Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Hello, everybody. Thanks very much for joining us today for Barry Callebaut Forever Chocolate: Impact beyond 2025 investor Q&A session. Delighted -- my name is Mike Tyrrell. I'm the editor of SRI Connect. I'll be moderating the questions. I have 2 very simple things to let you know. Firstly, to let you know that the call is being recorded. This is just for the company's usage, but we need to let you know that in advance of case you have any concerns. Secondly, is to tell you how to ask questions. When it comes to questions, we're try and group them in the relevant sections in the relevant issue areas. So please do use the post-question feature on Zoom. And what I'll do is I'll read them out, but also if your question is more complex or requires follow-up, I will open your line. Hopefully, that way, we should be able to get a very good flow of well-structured questions and answers. We've got a number of people on the call today, so we're going to try to be efficient about that. With that in mind, I'm going to hand over to Claudia, who is going to introduce the team at Barry Callebaut and leave us into the presentation. Over to you, Claudia.

Perfect. Thank you very much, and welcome, ladies and gentlemen. It's a pleasure to welcome you today to our special session for investor and analysts so that we can answer all your questions. You might have following the launch of our Forever Chocolate an impact beyond 2025 strategy from yesterday. I'm here with the entire team today to answer all your questions, and I'm delighted to have Nicolas Mounard, our Vice President for Sustainability and Farming; as well as Oliver Von Hagen, our Director, Global Ingredients Sustainability and of course, also from our corporate communication and ESG communication side, Christiaan and Taryn with us today. Mike already introduced himself, he will act as a moderator as you know, and we are supported by the interactive team today as well. So prior to addressing your questions, Nicolas will take a few minutes, and he provides a brief summary of yesterday's launch and the highlights of some of the changes and additions. Please, Nicolas.

Thanks, Claudia. So we'll try to keep it short, probably 10, 15 minutes on the main highlights of yesterday, and then we'll open up to questions. Next slide. So next one. We just wanted to start with a quick reminder about what Forever Chocolate was back in 2016. Most of you will be familiar with the structure, but basically 4 pillars, one pillar around [ Prospa Pharma ], which is the poverty reduction and agricultural pillar with an ambition to lift 500,000 funders out of poverty by '25. We have the second pillar, which was the zero-child labor, verbalized around an initial commitment of eradicating child labor from our supply chain by '25, which is our climate and carbon commitment, which was basically structured around 2 sub commitment being common positive being forest positive and then the sustainable chocolate the fourth pillar, which was around having 100% sustainable ingredients in all our products. Before we move into the new plan, I think we just wanted to maybe take a second through the next slide to also say how proud we are of what we've achieved over the last 6 years. And we just wanted to highlight 4 main elements of progress. Obviously, on Prospect nature on prosaic farmers, sorry, we are roughly midway through with 215,000 farmers above poverty line. I'm sure some of you will have some questions also around the world and poverty line. Just for you to know, it's been revised to at $2.15 per day back in October. But year-on-year, we were anywhere adjusting the 190 with the inflation. So we were already factoring an increase on that test. On the zero child labor, we have now some child labor monitoring and remediation system on 81% of our direct supply chain, which also was a great achievement. On the carbon side, we ended up with minus 18% reduction in carbon intensity per tonne and probably also one that we are extremely proud of the fact that at the moment, half of our business is sustainable. For you to know, the baseline was 16%. So we started with 16% of the business being sustainable, move to 50% in 6 years. So quite an achievement. Next slide. And next one. So basically, the thinking is structured around also 3 key ideas. I might actually start with the one on the far right. mainly because you will have seen some of you that last week, we took the opportunity to release a white paper and release all the data we have gathered over the last 6 years in Ivory Coast. And for us, there is a real willingness to really root the new plan into all the knowledge that we've acquired over the last 6 years and all the data we've combined. We also acknowledge that one of the reasons why we decided to sharpen the '25 commitment is because SUSTANIT is a very moving environment, a very evolving environment and that sustainability in '23 doesn't necessarily mean exactly the same as in '16, and we wanted to capture that evolution. And yes, again, for me, a key idea also of yesterday is like targets are one thing, but we also want to give a message of know-how and capabilities. and that we are also very proud and very confident in the how in the doing in the approach as much as in the targets. Next slide. I'll go actually straight to next slide. I'm pretty impatient to move to questions, so I want to save a bit of time. Can we move to the next slide Yes. So basically on that side, we capture what we announced yesterday. We wanted, as you know, to do 2 things and to kill 2 birds with one stone yesterday. We wanted to sharpen the '25 target based on our understanding of what could be achieved and what would need a revision. But we also wanted to give a long-term view of where -- what we think the next step of Forever Chocolate was for 2030 and even beyond for [ Trevi ] nature. Then if I take them one by one, and then Oliver and I will give you a bit of substance of the approach. But basically on Prospering farmer, the 25% target is not changing. We're pretty confident that we will achieve the $0.5 billion cocoa farmer in our supply chain being listed out of poverty. Then for 2030, through the target, we're trying to achieve 2 things. First of all, we want to achieve or to acknowledge the discussion on leading income. So we think it's a very fruitful discussion. And obviously, the question was for us, can we make a hard commitment to leaving income? And the answer for us was no and there was 2 main reasons for now. The first one is around the fact that we are a B2B company, and that's 2, in order to commit to living income, we need our customers to committed living income, which is not a reality yet. And just for you to know, if we're considering currently the farm gate price in Ivory Coast and Ghana, leaving income would mean an additional $1,000 to $1,200 per tonne on top of the [ systemicity ] price that we're charging at the moment. But there's also more fundamental reason for us where we really believe that leading income can only be a reality through a massive transformation of cocoa. And we want to be quite a leader in the discussion around the transformation of cocoa farming. And we think that in order for the income to be a reality, there is a lot of factor that needs to change, including size of farm, which is a key factor. So we want really to advocate for a radical transformation of cocoa farm. On human rights, we're committed to having full due diligence on our supply chain. You will have noticed that we are also expanding from talking only about child labor to now talking about human rights. That was obviously on purpose. There is a willingness for us not only to address child labor, but to also address other topics like force labor. And then for 2030, what you will -- the spirit of what we formulated as a target for 2030 is very much the fact that we believe in the necessity to move from a very individualized logic on -- particularly on child labor to a more collective community-based and systemic-based approach. I'm sure you will have some questions on this. So I'm shifting out to trading nature. We keep the commitment of being for us positive for 2025. And then we really wanted to embed trading nature into the science-based target. Most of you will be familiar with that. But really, this is the translation of the Paris agreement into the corporate world. And for us, there's a core commitment to focus mainly on our own emission more than relying on the voluntary carbon markets to offset. So there's a real willingness for us to decarbonize the business. And we also announced a net-0 commitment for 2050, which is something that also we are extremely proud of. Finally, on the fourth commitment. Again, I really want to reemphasize the huge progress that we made on this one, starting from 16% to 50%. According to our forecast, by '25, we will be probably around 75%, 76% of the business being sustainable. We think we need 5 more years to make it up to 100%. But we also wanted in that commitment to add also something that we are very proud of, which is the commitment to full traceability to farm level by 2030. So here are the target we announced. But again, for us, it's the target, but it's also the approach. And both Oliver and I wanted to bring you through our thinking about the way to achieve this target and how we are approaching the program. Next slide. Next one. So then when we talk about poverty reduction and we talked about agriculture in general, for us, it's quite a big statement that we've made yesterday around moving from a knowledge-based approach to an action-based approach. What do we mean by that? We made the conclusion that a lot of the industry actually also NGOs are really building a lot of the [ sustainability ] program around the notion of training around the notion of [ Farmasil ] school around the notion of demo plots. And therefore, for us, the assumption behind a knowledge-based approach is that basically farmer would need to be trained and farmer would need to be top. And according to the data we released last week, we don't think it's the right assessment. You will have seen that in the white paper, but we think that the main program is under investment in the farm, really very significant underinvestment at the moment in what you will have read in the paper last week, $119 per copper year in Ivory Coast, which is ridiculously low. And because we believe also in the ability of yield increase to generate property reduction, we're actually pretty clear on how to achieve yield increase, but that get increase can only be achieved by a higher level of cost of production. According to our assumption, probably somewhere between $550 to $650. So what is core to our approach is to say, let's do less training and let's free up some investment capacity to company farmer in that journey towards an increased level of cost of production, leading to increased yield and leading to a reduced property. So a lot of investment for us over the last year and the coming year towards labor groups, so subsidizing labor towards access to fertilizer and also towards access to planting materials. So those are the 3 big elements that we want to push in the coming years. Next slide, twice actually Yes. Again, I want to repeat that point, but for us, it's also quite innovative and both. A lot of the industry has been structured around an individualized approach, particularly on child labor, which would mean that we would have to visit every single farmer and to interview every single child. And then based on the identification of child labor, we would have to develop some individualized remediation plan. We don't really think that the individualized approach makes sense, both in terms of identification in terms of remediation. In terms of identification, we think research like the [ Nor ] report for example, that was published in 2019 are probably better way to measure prevalence of child labor. And in terms of remediation, we're pretty clear about what are the driver of child labor, being in terms of use of chat tools, use of heavy loads, exposure to agrochemicals. And we think it makes a lot more sense to deliver remediation at community level or at systemic level and to move away from an individualized approach that we don't think is particularly effective. So a lot of the strategy in the next 3 to 5 years will be around community-based approach, system-based approach, which we think are more efficient than individualized approach. Then I'll hand over to Oliver, who is going to talk about the approach on climate and ingredients.

So talking about next slide, driving nature. Nicolas mentioned it, we're keeping our forest positive commitment for 2025. So making sure that there is no deforestation in any of our supply chains backing that with remote sensing and traceability. Data, plus adding the first positive part through agroforestry and cocoa, for example, or landscape projects in palm oil in Indonesia as another example where we protect forest and engage in reforestation. Can you go to yes, okay. That's fine. That's okay. We're also changing our current positive targets in terms of timing, but also in times of wording. Nicolas mentioned it, we're using the science-based target initiative, so really linking our targets to science and making sure that we -- with the emissions that we're responsible for stay within the 1.5-degree trajectory by 2030 and then becoming a net 0 company by 2050. And so if we move to the next slide -- you'll see that the notion of offsetting that was always part of a current positive target is not there anymore. It was important for us to change that into a notion of in setting, so reducing our emissions in our supply chains, with our suppliers and with the farmers that we source from Plus, of course, within our own operations. If we move on -- to our last commitment around 100% certified and verified cocoa and ingredients. So we pushed that from '25 to '30. So a change in timing as well, more significantly a change in wording to getting rid of the sustainable cocoa ingredients wording that we thought it was too blurry. And here, we bought being actually more precise about what the achievement is on. Obviously, the certified and verified includes certifications that we think are strong enough, are credible enough to help us achieve our targets. And then the Verified, of course, expresses our own programs such as cocoa horizons, such as programs that we run on dairy or coconut. Nico mentioned it, the additional ambition we're really adding here is the traceability to farm level. One thing is achieving that in our direct supply chain, another challenge is achieving this in indirect supply chain, so where we depend on third-party suppliers. -- that is, of course, where it is much more challenging because we depend on others to achieve this, and we need to work through suppliers to achieve this level of traceability that we need. However, we thought this is absolutely important to add a traceability commitment to offer adopted strategy as it is the backbone of a lot of the things that we do, a lot of the targets that we have, whether it's on deforestation, whether it's on decarbonization or any of the other targets that we have. So we're very proud and very excited that this is now -- visibility is now part of our take. Finally, a word on how we changed from a more conceptual and approach point of view, the last pillar whereby we've been focusing a lot on customer-centric programs with relatively low levels of engagement of governments, whether in the origin countries or particularly in the Artic countries, but also in the receiving countries, if you like. So our sales regions to a program that actually embraces more what we have said from the onset when we launched Fire chocolate in 2016 that we need to create a movement. And that, of course, includes the involvement of all stakeholders. And we stand by it. We do need all stakeholders to achieve our targets, including NGOs, but governments particularly. And we're seeing more engagement from governments in origin countries but also in other regions, Europe, for example, where more regulation is coming up, and that is really helping us achieve our targets, but we've been also pushing actively in urging countries, Ghana and Ivory Coast to mention 2, but also at EU Level 4 for a partnership because we do need to embed what we do intrinsically in what governments are doing and partnering with that. So that is an important conceptual shift as well in how we approach our last commitment of fortunate.

I think we are ready to open the question, [ Mike ], at that stage.

Lovely. Thank you very much. Nicolas, Oliver and Claudia at the beginning. That's been a very comprehensive run-through of an evolution in your program. The last slide actually had me thinking that the need to go to a wider stakeholder model is I'm sure what needs to be done. But of course, presents some challenges to investors, who would need to see individual value chains. So I imagine there are going to be a lot of people with specific questions about the changes to the those programs and what they mean for your value chain, notwithstanding that you're looking at a wider stakeholder approach. So just quickly, I'm not sure we have quite the right questioning setup. [Operator Instructions] But perhaps to get what people are thinking of their questions or formulating, perhaps I could ask a couple. So Oliver, actually. My first one is to Oliver, if I may. And you mentioned that ensuring traceability in your indirect supply chain is hugely important and difficult. Could you give us a little bit of detail on how you're going to do it.

Absolutely. I'll take example of palm oil simply because it is a high-risk ingredient when it comes to deforestation topics, but also on forced labor issues, for example. And so we work very closely with our suppliers. We've built up relationships, of course, over the years. We're engaging on programs on the ground. So how do we do it? First of all, we use our relationships with them. We link the ask for data to contracts that we have with suppliers. And so we're taking a holistic approach, whereby traceability is becoming one more metric, one more specification actually than we have when we buy from suppliers. And so it is important to -- some clear messages to them that, I mean, going forward, if you look at regulation, it will become mandatory to share this kind of data with companies like us that are buyers inside the EU. But also, we're seeing clear messages that going forward, when engaging in programs on the ground and also for that supplies outside of the EU traceability data is not negotiable anymore. And so it's becoming part and parcel of how we work with our suppliers. And so that message is one part and ways of operating. The other part is, of course, having a data infrastructure in place, working with partners that help us collect the data, traceability data and help us monitor deforestation based on traceability data. And so having a strong technical partner, on the other side is just as important. And so the combination of both, I think makes me optimistic that we're going to achieve our targets on traceability and that it actually is already a key part in how we work in this supply chain.

Thank you very much. I've got a question for Nicolas as well, if I may. Just to highlight, we've got no hands raised at this point and nobody sent in a question. So we've got some hands raising, tremendous. Okay. I'll be opening up your lines. Juan, just as a test, it would be great if you could also see if you can send us a question by the chat as well, but I will open your line up anyway.

My question quickly, then we're going to come to one seller. Nicolas, can you come back on your business? You've seen an aggressive way to put it? Have you come back on the 0 child labor target. You said 2030, but previously, I think it was 2025. Could you just clarify what's happened there and perhaps why?

I'm not surprised about the question. So no, we haven't come back on the commitment. We are still fully committed to eradication of child labor. You will have seen that in the way we also formulate and phrase the target. We are committed to remediate every single case we identify. Also really important for me to mention the approach. And I think there's a lot of innovation and boldness in the fact of, say, of acknowledging that an individualized and case-by-case approach needs to evolve towards a community-based approach. And I think we keep a strong leadership on that. Then it's clear that we also wanted to acknowledge that child labor would not be eradicated in 2025 and that we needed to be honest on this. I always give the same example. But at the moment in the U.S., you have probably more than 1 million cases of child labor. At the moment in the U.S., when your child of 12 years old and you have the authorization of your parents and you don't miss school, you are actually authorized to work full time. So they will -- we will not have achieved eradication of child labor by 25. We stick to that commitment. We speak to that ambition and that willingness, but we wanted to find the right balance between an honest assessment of the situation and the boldness of our ambition.

The chart is stable, at least for me. Yes, we're very encouraged to hear about the drive to enhance the dialogue you have with government. I think that fits really well with the overall vision that you're setting and even more than that, it's critical to achieve your objectives. We're just wondering what sort of guidelines, if any, or criteria, are you thinking of setting up to ensure that any dialogue/lobbying that you do with governments follows some sort of responsible approach, if you will.

Well, I would say, first of all, we're pretty clear again on what we -- on the vision of where we think cocoa funding should look like, and we have defined that vision per country. So now we're very clear about what we would like to see happening in Ivory Coast that we would like to see happening in Ghana, in Ecuador, et cetera. So going to create a framework that vision of where do we think we can engage with the government and on what topics. I can give you a couple of examples. One example is on traceability. Obviously, if I look at the approach that we have, our approach is structured around 3 tools. One tool is the polygon. So the mapping of the farmers. The second tool is an alert system. So we're basically uploading all our polygons into a satellite image system where we can overlap trove loss with our polygons and then investigate alert. But the third element of our approach authorized, I think, is very ambitious, is what we call yield control. So at the moment, we are capping the volume we procure from a certain farmer. We say, okay, if you have 1 hectare and you're in that region, that hectare cannot produce more than 600 kilograms breakdown. So we stopped buying 600 kilograms per hectare. For us, it's a big constraint on our supply chain. It's a big constraint that we're putting on ourselves. But obviously, as you know, cocoa and in general, commodity are liquid. So the excess volume above the 600,000 that can come from the forested area is slowing in the market. So for us, it is really important that we are taking the lead on something like your control but that year control has to be taken over by government for that control to be actually applied at country level. So all that to say, we have a model where we defined exactly the characteristic of what we would see cocoa farming evolving towards. And that created a framework in which we're going to engage with government, and then we will have a specific topic. I mentioned traceability. I could mention land that's a big, big topic. We think we need bigger farms, not massive farms, but at the moment, we estimate that to reliving income, a farm should be more towards 5 actors. And at the moment, in Ivory Coast and Ghana, we're probably more towards 2.5. So land consolidation needs to happen. And that's also a topic on which we want to engage.

And do you see scope for these conversations with government to be -- what's a word Basically, what I want to know is to what extent can you ensure that what you and others in the industry are telling the government is aligned to drive the improvements that you want to achieve?

I think what's very important on the line is that all our engagement with governments, particularly when the policy is happening in public platforms. So it's very -- it's either directly through trade associations or it's happening in public platforms such as the coal platform that the EU commission which are the accessible platforms.

I just wanted to kind of get more of an idea on -- you're obviously engaging with local governments, which is great. But in terms of how far you can actually go without the help of governments in order to achieve your sustainability goals, like thinking about the current environment you continue to work at mapping your supply chains and engaging with farmers. What's the feeling for you in order to be able to reduce child labor and ensure that your volumes are sustainable and certified?

I think it varies depending on topic. I think you mentioned traceability that's probably a subject on which things are moving forward very rapidly. We have just added over our database of Ivory Coast to go to the government of Ivory Coast, and we are really actively supporting both the development of Crest system in Ghana and Ivory Coast -- and we are welcoming the fact that team is moving forward very rapidly. On child labor or human rights, I would probably make here the distinction between Child labor and Forced labor. On fourth lever because here, we're talking about criminal cases. We need very strong engagement with local authority and child protection agency. We are discussing at the moment with the government of overcomes to sign an MOU on force labor. On Child labor, that's probably something that is somehow more in our control in terms of measurement and remediation. So we're pretty confident about the approach. Then in general, we're also very conscious that typically poverty reduction will be a big factor to reduce child labor and that therefore, there is a connection between the human right pillar and the Prospering farmer pillar. And on the processing farmer pillar, we see the need of structural change, as I mentioned, to drive property reduction. So obviously, on something like that, we think that the level of engagement with government needs to be to be really strong in order to generate the policy reduction that will have a direct impact at scale in terms of reduction of child labor.

Perfect. Pascal Boll from Stifel. So I appreciate your picture and your story you're telling us it's been pretty comprehensive. However, I think it's the fact that you adjusted your target is also fair to say that you obviously are not able to achieve targets you set in the beginning, right? Now you set new targets. So it makes me wonder, first of all, what are the main dragging factors that kept you from achieving the 2025 target? Is it that your clients sometimes don't support you enough, especially when it comes to price? Is it the governmental framework in many of the or countries? Maybe you can give us some more color here. And then related to that, what makes you confident that you can achieve the new targets by 2030. Then more specific on child labor. I mean you had a very, very ambitious goal to see any kind of child labor now you're moving your targets and your kind of approach to that. even if everything or the -- your whole value chain is covered by this remediation or monitoring systems, what actually makes sure that did labor really reduces over time. And then maybe -- yes, maybe the last one on traceability of your cocoa beans. I think roughly 20% of your volumes you source from third parties. Will it be able -- will you be able to trace those means as well? And is that an ambition? Well, you see…

Yes. I think for us, it's quite important to remember that I think right from the start, we said it's some very ambitious targets, and we were pretty clear that some of them would be fully achieved. And maybe on some of them, we would be late. But what was important for us was the movement was the dynamic was the progress. And yes, I think it was pretty clear from the stop that the bar was very high and that even if we hadn't achieved 100%, we would still be very proud of what we've done, and that's entirely the case. Then what are the main building blocks that very much depend, I would say, I can give you a few examples on that. I think on trading nature, I don't think it's the fact of not having a cheaper target. It's just the fact that -- we actually think it's fundamentally the right thing to do to reposition the targets towards in setting and that we think the world has really changed, where back in '16, it was probably normal to make a commitment of offsetting where we would say, okay, basically, let's continue having a mission that increase, and we will offset them on external market. Now the world has changed. And I think we're all quite conscious that the emission is to reduce within the business. So for me, actually, the driving nature is a more ambitious target. The fact that we announced a net 0 commitment is a more ambitious target than the initial one because we are reentering the climate commitment towards really our practice in our business. On Child labor, I think we mentioned it. We talked about it. I think right from the start, we were super proud of really putting that flag out there, mobilizing the sector and the industry towards that topic. I think specifically on this one, we knew it would be hard to eradicate. I think now after 6 years, we're pretty clear that it will not be the case, but we stick to that commitment. Then what makes us feel confident that we'll achieve 2030. Well, I would say that all the knowledge that we've acquired over the last 6 years, and that's also why for us, it's quite important not only to talk about the target, but to talk about the approach because for us, the approach, the operating model, the way of doing things is what creates the trust in the achievement of the target. And I think now in 2023, particularly, you will have seen what we released last week through on the white paper, but we are extremely confident in the approach. Extremely confident in the operating model, and that's really what we assure us in our ability to achieve 2030. And just on the indirect supply. So actually, it's more than 20% that comes from indirect on cocoa. We've already started this. So just to give you an example, at the moment, we have roughly 0.5 million tonnes of bins that are sustainable. Roughly 80% of that comes from the direct sourcing. So that's where we started implementing sustainability. We really started in the direct sourcing. But we've actually made a lot of progress over the last 18 months to start implementing sustainability and therefore, traceability through third party. And we have now more than 100,000 tonnes of sustainable beams that are fully traceable and supplied outside of our direct supply chain. So really, the whole challenge for us in the coming 2, 3, 5 years is really the duplication of our direct sourcing model to the indirect sourcing model, and that's something on which we've made a lot of progress over the last 12 months.