on the category outlook. Can you provide some color on in-home coffee category, please, because you mentioned in the presentation, you have seen the coffee category to exit the post-pandemic normalization. Is there any other factors we should be mind of going to 2024. For example, have you seen much consumer behavior change, or have you seen much of the changes through competitive landscape as the industry faced more volume pressure? So, any color on the category would be helpful. Thank you.
Fabien Simon: Good morning, Bing. Yes, thank you for the question. We have been talking in H1 that indeed the category was still evolving in a post-pandemic way where consumers have been really a bit more away from home. And that’s why the category has been adjusting to it. And that’s why in H1, the category globally, I am talking year volume because value can be misleading with pricing, was in decline by about 3% to 5%. But we have seen already in H2 some recovery. In the U.S., it’s still a bit negative, but low-single digit level. And outside of the U.S., we are closely approaching the – almost a stabilization if we look at the last moving quarter, almost zero, which really confirmed what we have always said, which is that consumers have not drunk less coffee, they were just a bit less at home. And consumers have not been drinking less coffee because there have been some inflation because of the commodity side. It was purely a post-COVID adjustment. So, we feel that the category is getting back on track, U.S. a bit later than – a bit later in other geographies. If you look from a more behavior on the consumer side, we see a bit of a difference between the U.S. and the rest of the world. What we see in the rest of the world, brands are back. If I look, private label is stabilizing, and it is today lower than what it was pre-COVID. While in the U.S., there is a bit more bifurcations, premium, super premium growing and private label growing in between a bit more challenging. And we are very fortunate to be positioned on the premium, super premium side. That’s why with our Peet’s amazing brand in the U.S., we have been holding our market share because we are positioned on the good side of the category, and that’s why we were very excited as well with our Caribou acquisition to stay focused on the premium side of the market. We believe that we are more in a normalized way. What we don’t know for the U.S. is how it will totally evolve going forward. And I have a bit of an intuition here is in the U.S. a lot of coffee players are actually multi-category player. And coffee category was a bit more difficult category to manage over the last 2 years to 3 years. And it is not unlikely that they have been putting most of their investment effort, innovation activations outside of coffee, but premium [ph] category. And we know that we have to add coffee and consumer are coming back, it will normalize. And that should support, in my view, the coffee category. If we look from what consumer wants or have to consume, we see the trend remains the same. When you go after coffee in home, you want a better coffee, you want a more convenient way to get your coffee, you want to replicate your out-of-home experience in home, that’s why we see the category which are bean, single-serve, premium instant are the ones that are growing at a higher pace than the rest. But it is a trend we have been seeing now for 10 years, and we don’t see any signs of that changing. Your second – no, I think I have answered the second question…
Bing Zhu: Thank you.
Operator: Thank you. And we will now move on to our next question from Tom Sykes with Deutsche Bank. Please go ahead. Tom, would you like to take you mute button, please Tom.
Tom Sykes: Yes. And it’s still there. So, just trying to pick some of the one-offs that may have been in the adjusted EBIT line in H2. Just for this – going back to the scope, first of all, will the definition of that remain the same in full year ‘24 versus ‘23? And are you – does that include all of the revenues and costs from the U.S. rollout, or are you booking some revenues and costs not through the scope line? And then perhaps kind of lumping central or maybe even Russia together, the central line looked high in H2. And obviously, Russia profitability was weak. Is there anything one-off that you would pick out in the combined cost base of those two, or should we take H2 as a sensible run rate, please?
Scott Gray: Sure. Let me start on those items, and then I will pause and let Fabien add where I missed something. So, maybe on first on the scope on the new business venture and whether the definition will be the same in 2024. There is no change in the definition. I mean we had the same definition actually in 2022, so same as 2023, and it would be the same case for 2024. And we had the adjustment that started in the back end of 2022 and carried forward. I think on that particular adjustment related to the U.S., it even phased out in the last couple of months of the year because it’s an organic scope adjustment. So, it’s just looking at the prior year periods. And actually, in scope, we don’t see anything notable in 2024 because in that example of that new business venture, that’s past the first year of that rollout. So, I don’t know if anything you want to add on, Fabien?
Fabien Simon: Yes. So, it’s going to be back on the organic, so we don’t expect anything there. If anything, we expect positive because on scope next year we are going to include the acquisitions of Maratá and Caribou because they go through inorganic in the first year. Your second question was on the Russia, Tom. On Russia, we have been very transparent since the beginning about our acquisitions. And in particular in for H2 of this year that we would move even more into local for local organization with transitioning our international brands out of Russia, which I think is the right thing to do because there is uncertainty, unpredictability in Russia, but as well it’s a way to protect the equity of our brand we acquired, but as well more and more putting the company focus into the rest of the organization. And as the rest will grow at a faster pace over time to continue to even reduce the weight of Russia in our business. And overall, there is the exposure of Russia for the shareholders. That’s why we guide – we were transparent this year to show our results with and without Russia, and we are back without Russia to our long-term algorithm. That’s why even next year, we will stay in our long-term algorithm without Russia, but the impact of transitioning to local portfolio, higher cost of running business in Russia has had an impact in H2. We don’t expect incremental impact in next year, but the effect of this H2 impact will just carry over in H1 because it was not on the base of H1 of 2023. After that, we don’t expect really incremental effect. The only thing we don’t know that can turn positive or negative is the currency. Nobody can anticipate and predict what it will be. But we think that now it’s past, and we think it was really the right thing to do.
Scott Gray: Yes, absolutely. And then on your other question, Tom, I believe related to central cost, I think your question, I guess is around the unallocated, is that correct?
Tom Sykes: Yes. That’s right. Thank you.
Scott Gray: Yes, absolutely. So, on that, so I think the kind of the perceived increase in cost or, I would say, like the negative EBIT impact there is a year-over-year reported comparisons. So, it’s not an organic and it’s a reported. And you really need to look at absolute of that one, which is kind of the central balancing. So, I think the – while the unallocated bucket includes some central SG&A cost, including headquarters, operations, R&D, for example. There are also some other non-people related centric costs that are not allocated to the segments. And also, there can be some restructuring things that are one-offs that go there that don’t necessarily go to an adjustment item because those roles may stay in place and have some double run during the restructuring. I think there were also some central one-off benefits in 2022, so that’s why the year-over-year comparison. There are some one-off central cost in 2023, so that causes that variance. And I think for example, like if you look in 2023, we had some – I will give you some – we had some negative one-off impacts from our captive insurance companies, for example, due to the various supply chain issues we had in 2023 in Europe, Asia and the U.S. So, while there is an impact in the segment, there is also some central cost impact. And it’s important to note that the 2023 unallocated EBITDA is quite similar to previous years. So, it’s just that one year-over-year comparison. And I was just looking at, in fact, I think on a reported basis, the 4-year CAGR is less than 2% on an organic basis is exactly flat over the last 4 years. So, it’s – I believe in 2021 that was €306 million, so quite comparable to what you see in 2020. You just got to look at some context because that can be a little bit skewed on the year-over-year due to those items. So, quite a bit of detail, but hopefully that addressed your question on the unallocated.
Tom Sykes: Yes. That’s great. Thank you very much.
Operator: Thank you. We will now move on to our next question from Robert Jan Vos with ABN AMRO (AS:ABNd). Please go ahead.
Robert Jan Vos: Yes. Hi. good morning. I have a couple of questions. When I listen to Fabien’s comments on COGS inflation and you used the term disinflation, all-in-all, is it fair to see based on what you now know today that pricing will be lower in 2024 compared with 2023? That’s my first question. And my second question is the supply chain financing was €431 million at the end of last year. Scott, can you maybe share with us what the amount is at the end of 2023? Thank you. Those were my questions.
Fabien Simon: Good morning, Robert. I can take the first one. Yes, indeed, today we see disinflation. So, lower COGS increase than what we have had in the past, which naturally will lead to a lower price, and that’s why our organic sales growth is normalizing to a more balanced contribution between pricing and volume mix. But again, as I have said, we note in coffee is volatile. If we see, of course, an increase persisting, we may go back to a bit higher than what we see. But today, it is correct that we are expecting a lower level of price increase than in 2023.
Scott Gray: Yes. In regards to the question on the supply chain financing, so there was a small increase in 2023 versus 2022, and it’s somewhat comparable to 2021 level. I believe that the amount that we will be, and we will disclose that shortly, but I can give that to you. I think it’s going to be around €490 million and the increase in 2023 versus 2022 is mainly due to inflation and just the mix of the spend, so nothing structural there. It’s just really the fluctuation of that bucket.
Robert Jan Vos: Alright. Thank you.
Scott Gray: Thank you.
Operator: Ladies and gentlemen, we are now approaching the end of the call. We will now take our last question from the line of Feng Zhang with Jefferies. Please go ahead.
Feng Zhang: Hi. Two questions. The first one is a technical one. So, volume growth in Europe was minus 2.4% in full year ‘23. H1 was minus 8.6%. H2 was called out at 5.2%. But if we are using the full year, the implied H2 will be just 3.7%. Can we just get some clarification if there is any restatement made on sales pace or growth definition? And the second one is about the roast and ground business in Europe. You mentioned before that the weight is getting much smaller than 2 years ago. Are you actively reducing the exposure by cutting SKUs, or are you saying the SKU cut of the 20% was mostly just in APAC?
Scott Gray: Yes. Maybe I will take the first one. And it was a little bit difficult to hear you, but I think I got the point of the question, the volume was low. But on Europe, in terms of the volume, as you were looking at the semesters and there was no restatement there that we did in Europe. So, anything was just on the year-over-year comparison, but no adjustments there. And we have adjusted the base, of course, on our organics and also when you look at the volume mix for the omnichannel combination of bringing retail and out-of-home together. So, it’s just bringing those segments together. But again, it is a like-for-like base and no restatement items in Europe. Fabien, I will let you take the second one.
Fabien Simon: Yes. And I can answer on the SKU and roast and ground in Europe. We have been communicating in our Capital Markets Day at the beginning of 2023 our agenda on SKU rationalization. Back then, we were at 10% reduction. And at the end of 2023, we will end at 20%. So, we have really doubled our effort in 1 year. And it affected mostly our European and Asian business in category of roast and ground, in particular a bit of tea, and it affected as well our out-of-home professional organizations. And per category, I mean every category have contributed to it, but it could range from 6%, 7% on the lowest, to 30%, 35% for the highest category. And indeed, roast and ground in Europe has been a big contributor to this one on top of APAC. Well, APAC was mostly on the professional side. And what I can share because it’s an important measure is 2 years ago roast and ground in Europe was representing more than the third of our business on the in-home side. Today, we are more approaching like 25%, which is well below the market. And it’s important because we continue to premiumize our portfolio, but it’s as well a way to reduce our exposure to the volatility of coffee, which always hits more countries and categories where roast and ground is more exposed. And that’s why we feel – say we are cautiously optimistic to the question which was asked earlier on our ability going forward to continue to improve our profitability.
Operator: Thank you very much. And I would now like to return the call to the speakers.
Robin Jansen: Thank you, Laura. Ladies and gentlemen, thank you very much for attending today’s earnings call and for taking part in the discussion about our results. If you have any additional questions, please don’t hesitate to contact the IR team. We are happy to answer your questions. And again, thank you very much, and enjoy the rest of your day.
Fabien Simon: Thank you.
Scott Gray: Thank you very much.
Operator: Thank you. This now concludes JDE Peet’s earnings call. Thank you all for attending. You may now disconnect your lines.
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