Barry Callebaut AG (BARN) Earnings Call Transcript & Summary

Hi, everybody. Good to see you all today just waiting for people to join in. We've got a lot of people joining the call today. So if you can give us a couple of minutes just to make sure everybody is online, then we'll make a formal start. While we're waiting, I might as well say I'm Mike Tyrrell, I'm the editor of SRI-CONNECT. I'm going to be chairing today's session and before we get started formally, for those of you who are on, I think I'm absolutely delighted to see this. This is exactly the sort of session that we know investors are interested in seeing and it's great to see Barry Callebaut take these steps on this important issue. So I think we're in for a good call today. And the participants appear to have joined or the rate of joining seems to have slowed slightly. So with that, I think we'll make a formal start. Hello, everyone. Thanks for joining today's briefing by Barry Callebaut on the EU Deforestation Regulation. I'm Mike Tyrrell of SRI-CONNECT, and I'm going to be chairing today's session. As such, I have a few points of admin to run you through. Firstly, I need to tell you that today's call is being recorded. And secondly, I need to let you know how to ask questions. Please post them at any stage in the presentation in the chat window. And then when we come to the question session, which we've left plenty of time for, I will group them hopefully into topics of similar relevance. I will attribute you. So do let me know if it's not immediately clear who's asking the question. And then we should get a good amount of time for the company to answer them and do that through the presentation. So don't sort of wait to deliver a rush of them at the end. And with that, nothing more from me, I'm going to hand over to Sophie Lang, the Head of Investor Relations at Barry Callebaut. Let her introduce the team. Over to you, Sophie.

Thanks, Mike, and good afternoon or good morning to everyone. As Mike said, I'm Sophie Lang, Head of Investor Relations at Barry Callebaut, and it's my pleasure to welcome you today to our investor webinar on the EUDR regulation. We wanted to host the session today to share more detail on the regulation and our approach at BC. As we know it's an important topic for all of you. We believe we're well positioned at BC given we're fully vertically integrated, and we cover every step in the value chain from our strong footprint in the cocoa origin countries right through to the production of chocolate. Our session today will be hosted by Nicolas Mounard, our VP of ESG Sustainability & Traceability; as well as Juliette Cody, our Head of Forest & Climate team; myself and Taryn Ridley, our Head of ESG, are also presented to support the Q&A session as required, which, as Mike said, will be moderated by himself. So with that, I'll hand over to Nicolas.

Thanks, Sophie. Look, I will hand it over quite quickly to Juliette, who has been created and has been the brain behind the EUDR approach. I just wanted to introduce with 3 points. I think the first one is to kind of address the elephant in the room around a potential delay of the regulation. You will have seen in the news some declaration from the German Chancellor last week in particular. Just to let you know that on our side, we keep working on the assumption of 30th of December '24, probably 2 reasons for that. The first one is I think the closer we get to the date of implementation, the more difficult it will be to reopen the political discussion. If the commission was willing to extend the transition period that would be basically a change in the regulation that would require a wider debate. So we think the timing is relatively stretch to implement a delay. And the second reason is, yes, we've been welcoming for a long time and level playing field, and I don't think there's a better level playing field than EUDR. So pretty keen to see it implemented on 30th of December '24. The second point I wanted to make an introduction is how transformational that regulation is. I don't think I've seen anything as transformational in the industry for the last years. Obviously, today, we'll focus a lot on the consequences in terms of sourcing, sourcing policy and deforestation monitoring. But keep in mind that the work that has been going on in the company cover a huge scope. Obviously, the regulation means physical traceability. So we'll talk a lot about physical traceability, but you can imagine that this has a lot of consequences in the way we share factories in the way we define flows in the way we design systems. So a lot of system question. So yes, basically, for me, it's a huge transformation of the company. It's a huge transformation of the industry, both in terms of traceability, in terms of deforestation monitoring. And if I just give you one example in terms of sourcing, I think it's quite widely known that probably 30% of the Ivory Coast crop comes from a protected area. Obviously, that volume will not be available for the EU market, which still represent the biggest part for the chocolate industry. So the consequences are huge in terms of how industry is structured. The last point for me is to talk about maybe our uniqueness. Obviously, Juliette will dive into it. I don't have a sense about how other companies are approaching the EUDR or at least not in detail, but I'm super confident about the way we are approaching it. I think we are ready. I think we are very robust in our approach. And for me, if I had to summarize our uniqueness or USP, I would say 3 things. The first one is the way sustainability and deforestation monitoring is embedded into our sourcing decision. I think we're reaching a huge level of integration in the way we are working together and the way decisions are taken. The second thing is the depth and breadth of our due diligence toolbox. Juliette will also go through that, but we've developed 7 tools. I think they are quite comprehensive and it goes from maps to yield control to deforestation monitoring and key partnership with people like Starling. And the last but not least, which I think will make us very unique is the fact that we are systematizing and mainstreaming forest protection as an element of compliance for the regulation. You will know probably that there are 3 key articles in the regulation, Article 9, 10 and 11. Article 11, it's about the way we mitigate the risk. And for us, it's not a best way to mitigate the risk of deforestation than to invest significantly and massively in forest protection. I don't think that will be the case for everybody in the industry, but for us, it's what makes us unique and on a personal note, it's what makes me very proud of what we've done. Over to Juliette.

Juliette, we can't hear you. Seems like you are on mute.

Yes, sorry -- go ahead.

I was sharing that it was my pleasure to welcome everyone on the call over our strategy to reach EUDR compliance. And I will start by sharing a reminder of EUDR scope and key principles. To introduce this presentation, there are 3 figures I would like to share with you. First is that 90% of deforestation has been associated with the expansion of agricultural land. The second is that at least 50% of cocoa expansion since the '60s has been at the expense of forests. And the last number I wanted to share is that EU import 58% of cocoa produced globally. And so to address this, and in efforts to support broader climate commitments, the EU will be enforcing from January '25, a regulation seeking to prevent imports from selling commodities to be associated with deforestation or legal farming practices. So commodities and scope are pastel, cocoa, coffee, palm, soy, wood and rubber. And companies placing these products on the market will be subject to that regulation. So what does being subject to EUDR means? It means to be able to demonstrate that cocoa imported in EU is traceable, is deforestation through, meaning that it is not associated with conversion from forest to cocoa since 2020 and that has been produced equally, meaning that production is compliant with local regulation and local regulation, specifically around farming on that land. So what needs to be demonstrated is those 3 things by providing to the regulations 2 big bodies of documentation. First, what I referred to as the due diligence statements, comprising declarations and in action to all the plots that are associated with the import on the EU market. And second, risk assessments and risk mitigation declarations. So an assessment of whether there is any risk that imports in EU are associated with nontraceable, nondeforestation-free oral practices. So this is what we have to comply with on moving forward. At BC, we have worked on designing an approach that enables us to both address EUDR as well as our broader commitments that are connected to our deforestation free supply chains. And so we refer to this approach as our first positive strategy. Now I'll give you a brief introduction to the key considerations that have enabled us to build that approach as well as share the 3 elements of some of which are approaches. So our approach is structured around risk and it is structured around 3 elements: the first being knowledge of deforestation dynamics in cocoa producing landscapes. Secondly, robust due diligence approach; and third, forest protection as a risk mitigation element. So the first consideration to share with you is our forever chocolate ambition. Our ambition is to be forest positive by 2025, and what this implies is sourcing EUDR compliance and deforestation free products by 2025. Our second -- the big commitment is being in line with a 1.5 climate trajectory and therefore, having science-based targets and net zero commitments by 2050. The second key consideration that we used to structure our approach towards EUDR compliance is the fact that we have in mind and we know that we source some countries that in principal and in the majority have been ranked as either having the highest deforestation rates in 2022 in terms of surface deforested or relatively in terms of deforest surfaced on the territory. The exception that is being made is with Ivory Coast historically, which has been one of the countries that have seen relatively highest deforestation rates in country level in the last 2, 3 years. In EUDR, what this means is that we are structurally sourcing from areas that are considered to be at high risk of future deforestation. The third consideration for us in terms of how forest positive strategy is structured is refocusing on EUDR itself and its implications for us. We are required to share significant amount of data relative to our supply chain with the regulators that will enforce EUDR. The more risky the data or the latest we identify the risk in our sourcing process, the more risk is borne by the business. And so any risk associated to noncompliance is twofold for us. First, it's obviously financial because fail new checks would result in recall products, but it's also operational because if products are suspected or deemed noncompliance -- noncompliant after being cleaning stage, for instance, volumes corresponding to all products mixed with noncompliant means would have to be discarded. So the risk for us are significant in terms of noncompliance and this was structured in how we have decided to formulate our strategy towards compliance. The fourth consideration that I would like to share is around forest protection. So we did significant literature review to identify what means were available to us to mitigate risks of deforestation in cocoa producing landscapes because in the end, this is what we need to do, obviously, we need to ensure that products entering our supply chain are compliant, but we also need in a way to address and understand structurally how the risks are coming to emerge and what mitigation options are available to us. And so looking at multiple studies and specifically one method study that was performed last year, what we can see is that literature review really identifies that forest protection is key and by far, the most positive factor in reducing deforestation. So using all those considerations, what we have decided to do is structure, first of all, our approach around risk mitigation and really structured around 3 pillars: First, sourcing knowledge. So ensuring that we know where to source them from areas where we see deforestation is low and were forest positive targets are reachable. The second piece is a due diligent approach. So implementing a toolbox that is robust and that can support us in managing risk and reinforcing best industry practices in that regard. The third piece is supporting efforts through the reduced deforestation in high-risk areas, and we really foresee this as being the most efficient risk mitigation strategy that is handling also the most differentiating. So I will start by sharing our approach around sourcing knowledge. So as I shared initially, 90% of deforestation has been driven by the expansion of agricultural land and deforest. What we did first is reinsure that we build good knowledge internally of what a forest is, what conversion from forest to agriculture land means and to ensure that we have then the right approach to monitor this and to make sourcing decisions that are based on this understanding. And obviously, we also link that to a strong knowledge being built internally around how specifically that dynamic takes place in the cocoa producing landscape and how that has evolved in return, how this is likely to evolve. What we have performed is a global risk assessment. So what we have done is taking over the criteria that are included in the regulation as well as criteria linked to our own supply chain. We have assessed all main countries that we source from in terms of risk to identify where structurally or even linked to our own supply chain practices, the risk of noncompliance with EUDR was the highest. And so that -- this has guided our thinking around sourcing strategies and orientation of sourcing flows. And this is what is speeding constant discussions at the sourcing level and within that part of the business at the moment. The second piece of our strategy is really built on due diligence. So using that knowledge, how do we then implement due diligence approach that enables us to address and mitigate that risk in our sourcing practices. And so what we have done is we have formalized our approach around, first of all, risk policy and sourcing guidelines that really support our sourcing teams to make the sourcing decisions that enable us to source EUDR compliance means and on, I would say, a regular ongoing basis dynamically assess and to gain risk throughout the sourcing season. I want to share a bit more detail around our due diligence approach and how it is structured. There are 3 pillars to this approach. First, what we do is our country level, we assess risk in a way that is aligned with the regulation itself. And really the ambition there is to identify a country-level substantial level where we structurally see a risk of the crop being noncompliant with EUDR. Where the risk structurally of cocoa expansion at the expense of forest of where legal practices are high, where traceability is structurally a challenge. There, we invest in forest protection as main risk mitigation measure that we have at hand. We also have sourcing decisions being made based on that assessment and specifically where we see that very high risk is being identified sourcing committee at the highest level of the organization is gathered to make an important decision as to whether or not it is possible for us to continue sourcing these -- our products from this region and import them in the EU. The second step of our due diligence is that supplier level. So there, what we assess is whether suppliers are also structurally and capacity of delivering products to us that comply with EUDR in its requirements. So in terms of risk mitigation, we request supply to take time and action in case they haven't fulfilled all the requirements that we have placed forward to them. We also perform audits and have a reverse mechanism and training support and that we provide to them. There, again, sourcing decision is made on a supplier-by-supplier basis based on both the risk assessment and the risk mitigation elements that we have put forward. The third step is at farm level whereby we assess all farms that are associated with cocoa entering our supply chain and being imported in the EU. So this is where we assess polygons to GPS points. And asset there is a risk that these are located either in protected areas or associated with deforestation that has happened since 2020. And there again, there is unease whereby we make a sourcing decision based on that assessment and decide whether or not we can continue sourcing from those farms, but whether we have to discuss them from our database and our supply chain. To perform those assessments and to follow this risk mitigation at sourcing level, we rely on 7 tools that we have formalized and rolled out progressively over the last year. So we have formalized a country risk assessment methodology to perform the first step of our risk assessment. We have -- we are currently in the process of finalizing those country risk assessments for each of the countries and the supply chain, the assessment is done both at national and subnational level. We have similarly formalized supply risk assessment that we are currently conducting for all suppliers for direct and indirect flows. As I said, to assess whether structurally there in capacity and providing us with EUDR. And the last assessment that we have formalized is on farmers assessment. And so they're really defining in much detail very clearly what constitutes a risk and how do we assess it throughout our supply chain. We have formalized a deforestation monitoring approach. So we rely on tool that I will describe in a bit more detail in a minute. But essentially, we assess our polygons and farms that have been mapped in our supply chain against land use maps but also using remote sensing technology and to be able to assess whether or not farms have been installed prior to 2020. If conversion has happened since 2020 if there is a risk of deforestation happening around those farms. So we rely on a tool for this, and we have embedded this in our sourcing systems. In terms of risk mitigation, we rely on 3 tools, yield control, and this is really important. It's a key element of our approach towards traceability. So traceability is one of the 3 requirements of the regulation. And traceability means that we have mapped land where cocoa we buy is produced. We are in capacity of registering as well and transaction linked to that cocoa change in hand entering the supply chain. But also, we are in capacity of controlling that structure cocoa that we buy can be produced on lands that we declare has been in our supply chain. So throughout the transaction, in our supply chain, we apply thresholds to ensure that we document how much production can promote of hectare given place and that we narrowed that in the traceability processes. The 2 last tool that we have in our risk mitigation strategy is grievance mechanism. So we have a tool that is currently live, whereby stakeholders can reach out to us to inform us of risks in our supply chain and inform us of potential breaches of our own policies or the EUDR. And the final tool to mitigate risk, is stakeholder engagement. We are training suppliers, sharing our requirements towards them, ensuring that our approach is understood. We are also supporting them specifically in traceability, provided in guidelines, providing technical support, sometimes also providing support in the field to ensure that we are able to -- they are able to reach EUDR requirements. The tool that I wanted to focus on for today is our deforestation monitoring provider. So we have decided to partner with Starling for cocoa. We are currently launching that partnership and ensuring that we analyze all plots that have been marked in our supply chain with them. So we are building on many years of experience on their end on land use assessments. We're also really leveraging very high technology to be able to decipher what land use is in the context of cocoa. It's not always easy from the sky cocoa under forestry often looks like a forest. So we are very -- I'm very grateful for the technology that they have put on the market and for us to be able to understand through that tool. What is land use going forward after 2020? Move to the last part of the presentation. So the key risk mitigation strategy that we are using is forest protection. So we know that investing in forest protection is really complementary to a supply chain approach where risk is mitigated and that we know that to continue sourcing in certain areas and to continue sourcing EUDR compliant being, this is a key element of our strategy. So we're currently partnering with various institutions to tie meaningful partnerships and ensure that this is launched in the field. I think this is also something -- it's a field where private and public sector can partner for innovation. And so we also seek to push differentiation there and specifically through those partnerships and collaboration. And to guide our decision-making, we have built as well tools methodology to support us to identify how and where and whom to partner with on those forest protection initiatives. So the focus is at the moment to identify initiatives, projects and partnerships that are robust, that are relevant to this forest protection agenda that are effective in this growing right tools, methodologies, means to reach forest protection calls and that ensure permanent benefits over time. Ongoing commitments and partnerships are mostly being signed in Côte d'Ivoire and Ghana. So in Côte d'Ivoire, we have partnered with the government institution that is in charge of forest protection. It's called [indiscernible]. And we are specifically investing in the areas where risks of deforestation associated with cocoa are -- have structurally been high for the last years and are continuously being under scrutiny in cocoa. We're currently investigating opportunities in Côte d'Ivoire and trying partnerships in [indiscernible] and in east. And we're also discussing partnerships in Ghana in the [indiscernible]. So in terms of concluding remarks. At this time, we're preparing for, as Nicolas said, full implementation. We're really in the process of rolling out other tools launching the partnerships with forest protection. So it's, I think, quite transformational indeed for the business. We're reaching a point where we're seeing all those tools being used by sourcing teams and by the various teams that are engaged in EUDR. So very much, very satisfactory in that sense for us and still plenty, I think there's things to learn as we go into EUDR.

Thank you very much, Juliette. A very comprehensive presentation, very concisely delivered. And I'm pleased to say that it's stimulated a good number of questions coming in. So I'll be trying to group those and direct them to you. I wonder just -- I had one on the way through. Could you just take us back to Slide 16. Because I just wondered if other people would have found the context that I would have found helpful while we're lining up the other questions. Am I right to read that as a red is this is a high risk because obviously, you read against Cameroon, cocoa is a minor driver for deforestation. That doesn't -- that seems like it's therefore a low risk. Can you just explain how to read that table?

Yes. So this table should indeed be read as red representing high risk, medium is yellow, and low is green. And cocoa has been a driver for deforestation in Cameroon, albeit not in the same dimension as Côte d'Ivoire or Ghana. But currently, we see it as being a major driver for deforestation, and we see that risk increasing. In the coming months and coming years, with prices of cocoa being extremely high and the presence of forest to be an important in the territory as well.

If I may add a quick fact also that if you compare it to Ivory Coast, obviously, in Ivory Coast, 9% of the territories under forest. Mainly linked to it, as explained, like a huge level of deforestation over the last 50, 60 years. In Cameroon at the moment, the forest covers around 55% of the territory. So obviously, you have a lot of forest. On our polygons, we detect a presence of forest on a very large amount of polygons. So actually, ironically, the large presence of forest also makes Cameroon more risky because if you combine the presence of forest with a high level of price in the market at the moment, obviously, it's a big risk for us in the industry.

Okay. Right. I'm going to try on group questions a little bit. I may end up there for not attributing them in the way that I might. But there are a couple of questions here about monitoring and enforcement. One, if you could share some expectations of how the EU will actually monitor and enforce compliance. And secondly, what resources will be available to the authorities to monitor and enforce this compliance.

I think those are questions that we ourselves are seeking clarity over and being fully transparent. What we expect is that at least in the first year implementation. First of all, there will be a dialogue with operators and putting our products on the market. We expect that this dialogue will trigger the types of checks that are being performed. But initially, my assumption is that they will check the administrative requirements being fulfilled and that there will be sample check, for instance, on polygons that have been shared against these maps, as well as the general check, most likely in the processes that companies are putting together to compile with the regulation. But in the detail, how those checks will be performed and how checks would be performed in one country versus another, this is something still that we will be currently something that is clear to institutions alone.

Can you maybe remind the audience about the percentage of tests that will be done performed depending on the level of risk? I think everybody starts with an average risk.

Yes.

I think we're -- because that's probably a key information for the audience. I think you have 3 level of risk depending on the country. Our understanding is that everybody will start on the same baseline for the implementation, but the level of checks will depend on the level of risk between kind of low, medium and I think it goes up to 9% check, I think, on the highest level of risk. So meaning that for imports in the EU market, where the level of risk is to see it as the highest 9% of the transaction are supposed to be checked with obviously the caveat that you did mentioned where we expect Tier 1 to be relatively lenient.

And I think this is probably another relevant contextual question. How much of the global cocoa supply do you think is not compliant with EUDR today?

Over to you first.

It's honestly, it's really hard to tell. Then I think more than a positive assessment, what is important to keep in mind is the fact that the biggest gap towards compliance is around traceability. At the moment, there are significant portions of the cocoa supply chain that are not traceable. When this is going to multiple factors, I think the industry has done a lot of effort in the last years towards traceability, but not to the level that majority of the supply chain is currently traceable. I think also it's fair to recognize that in a normal farming context, traceability can be challenging, especially by its requirement scale. My hope is that traceability systems being reinforced by exporting countries, like Côte d'Ivoire or Ghana but also gradually support the request and requirement to have traceability of covering the vast portion of the supply chain. But yes, I would say, in general, more than a quantitative assessment, I think it's important for everybody to the fact that it is traceability that is the biggest gap towards broad compliance in the supply chain.

And to give an order of magnitude, I will just revert back to my point of introduction. Obviously, Ivory Coast still represent 40% of the global crop. There I think all the literature sources are pretty clear that particularly on the topic of protected area, we're talking about a significant portion of the crop, probably somewhere between 15% and 25%, 20%, 30%. You have different assumptions, but the significance of it is not in that.

And then perhaps a follow-on to that, real deal of capital asks, what are the expectations for volumes that are considered ineligible? Will these be shipped to markets that don't have regulation?

Well, can I quickly take this one? That's, I think, both for Juliette and I, an argument that we are fighting. I think we heard a lot of that internally 12 to 18 months ago, say, okay, what is not compliant, well, just go in other markets. I think there's limitation to that. First of all, you should take the 2 biggest alternative market for us, North America and in Asia. In North America, most of our customers already have requirements in terms of traceability and transparency. So we actually think that for most of our big U.S. customers, the level of demand will be pretty similar versus Europe. And okay, APAC still remain a relatively marginal market in terms of consumption of chocolate. So I think there is no expectation that APAC will welcome all the noncompliant deals. What I would also add is a genuine concern on our side from an industry perspective about a potential 2-tier market where, indeed, in depending where the destination of the beans will be. You might have a competition between people like us who will mainly source compliant beans and more regional players that typically might be dedicated to the in region and be less demanding and therefore, have to pay a lower differential. But those are key questions that we're also addressing through professional association, particularly ECA, European Cocoa Association, in order to be clear that we are all playing according to the same rules. But again, back to what Juliette was saying, for us, the emergence of a national traceability system in Ghana and Ivory Coast, which basically represents 65% of the global crop. That's the main guarantee that we will all play according to the same rules.

And then one more question on context and we'll come on to your response next. So is there any country that's at risk of being excluded altogether from EU imports?

My answer this would be no. I think -- so there are several things. First, the EU will work on country benchmarks whereby it will assess structurally, whether commodities from a given country are associated with deforestation, where do you think they practices, working on those work challenges. But those benchmarks have not yet been made public. Do you think there is a diplomacy topic there that is being discussed by EU and countries that exporting commodities in scope. I don't see a ban applying to an entire country and I don't think that is realistic because obviously, commercial exchanges are not limited to products that are in scope for EUDR. That being said, it is possible that it's structurally a given commodity from a given place associated with very high levels of deforestation that obviously, there will be fines multiplied towards that flow, and that would have significant consequences on trade exchanges and relationships between given country and we...

And maybe one point also to make it busy specific. I think what also makes us quite innovative. And I'm not sure I've seen that a lot in the industry is the way we've also rethought our flows. I think it's much easier for us to try to concentrate on a smaller number of exporting country on which we put a huge amount of effort in being compliant. So a lot of work has also been going on in terms of reshaping the recipe and making sure that most of our EU volumes will be served by 5 countries. So Ivory Coast, Ghana, Ecuador, Nigeria and Cameroon, which I mean was also a very smart approach.

So there's a question which I ask you to extend on that really. How does your approach compare to that of your peers, perhaps more broadly than just this on this specific point?

Well, I can quickly take this one. I think for the moment, we don't necessarily have a huge amount of detail about our competitors are approaching it. I would say 2 things. First of all, as an industry, we worked on a harmonized protocol at ECA level, the European Cocoa Association. So at least on the main articles, which are Article 9 on data collection, Article 10 on risk assessment and Article 11 on risk mitigation. We came to a broad common understanding, although if you compare the ECA protocol with what we've developed in terms of sourcing guidelines, obviously, we're not talking about the same level of detail. So the ECA protocol are a good common understanding of the 3 main articles of EUDR and guaranteeing some form of harmonized understanding around EUDR. But as a company, we had to go a lot deeper. Maybe I can also add one point on something that has kept us quite busy over the last weeks. The regulation makes a difference between plots that are under 4 hectares and plots that are above 4 hectares, requiring polygons, so basically the whole boundary of the plot to be captured or plus above 4 hectare and only a GPS point for plots under 4 hectares. If you look at our approach, we've made the decision to go 100% polygon. So probably a bit beyond what the regulation was asking, the reason being mainly around risk. If you take the logic of GPS point, I think there are 2 things that were problematic to us. First, the assumption that the GPS point would be collected in the center of the plots. I don't know how much of you guys have been on a cocoa plot, but finding the center of a plot is not the most obvious things to find. And second thing, if you only have a GPS point, then you should define a catchment area, that catchment area according to what we see in the industry is roughly 4 hectares. And for us, if we rely on GPS point because you don't know the exact bundling of the farm, there's 2 risks, one risk of picking up forest positive. So deforestation earlier that would occur within the catchment area but outside of the plot. But also to miss some deforestation alert that would actually happen within the boundary of the plot. So for us on a question like that, with all the think in-depth work that has been going on in the team and particularly under the leadership of Juliette, we've decided to, from a risk management point of view to go for adds and polygons.

And I just want to pick up an extended question and you may have answered this, but Chris Armstrong from Berenberg asks it. So I'll read his question out because you may want to explain a little bit. So should we read Page 16 as it makes it more likely you will source from lower risk countries like Ecuador, Indonesia and less from established countries. And do these countries have the ability to supply in volumes and to comply. So you did mention a focusing on 5 countries, but is there going to be a significant shift? And do you -- can you get the volumes from the countries you're shifting to?

Maybe I can say a word of introduction on that. I think the idea according to which we would shift significantly away from West Africa, at least for the coming 20 years is probably a wishful thinking. So the short answer is no. Obviously, Ecuador is an exception. We are growing really fast in Ecuador and the plan for us is to source yes, probably between 80,000 and 100,000 tonnes of beans from Ecuador probably the second biggest origin for us in terms of sourcing in the coming 2 to 3 years. Other than that, I don't think you should read that as basically we're going to stop sourcing from Ghana and Ivory Coast. That's not going to be the case. I think we need to take that as, obviously, in order to keep sourcing from Ghana, Cameroon and Ivory Coast, we need to understand the landscape very well and being very clear on where in this region and from who we can keep sourcing. But there is no intention for us of declining volumes from Ivory Coast, Ghana or Cameroon.

And then the other -- sorry, one more related question, then I'm going to move it on, we may need to come back to this topic area. But Stefan Frischknecht asks does he understand correctly that you're not sourcing from Brazil and Indonesia? And is this because of the high risk in terms of first mile traceability?

I can take Brazil rapidly then maybe I'll do Indonesia. Brazil is quite obvious. Brazil is a deficit market. So basically, all the crop of Brazil is used on the domestic market for the Brazilian market. Just for you to know Brazil imports spending on the year between 20,000 and 30,000 tonnes of beans from elsewhere, particularly Ghana. So there's no export out of Brazil because Brazil is just not self-sufficient. So Brazil is not an EUDR topic for us because everything we buy in Brazil is consumed in Brazil.

And speaking about Indonesia, we haven't decided not to import beans from Indonesia. I think there's -- we are prioritizing other flows in our direct supply chain. But we do see that Indonesia as other countries as that portion of the supply chain where huge efforts have been made by suppliers to EUDR complaints. So there are challenges for sure, linked to first mile traceability in Indonesia, but this is not a decision that we have made a decision to stop sourcing for the EUDR.

Okay. Now I want to move the questions on to have other questions of competitive advantage. And then also one question or sort of a multipart question on the pricing and costs. The question is on competitive advantage. What have been the biggest opportunity you've been able to realize by changing your processes to align with EUDR? And the second one -- no handle that one first. So what are the advantages? And how do you see this playing through the competitive value chain? And then I'll come on to the questions of costs and pass through.

Can I start with the answer. Maybe sharing a bit of, I think, of our experience. I think if you look back 12 or 18 months ago, I think -- where I think we've been good is understanding quite early on the magnitude of what EUDR would generate. And I don't think it's been the case in general in the industry and with our customer. I think you took a lot of time for them to understand what EUDR would mean. And I think that creates a key competitive advantage for us because, it gave them some time to wake up to the magnitude of the regulation. Now over the last 2 or 3 months, we've seen a radical change in the nature of the dialogue what everybody over the summer and probably a little bit before that, I said, okay, I mean, this is absolutely huge. And we said, okay, yes, we know and we've been working on that full on for the last 18 months. And we saw, I think, a big shift over the last month with a clear thirst from our customer for robust implementation. Obviously, what makes EUDR quite unique is like the burden of proof is on us and the burden of proof is passed along the supply chain. So the burden of proof is also passed to our customer. And we are basically guilty until being proven innocent and that statement is also true for our customer. So basically, if we're not able to prove that the risk is nor or negligible, then we will have to wait for the product and the financial risk, as mentioned in Juliette's presentation, is very high. So the robustness of our approach for me is the key -- is the key competitive advantage. And obviously, our model of the vertical integration with a strong presence on the sourcing side, where a very significant proportion of our volumes is sourced directly by us across a very large presence on all these different geographies is also a critical advantage.

We knew that there were going to be some questions on cost and pass-through ability. And I said we'd take one. And so what I'm going to do is I'm going to read you the 3 that we've received and you're going to tell us what you can tell us and then we'll appreciate that, that probably is what you've got at this stage. So the questions that we've got so far is do you think you can pass on costs of the EUDR to your customers? And very much the same one, how would you assess your worldwide customers' willingness to pay for more sustainable cocoa? And then differentiated one, what are the expectations for what EUDR compliance will mean for cocoa prices? So if you could share what you can with us on costs and on prices, then that would be appreciated. We understand it will have to be determined still.

I will not plead the fifth on the full spectrum of questions. So I'll give you a bit of element of answer. I think, first, it's quite important to understand that without getting into the detail of the cost, there are 2 cost drivers. There is the cost of due diligence, but there's the cost of sourcing traceable beans. Obviously, those are 2 different cost driver in terms of order of magnitude, we think that the fight for traceable beans is probably going to be a key factor in the coming years. On our ability to pass cost to customer, I think we have absolutely no concern about that. I think the guidance from our CFO has been pretty clear that any costs will have to be passed. Obviously, because the main crop is starting in a few weeks, we've had this discussion with most customers. And again, for the moment, we don't foresee any inability to pass cost and that has been basically set in stone in our pricing system from 1 of September. So it's not a negotiation. We pass it. It's set in stone. It's set in our system, and it will be charged. Then I think the question of sustainable cost versus compliance cost, that's probably a different question. Do we see an appetite for passing all sustainable cost in the future? I think that I would probably give you a more nuanced answer on this one. Obviously, the -- what has happened market-wise over the last 6 months with price between $7,000 and $10,000 makes most of our customers quite price sensitive. And we see some tension in some of the discussion on sustainability program in general. But okay, that's a key question for us in the future because in order to get impact. I think the price of sustainability will have to increase significantly in the next decades. But yes, no concern on our side on passing the cost of compliance, and that will also be the case. I'll talk briefly about it in my conclusion, but that's going to be also the case on CSDDD on immunity diligence. For us is just a license to operate, and that's how our customers are understanding it.

I should just say, Ephi Young, sorry, I apologize. You did ask this question as well. I think it's -- I didn't read it out of verbatim, but I think it's probably been covered there as well. A slightly different and related one, AAK have said they will build in Europe and inventory of palm oil ahead of year-end regulation, the regulation start to buy them time. Do you plan to do that?

So you see there's always 5, 10 seconds of delay in the hope that my colleague will take the question on my behalf. So I'll give a technical answer to that. So obviously, there is -- the regulation was voted and live in '23. We are at the moment in the transition period and the transition period will extend until 30th of December '24. And during that transition period, any product that hit the EU market as long as we can prove that the import was prior to 30th of December '24, doesn't have to go through the whole process of assessment of no negligible risk. So are we using stock? Basically, yes, but to a limited extent because you would also know that we have quite strict stock targets and also, we are looked at quite carefully in terms of our balance sheet and working capital. So I don't think it's a strategy for us to use inventory as a way of compliance. Yes, of course, on some specific cases we do, but it has not been at front and center of our strategy. Basically, we'll be ready for 30th of December '24, irrespective of level of inventory.

Thank you. I'm going to flag it before. We are going to finish on the hour. So I'm going to spend the next minute looking for any questions that I may have missed. But whilst I do that, we've got 2 great questions from Peter Forslund. One is would reforestation efforts be able to be packaged as a way to sell carbon credits, while at the same time, harvest cocoa sustainably? Is this an option that has been explored? And his other question is you mentioned that Theobroma cocoa trees are part of the natural floor in the regions mentioned. Have you considered reforestation of patches of land where cocoa trees are planted as part of the reforestation? So I'll leave those with you to answer the technicals while I find any other questions. Anybody else who has a question to ask, this is your time to put it in the chat and we'll try to get through as many as we can by half past. Back to you, Nicolas.

Go ahead.

Okay. So on the first part of the question, cocoa tree has been part of natural form and flora. So we really distinguish the difference between forest and agricultural land. So land that is in agricultural it is mostly exported to harvest a given crop cannot be considered ever as a forest. And so that is also something that is mirrored very clearly in EUDR, meaning that it's not the amount of trees on a portion of land that make it or not a forest. It's whether or not those trees have been planted and are harvested for a specific agricultural reason that we make that distinction between the forest and agricultural lands. So in our case, cocoa trees do never constitute like a cocoa plot doesn't ever constitute a forest. However, a practice that we really support and encourage is agriforestry. So naturally, cocoa trees do grow under the countries and cocoa has been grown under a certain like shape traditionally. In the last years, this shaping practice has disappeared from mostly Côte d'Ivoire and Ghana. And with that, we have seen soil fertility, decreased rainfall being also, I think, imbalanced. So we are supporting putting shade back into cocoa plots, and that is mostly towards preserving the resilience of the crop and preserving soil fertility, supporting rainfall in cocoa producing landscapes. But it's never a case of whether or not we are -- it's not to ever be seen as a risk mitigation strategy in the face of EUDR nor can it be seen as, for instance, a way to remediate deforestation that has occurred. The regulation is extremely clear on the fact that what matters is the conversion from forest to agriculture. And whether that conversion has happened before or after 2020. Any conversion after 2020 really prevents material grown on a given amount can be imported into EU and there is no remediation part that can actually revert that. So once a forest is gone, nothing that has been planted amongst the same can actually -- on that portion of land can ever be imported.

We have 3 specific questions. I'm just trying to squeeze them in on your processes. So one question is how we interpret traceability audit and the slide in front of you is having no risk assessment. So that's the first one. And the second one, among the risk assessment tools, how specifically are you implementing deforestation monitoring? And then the third, as the cocoa is transported in bags, what level will the due diligence statement be prepared at? And will the offtaker presumably a buyer, be able to use the same submitted due diligence statement.

Just for the pleasure, can you let me do the third one?

Sure. I'll answer the first 2 questions. So I'll start by answering actually your second question on deforestation monitoring and how specific we are. I can safely tell we are being very specific in a sense that we are assessing each and everybody going, each and every farm that has been mapped in our supply chain. We have defined a protocol whereby we look at land use over time through time series that reflects basically what land use have been gradually and chose to satellite imagery when it was converted from forest to cocoa. So we are very specific in that. We assess with a lot of granularity, any deforestation events that have happened. So the smallest we look at is 0.1 hectare of deforestation on a given plot and that is one of the thresholds that we need to be critical to assess whether the plot is compliant or not. We also rely on high-resolution imagery. So the satellite imagery that we get in Starling goes up to 50 centimeters of solution. So we are very granular in our capacity to assess the land use change over time on a given plot. That's to answer the second question. On traceability, what does that look like in terms of audits? So we have different levels at which this can be performed and the levels of audits will also differ depending on the type of supplier that we're looking at, but say, if we look at and give them cooperative in for instance, Côte d'Ivoire, we will check that, for instance, through a sample base, mapped plots coincide with the farmer information that we have received. We would verify that those plots have been mapped properly by them to the field, making a verification there. We would look at how transactions are being reported in a cooperative and we would also like if we were to take things a step further, look at broadly speaking, cooperatives entire business and business model. So you take a look also financials over time to see how stable the supply base is when and how the mapping efforts have taken place to make sure that it will cope up towards and matches the information that has been shared with us.

Nicolas, if I may just interrupt you there because we're going to finish very soon. Could I add one more question to you and then I'll let you go answer the bags question. and then on into your summary. Just to say, Georgia's the extent to which EUDR affects investors, I think, probably lies a little bit outside the scope of this, but I'll pass the question on to Sophie separately. A question from Cedric Norest is as this regulation adds complexity, could this encourage more brands to outsource production? So if I could leave you with the question about the bag stat and then your summary, that would be excellent.

I mean I don't have any opinion about -- we'll encourage brand to do more outsourcing deal, I don't know. Does it bring more complexity? For sure. Absolutely. 100%. I think we hope we have conveyed part of that complexity, but obviously, it's complexity in terms of sourcing the decision, complexity in terms of how dynamic the risk assessment is very complex in terms of how we organize the supply chain, how we segregate the volumes, very complex how we will deal with systems. So yes, increasing complexity, a 100%. Are we well positioned to manage that complexity? Yes, 150%. So I'll let you reach the conclusion of that. But will it make things more complex? Yes, for sure, very much so. And then very quickly on the rest. The reason why I wanted to take the last question is because that's an area where there's still different interpretation about what we call the role of downstream operators. There's 2 schools of thoughts on that. There is one school of thought that says that basically once the DDS has been produced, anyone downstream only has to collect the DDS. We are not from that school of thought, mainly because what the regulation says is that you can rely on DDS, if and only if you've assessed the robustness of the due diligence of the people of the company, of the operator, you buy the product from. So on our side, we will not realize exclusively on the DDS on the indirect supply chain where we source the product downstream. So we'll still have a robust approach on assessing the due diligence system of our suppliers, and we will not realize exclusivity on the DDS. Maybe just before I -- Sophie, I'll let you conclude. 2 remarks on my side, one is to also let you know that we've done a similar exercise to this with NGOs. I think it's worth mentioning because you will have seen in Juliette's presentation that the element of people's mechanism will take very big importance. And that basically means that us, as an industry, will be exposed to grievances, and we expect most of this grievances to come from NGOs. We already collaborate a lot with some of the main environmental NGO and their understanding of the cocoa supply chain and the challenge in the landscape where we're operating is extremely detailed and extremely sophisticated. So we see the importance of maintaining that dialogue with the stakeholders, including NGO as a very critical part of the year ahead. And we're working very well on this. The last thing I also wanted to say is like in that old topic of level playing field, we see that level playing field as having 2 legs me, EUDR is on one leg, CSDDD is on the second leg on contact reaching the market and EUDR as we described. But yes, for us, the combination of both regulation makes a fabulous opportunity for the industry to develop that level playfield beyond sustainability.

Okay. That brings us to the end of the session. So thank you very much to you all for dialing in and listening today. I hope you find it useful, and thanks also to Mike for moderation the session. If you have any more follow-up questions, please get in touch with me over e-mail. And yes, we look forward to seeing you next at the full year results on the 2 of November. So thanks very much for listening.

Thank you.

Thank you very much. Have a good day.

Thank you. Bye-bye.