Barry Callebaut AG ($BARN)

Great. Well, good morning, everybody, and thank you for joining this session. And we're very pleased to have on stage Hein Schumacher, Chief Executive of Barry Callebaut, especially on this in important day when you've released your strategy announcement this morning. Perhaps before we get into the details of the strategy, perhaps you could tell us about your first 6 months in the role.

Your appointment was made in January. What was your perception of the business as you started? Why take this role? And how did you go about appraising the challenges that the company faced?

There's quite a few questions in 1 go, but yes, let's get started. So maybe to start with, why did I take the role? I mean, I have a foods background. I love Global Foods. And there's only a very few companies in the world that have sort of that end-to-end value chain. But also -- and I think this is super important that have a very deep expertise in what they do and that are truly global in nature. And obviously, I have a CPG background to branded background. So for me, the new leadership opportunity was the business side of things. And so those were probably the 3 biggest reasons. And I felt that this was a company where you can really make an impact. The company, and that's sort of a segue, I think into this other part of your question, the company has been under pressure over the last couple of years from a number of things, a perfect storm. One very fast-growing cocoa prices. I mean, literally, it shoots up almost 5x to the historical average which obviously, you're all very well aware of. Secondly, a few big quality incidents in the large sites of the network, and that hampered customer service. And thirdly, the company went on a massive transformation. And if you do everything in one go, that had an impact on the people, had an impact on the organization, had an impact on service delivery, had an impact on stability. So I felt this was an opportunity to potentially make a difference. And I think the first impressions over the last 6 months were sort of in line with what I expected. There is a deep expertise. There are good foundations. There's a huge opportunity. I feel, for the medium and the long term, for sure. But at the same time, we had to get a few things right to strengthen our basics, strengthen the fundamentals and making sure that we do the things that our customers expect us to do.

Thank you, Hein. And so looking at the business now after that period of discovery, perhaps we can walk through your assessment of the business as it stands, and then you can talk us through the focus for growth strategy announced this morning. If we divide that assessment maybe into people and culture, the infrastructure and the go-to-market, starting with people and cultures, you say, been significant external volatility, but also a very high number of internal initiatives aimed at improving performance and also cost savings. Presumably, that can take a toll on an organization. So how would you position the morale currently? And was it a place you think where people who were outperforming actually got recognized?

I would say when I arrived with everything that I sort of talked -- that I just talked about, I think it was a bit of a fatigue factor in the company, and I felt it. Many initiatives that had to be done and we have a high attrition level overall, which is something that we talked about. But at the same time, this is a company, we are selling joy, right? I mean this is joy and indulgence and it's a very global company. And I felt that in the conversation with people, the opportunity that we have, and which is what we talked about earlier today, the Focus for Growth program to charter our own course. And I involved immediately 30 leaders from around the globe, not actually my direct reports, but below. And we did that exercise to hand pick them and with that group, we designed that Focus for Growth action plan that we talked about this -- earlier this morning in a video message. So involving people, making them part of the journey, doing this collaboratively and co-create the way forward, I think, was felt as a very positive step forward. So in every organization where you come in, there is a certain culture and so forth, but I think there's an opportunity to quickly put everyone and get it in the right direction. So I feel there was a lot of enthusiasm and passion in the business but it needed to be unleashed. It needed to be unlocked a bit. And I think that's sort of where -- that's probably where we are on the people side. I think second, on the infrastructure side, as I said, I think there was an immediate opportunity to strengthen fundamentals. I felt that the customer service process, our planning process, our quality assurance process, we're not as robust as I would have liked to see it. So I want to be very upfront about that. But at the same time, with a high operating focus and requiring discipline around those, I think we are making progress. It's not a silver bullet. It will not happen overnight. We need a bit of time which I talked about at the end of our second quarter. Hence, we also changed our guidance for this year. But at the same time, I feel that we're making rapid progress now. And I think it's a matter of, I would say, towards the end of the year, and we should get that stability, right? So that's on the processes. I think the second one is on stability in the network. The network was very aimed at closing sites in the last couple of years to reduce cost, and that's a wonderful thing. But at the same time, you need to service your customers. So what I'm very focused on is, first of all, to get the right capacity in because the customer and the consumer has evolved over the years. For example, customers. I mean, it's bifurcation that you're looking -- that's pretty global, and we're seeing it in chocolate too. Affordable solutions, then that means cocoa coatings and compound solutions and premium solutions. So dark chocolate, specialties, et cetera, et cetera. And our network was not -- was very focused on the mainstream. So we had to make some changes. And that's what we're doing now tactically to make lines more flexible, so they can either produce those compound solutions or the full solutions. But we also have to invest in capacity, and we had to cut through a couple of notes quickly. So -- which we also announced this morning, it means a significant investment in Northeast U.S. It's a place called Penn Soken. It's a significant investment in Canada, and we announced the planning or the building of a new site in the Midwest. So North America, which is about 23% of our volume, I wanted to absolutely prioritize that, make sure that that's where the money goes and revamp the network there, but it was needed. So that was the infrastructure part. You had another one.

Yes. Well, it's on the go to market. Yes. I mean, I guess when we think about the digitization of the business or sometimes a perception at the level of investment required to fully modernize, Barry hasn't perhaps been made. Is that fair at all?

Yes. I think that's fair. I think we had an opportunity on digitization and the use of AI on three areas, one in R&D, but I'll talk about that later. But the most important one for us is, I would say, in the planning and in the customer interaction. So do you know what the customer really wants, where is the signal? And how can you have your supply chain cater for that? So I think that was opportunity one. Secondly, it's in our Gourmet segment. So that's our premium -- most premium segment. And we inspire chocolate making and recipe making around the world. We're by far the global leader on that but we do that through Chocolate Academies. We have 20 of them around the world, but we had an opportunity to digitize that and not just Inspire on recipes, but also convert into e-commerce. And that still -- it strikes me, given the experience in B2C, but it's still at a relatively early stage. And that's -- I believe it's an area where we can lead, and that's where the investment in digital now goes.

And what would be your assessment of the way, I guess, you've sought to maximize those growth opportunities before. I mean you've sort of alluded to perhaps a lack of rigor perhaps in the planning and assessment of those opportunities. I guess, how quickly will that change? And in terms of the sort of oversight and accountability, how you'll actually be getting the reports and the MIS systems? Is that something that's going to change in...

So what I saw was an organization that was pretty hybrid in its execution. So we had people managing the commercial operations in the regions. So we are a food company, and I believe, therefore, a regional focus or having a regional way to conduct your business is the right choice to make. It's because the way people consume chocolate and use chocolate in North America is different than in Asia. It's different than in Western Europe. It's different than in Latin America. So I want to steer the business really on a regional basis. We have defined 5 regions, and that's where the P&L should sit. That's where the resources should sit. And as a function, global functions, they have a very important role to play on the how, on planning processes on what tools to use, et cetera. So there is clearly a value for the company, but we needed to get that clear. That wasn't clear. So it was quite matrixed and I feel that bringing that clarity now is super important. That was one. Second, the world was our oyster, and that's a good thing, but we've now defined 10 markets that are more than 2/3 of our volume and definitely more than 2/3 of our profit. They get the first call on resources. So when it comes to solidifying planning and service, first U.S., it was very -- that is number one. Secondly, 4 countries in Western Europe and then thirdly, four emerging markets. And I think, look, choosing is not losing, learnt that the hard way across my over my career, but you need to -- yes, to make it explicit and then and then organizing coherently your resources behind those choices that usually takes a little bit of time. But I feel it's happening. By the end of our fiscal year, which is by the end of August, I believe, we will organizationally be in the right place.

Thank you. Well, let's move on to today's announcement, in particular, then. So in your own words, how would you like to give an overview of the Focus for Growth action plan that you announced and its key elements?

Yes, sure. So I would say 3 things. First, relentless focus on these fundamentals that I talked about we had customer service and on-time and full rate on our important segments below 80% last year. That needs to be -- now to customers that need to deliver 95% or 98% to the retail. So we just simply have to step it up there. So that for me is priority #1. It's a bit brilliant boring basics, but you simply have to do it. So I think that's number one. Number two, we are -- we've made a clear choice to do what I would call everything chocolaty. So that is full chocolate solutions, compounds and coatings, but also chocolate replacement opportunities, and that includes sunflower experiments that we're doing on a global basis as well as cell culture. So we really want to lead that. So that's two. Third, we are making a clear shift towards premiumization. If I would add up the Gourmet segment, which I just talked about, plus Specialties plus some of our premium powder solutions, at the moment, it's just shy of 1/3 of the volume of the company already, but that's where we can make a difference, both in profitable growth as well as in absolute growth. So a clear shift to premium and be intentional about our resources. And then finally, point number four, in those market segments, in those 10 markets that I talked about that we believe are attractive and that's not only chocolate confectionery but think of the use of chocolate as an ingredient, in ice cream, in protein bars, in pastry snacking, provide a more holistic solution to the customer so that we become a one-stop shop for them. And that includes everything chocolaty, but that can also include a specialty like a decoration, a filling, which we already have, but we didn't -- we weren't intentional about it, and I want to scale that up significantly. So for ice cream, for example, for ice cream, we're working with 10 out of 10 of the largest ice-cream companies in the world. And I think with everything that I've seen in the company, we can sort of provide that holistic solution filling, a decoration and caramelized nut solution plus the chocolate side and that is very attractive if we get that right. So those are the 4 elements.

Okay. And obviously, given an assessment of the categories, and you've sort of outlined the geographies where you intend to allocate the majority of your resources to. Are there any areas of the business that you'd consider exiting where you can't make the required return?

So when you list those specialties that I talked about, for example, I think we meet ultimately around 6 or 7 type specialties. So chunks, baked inclusion. So these are, for example, those and so forth. The caramelized nut solutions that I mentioned, one shot fillings for ice cream. That's a list of around 6, 7, roughly. And I would say, at the moment, in the periphery of the company, we have around 25, 26, and that clutters the company, and that requires an adjustment in the portfolio. Those are not huge in terms of volume but they require attention. They require CapEx. They require people. They require processing. So there we need to make a choice and we will.

The company has been through a number of costs...

By the way, just Tom, before I go, because I think also that differentiates us a bit versus the competition there without going into all kinds of competitions, but there are -- and then one of the companies is actually currently for sale, but they would be a specialty solutions provider for around 30 or 40 different specialties, all very small and so forth. We do need to provide a certain scale to things. So that's -- we need to make choices. At the same time, we're not a trader. We are a company that is truly end to end. We're putting our emphasis on the value-added side right now, but then you need to choose on what you can do in a bigger way.

Okay. And so if we look at the cost side of the business, as we said, there've been a lot of initiatives before, a lot of cost initiatives over the last few years. There isn't a cost saving target as part of your profitability targets. Where is the productivity going to come from going forward? And can you still make these productivity savings without affecting your ability to supply your customers?

Yes. Look, I mean, first of all, we didn't specify a productivity target as such. I mean, on cost, however, we did say -- I mean, on the medium term, but also on the shorter term that our -- we expect profit to grow ahead of volume, right? So you do need leverage in your P&L. And I feel that we can do that. If you look over the last couple of years, the company has invested also GBP 250 million in extraordinary items or one-offs. I expect that level to be way lower going forward. So that's, I think, a remark number two. I think three, I feel that the current cost base that we have is mostly served by growing in the areas that I talked about, the 4 things and we need to shift resources behind those things first. And I felt that announcing now a major global restructuring after the last couple of years that I talked about was not the right message to -- in the company. And we first need to make sure that we resource the priorities in the right way. After that, of course, you can never exclude it but it wasn't part of the plan as such today.

Okay.

We don't expect -- I also don't expect major cost increases. We talked about capital expenditure. We were at a level of GBP 300-ish million. We're ramping that up probably to GBP 350 million and on an OpEx level, I'm very keen to get inflation compensated by productivity. So that's all in the plan, but not a major restructuring.

Okay. So in terms of the priorities for investment through the P&L, obviously in your presentation, you give a red box that says investments, but that's the -- that's not quantified at this stage in terms of the incremental OpEx spend.

Well, as I said, on the capital expenditure, I think we're pretty clear and that's the step-up that we're going to have to make. On OpEx, I feel that with everything there, whether it's digital, but also whether with the plans that we have, we can -- we should be capable to drive net productivity ultimately in fixed costs which would be a trend change already. But -- and as I said, this is also not a plan for a major restructuring or a major step up in OpEx. I feel it's a shift plan. People are doing too many things, have been doing too many things. Investments as a result, get diluted. And I want to bring clear focus in everything that we do and bring consistency in our performance.

And in terms of -- you mentioned obviously the higher CapEx investment that you're putting in to support the growth in the 4 key areas. How do we -- should we think about whether you're actually building out capabilities that you already have or that you're actually having to build muscle in areas that you don't necessarily have now?

Yes, I think to give you a statistic, our network at this point is capable without going too technical, but 35% of our lines, they can sell cocoa coatings or switch back to real chocolate solutions. And cocoa coatings tend to be more affordable, right? Because cocoa coatings in combination with oils and fats are an important ingredient list for many of our customers. But interestingly, when the cocoa price, which is around now GBP 3,000 per tonne, when it drops, so when it's higher than that, around GBP 3,500 or something, then these cocoa coatings become a lot more financially interesting. When we're at the current level, that's sort of an inflection point and people do prefer taste and do prefer the more premium solution and they tend to go for chocolate. And we can talk about that and say, well, we like this or we like that. I'm taking a fairly pragmatic approach. And I'm saying, "Hey, we need to bring that chocolaty experience. And that means I need to have lines that are flexible. And we need to increase that flexibility and agility. So a third of our lines can do that in our important geographies, but I feel we still need to have a -- we can still make a step there. Secondly, on the specialties, as I said, we have -- for example, we have baked inclusions, which are super popular on ice cream. And they have been out of stock because the demand has been there. We have a supply point in Europe. We've got a supply point in India, wonderful, but we need to step that up in other markets. And I feel that, that's something that we need to be faster on. When we see those trends happening, okay, that -- caramelized nuts, we produce in Spain, wonderful solutions in combination with chocolate and particularly chocolate that performs great when it's frozen in ice cream again. That combination is golden. All right. Great. How do we move faster? And I feel that's something -- that's a muscle that we need to build up. And that will take a bit of time, but I feel those are probably the 2 changes that we need to bring.

So there's a lot of aspects that we've spoken about. So perhaps if we bring that together to the targets that you're setting, the phases of the plan and the time frame in which you're looking to deliver those outcomes. You're targeting 2% to 4% volume growth margin -- on the margin side, mid- to high single-digit EBIT growth and low teens PBT growth that's the impact of lower financing costs as well as cash flow, GBP 300 million to GBP 400 million. What are the key phases of the plan and the milestones that we should all look for delivery?

So -- so first of all, that's a medium-term algorithm that we feel can -- is feasible in combination, by the way, with 11% to 13% ROIC as well as a leverage in a company that we -- that should get us to a safer level than where we were a few years ago, and I think that's ongoing and going in the right direction, but it's a medium-term outlook. In the short term, we've guided towards a volume growth for the next 12 to 18 months, that is not 2% to 4%, but around 1% to 3%. Now what's -- first of all, what's driving that? First of all, we've seen 50% price increases over the last 3 years. And we need to see prices come down, and we need to see the consumer responding to that. I am positive that, that's happening because we've guided for this fiscal year, for the second half of our fiscal year towards volume growth already. And that's with all the knowledge that I have today, that is indeed coming through. And we expect that to continue to some extent next year. But of course, it will depend on the pricing and how consumers are responding. So I would say, I just want to be a bit cautious on that one in combination with higher fuel costs and disposable income and so forth. So that's one on volume. On profit, we expect -- also for the shorter term, we expect profit to be ahead of that volume, but I want to be careful as well. We are making investments in our capabilities that I talked about. We need to step -- step up fundamentals. We have things to repair. So I just want to be a bit cautious. We have a cost headwind on the fuel side, particularly in logistics, which is an important part for us. And I feel that we're going to make steps. But -- and the steps will be also the profit before tax actually will be ahead, I expect, in the short term will be ahead of the midterm algorithm because of financing costs that are coming through to a faster extent than what we anticipated, which is all good. But I want to caution to great expectations on margin development per se.

Okay. And in terms of a definition of medium-term or milestones, I mean, is there anything you can sort of say about what medium term means, I suppose?

You can say around 18, 24 months, you should get to a medium-term type of view.

Okay. If we link this to your mission to be a reliable and innovative global leader, how do you think about the balance between wanting to get that volume growth and the positive benefits of operational gearing and wanting to provide a more consistent solid foundation to that growth?

Yes. I think the world is -- I mean the world in what we do is changing a bit. So -- and we talked -- I talked about it this morning in the Q&A as well. The chocolate confectionery market, from what I can see versus the past is not growing to the same extent. As I said for the short term, but I feel overall will be sort of between 1% and 2%. That's lower than probably what it historically -- has historically been. But I feel that chocolate as a very versatile ingredient is used in adjacent categories that are super interesting, ice cream, which I know from some experience has been growing and will grow, I would say, between 2% and 4% roughly. Snack occasions, such as protein bars and where chocolate is the preferred -- by far, the preferred taste and ingredient, will grow faster but also pastries will go faster. So the second thing that we need to do is to move in those adjacencies and therefore expand our addressable market more intentionally. And then third, as I talked about, our service. Look, I feel that stepping up the fundamentals is arguably our best lever for growth right now. So your question, look, I think this is the three things that we need to do, and that will give consistency over time, but we do need to build that machine. And as I said, I'm not asking here for everything long term. I say, hey, 1% to 3% volume growth in the shorter term, profit ahead of volume and PBT somewhat ahead of the midterm guidance because of the particular dynamics around financing costs. But at the same time, we do need to build the machine and that is not an overnight exercise.

And you've very clearly introduced more oversight and accountability at organizations in your -- you've been in charge of in your career. What can you say about the degree of rigor to that, which will be brought to Barry? And will that affect the rewards and incentives framework that the business operates in?

Answer is yes. So as I said, I felt the organization is a fairly matrixed organization in terms of global functions, regional responsibilities that are not fully defined and so forth. So what we're going to do, 5 global regions, a simple set of targets for the regions in which they have accountability to deliver and of course, a global target set that's there. Key functions supporting the regions in a few important areas, supply chain and engineering, obviously, finance and operations to global shared services. We have now 4 locations. And I want to stabilize that, get the cost levels out there, which I believe will help us to reduce that inflationary impact that you have every year, which I talked about. So that's for me finishing a journey. And I would say those are probably the key things. But we do need to get the accountabilities in the organization. Absolutely right, and I want to be very straightforward. If you're the President of North America in our organization then you run that show. And our regions are around 85% self-sufficient. So a large region like North America, for example, is around 85% to 90% almost self-sufficient. And then there are some, of course, chocolate from Belgium, which is super famous, and that's what we own. Cacao Barry here in France, which is a very super premium chocolate. It's wonderful. You should taste it. And that's something that we can export. But for the rest, they should run the show based on and with the help of global colleagues, but clear light regional offices, light head office, design fit for purpose and put the resources as close as you can to the market. Yes, I have to admit, yes, that's something I've done a few times, experienced before, as you probably are aware of. And I think it works to have the accountabilities right.

Absolutely. So sustainability has been a top priority for -- well, for the industry, clearly and particularly for yourselves as a global leader. What role does this play in the focus for growth plan?

It's bigger than you think. I think it's worth saying that the undercurrent of sustainability, in particular for us in the ESG framework, the S, so child labor issues, but also, of course, deforestation issues in the chain, I take them extraordinarily serious, but not just that, but actually, we see the demands from our customers and the brand owners are going up and not down. So while the topic of sustainability is sometimes not hitting the front pages these days, the undercurrent on the demands, the action that the industry is taking, I think, are very serious. And we have a program that's called Forever Chocolate that was started 10 years ago, big credit to my predecessors on that. And we are not relaxing our targets on that. And I'm not going to make major changes. I want to make sure that the couple of key targets that are in there that we hit them and so I'm prioritizing 3 or 4, and that's what we will go after. But I think by doing that, we will be capable to provide something to our customers that no one else can because that's a clear level of differentiation.

So we've spoken about a number of different aspects across the plan that you've announced and obviously a number of different stakeholders as well. So in your view, what does success look like in the Focus for Growth action plan?

We cannot have in our most important segments, customer service levels below 80. They need to be 93%, 94%, 95% plus, and that needs to be reached pretty quickly. Second, that 30% of premiumization in the portfolio needs to go up as a percentage of the total because it's a clear trend, and we need to address it. And third, the segments that we want to win in, I call out ice cream, I called about bakery, I called out snacking and protein, with the specialties that I talked about, we need to win those segments and be the absolute market leader. For me, those are the 3 big ones. And of course, very motivated and happy organization, but that's something you probably won't see from the outside so much.

Okay. Well, we've been through an awful lot this morning in a short period of time and some significant actions that you're taking to improve the performance, Barry, so thank you very much for joining us today and giving us this chance to speak on this important day as you launch the strategy. Thank you.

I appreciate your time. Thank you.

Okay.