Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for joining us today to discuss Barry Callebaut's strategic update. My name is Christian Hansen, and I am Barry Callebaut, Head of Global Strategy. Today's discussion will be led by Peter Feld, Chief Executive Officer. For the Q&A, Ben De Schryver, Chief Financial Officer, will join us on stage. I'd like to take a moment to remind you that the information given during today's conference call contains forward-looking statements. These forward-looking statements reflect the best of our current knowledge and actual results may vary. I'd like to remind you that more details can be found on Page 2 of the presentation uploaded to our website shortly ago. Furthermore, this webcast is being recorded. With that, I am very pleased to hand the floor over to Peter Feld.

Thank you, Christian. Good day. Good morning and good afternoon, everybody. Thank you very much for joining us on such a short notice. This morning, we've announced the Barry Callebaut Next Level investment program. Our program that will bring us closer to customers while becoming more digital, leaner and agile inside of Barry Callebaut. I appreciate you all taking the time to let me walk you through the key elements of our plan. Over the past 5 months, I've spent significant time with our employees around the world, learning about our business and how we create value for our customers. I've met key customers and their CEOs from around the world to understand their thoughts on how we can create value for them and what is most critical for the success going forward. I've collected feedback from you, our investors and analysts on potential opportunities and areas for improvement. And we've assessed intensively our internal systems and processes and also and importantly, what went wrong last year in quality and why. In addition, I visited our most important growing countries in West Africa, but also in Ecuador and Brazil and I'll review the regulation and NGO perspectives on farming and ESG in general. Now during my meetings with our customers, it became very clear that our customers want us to play a stronger and larger role for them, but they also expect us to step up our game. As regulatory requirements increased steeply and consumers and NGOs rightfully demand better work around ESG altogether, a true expert in chocolate that covers the full sustainable value chain from the farm to the tanker truck is critically key for all of our customers' success. Already in April, we put a task force together with people from within Barry Callebaut as well as experts from the outside to assess in-depth what works well, where we need to improve, what we need to stop and start doing to deliver more relevance and more stickiness for our customers, delivering better value, better service, better sustainability and better quality at better costs internally. Following this work over the past months, I'm absolutely convinced that Barry Callebaut all required assets enhance to push into the next decade of sustainable growth successfully and has a very important role to play for our customers around the world. As you know, our full year results will be available on the first of November. We, however, did not want to waste and not to lose time to prepare Barry Callebaut for the next decade. And hence, we are announcing and launching today our Barry Callebaut Next Level program, our plan to unlock our full potential. Now let me take some time to unpack this for you. So with our Barry Callebaut Next Level program, we will pave the way for the next decade of sustainable growth and value creation. We are moving closer to customers and markets while fostering simplicity and digitization inside of the company. We will invest CHF 500 million net in core customer areas and in efficiency measures and in turn received synergies of about CHF 250 million annual cost reductions supporting margins and cash flow. Now we're happy to say that we're playing in a very uniquely positioned area, and we're operating in a great market. Chocolate was here 2,000 years ago. It will be here in 2,000 years from now onwards. And we already today are the global market leader with a global business and a tremendously global footprint. We have a very resilient business model that is able to deliver sustainable growth and we have critical global supply chain presence at scale. Now we really celebrate our partnership-based relationships with the most important players in the industry and, in turn, have been recognized as a leader in innovation and sustainability with clear advantageous capabilities. The good thing is we're operating with a very robust balance sheet with low leverage, and what is very exciting for me is we have a tremendous passion for unlocking chocolate solutions for our customers across the entire team of Barry Callebaut from the very bottom to the very top. Now the upgrade starting position has delivered very robust growth across the past 25 years. And it is important for me to say that we are doing that serving across all our customer segments. The regional account that in food as food is local play an important role, but also the big global CPGs as well as the food service business areas, the artisans and the bakeries around the corners and the bakery chains. Across all of those segments, we have a very healthy distribution, both in volume as well as in contribution margin. And importantly, we are growing across all those segments. Now the way that we unlock value for our customers is through these partnerships that we have from the very big ones to the very small ones. And so it may not be a surprise to recognize that 30% of our sales come from products created just in the last 3 years. Our chocolate academies and R&D centers work hand-in-hand with our customers to really unlock game-changing innovation for our customers that they bring to market. So with all of that and a great strong starting position, let me unpack my key priorities as we go forward. First and foremost, we have taken decisive action on the Visa quality incidents and we've done that not just for Visa, but across the BC network. So what happened in Visa? You could say it was a perfect sum. We had 3 things come together with a supplier issue that we had with materials. We had engineering design issues in our factory that amplified the issue that we have created. And we had leadership and accountability gaps that we had to address. Now we've tackled all these areas where we clarified our cross-functional accountabilities to the plant managers globally, we have had a reset on our supplier strategy and requirements that we implemented over the last weeks. We have implemented factory firewalls and changed engineering design to safeguard our production processes, and we've implemented a new set of testing protocols to make sure that we know precisely that the quality is good that we're shipping to our customers. That work is a continuous journey. And with Barry Callebaut Next Level, we'll have a fundamental investment going into the area to ensure that we are providing the right quality to our customers also in the future. Now I already said that I've analyzed the business meeting customers spending time as our teams be that in the sales organization or in the cocoa bean growing on sourcing countries I've met our teams to assess our global processes. And you see a few examples here. We have met with our customers in China on a frozen cake manufacturer that is a strong partner for us and ships their products around the world to retailers, be that in the U.S. or in Germany or in Europe. We've met the teams in the factories. I've in fact, visited 25 of our 60 factories to get a good picture on the most modern factories and also the most oldest factories that we have in our network. I've also spent time with our bean sourcing countries, bean cleaning as well as in the growing areas and I've met our local sales teams, in that case, in south of France, where we met the team for Artisan and distribution to really understand how is the last mile to the end customer actually working and where can we improve there? Now all of this assessment clearly leaves me with a thought that we have a substantial opportunity to grow faster than the market in the future and we do that by increasing our relevance and our stickiness for our customers. I even think that right now, we are at a pivotal moment because there's a few trends in the market that should swing more business to us, and we need to grab that. First, we have customer needs and consumer trends around innovation and sustainability, as I mentioned earlier, that require an expert to really manage that. Second, we see expanded scope of our customer portfolios, they're shifting in new areas and expect us as the expert in chocolate to play a stronger role in that portfolio. And then thirdly, we have a new regulatory environment that is make it more complicated for all of our customers to operate in this field and again, should actually drive business to the experts that Barry Callebaut truly is around the world from the farm to the tanker truck. Now in that, we will have 4 strategic levers that we will look at. First, outsourcing partnerships, and that is for our top CPGs, the regional leaders, emerging brands and also retail. We will launch Gourmet 2.0, increase our global market share and drive digital engagement directly to the end customer. Third, scale up our specialty business and take that away from startup embedded into the country clusters, and we'll actually focus there on all the different things like vegan, nut-free origins as well as reduced sugar solutions, decorations or inclusions. And then importantly, as the last pillar increase our market share in APAC. We here have a clear opportunity to become #1 in the core focus countries, and that is what we will relentlessly focus on. Now, you could say the formula seems to be ready that we can actually unlock much more growth in the next decade for Barry Callebaut. But what brought us here may not be good enough to go from here to tomorrow. So we must go to the Next Level, and that has become very clear over the past 5 months. So we're launching our program that will bring us closer to markets and customers while simplifying a digitized Barry Callebaut insight. There's 4 key things by area that I want to talk you through. Closer to customers and markets. First means that we will strengthen our growth focus through a distinctive focus on country clusters, food is local. And so for me, it is fundamentally important that we have a go-to-market strategy by country cluster across all of our assortments to drive growth for our business and our customers. We will elevate Gourmet in specialties from before start-up silos into the core mix of those country clusters. Third, we will scale innovation faster globally through our new customer supply and development organization and fourth, establish an end-to-end supply chain to enhance product delivery, sustainability and quality. Internal to BC, we will simplify and digitize eliminate complexity that we've onboarded over the past 25 years through acquisitions and working with our customers around the world that today and tomorrow, does not add value to our customers. We will reset our manufacturing network for best-in-class service and quality and importantly, establish distinct digital platforms that boost speed to market and facilitate seamless partnerships for our customers. And we will streamline our enabling functions and shift work into global shared service centers. Now in that, we will invest CHF 500 million net over the next 2 years and the investments will go into areas that are most relevant for our customers as well as in efficiency measures. First, operating expenses of CHF 290 million, where we rebuild our organization, we will actually invest in IT programs as well as the next level program and capital investments of CHF 210 million that mainly will be directed in the customer supply and the development organization, our manufacturing optimization and quality upgrades in those digitizing BC and importantly, and implement traceability for our sustainability commitment to our customers going forward. Now the investment of Net 500 will be funded from within existing financial resources. In turn, we will create synergies of CHF 250 million that will be about 15% of our cost base, excluding raw materials. The CHF 250 million cost savings stem from 5 key areas: reduction in cost to serve in operations, optimizing our manufacturing footprint, streamlining the enabling functions leveraging our shared service centers and a rigorous end-to-end supply chain excellence. As you can see, we're expecting about 70% to 80% being materialized within the fiscal year '24, '25. Now in that, we will also transform our ways of working in our company. So BC Next Level operating model will bring us to a simplified, scalable and consistent organization with clear accountabilities and aligned KPIs across the group. We'll move to local customer proximity while driving functional excellence and central guidance to best practices and will implement technology and AI support a globally standardized processes and create focused leadership and teams with increased capabilities. Now again, in our 2 dimensions closer to markets and simplify and digitize BC. That means that closer to markets, we are focusing on 5 regions rather than the 3 that we had before. Each of them will have 5 to 6 country clusters. That is not the case today. It is important given we have a local food business. It is important for us to have that proximity to drive the go-to-market strategies for each country casa locally. On the other side, the scaling of innovation and the end supply chain end-to-end supply chain capability will be established, and we will be able to integrate offerings across all of our product categories in each country clusters. These things will drive growth and importantly, stickiness and relevance for our customers. The second element is about simplifying and digitizing BC. So we'll have leaner, more standardized enabling functions across finance, HR and for example, technology. We'll do smarter sourcing and will align on globally standardized and digitized processes throughout our complete Barry Callebaut Group. That, in turn, will increase profitability, cash flow and efficiency of our company. Now with these changes, we are very happy to say that we're moving to 5 regions instead of 3, created customer supply and development organizations, and we will establish what we will call an executive leadership team of about 18 individuals for faster decision-making. In that, we will elevate strategic priorities like digital, innovation, marketing and importantly, sustainability. Now I'm very happy to say that we have Peter Vanneste to join us as our new Group Financial Officer effectively November 1. Ben, who will be joining me on stage later has been our Chief Financial Officer will continue doing that and close out the fiscal year, and we're very happy to have them then move into the new role of Regional President North America as from the first of November. Clemens Woehrle will join us as our Chief Customer Supplier and Development Officer; and Jutta Suchanek will join us October 1 as well as with Clemens as Chief People and Diversity Officer. So with that, I think we are opening up the next trajectory of growth for Barry Callebaut. Our mission in that will remain as it was. We are the heart and the engine for the global cocoa and chocolate industry. and we're now accelerating to the Next Level. Thank you.

Thank you, Peter. We'll now take a short break to prepare ourselves for Q&A and also to invite Ben on stage. But before we do that, I'd like to take a moment to invite all of you to our full strategic update, which will be provided in conjunction with our full year 2022, 2023 results announcement on November 1. Importantly, this update will be presented at a hybrid online in-person event taking place in London. It will include midterm guidance linked to the BC Next Level program as well as further details on the BC Next Level initiatives and on our strategic growth priorities. So with that, I'd like to invite Ben on stage as well as take a short break to prepare ourselves for Q&A. Thank you.