JDE Peets (Baa3/BBB-/BBB) 1H (to June) Results

The reject among local F&B names - trades at wide end with little company - has given firm results. It generally has a good history of passing through spot coffee price increases {KCU4 Comdty} & {DFU4 Comdty} and we are seeing signs of that again. Credit positives are geographical diversification (with ~half in Europe), product and channel diversification (pods, store retailing, online). That needs to be balanced with the obvious concentration to coffee (84%) and tea (3%) consumption. We see value in the 3-5Y (at Z+ 75-100) particularly with new Barry 29s not far off it now and no near term supply expected. We'd ignore equities (its only reversing last months fall, free float is small/~€2b).

• 1H sales at €4.2b (+3.6%, +1.2% on volume/mix and 2.4% on price. adj. EBIT was €692 (+18%) at a 16.4% margin.
• Margin development was very divergent; Europe (50% of group) grew +1% and EBIT +14%, LARMEA (16%) grew 12% but fell -10% on EBIT, APAC (10%) was flat at +1% but EBIT up +60% while Peet's brand (13%) grew +4% and bottom line +42%. Seems to be a mix of fx, spot coffee prices on inventories held and one-offs driving the bottom line vol.
• It's saying 2H will see a increase in costs; green coffee is up 13% for Arabica and 54% for Robusta which its reacting to with price increases.
• Capex was €138m (+20%) leaving FCF at €315m (up from the €14m last year). Note WC (-€227m) is seasonally weak in 1H and should boost 2H FCF. It is subject to volatility in green coffee prices on inventory, though we are not seeing the WC swings we would see in Barry Callebaut.
• Gross debt rose to €6b (+€1b yoy), net at €4.8b (+€0.6b). On LTM EBITDA (of €1.5b) it leaves it 3.9x/3.1x levered. It always reports in net which is up from the 2.8x last year.
• Rise in debt was due to acquisition of Marta's coffee in Brazil (for undisclosed amount) and the acquisition of Caribou's roasting operations in Minneapolis which came alongside a agreement to sell Peet's coffee products in Caribou's coffeehouses. Acquisitions totalled €928m in cash this half. Its been light on acquisition activity for the last 3 years (we haven't looked further back).
• Leverage is at the top end of last 4 years range but it has "optimal leverage" target of net 2.5x and has said it will not "prioritize" share buybacks on the rise. We are less sure it will actually hit 2.5x (it never has in the recent past). It is long-time Baa3, raters cleared above transactions staying on stable outlook.
• FY24 outlook is now organic sales at high end of MT target (+3-5%), adj. EBIT growth of around 10% (would leave it at €1.24b), FCF >€850m, net leverage <3x and dividend stable (paid €0.7/share or €340m last year).
• It has said in the earning call that the "coming two towers have already been refinanced" - its referencing the $500m Sept '24 and €500m Jan '25 lines - the only two maturities in the next two years and adds "no immediate funding needs as we focus on deleveraging". Funding for those was the €1b done across the 30/34s in late 2023.
• Governance: it's still looking for a new CEO after Simon (CEO since 2020) announced departure. Interim CEO was on the call and said it will have someone in by the end of the year and doesn't expect drastic changes (company strategy will be in line with his current view - he will stay on as Chairman). Reminder local issuer JAB (Baa1/BBB+) - the investment holdco - owns 59% of JDE Peets and Mondelez (A3/BBB) another 20%. Both have representation on the board.