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 Conference of the Barry Callebaut Group. The topic of the webcast is the half year results of the 2020 - 2021 fiscal year. The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, I would like to turn the conference over to Claudia Pedretti, Head of Investor Relations of Barry Callebaut.

Good morning, ladies and gentlemen, and welcome to our half year results 2020 -- 2021. We are here for the media and analyst webcast. My name is Claudia Pedretti, I'm Head of Investor Relations. And speaking to you today are our CEO, Antoine de Saint-Affrique; and our CFO, Ben De Schryver. Please be reminded that the information given during this conference 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. This is our agenda for today. Antoine will present to you the highlights of the first half year and then hand over to Ben, who will walk you through the financial review. He will hand back to Antoine for his remarks on strategy and outlook before we will finish the webcast with a questions-and-answer session. You will get instructions from the operator once more at the end of the presentation on how to ask your questions. And with that, I hand over to Antoine.

Thank you, Claudia, and good morning, ladies and gentlemen, and welcome to our half year results conference. It is once more, and to my sorrow, in a virtual setting. But hopefully, we will be soon able to welcome you again in person, and finally have you try some of the fantastic chocolate innovation that we have been cooking for our customers and do so face-to-face. Before we go to the results, let me start with what was for some of you, I understand, a surprise in this morning's release. As you will have read this morning, I will, at the end of this fiscal year and after 6 very rich and very exciting years at the helm of Barry Callebaut, pass the baton to Peter Boone, who currently presides over our Americas region. Peter, that many of you know very well, has an amazing track record as a business leader, as a people grower and as an innovator over his many years at Barry Callebaut, and I think no one could be more ready than he is to fill this role. As you will also have seen, I intend to remain very closely associated with Barry Callebaut. I will be proposed as a Board member at the next AGM. We have been planning my succession for quite a while with the Board, and we have in the past weeks come to the conclusion that the end of this year would be a very natural moment for it. The company will have navigated the crisis well and is coming out of it stronger, as you see from the results. It will be then ready for it next chapter. Whilst I'm sure it will be for me a very emotional moment when at the end of the year, I step down from a company which I served with passion. I believe it's the right thing to do at the right time. And I must say I'm very delighted that the Board was able to pick, after a thorough succession process and for the very first time in the company's history, a successor from within Barry Callebaut. This is a clear tribute to the strength and to the quality of the talent bench at Barry Callebaut. But before this happens, I can promise you, you will still have to bear with me for about 5 months. And I can promise you as well, we have no intent to stay idle during the next 5 months. Speaking of bench strength, I'm also delighted to announce two newcomers to the executive committee, both of them strong, homegrown talents. Steve will be succeeding Peter as President Americas as of September 1. Jo will become our new President for Asia Pacific, as per July 1. Both are great homegrown talents, and I'm really delighted to see homegrown talents joining our Executive Committee. Let's go to the next slide, please. Now let's have a look at the financial highlights for the first 6 months. We have seen continued volume recovery, and we have delivered solid profitability in a still challenging environment. The disciplined execution of our smart growth strategy, together with our continuous capability building and the successful sharpening of our business model, are the basis for improving performance. Sales volume continued to recover in the second quarter, further reducing our decline to minus 2.9% for the first 6 months of the year. Our EBIT was solid at slightly below CHF 300 million, up 3.8% in local currency compared to our prior year EBIT recurring. Our net profit increased even by 6.9% in local currency compared to prior year recurring. And we reached a strong adjusted free cash flow of CHF 163 million. Ben will share more details with you on how we achieved those solid results. Next slide, please. You obviously are all familiar with the graph on Slide 6. It shows the volume development third quarter on our cocoa and chocolate. It clearly illustrates our continued volume recovery and shows that our chocolate volumes are nearly returned to positive territory in the second quarter. This recovery in our chocolate was achieved in what is still a challenging environment due to our COVID-19 restriction in our major markets. Volume of Global cocoa was down by minus 9.6%, as we continue to focus on more profitable activities. Let's now have a closer look at our key growth drivers on the next slide. Emerging markets volume led the recovery with plus 6.1%, excluding cocoa. Markets like China, but also and despite COVID restrictions, India and Brazil contributed to the recovery. Long-term partnership and outsourcing start contributing to the recovery as well. And we see increasing number of discussions starting as a consequence of the COVID-19 pandemic. Gourmet & Specialties volumes showed resilience for the first 6 months despite significant lockdowns, in particular in Western Europe. There, our efforts to sharpen our business model by reaching out to new customers, new channels and expanding our geographical reach resulted in a slight positive volume growth for Gourmet alone, and is setting the stage for continued recovery and positive growth going forward. Next slide, please. As you can see from this very busy chart, and I don't expect you to read anything of it, a lot was achieved in the first 6 months of the year. Let me highlight a few for you. In a nutshell, we continued building for the future and gearing up for a post-crisis world. We kept expanding our customer and geographic footprint with the opening of a new sourcing facility in Ecuador, with a new factory -- a new chocolate factory in Baramati, India. India is the world's second most populous country and one of the fastest chocolate-eating countries with our, for instance, also a new distribution partnership with Garudafood in Indonesia. We kept making good progress on sustainability, which I believe will play an even more important role as a result of the pandemic. This year, again, the carbon disclosure project gave us a top ranking for engagement on climate issues in our supply chain. And another example, we started a promising collaboration with Seekewa, an award-winning start-up from Cote d'Ivoire on a pilot project to increase and diversify income of cocoa farmers in our Cocoa Horizon program. But it is not only on sustainability topics that we bring our innovation to the market. Next slide, please. We do believe that our customers will need innovation more than ever as consumers' behaviors are evolving as a result of the crisis. This is why we focus more than ever on our new trends and innovation. We keep tapping in the growing demand for plant-based indulgence. Through our Plant Craft range and products such as our 100% dairy-free milk chocolate, we just opened our first fully segregated DFC production in Norderstedt in Germany. When markets open again and travel opens again, on your next trip to Italy please take the opportunity to experience the taste or the new taste of cacaofruit or gelato, which was developed in partnership with our Cabosse Natural entity. If you cannot travel or prefer to stay in wonderful Switzerland, you may want to try the new Magnum with our premium Belgian caramel chocolate, which is also already in sale in Europe if you don't live in Switzerland. I promised you that next time we see each other, you will have the opportunity to taste those and many more. And with that, I hand over to Ben, which will introduce you to our key financial numbers. Ben, over to you.

Thank you, Antoine. Good morning, ladies and gentlemen. It's a pleasure for me to present to you a strong set of results for the first half of 2020 - 2021. This time, we still meet in a virtual environment, but I'm very much looking forward to meeting many of you in person. Now let's have a look at the half year results in more detail. Next slide, please. During the first 6 months of 2020 - 2021, we have delivered continued growth recovery and solid profitability in a still challenging environment due to COVID-19 pandemic. As you remember, last year we incurred an CHF 8 million loss due to the closure of our cocoa facility in Makassar, Indonesia. Therefore, all profitability numbers in this presentation will be compared against prior year recurring, i.e., excluding this effect. As Antoine said, sales volumes continued to recover in the second quarter, driven by the Chocolate business. Overall, group volume ended at minus 2.9% for the half year. The disciplined execution of our smart growth strategy and continued focus on cost control led to solid profitability. The operating profit EBIT amounted to CHF 296.7 million, up 3.8% in local currencies. The net profit amounted to around CHF 206 million, up with 7% in local currencies. And also, we generated strong adjusted free cash flow. We will get back into more detail in the coming slides. Next slide, please. But first, let's have a look at the regional performance on this Slide 14. The volume recovery was led by Region Americas and Asia Pacific, but all regions contributed to solid profitability. First, in Region EMEA, volume continued to recover in the second quarter to minus 3% despite a challenging environment, due to renewed COVID-19-related restrictions across major Western European markets. Overall volume declined by minus 5% for the half year. However, with a positive growth contribution from Eastern Europe, when comparing the underlying markets of Nielsen, this does not fully capture the full market. It does not reflect fully the out-of-home and impulse channels, which were most affected by COVID-19. Food manufacturers volume growth improved seasonally lower activities in the first quarter. Gourmet & Specialties volumes declined in the low teens. The decline was driven by the challenging market environment in Western Europe, while Eastern Europe recorded positive volume growth again. Thanks to the strict cost discipline and improving mix effect, the operating profit was up 2.2% in local currencies. In Region Americas, we had a good start to the year with a volume growth of 4.1%, well ahead of the underlying chocolate confectionery markets. Growth was supported by both food manufacturers and gourmet. The good volume growth and an improving mix was also visible in the operating profits increase of 5.8% in local currencies. In Region Asia Pacific, half year growth accelerated to 6.9%, indicating we are back to double-digit growth in the second quarter. Food Manufacturers' growth was broad-based, and Gourmet volume was back to double-digit growth, led by key markets such as China, India and Taiwan. The operating profit is up by 9.2% in local currencies on the back of this accelerated volume and improving product mix. As outlined in our first quarter update, we focus on smart growth in the Global Cocoa business, which led to a minus 9.6% volume decline in the first half year. At the same time, operating profit decline was limited to only 6.9% in local currency, in a very volatile market environment. Next slide, please. Going back at group level. Let's have a look at the gross profit bridge on this Slide 15. The improving mix effect and positive contribution from Cocoa mitigated the negative volume impact related to COVID-19 restrictions, and resulted in a stable gross profit in local currencies. The improving mix effect was supported by more value-added product sales in the Industrial business as well as an overall faster recovery in Asia Pacific. Please note that currencies had a strong negative translation effect of minus CHF 38 (sic) [ 26 ] million. Next slide, please. The cocoa combined ratio shows, as you know, the relation between the cocoa market prices of cocoa butter and powder in relation to the underlying cocoa bean price. This is a forward-looking curve. Results are normally shown 6 to 9 months periods. This is also the European ratio. While it's the most relevant ratio, do remember we run a global business. The combined ratio gives only a broad indication on this industry's profitability, but it does not reflect some important variables such as the country differentials and the LID. At the end of February 2021, the cocoa combined ratio was at a level of 3.3x compared to 3.4x in the first quarter. Cocoa powder prices remained robust, while cocoa butter prices deteriorated due to the COVID-19 related lower demand, while ample stocks were available. As mentioned before, we deliberately focused on smart growth in our global cocoa, and did not add fuel to the cocoa butter price competition. Next slide, please. Now let's look at the operating profit development on Slide 17. Our operating profit in the 6 months increased by 3.8% in local currencies. Besides the resilient gross profit, the effect of cost management and lower costs related to COVID-19 restrictions, like travel and promotional events, led to lower SG&A costs. Currencies had again a strong negative impact of minus CHF 26 million, resulting in an absolute EBIT of just below CHF 300 million. Next slide, please. In the next bridge, we show you the development of EBITDA to net profits for the first half of the year. Financial items improved by CHF 2 million, thanks to financing actions we have taken over the past years. Tax expenses were lower at CHF 43 million. The decrease mainly resulted from lower profit before taxes, more favorable country mix and a positive impact resulting from the Swiss tax reform. This leads to a temporary lower effective tax rate of 17.4%. This result in a net profit of CHF 205.7 million, up 3.8% in local currencies. On Slide 19, you can see the long-term development of our key raw materials. Please be reminded that based on our cost-plus model used in the majority of our business, the volatility of these raw materials normally does not affect our profitability. However, it has an impact on our working capital. The terminal market price of cocoa beans remained volatile and fluctuated between GBP 1,600 and GBP 1,900 per tonne. On average, cocoa bean prices decreased 9.4% compared to prior year period. Global bean supply and demand showed a sizable surplus. World sugar prices increased on average by 12% on the back of strong demand from China and delayed Indian exports. The Europe sugar prices remained on average fairly stable compared to the demand-related lower prices at the beginning of the COVID-19 pandemic. Dairy prices continue to increase on the back of strong demand from Asia and some supply chain constraints. However, on average, prices remained 10.6% below the average of the prior year period. Next slide, please. I'm pleased to show you that a continued strong free cash flow generation on Slide 20. Our adjusted free cash flow amounted to almost CHF 163 million, a very strong number for the first half year. Let me explain to you how we achieved these excellent results. Our continued focus on working capital management led to a decrease of CHF 60 million on the back of structural improvements in payables, while inventories as inventories increased in line with seasonal patterns and continued volume recovery. Interest and income taxes paid amounted to CHF 59 million, CHF 40 million lower than in prior year period as a result of the improved financing structure and lower taxable income. We continue to invest in our capabilities, which enable future growth. Our capital expenditure of CHF 138 million was about at the same level as our prior year period. Before the effect of cocoa beans regarded as RMI, the reported free cash flow amounted to 183 -- minus CHF 183 million, which shows about the same level of improvement as the adjusted free cash flow. Next slide, please. Our net debt was further decreased by CHF 228 million. Considering the cocoa beans as RMI, the adjusted net debt decreased by CHF 220 million to -- by CHF 220 million to CHF 662 million at the end of February 2021. Let's have a look at the key balance sheet numbers and ratios on Slide 22. Our net working capital decreased to CHF 1.579 billion from CHF 1.838 billion in February 2020, thanks to our disciplined working capital management. Our ROIC and ROE declined to 9.2% and 12.8%. This is mainly due to the lower profitability linked to the adverse effect of COVID-19 in our mix, which is fully included in this current half year, while prior years, this was not yet impacted. The adjusted net debt decreased to CHF 662 million and the adjusted net debt-to-EBITDA ratio remained stable at 1.1x. And with that, I hand over back to Antoine.

Many thanks, Ben. Now let's have a look at our strategy and on how we want to continue to unlock opportunities before we open the lines to questions. Next slide, please. As you know, we are boringly consistent in our long-term strategy, whilst evolving when needed its execution to try and stay ahead of the curve. The continuing COVID-19 context has not changed this. And if anything, it has pushed us to be even sharper in its execution. We continue to focus on our 4 pillar of: Expansion, innovation, cost leadership and sustainability. In their own way, each of them have provided a firm foundation for our company in the current context. Next slide, please. Let me start with our expansion. We made the clear choice not to stay idle during the crisis, but to actually use it to lay the ground for the future. We expanded our footprints in major captive markets, like with our new factories in India and Serbia. We broadened and deepened our reach to geographies and customers we were not covering properly, such as, for instance, semi-industrial bakery. And we are strengthening our capability to serve customers with our new global distribution center in Lokeren. It will be ready before the end of the year, and it will serve as a logistic hub for the global distribution of chocolate produced by Barry Callebaut. On innovation, we are also consistently pushing the boundaries of what is exciting, of what is technologically possible and of what is on trend. I already mentioned the plant-based trends, which we addressed in a number of different ways. We also, for instance, are teamed up with a very promising start-up, Bloom Biorenewables, to investigate how side stream from chocolate manufacturing processes could help us become carbon positive by '25. But we don't stop here, we also want to shape the future of chocolate. On April 28 next week, we kick off the journey of Treat Tomorrow. Together with customers and with experts, we will carve the plan for our new chocolate indulgence, reflect upon topics our consumer care about, personal health, our next-generation indulgence, obviously plant-based and our sustainability and the climate. But rather than me describing at length all the great things we're going to do in a couple of days, I suggest we roll the video. So please roll the video. [Presentation]

I can tell you, I really look forward to it. We will support the Treat Tomorrow initiative, with a platform which I'm sure will provide our partners with a Netflix-like experience. And obviously, all content will be available to the journalists and to the analysts, but after April 28. So I'm afraid you'll still have to wait a little bit to access to it. Besides what we do -- next slide, please -- besides what we do in our innovation, we also keep future-proofing our business. As we always say, our cost leadership is critical in business-to-business and even more so in crisis time. This is why we keep investing [ hour ] in digital systems and in streamlined processes, further leveraging our global SAP and Salesforce platforms. We also keep expanding the scope of services from our shared service center in Lodz in Poland, which are by now bundles finance, IT, procurement and HR activities. Importantly, these initiatives are not only about costs. They help us grow. They help us to improve our business relationship management with customers and suppliers. And they help us, and you've seen that in the course of the last year, to maintain an excellent business continuity. On the sustainability front, we have been, as a company, pioneers, as we believe that it makes our business better and stronger. I'm convinced that this will be even more important as a result of the current crisis. As I mentioned in my opening, we kept making progress, but what is even more important we keep making an impact. You all know my passion for sustainability, but let me elaborate further on another topic which is close to my heart. It is our people's agenda and how to create even more than today, an environment that is inclusive and diverse at Barry Callebaut. An environment where everybody feels they can be at their best. Next slide. In January, we launched our diversity and inclusion strategy. I believe we can only grow if we grow as individuals and as teams, and if we are able to attract and retain talents wherever they are. For our diversity and inclusion strategy, we have chosen to focus on gender and on local talents. We clearly have progress to make on both fronts, and this is where I believe we can have the bigger impact. So we will go at it with time-bound and metric-gated targets, as this is the way to make progress, but also with a dream. I dream to see the day where this company will be run by kids from origin countries and by some of our daughters. Next slide, please. So let me summarize before we open to questions. In the first 6 months of the fiscal year, we have seen a continued recovery and a solid profitability. While the environment remains volatile, our continued focus on customers, our drive for new opportunities and our strong innovation pipeline, together with a sound balance sheet, make us confident that we are coming out of the crisis stronger and to deliver on our midterm guidance. Next slide, please. Finally, I couldn't close this presentation without mentioning and thanking once again the teams at Barry Callebaut. In a market environment that is extraordinarily demanding, abiding by extremely strong COVID measures, they continue to display every day passion for the customer, passion for the company, and they continue to perform in an outstanding way. So a huge, huge thank you to each and every one of the Barry Callebaut team. We are, and I am incredibly proud of them. Next slide, please. And with this, ladies and gentlemen, I conclude the presentation, and we will open the floor to questions. So operator, could you please instruct the participants accordingly?

[Operator Instructions] The first question comes from the line of Jörn Iffert with UBS.

The first one, Antoine, would be to you. Sad seeing you leaving. However, could you maybe share with us what do you think could be the next steps for the company in the next 3 to 4 years? Will the strategy remain on the fundamentals? Can Barry go, for example, outside chocolate? So what do you think would the new strategic period be filled out with? Would be quite interesting to see this from your point of view. The second question is, please, in Gourmet, this lockdown the operational performance was much better than the last lockdown. Can you share with us some clarity on market share gains, number of clients? And the third question would be on innovation. The [ cacaofruit ] product that you're also using the pulp as a sweetener. We see this launched by many, many other consumer companies. I mean is there a competitive edge Barry has here regarding mass production going forward? And also for larger outsourcing deals, so is it something which the consumer companies will do on their own over the next 2 to 3 years?

Jorn, I hoped you would have some questions for Ben rather than making me work extremely hard from the first few questions. So listen, the -- I think on the leaving -- well, first, I'm not leaving for the next 5 months. So we're going to drive the ship as hard as we can. And you can see that there is a good dynamic. I think the second thing, which is very important, and you've seen that from all the appointments, is a message of continuity. It's our people that have been around the company for a long time, it's people that have been part for -- I mean, to the strategy. I mean, Peter was working hand-in-hand with me on Forever Chocolate. He has been instrumental in our innovation pipeline. He has been running our strategy in -- or the deployment of our strategy in the Americas. I'm also joining the Board. So if anything, you can take is a message of continuity, and is a message of where we keep being a growth company, which is being an innovation company and which is being a value-adding company. On your questions on Gourmet, I mean, you said it exactly right. I mean what we said at the time when the crisis was hitting, is well, we are not going to stay idle. Some circuits are closing. So obviously, the -- I mean, the restaurants are closed. Well, luckily enough, the terraces opened 2 days ago in Switzerland. But it's not the case in France, not the case in Germany. It wasn't the case unless -- until 2 weeks ago in the U.K. So our travel is closed, our hotels are closed. So rather than looking at that, we really focused at looking at which were the customers that we are underserving, which were the geographies we were underserving, and was our range strong enough. So we've made some significant inroads with our people, like semi-industrial bakeries, to take an example. We've made significant inroads in places where we were underrepresented. I mean you take Brazil, I think we've discussed it together in the past. Brazil, we were growing extremely fast, but on the base of hotel and restaurants in the Rio and Sao Paulo area. We were actually very small in the Nordeste, where the restaurants and the hotel closed in Sao Paulo and Rio. We reconfigured the sales force to go after the semi-professional in the Nordeste of Brazil. And you've seen -- I mean, the results in Brazil are just amazing. We have two things in mind there. One is obviously -- I mean fight COVID and be back in momentum, and you see we are back in momentum. But the other thing, and that's why I'm convinced that we will come and we are coming stronger out of this crisis, is when are the terrace and the restaurants opening again. We will benefit from the work we've done on the side and the reopening of the circuit. So that's the -- that is the vision. Can I put a number on it? No, so I'm going to disappoint you there, even also that I don't know when the terrace and restaurants are going to open outside Switzerland, but that is the direction of our travel. On innovation. Innovation is more relevant than ever. We know that on the core. And plant-based is really core innovation. You see that -- you see it everywhere. It's doing extremely well. I was delighted to see our Magnum launch our Caramel Dore. I mean they are too, it's a core variant. But we also innovate by bringing totally different things, so infusions that go into the products, or cacaofruit products out of which you make gelato. So innovation is here to stay. We are convinced, and I hope you'll be able to look at what we do with Treat Tomorrow. We are convinced that if anything, we will get more out of our innovation. Last on outsourcing, I told you again, I think that as a result of the crisis, where we have proven a couple of things: One is, we can deliver continuity and we've delivered outstanding continuity in times of crisis, and we are competitive. So I'm sure that some of our customers are listening to the call. We'll look at opportunities to outsource to us.

Antoine and all the best to you, but I'm sure you will see us before you're leaving.

I'm not going for another 6 months, Jorn.

The next question comes from the line of Jon Cox with Kepler.

Antoine, as Jorn said, I'm sorry to see you go. I'm sure I speak for everybody on the call. But Antoine, you seem a bit too young just to take up Board appointments. Should we expect you to return as a senior executive in another organization then, down the road? If you could give us some indication where you may be going, that might be useful. And then a couple of nuts and bolts question. Then just on the cash flow, very, very strong. I'm just wondering -- on the payables, are you starting to use trade financing there regarding payment to some of your suppliers? Because you talk about a structural improvement in that trade payables line. I'm just wondering what's going on there? And then just given the good figures, do you have a best guess for free cash flow this year? And then sort of like a question in terms of the -- if you look at operating profit, it was down about 4% or so versus 2019 H1. Should we assume that will be the same for the second half of the year? Or any reason why it shouldn't be, just in terms of us trying to work out where the business may be going? And then the last one, I'm sorry, and I'm rambling on a bit. Basically, just on the Gourmet. Obviously, that's now down around 6% volume in Q2. Just wondering what you can say about Q3 March and April? Obviously, you are seeing things opening up. Is that sequentially improving? And have you swung positive in Gourmet in the last few weeks since the start of the quarter?

So Jon, thanks for your kind words. I'll take the first and the last question, and I'll leave the rest in the capable hands of Ben. Well, listen, first, I'm not that young. So that's the first point. Second point, I have only one focus for the foreseeable future, which is drive the results at Barry Callebaut like there is no tomorrow, and leave the company in full swing. Then I'm sure I'll take a vacation, and join the Board. So that's my focus and my sole focus for the next 5 months. On our Gourmet, obviously, as you know, we don't give you early guidance. We don't give even quarterly guidance. So I won't give you a number there, but let me try and help a little. The -- you've seen where we were in Gourmet a year ago when everything was closed. You see where we are in Gourmet in this quarter, where still you have a large number of things that are closed. The difference can be explained with -- by what I said in response to the prior question, which is that we have been working on our business model. And not staying it, also we went after new customers. We went after new markets. We also -- we went digital. So we improved what we were doing, and it shows in the results. As the markets are reopening and as, obviously, the restaurants, the hotels at some point, the travel is reopening, we should benefit from the good work we have been doing in the things that were still open. And the rebound of the -- in particular, the [ leisure ] and the travel market. When this will be is a bit -- anybody's guess. You've seen that decisions on lockdowns have been a moving feast, some people opening, some people deciding to close or some people deciding to close to -- I mean, for a longer period of time. So it's hard -- besides the fact that we don't give that detailed guidance. It's hard for me to pinpoint towards a number, but the direction of travel is very clear, and I think that out of this crisis, our business in general, but our Gourmet business is coming stronger. Ben?

Good. Thank you, Antoine. Jon, so on your question on cash flow and on payables, we use, of course, all kinds of tools, and trade financing is one of them. It's only one of them. Basically, it's a very simple thing. It's about paying attention to the details and also in your payables side, is also making sure that you do the right partnerships with the right suppliers, having a longer-term view. And then, of course, your trade terms is one part of it. So that's the reason why we can ingrain it in our business and where you see an improvement as such. For the free cash flow question that you have, of course we don't give an estimate for the year. The one thing that I would want to highlight, of course, as we are growing again, you will see the receivables part in our working capital, of course, normalizing. We said it at the end of last fiscal year as well. So that's about CHF 100 million that will come back at the end of the year. But the other measures that we have on our cash have been ingrained and are also very stable as such. On the operating profit, it would be too simplistic to just take our first half year and double it as such. Antoine talked about the positive sides and signs that we see. As a CFO, of course, I have to also watch on certain other aspects in terms of our costs, our SG&A cost. Of course, there is -- some of it was temporary in nature. We had, of course, linked to travel costs and trade events, marketing events as such. As the business is opening up, you see an increase of those costs as well. And secondly, you will see also in terms of distribution, and it's not something new. You see that in a lot of businesses. We see a lot of pressure in terms of the logistical cost as well. But having said this, I must say that we have a very strong positive view. But again, we don't give specifics on the second half as such, but have more a midterm guidance. With that, I think that answers...

I think we go to the next question.

The next question comes from the line of John Ennis with Goldman Sachs.

Yes. And Antoine, to reiterate earlier messages, obviously, wishing you all the best for the future as well. I've got two questions. My first is on the EBIT per tonne improvement. Of course, you cited mix as a big component. So I just wondered if you could detail what exactly is driving that mix improvement? Is it down to customer mix? Is it down to product mix or another reason? Because I guess as Gourmet recovers, we should also see a favorable mix contribution from that as well in the second half? So that's one probably more for Ben. And then Antoine, maybe one more for you on outsourcing contracts. Have you announced any new contracts in the second quarter that you can share with us? And can you give a bit of a steer on the outlook or the pipeline for the remainder of the year? Usually, outsourcing contracts tend to be a 30,000 to 40,000 tonne contribution on an annual basis. But I guess, year-to-date, we're running below that run rate. So is that a fair conclusion? And is there anything to read into that?

So let me start the second question, indeed Ben will take the first one. On the -- on outsourcing first, we run on average 30,000 to 40,000 per year over the period of the guidance. In some years, we do much more. In some years, we do less. So it's not -- I mean, a clockwork. I mean this is -- they can come in spates. You can discuss them for a long time. It doesn't come as a clockwork. We have a very healthy pipeline. We have a number of discussions that are going on. We have concluded a number of outsourcing, which we haven't announced because our partners asked us not to announce. So If you look over the -- I mean, over the period of the guidance, we are pretty confident that we are and that we will deliver on these components of our goals. The fact that it was it was a bit slow, it's accelerating, but it was a bit slow at the beginning, is when you do an outsourcing, you need to go and visit the factory of your customer. And as we do to protect our factory, a number of customers didn't let us in their factories for sanitary reasons. So some things are taking a bit longer but it's not structural. It's more a matter of phasing of things. So our pipeline is looking good. We have a number of small or medium-sized deal that came onstream that we haven't announced because either we don't announce them or because our customers didn't want us to announce. But altogether, the diameter is there. And we have a number of really interesting conversations that are going on and things are accelerating as a result of the pandemic as well. Ben?

Go to -- on the first question about EBITDA per metric tonne. What I can say here is in the midterm view, of course Gourmet is important in our profitability mix as such. For me, it's all about strategy, and we have executed our strategy very vigilantly. Our smart margin growth is basically looking at accelerating of our Gourmet business faster than our food manufacturing business or faster than our cocoa business. And it's all about trade-offs. As I mentioned earlier on about our global cocoa business, where we had to take trade-offs and going for a lower -- a decline on our volumes, but looking at the bottom line as well. So what is Barry Callebaut all about? It's about the mix between the different business units, but it's also a mix between the different geographies as well. Now you saw already in the second quarter, our Asia Pacific business are growing faster. So that's also an important factor to our overall EBIT per metric tonne mix development. So we'll continue to watch on that in the midterm as well, making sure that we do good housekeeping. But at the same time, pedal to the metal as Antoine always mentions.

The next question comes from the line of Jean-Philippe Bertschy with Vontobel.

And the first one would be on growth. And I think the underlying growth is getting -- or gaining traction. And to come back on outsourcing, and you have been telling us that basically the conditions are quite favorable. The first part of the question is, if you think you can overshoot these 30,000 to 40,000 tonne per year in the coming 2 or 3 years? And related to that, net debt is at kind of a record low. What is your view on the M&A pipeline, if you have some deals coming up, if you're becoming a bit more aggressive on that side? The second one is on innovation. I think it was very interesting to see the setup of a new factory or separate factory in Germany for vegan and dairy free. And if you can share with us what are your expectations in the midterm in that part of the business? Keeping in mind that when you look in the long-term perspective, your breakthrough innovation like Ruby or Seekewa were very marginal in terms of volume. And as a [ complete ], if I may, on sustainability or ESG. You've been really making some significant progress on that part. But child labor is always kind of an issue, recently kind of a political issue in the U.S. So what is your plan here to tackle that issue, now that it is impacting your business too much?

J-P. So I think I'll take on with the help of Ben, but I'll take most of them. On the growth and on the -- let me start with the M&A. M&A, we will keep looking and we'll keep actively looking at M&A. And we keep actively looking in the same way we've done in the past, which is mostly value-accretive bolt-on acquisition that either bring us capabilities we don't have or bring us market positions we don't have, in a market that is relevant to us. So the -- we don't disclose what we do there. I can tell you, we are pretty active and we keep talking to a number of people, but we keep doing that in a very disciplined way. So you probably remember that in the last number of years, we never overpaid on an acquisition. When we look at our capital allocation, we have plenty of organic growth opportunities. So there is always a trade-off between what you pay for an acquisition versus investing your capital into organic growth, which is the base for capital allocation discipline. Our outsourcing, once again, we don't give guidance or we don't change our guidance, doesn't come like clockwork. I mean there are plenty of opportunities, it takes many different forms. So I'm afraid there JP, I'm not going to be super, super helpful. On the innovation and on plant-based, it is a trend that is a trend that is here to stay. It is a trend that is extraordinarily material. And it is very difficult to do a milk chocolate without milk that tastes like milk chocolate, which is very difficult on two accounts: One is making sure there is no traces of milk in your chocolate; the second one, making sure that it is tasting like chocolate. And this offers us obviously opportunity because it's technically difficult. It's difficult in terms of production, and therefore, it's a value-added market. So you see it -- you see basically exploding everywhere. You saw what we did two years ago with Magnum Vegan in the U.S., which was at the time the best and biggest launch of Unilever. We are doing lots of things with lots of people. I won't tell you how much it is in our turnover or volume, but it is not insignificant and it's certainly, it's a growth driver. On sustainability, we are very clear. You know that one of our 4 pillars of sustainability is about zero child labor in our supply chain. You know that child labor in the supply chain is, in the vast majority of the case, in all the cases we have been noticing on our side, are kids that are working too hard on the farms of their parents. And that is something -- and doing things that shouldn't be doing. That is something on which we are actively engaged. As Barry Callebaut, we do monitoring. We do remediation. We are very systematic. We are going deep. And by the way, we are extremely open in everything we report, but we work also hand-in-hand with our governments, with communities and with NGOs, because that is not something that you resolve by yourself. I mean it has to do with the availability of school in some cases. It has to do with the availability of infrastructure. It has to do also with community work, which is why, by the way, we do lots and lots of community work. So that's something that we keep netting progress on, together with governments, together with NGOs.

If I may just add, Jean-Philippe, on your question about the net debt as well linked to the M&A. Of course, we -- the net debt is an outcome of a lot of work. But it's also during the crisis as well, that Antoine mentioned it earlier on. It's about cash. It's about continuity and it's about cash. So of course, we made sure that we made -- that we had the right liquidity going into this crisis. And then taking also a look at our financing structure as well. As you know, we have converted quite a bit of our debt in long-term debt. That is all with a bit of fixed interest rate or with an hedged interest rate. So with that, of course, we have the ammunition to come out of this crisis now. But it doesn't mean that we have to go after every target. For me, it's more important about the quality of the analysis that we do. Can we do it by ourself? Can we grow organically versus inorganically as well? But having said this, if there's a nice opportunity in the market, absolutely, we will look at it.

We also have a question from the Q&A tool on the webcast, and the question is coming from Philippe [ Ray ] from [ La Chifie ]. And he's asking, so you will broaden your customer segmentation. What does it mean in particular for the Gourmet & Specialties segment?

Well, thank you for -- I mean, thank you for the good question. The way I would probably best explain it is, it is continue to do something that we call deaveraging. So if you look at your average market share on the segments -- or on the market, let's say it's 20%. Then you look at one level further down at the places where you are below that average. And you start taking them one after the other. And you do that by segment, you do that by geographies. And geographies could be countries or could be subregions. So if you take Gourmet, we have very strong market shares in Canada, where we have an amazing business team. We have very weak market shares in Germany. So how do we bring, what does it take to bring the market shares of Germany to the level of at least the average of the company, if not the level of Canada? If you look at Brazil, as I mentioned earlier, we have very strong market shares in Sao Paulo and Rio, but we were very weak in the Nordeste. What does it bring to deaverage and bring them back to the average? And you do exactly the same by segment. So you look at the various segments, we were very strong in restaurants. We were not that good in our semi-industrial bakery, both in terms of our market share, both in the breadth of our portfolio. So you look at where the gaps are and you fill the gaps. It's lots of executional discipline. And I must say it has served us well [ and it's ] reinforcing our business.

The next question comes from the line of Alex Sloane with Barclays.

I've got a couple, please. Obviously, the midterm guidance has -- you've reiterated that, which is as expected. But obviously, after minus 2.9% in H1 does imply a meaningful acceleration going forward. When you set that target of 5% to 7% last year, perhaps you were not expecting the 10% decline in cocoa in H1. So just wondering, is reiteration mean you're even more confident in recovery prospects at Gourmet and growth in FM? Or is the reiteration of that guidance, more a view that the cocoa drag that we've seen in H1 will prove quite temporary? And then secondly, just related to that on cocoa. Obviously, cocoa butter prices have been falling, while palm oil prices have been rising very significantly to near all-time highs. If this is sustained, would you expect this to lead to any recipe reformulations in the industry, with more cocoa butter use as opposed to vegetable oil use in your customers' products going forward, potentially helping reduce some of the ample stocks of cocoa butter that you referred to?

Let me take the first one. You take the second, Ben. On the -- I mean on the midterm guidance, I mean it is our -- first, it's a midterm guidance. So it's not our quarter-by-quarter or year-by-year and subdivision by subdivision. And we reiterated it because we are confident in our midterm guidance. If you look at cocoa, we made the decision not to go into, I mean, a downward battle on some items and not go for volume, but secure the profit. And that's, I think, a great illustration of the strength of having a 3 years' guidance. It enables you to make the right choice for the midterm, while still delivering on to your guidance. So we are confident, yes. That's why we said it. What's going to be the phasing of it? I cannot tell you because we don't tell that. But we do see -- and you've seen that in the quarter -- we do see a nice volume recovery, and we don't anticipate it to go any other way. Go Ben?

Thank you, Antoine. On the second question about cocoa butter prices falling. Indeed, we have seen that, and it's quite normal and natural. Cocoa butter is entirely -- almost entirely used in real chocolates. And of course, when you see the confectionery sales going down through -- due to COVID-19, especially in EMEA market, it has an effect on the stocks of cocoa butter because at the same time, the cocoa powder is used in much more applications. It's used in drinks, it's used in bakery products and so on as well. So there is much more offtake there versus confectionery. As the markets are changing -- as the markets are opening up again, we will see the trend that there is, again, going to be a need for quite a bit of cocoa butter as such. On the price differential between palm and cocoa butter, yes, you will see some effects, but I don't expect it to be big because the only reason why palm oil is used as well, is for certain applications and in certain geographies as well, to make it more heat-resistant in tropical climates and so on as well. I don't think it's necessarily always a factor of pricing, but it's about the functionality of the chocolate-type products you see in the market as well. And I don't think it's going to be a big trade-off between cocoa butter and palm oil or that it is certainly going to be a huge switchback.

And don't forget that a reformulation exercise, which means also changing the packaging, is an extraordinarily complex exercise for any consumer goods company. So you -- I mean, it takes a bit of reflection before doing it. So they won't react on also short-term trends, as Ben just said.

The next question comes from the line of Pascal Boll with Stifel.

I have one question. We saw strong growth in Asia as well as in America, where Europe was clearly lagging. What's your expectation for H2 in those markets, also with regard to your reiteration of the midterm guidance?

Do you want to take it, Ben? Or shall I?

Yes, you, and I will chime in on the...

So listen, the -- as you've seen, we are still having different dynamics at this stage between the various regions, for obvious reasons. I mean the large parts of Western Europe, in particular, was in the lockdown. We know also that a number of customers in Western Europe are servicing travel, are servicing duty-free. So that's why Western Europe is more impacted. You see a very strong rebound in most of Asia with our Japan still impacted, but a pretty remarkable rebound in China and an impressive, actually, performance in an Indian country, which is heavily affected by COVID. You see the same, by the way, in Brazil and to some extent in Mexico, which are also heavily affected by COVID and doing very well. I think the -- as the world goes back to normal, we should get back to what we have seen in the past and without giving any guidance by region because we don't do. Where you'd see in Asia, where we still have plenty to go forward. It's a very large population. It's a growing chocolate market, and we are only in some way scratching the surface there. Still with a good sustained dynamics in the Americas. The American market is very dynamic. There are plenty of things to be done there. Brazil and Mexico, to talk about 2 large markets, are also extremely dynamic. So you should see a return to or the continuation of a good trend there. And Europe will, when the COVID is over, come back to normal. So we don't expect major shifts from the past when it comes to the overall dynamics if it can [ held ].

Maybe I have one follow-up question with regards to Asia. You said you are only scratching on the surface there. Do you see there differences to the rest of the world in order to get a more edge on this market, or how does that go?

Do you want to take that, Ben?

I have spent quite a bit of my life in Asia, and it's near and dear and close to my heart as well. The secret of success or the secret sauce of doing business in Asia is, of course, we're a global company, but we have to adapt to the local market needs. Their tastes are different. Even when you look at the market of China, there are differences between taste profiles in the North and the South and so on. So the first thing we did, we were an early adopter in Asia. We started very early by producing locally in Singapore. But in the meantime, we have a solid footprint in Asia Pacific to cater to those local needs, having local teams on the ground. And as the markets are opening up, and you saw that in a lot of markets, there is a taste for chocolate. It is growing. Some markets are growing a little bit faster than other markets. We are well placed to capture the growth. I think that's what Antoine meant by scratching the surface. It is only the beginning. It's a snowball effect, we will see acceleration in the coming years as such. Because just to give you a small comparison: in China that the consumption of chocolate is about 100 grams per person. In Japan, it is more than 2 kilos. So you already see within Asia, the differences between chocolate consumption as well. What I would say that is, the growth is there. The potential of the market is there.

So I think we are coming at the end of our time for Q&A question. If you have any Q&A, by all means, you reach out to our Claudia Pedretti, who will be absolutely delighted to take them, answer them. And I'm sure anywhere, we will see a large number of you in the roadshows in the coming weeks. So on that, a big, big thank to all of you for joining the conference. And I'm very much looking forward to see you, in Zoom probably, or in Google Hangouts in the coming days and hopefully in person in the near future for us to taste some chocolate together. Thank you.

Thank you.

Ladies and gentlemen, the conference is now over. Thank you for participating in the conference. Have a good day.