Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. This is your conference call operator. Welcome to the Media and Analyst Webcast of the Barry Callebaut Group. The topic of the webcast is the COVID-19 and the midterm guidance update with regards to the 9 months key sales figures of the 2019/'20 fiscal year. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Claudia Pedretti, Head of Investor Relations of Barry Callebaut.

Thank you. Good morning, ladies and gentlemen. Welcome to our Media and Analyst webcast. While we usually only publish a press release to update you on our 9 months key sales figures, this year for all of us is special. And we promised that we will come back at the half year conference, and we would like to take this opportunity to give you a broader update. My name is Claudia Pedretti, I'm Head of Investor Relations. Speaking to you today are our CEO, Antoine de Saint-Affrique; and our CFO, Remco Steenbergen. Please take notice of our cautionary note on Slide 2, and that the information given during this presentation contains some forward-looking statements, which reflect the best of our current knowledge. Actual results may be different. Furthermore, we would like to inform you that this webcast is being recorded. Let's look at our agenda for today. Antoine will briefly talk you through the 9 months key sales figures of fiscal year '19/'20 and give you some more color on the impact of COVID-19 in the third quarter. He will then share his remarks on our strategy and the outlook with the updated midterm guidance. After the presentation, Antoine and Remco will answer your questions. Please note that you have to dial in by phone if you want to ask a question. You will get instructions at the end once more from the operator. And with that, I hand over to Antoine.

Thank you, Claudia, and good morning to all of you. As Claudia said, we normally do not organize an analyst and media conference for 9 months sales figure, but COVID-19 times are not normal time. And we had promised we would come back to you at this point in the year. As I just said, these are extraordinary times at all levels. I know many around us have been personally impacted. So let me start with the thought for all of them and with many good wishes to each of you personally and professionally. After a strong start of the year, our third quarter saw the full impact of COVID-19. As governments were introducing stringent precautionary measures. The COVID-19-related lockdowns effectively closed down a number of important distribution channels for our group, such as restaurants, hotels and chocolatiers. They also affected the on-the-go and import consumption and a number of small to midsize customers who struggled to maintain continuity. As a result, sales volume in the third quarter declined by 14.3%, bringing our positive volume growth of the first half year down to an overall volume contraction of minus 1.3% for the first 9 months of the fiscal year. Our sales revenue amounted to CHF 5.2 billion, up 0.4% in local currencies. As government started lifting the precautionary measures in many markets, we are seeing since mid-May and in June, some encouraging signs of sales volume recovery. This feeds our confidence that we will recover, but we take some caution in making precise predictions on the exact pace of our recovery as COVID-19 is not yet fully under control. Based on this, we have updated our midterm guidance starting in September '20, with increased metrics of 5% to 7% volume growth and EBIT above volume growth in local currency. On average for the 3-year period, 2021 to '22, '23, and obviously, barring any major unforeseeable events. Because COVID-19 has turned fiscal year '19, '20 into such an atypical and unforeseeable year, it will be excluded from the mid-term guidance. Slide 5 shows the familiar graph with the growth per quarter for cocoa and chocolate. As you can see, and as I was saying, the government-imposed restrictions and closures of restaurant and shops across the globe impacted our volumes in chocolate and cocoa. Our Gourmet & Specialties business was particularly affected with the closures of the majority of its outlet channels. Although less pronounced, our food manufacturer business was also affected by the fall of import consumption and the closure of all retail outlets, except for mass retail. This had, in particular, a negative effect for smaller customers. Some of the larger ones to the contrary, we are benefiting from precautionary pantry loading. This is what you see reflected also in the Nielsen numbers, which focus, as you know, essentially on confectionery in mass retail outlets. Worth mentioning is that beside the COVID-19 impact, we're also facing a tough comparison base with double-digit volume growth in the prior year quarter. As you can see on Slide 6, we experienced the effects of COVID-19 across all regions, but with different intensities. In our region, EMEA, the full lockdown of all major European markets for most of the third quarter has clearly impacted volumes, which declined by 17.1% in the quarter. The out-of-home and import consumption was particularly affected, which was reflected in the nearly halved volumes of Gourmet & Specialties as well as in the double-digit volume decline of food manufacturers. In our region Americas, sales volume were also negatively impacted by COVID-19, leading to a 12.1% decline in the third quarter. Our Gourmet business there lost about 1/3 of its volume due to the closure of restaurants, hotels and shops across the region. Food manufacturing in North America suffered a high single-digit volume, in particular, due to the negative impact of lockdowns on customers serving the out-of-home channel. The overall performance in South America was negatively affected by the severe impact of COVID-19 in Brazil, a key market for us, which resulted in volume declining by 1/3 in that part of the region. Region, Asia Pacific, where the COVID-19 pandemic started first in January and February 2020, was holding up well in the third quarter, with flat volumes leading to a still double-digit volume growth in the first 9 months of the year. There too, Gourmet was impacted by COVID-19 precautionary measures, which led to a low single-digit decline. But the speedy recovery of demand in key markets, such as China and Japan, cushioned the impact of the lockdowns. Food manufacturers showed good resilience and grew by mid-single-digit in the third quarter, keeping volume growth up in the double digits for the first 9 months of the year. Sales volume of global cocoa shows similar impact from COVID-19 in the third quarter as the chocolate business and declined by 14.6%. Now let me get to Slide 7. We thought, at this time, besides the traditional quarterly view, that it was worth sharing with you a different level of granularity. So rather than focus on the quarterly picture, let's have a look at what's happened in more detail month by month. At the peak of the lockdowns in April, our Gourmet & Specialties business lost somewhat more than half of its volumes. But even during that time, we continue to sell, and we continue to support our customers with creative initiatives like Not Without My Chocolate or with the online CHOCOLATE ACADEMY, which featured even more learning session and like webinars for chefs and customers. With the easing of the lockdown measurements, restaurants, hotels and shops are progressively getting back to business, and we are obviously at the forefront to serve them. The food manufacturers and global cocoa business were more resilient while still suffering from the changed consumption patterns and in particular, from a shortfall of imports consumption as people were asked to stay home but also from the temporary focus of retail on larger A brands. This led to volume decline in the mid-to-high teens in the third quarter, which, as I said earlier, was also facing a tough comparison base from prior year, when a number of new outsourcing contracts came on stream and when we started the consolidation of Inforum. What is important and what is, I believe, very remarkable is that the whole time, our network was fully operational. We have been able to serve customers throughout the crisis despite very erratic demand patterns. And in that context, we even improved our service level. I know because a number of customers have told us that this will not be forgotten when better days come again. Since mid-May, we see improving trends and the latest volume development in June show a further move in the right direction feeding our confidence in a gradual recovery. So ladies and gentlemen, let's now cast our eyes forward. As I said, COVID-19 clearly was a major unforeseeable event with a negative impact on our third quarter. But we do believe that when it is over as a vaccine or efficient treatment comes on stream, we will come out of this period even stronger. We've had the opportunity to test our model in a big storm, and we have proved how resilient our systems, our network and our teams are. We have also shown to our customers that they can trust us to deliver even in tough times. Our long-term strategy is also during this crisis time, proving to remain very relevant. Despite COVID-19, we further expanded. We deepened our presence in region Asia-Pacific by bringing on stream in June a fourth production line to our chocolate factory in Senoko in Singapore. We made a strategic acquisition in Australia by adding GKC Foods to the Barry Callebaut family in May and we closed the acquisition on July 1. In region, EEMEA, we signed a significant outsourcing deal for the supply of compound and chocolate. Despite COVID-19, we continue to innovate. Summer is upon us. And as I said, summer will painted in ruby colors. For those of you that are in Switzerland, you can see Ruby all over the Street. It entered the ice cream and drink category. You see Magnum Ruby everywhere. It even says that it's the most successful magnum launch. Starbucks launched the great tasting and also extremely Instagrammable Flamingo Frappuccino in Asia, pretty cool actually. And furthermore, we also continue to innovate in terms of the way we go to customers. We couldn't visit them in person. So we turned this into an opportunity. We launched BC LIVE in the U.S. and Canada, a digital platform where we let our customer deep dive into the trends in our chocolate. Importantly, despite COVID-19, we continue to invest in sustainability. If anything, the COVID-19 pandemic has made the need for sustainable supply chains even more obvious. And it has made what we aim to achieve with Forever Chocolate even more relevant. During this crisis, we stood by the cocoa farming communities. Helping concretely. We're directing our on the ground trainers to provide health and hygiene training, distributing protective equipment, gel soap. But also in some cases, teaching them to make soap, to protect themselves but also to generate more revenues in our crisis time. The approach we took as the crisis escalated, has been focused on our 3 interrelated pillars: care, continuity and cash, with the ambition to come out of the crisis even stronger. We wanted to protect the health of our employee and get their full support and engagement to get through the crisis. We did so by introducing, in addition to our already strict hygiene standards, extra measures in factories, in offices, in laboratories and in distribution centers, measures such as new hygiene protocols, team segregation, social distancing on the work floor and remote working to quote a few. We are committed to ensure maximum continuity for our customers so that we come together stronger and faster out of the crisis, and we succeeded in doing so. Our network kept going with great service level. And we had obviously to ensure that we continuously maintain a solid financial basis without which nothing lasting can be achieved. As you know, we secured access to liquidity by drawing 100% of our revolving credit facility. To further strengthen our financial basis, we are, as we speak, in the process of issuing a new Schuldschein to reduce our uncommitted and increase our committed funding. We are maintaining strict financial discipline and manage our working capital tightly. As governments are lifting the COVID-19 precautionary measures, we expect to emerge from the crisis with even closer relationship with our customers and suppliers. With our fresh insights into innovative ways of doing business and with a solid financial basis. So -- and I'm now on Slide 11, let me summarize what we have been sharing with you. The COVID-19 pandemic is a major unforeseen event, which makes fiscal year 2019, 2020, totally atypical. And this leads us to exclude this year from our midterm guidance. We are [indiscernible] and guidance starting in September '20, with increased metrics of plus 5% to 7% recovery from COVID-19 without major lockdown resurgence. I would like to call out the resilience that all Barry Callebaut colleagues have displayed in adapting to a new normal work situation. This includes not only the fact that they have been adapting when working with social distancing in factory or when working from home. It is about their ability to pivot in a very challenging situation to keep the business going, no matter the circumstances with incredible spirit. We received many message of thanks from the customers, from suppliers and from government because we kept our operations running. So I would like to end this presentation with a huge, huge thanks to all of you colleagues around the world for your resilience, for your perseverance, for your passion, for your entrepreneurial spirits. They make our company and our values shine. And on that, we will open to questions. So operator, can you please instruct participants accordingly?

[Operator Instructions] The first question is from Mr. Jörn Iffert of UBS.

Two of these, please. The first one would be, you mentioned that you are likely emerging stronger from the crisis with better client relations. Can you give us maybe a little more clarity? Have you intensified outsourcing these discussions recently? Are you also seeing that maybe some come gourmet competitors are struggling in this environment? So some more clarity would be appreciated here. And the second question, a technical one on the guidance. If you would have assumed that 2020 is more a normal year, this would imply then that in the '21 to '23 guidance implies 3% to 5% volume growth. So below the 4% to 6% you were guiding previously, is this roughly correct?

I'll take the first one, and Remco will take the second one. The -- if you look at where we are today, I mean, the crisis is opening new horizons in many different ways. Obviously, as we said, gourmet is more affected. Obviously, also, the pace of recovery is going to be faster in FM than it is in gourmet. But beside that pace of recovery, we probably see a number of opportunities that are emerging. I mean the first one is just linked to the fact that we did deliver, in a difficult time, at a time where other people didn't deliver. So we proved the robustness of our model. And we were able to stand by customers and prove the resilience of our model. And this is obviously something that will open new opportunities. Not everyone was capable of doing the same. So we will obviously be able to open to new customer. I think the second layer of opportunity is linked to outsourcing. At the time of the crisis, a number of people are more open to question their business model. And as a result, it opens new opportunities for outsourcing. We are, as you know, in permanent engaging into conversation. But we certainly don't see a slowdown of those conversations, to the contrary. We see a renewed appetite to explore different kinds or different ways of working. I think the third one is in Gourmet, paradoxically. As you know, in Gourmet, we have much smaller market shares than we have in FM. So the crisis led us also to really dig into our customer portfolio at looking at where we had our gaps and at becoming much more systematic at addressing those gaps. Both through our distribution, trying to make our distribution stronger, but also through our direct approach to make sure that whilst the markets are recovering, we are also not only counting on the market recovery but also broadening our market shares by tackling our customers we weren't properly addressing in the past. So this gives us actually quite a broad base of opportunity. Once again, the pace of recovery is going to be faster in FM than in Gourmet. Once again, we cannot precisely predict that pace of recovery, but we see the -- we certainly see the opportunities, and we see the start of the recovery as well. Remco?

Thank you, Antoine. Yes, I think you partly answered already the second question. But Jörn, what is very clear is that we believe that the market at some point will come back. So that is very important. We believe as well that in FM and in Gourmet, as Antoine explained. In the meanwhile, we can do additional -- we have opportunities for additional growth. Now the horizon of the new midterm guidance is a 3-year period. So over this period and also comparing it with this year, which, of course, will be a small decline in our top line in volume. And of course, with that baseline, it's logically that our growth is then coming out slightly higher over that period, so that we get back on the trajectory we were before. And it is that exactly what we are very confident in.

Okay. And many thanks. Maybe one technical question at the end. You mentioned you had a larger outsource in Eastern Europe. Can you mention roughly the size and from which quarter you expect this to kick in?

So I mean, we expect it to kick in, in the first quarter of next year. We have been asked for the moment not to disclose more. So I hope we'll be in a position to give you bit more further down the line.

But Jörn, what you have to think of in terms of size is small to midsize chocolate factory in that volume range, you have to think.

The next question is from Jean-Philippe Bertschy of Vontobel.

To come back to your guidance, my first question would be like to what extent M&A is playing a role? And of course, related to that, if you have seen a renewed interest of some of the players wanting to sell their assets, maybe? The second one would be on -- probably difficult for you to answer, but how much of your business is exposed to tourism? And the third one, if I may, is like you are alluding to digital, I think Antoine? And to what extent it was playing a role during this COVID? And if you changed something structurally going forward?

The digital and all the learnings, how does it impact our business.

So maybe let me start with the last question. I think the digital -- I mean, the crisis was an extraordinary opportunity to accelerate what we do in digital. I think from an internal standpoint, the first thing is improve the robustness of our systems. I mean we moved everybody that was in offices are working from home. We had doubled the VPN, and we had anticipated on the crisis. We had literally flawless execution. We have our shared service center in Poland. It has been working also remotely without any interruptions. The changes we had made over the last couple of years in digitalizing everything that has to do with invoices has proven extraordinarily valuable. So the internal system have been tested in real-time. It's, by the way, proved also, as I think, everywhere in every company, that there are plenty of things that you can do remotely without having to get on a plane. So I think there also, we are learning. Externally, we've also accelerated on a number of fronts. I was earlier this week, and I cannot disclose with whom, but I was having a top-to-top and co-creation session, fully digital with a potential customer. We had shipped sample to them before the session. We spent 2 hours doing tasting and co-creation on the video conference with them. This is what is happening now as a matter of fact, across our business. Actually, we got some new customers, in Japan through those co-creation sessions. We also accelerated what we do in Gourmet there, with lots and lots of training through our digital academy. So I think it accelerates the -- I mean, the commercial part of digital, what we see as well and which we find extremely interesting is that the -- I mean, the digital channel keeps growing very fast. You remember, we talked about what we do in China with Leclerc. What is very interesting is a number of the gourmet players started to try and pivot their model. And as they couldn't host people in the restaurants, they started to do home delivery. There too, we are trying to help. So it is an inflection point and an acceleration of digital. In the same way, by the way, as SARS was the inflection point that gave the birth to Alibaba in China. So we'll see more of it. And I think there, we are fairly well equipped. So start of the journey, but it's looking pretty good.

I can take the other 2 questions. Jean-Philippe, first of all, on the exact split of Gourmet, we don't give normally information. But what we can say the following, and you can see that also on Slide 7, which Antoine has shown you, that when there was a full lockdown in April and in May, our Gourmet business was down by about 50%, which is impacted by a couple of categories. So tourism is a role with the hotels and restaurants, which is partly tourism, patisseries, et cetera. So that part of the channels were significantly impacted with the full shutdown of the -- and we expect that to increase with, of course, the last part being the whole tourism sector. So to give you at least some indication of where we are standing there. On the M&A front, I think it's still very important to make a split between additional competencies we're adding, which is a separate category from outsourcing, and outsourcing is not M&A. And it is also depending on how we structure a deal. So take, for example, now the Australia situation, correct? We have some additional business there, and we have as well done an acquisition. But that could be equally done in a combination of setting own infrastructure there, like we have done, for example, in India. We will compare that on an individual case, what is the smartest and the best and allows the best value creation. Of course, we will continue on the path of outsourcing on full strength in all the opportunities we see, and that will be a combination of own investments and acquisitions. On the, say, pure additional competencies, yes we will keep on looking. But currently, that is not really included in the guidance.

Yes. And on M&A, as we have been seeing -- I mean, all along, it's more -- we're looking at bolt-on acquisitions. We are looking primarily at Specialties & Decorations and Gourmet. When there is a thing that is making sense that comes to the market, we will look at it. And obviously, those times are times where I'm sure there's going to be opportunity, but we will remain financially responsible, and we have never overpaid anything, and we have no intent to start.

The next question is from Jon Cox, Kepler Cheuvreux. Go ahead, please.

I have a few questions for you. And you mentioned June improving, I wonder if you could just give us numbers for that. You obviously can see them. That would be useful in terms of the food manufacturing versus what's happening in Gourmet. First question. Second question, you did a presentation about 9 years ago on sales by segment in Gourmet. At the time, you were over a half in bakeries and patisseries. Almost 1/3 in Horeca, and then confectioneries was about 16%. I'm guessing that split now is more like 1/3, 1/3, 1/3, particularly what you're talking about, the 50% to 60% decline in April and May. I wonder if you can just confirm that for me. Just any question on EBIT. Now you mentioned this 5% to 7% growth being at least in line with whatever the top line is. If you look at consensus at the moment, EBIT growth for 2021 is almost 20%. So you've pretty much done all of that in one year potentially. Or are you saying actually, no, don't -- that's too ambitious. You shouldn't expect a bounce-back like that in EBIT, even if there is a recovery in some of your higher-margin businesses. A question on food manufacturing. You mentioned the smaller customers are struggling a bit, and the big customers are doing all right. I wonder if you can just give us a rough split there? I guess the smaller guys are maybe 20%, 30% of your business. And the big FMCGs are 70%. So just a question on the outsourcing deal. Is this a new or an existing client? And then just the last one, and I'm sorry about the shopping list of questions. Just on the living income differential, what are your thoughts about that going into the new financial year? And I think you have said just be a bit cautious on that and the impact potentially on profit going into the new year on a $400 per tonne?

Good. So let me start maybe with your last 2 questions, Jon. And maybe with a word of I mean, you would expect me to say that. But we are in those 9 months, I mean disclosing much more than what we do usually. We will still remain on the 3-year guidance, and we don't intend through go to the last granular details month by month, not because we don't like sharing but because also we are the only one to publish in the industry. And that would represent a competitive risk. So I want to be clear on that. So I'm afraid unless Remco has a different view, but your precise question on the -- either the granular details of June or the food manufacturing, we can give you a general sense but not a precise answer on that one. The outsourcing deal is a new customer. So it is a customer with whom we weren't working. It is a customer with whom we have been discussing for a long time. It's the start of a journey. It is an exciting one because it opens also new fronts. So it is a clear example that our model is capable of attracting new people. And as I was saying earlier, I expect the crisis to actually open new doors, some people have to revise their business model. So it is definitely a new customer. On the living income difference, as you know, it comes into action with the common crop. We have all along been saying that we are supporting the principle of it. As you know, in our Forever Chocolate, we have a commitment on our farmers poverty, which is one of our key pillar, and it's something that is very important to us. Because as a long-term business, you want to have farmers in 20, 30, 40 years. You want them to take care of their trees, take care of their farm and make sure there is cocoa. What we've said also in support of the -- in support of the LID. It is very important that the money that is being given to the farmers is being put into action in order to solve the structural yield issue that you find, in particular, in African farms. I mean as you probably remember, on African farms, our yield's 300 to 400 kilos of cocoa per year per hectare, well managed from our yields 1 tonne per hectare. So just by doing the right thing in the farm, you can almost triple the revenue of the farmers. So LID is an application, as we have said, we have passed on to our customers. It's a tax. We don't pay tax for our customers. So this one is being passed on. Remco, over to you.

Thank you, Antoine. On the numbers, correct, on Slide 7, you saw clearly, Antoine describing what is happening and we look more positive at June. You see also an arrow there. So we see clearly a positive trend in June. How fast we will be back to growth, that is still to be seen, but that is not expected for Q4. If you look at the EBIT over the coming years, that really depends, of course, on how fast all the markets will come back. We believe in the end, the market both for FM and Gourmet will come back in place. But of course, the phasing of that will also drive the EBIT coming back to pre-COVID levels. But of course, when we will grow also in FM, there's also an opportunity to do things on the EBIT side and outperform on the volume. We will manage very tightly our costs, correct, and with Gourmet market share gains, which we're targeting will give that opportunity when the market comes back, of course, that has a bigger impact. The timing for us of that is a question mark. We see, of course, a lot happening on the medical front in terms of vaccines and medication. Yes, I'm a very positive person, so I expect that to come in and then things to get back in place, but clearly, we don't know when that is. So to comment exactly how then 2021 will look like, it's just simply not possible to give that number. But don't keep -- please keep in mind the midterm guidance is for a 3-year period. And over that period, things should fall back in place, and that's where we're jointly going for.

And the split of the Gourmet? Can I just, like -- just take the 2011 slide? Or...

Yes. As Antoine said before, of course, as a company, we have further developed since 9 years ago. There's some information, which is known in the market. We have taken a policy of not going in detail in this regard for the same competitive reasons Antoine has described, the market competitiveness doesn't allow us to do that. That would be shooting on our own foot. So I'm sorry, Jon, I cannot comment more.

But you can understand the risk is, of course, on the Horeca segment, if travel -- it's something JP was alluding to, doesn't come back for a long, long time, that business could be aching for a couple of years even.

Jon, travel is not the -- I mean, travel is not the major part. I mean we are very strong in bakeries, in pastries, in confiseur, in the hotel and restaurants. The -- I mean, you told us that when you were traveling you have seen more [indiscernible] than us in the big international hotels. So I guess, it's an opportunity for us.

And then Jon, also don't forget, this isn't the worst. We were at 50% down, and now we're climbing a lot back. So also to see that in the context of the answer which Antoine has given.

The next question is from Mr. John Ennis, Goldman Sachs.