JDE Peet's N.V. (JDE.F) Earnings Call Transcript & Summary

Hi, everybody. Hope you're well, and welcome to the JDE Peet's presentation. I'm here with Fabien, who will be doing a fireside chat with me. I hope your stamina is holding up and having a great conference. It's going to be a fireside chat format, no prepared remarks. So Fabien, thank you very much for attending, your debut at Barclays Consumer Staples Conference. Lots of questions for you from all areas.

But I've got to start with the most obvious one, which is you're month [ apart ] of the IPO, the CEO has changed. You're now in the seat. The market obviously doesn't like uncertainty. Can you just elaborate a little bit, if you can, just on the circumstances, a little bit about your background and just reassure us there's nothing sinister around trading.

Yes. Good morning, good afternoon, everyone. Thank you very much, Warren. So of course, very, very legitimate questions, but we have been communicating very transparently what were the circumstances of the change, which has nothing to do with the performance of the company. Neither, I would say, on the delivery nor the outlook, and we have been really delivering very, very strong results in the first part of the year. We've been outspoken of what we are expecting for the second part of the year. I think it has all been a personal decision from Casey Keller. As you know, this global pandemic has been creating a lot of disruptions. On one hand, on the personal side for his family to not being able to relocate as they were expected in Europe. At the same time, creating some challenges on the travel side, which makes it difficult to apprehend the global nature and complexity very quickly about JDE Peet's. It was an honor for me to be offered this position, but I can totally reassure you that there is no other driver behind. And I am totally committed to the outlook, which was communicated by the previous management as well by the guidance. For a very simple reason -- I have no reason to believe that it is something that the company can't achieve, and I'm a firm believer of the long-term guidance which has been presented.

Okay. Thank you. And just to follow-up on that. I mean the IPO process was super quick. I mean, I think it's some kind of record how quickly you executed it. Could you maybe just talk a little bit about why so quick? And where we are in terms of the anchor shareholders, JAB and Mondelez and the free float liquidity and just how they kind of -- the business is structured?

Yes. So let's come back first to the IPO question. So I mean to have a successful IPO, you need few things. First, you need a strong equity story, backed up by track record, which obviously we had. But at the same time, you need to have some, I would say, stability and visibility in the stock market, which had been cumbersome, as we all know, at the beginning of this year. But for shareholders, what was important was really to deliver a quality IPO. And not only about timing, we are not in a rush nor the pricing being the priority, but really being able to anchor some very strong and high quality investors. Actually, we were ready already in January and in February. And 2 times, we decided not to go ahead because [ we think ] there were too much uncertainty. But of course, at some stage, you can't too much have stop and go on a process like that because it's very disruptive internally, it's very disruptive externally. And we came with a strong point of view, which was this global pandemic may last long and might create disruption in the market directly or indirectly, maybe potentially for years. So we were looking at the windows at which we could do a quality IPO. And what we have been doing, we talked in a confidential way to quite a lot of external investors. And what we realized is there were strong appetite for the quality of the equity story, for the quality of JDE Peet's and willingness to come along with us. So we have been monitoring very carefully windows that could have been an opportunity. But at the same time, we realized that a normal IPO, which takes 4 to 6 weeks on the last part of it, is really an eternity in the current stock market. So we have been creating and looking at creative way, with virtual road show, with accelerated timing, to compress this timing within 2 weeks. And I think we have been proven right to have a very successful IPO, I would say, from timing, from the size and the quality of the order book, but as well for the aftermarket performance.

Yes, certainly, definitely impressive on the timing. Maybe moving to the business now. Can you just outline the shape of the business in terms of coffee versus tea, the types of different coffees that you have in terms of the weight and talk a little bit about geography, emerging market versus developing market and then just channel. Just to orientate us in terms of the portfolio.

Yes. We are back on the history of coffee for more than 7, 8 years now. And it was important for us over time to shape the core company portfolio towards really the global consumer on coffee and tea, I would say, on a geographic standpoint, on a category standpoint, but as well on the channel standpoint. If I start on a geography standpoint, I think our brands are available in about 100 countries globally with a stronger weight in the developed markets, which do represent today about 78 to 78 to 77 -- sorry 77% to 78% of our revenue. Looking at it from a, I would say, channel standpoint, we made a very intentional and strategic choice, but already 7 years ago, to focus mostly our business towards CPG. Because we saw at that time, the trends happening Away-from-Home where consumers were really showing willingness to have a better coffee, to spend more on coffee. But we believe it will be very quickly crowded but as well required a lot of capital intensity. But we believe we could offer to consumers a similar experience at home. And that's why today, we have about 75% of our revenue, which is at home. Yet, at the same time, we believe there are some attractive channel, very selective on the out-of-home space. That's why we do have the remaining part of our business, which is Away-from-Home and most at [ office site ]. If I look from -- in our category technology standpoint, we are mostly a coffee company, which represents 98 -- 97% of our revenue, yet we have a bit of tea because we believe there is a lot of complementarity for consumer. And for the rest of the coffee industry, we have around 25% of our portfolio in instant, 25% on roast and ground, 25% on single serve and the remaining being on out-of-home, where we are more offering a full service to consumer. And at the end, what was very important for us is really to offer what consumers like on coffee, offer the diversity, yet I would say, getting an overproportionate exposure to the fastest-growing part of the category, which are single serve and premium beans, okay?

Okay. And just in summary, how would you kind of sum up the investment case for JDE Peet's?

So I think first, coffee and tea is a great category, one of the most attractive category to be on the food and beverage space from a growth profile and from a profitability standpoint because it's really underpinned by very strong consumer tailwinds around health, around quality, around premiumization, individualization. And in that space, we are the world's largest pure player. And we believe it offers 2 things: it offers, on one hand, scale; and it offer on the other side, focus and expertise. And that's fundamental because as consumers are going for an increasing level of premiumization, higher quality at home, you can only offer that if you have all the assets. And we believe we have all the assets, which are required to win in that space, being the brand. We are the largest owner of coffee brands in the world, which enable to offer to consumer across various price point of what the consumers are looking for. We master all the technology on coffee, all of them without any exceptions. And it is becoming increasingly differentiated and increasingly barrier to entry on the coffee industry. And at the same time, we are an omnichannel with a stronger presence on CPG and increasing level on the e-commerce side.

Okay. And just turning to the algorithm. You've got 3% to 5% organic growth at constant commodity prices, something we might find a bit odd, constant commodity prices, maybe just talk through that. And then within the 3% to 5%, how much of that algorithm comes from price/mix and premiumization versus volume?

So we have not -- I think we have not broken down this volume and mix component because I think the dynamic differs by geography mostly. But I want to come back on why 3% to 5%, it's very simply what we have been able to deliver over the last 3 years. It is what we believe is putting us in position to be a winner in the industry, to be slightly ahead of what's happening in the category, in the geography where we are present. And it's going to come from various things. First, strong consumer growth from a volume standpoint. Every year, you have around 2.5 trillion of coffee and tea which are drank. And that number is increasing. From a volume standpoint, it's increasing mostly in emerging markets. And on a premiumization standpoint, it's across the geography, mostly on the developed economy. That's why you will see in Europe, for instance, limited volume growth, but much more premiumization growth, mix growth. While in emerging markets, and in the U.S. actually, you more have volume and mix growth. Why -- your question on why net of commodity, it's very simple. It's a unique category on the food and beverage space, where there are a lot of volatility actually on the commodity side. But we should not confuse the volatility of the commodity side and the volatility of the P&L. If you are a pure player on coffee and tea, you don't look only at your shape in your P&L, but you look at the underlying driver. And consumer and customer has been educated over time to see on coffee, [ price is up and price is up ] on -- down on shelf simply because there are some volatility on the coffee side. But as a strategic player on that field, what we look at is the volume and the growth on their consumer trends. We are looking at our margin from an absolute dollar or euro standpoint, and we look at our earnings profile. And these are totally resilient to any volatility on the commodity side. That's why we are expressing our guidance from a growth standpoint, net of commodity. If 1 year would be a significant increase on coffee, for instance, you will see a higher growth rate but we will judge ourselves not on the growth rate as we put pricing through. But clearly, on the underlying volume and mix offered to consumers.

Okay, that's super clear. Thank you for that. Maybe moving to single serve. It's been a massive success story for you in Europe. I know you've had the question already, but Nestlé, Starbucks, Coca-Cola, Costa, they're trying to eat that attractive market share that you've got. How do you defend your position against those big guys with deep pockets so that you can still win? Is there any concern around that in terms of market share losses?

So let me start first by saying that I do have tremendous respect for the companies that you have been citing. So I think that these 2 companies, in particular, being Nestlé and ourselves, are going to be the winner in the long-term on this category because we have -- we are playing the same rules, and we have all what it takes to win by providing better proposition to consumer innovations, building in brands. I see them more as almost a co-partner to create category growth going forward than real competitors. I think we have been extremely successful. I suppose that you are referring to the aluminum capsules. We have been moving our market share from about 26% to 44%, 45% over the last 3 years. Having Nestlé entering the grocery aisle with Starbucks is a great news because it continued to educate consumers to more premium propositions on the technology side. But -- and taste, but as well on the brand side, and that is going to continue to lift the category up. And the one who will take a disproportionate amount of that category trend are going to be the player to come with a better consumer proposition, in particular, with aluminum capsules. But as well with brands that consumers do recognize. And I believe we will both benefit from it. And we have been seeing over the last 6 months, for instance, that as Starbucks entered in grocery aisle, our growth rate has not slowed down. And the players that do suffer the most from it are the #3, the #4 players actually in the industry, who do not have the same quality propositions to consumers.

Right. Okay. Maybe moving back to channel. I mean there's obviously been a huge contrast in-home versus out-of-home. You cited some improvement in the out-of-home trends at the end of the quarter. I mean, obviously, crystal ball and lots of moving parts. But what's your kind of best feel for the shape of out-of-home in the back half? What would be your base case? What's your bear/bull case on that? I'd be interested to get some color.

So I've been already sharing what is the split of our revenue, 75%, 25%. I think this was our revenue split before the pandemic crisis. So on one hand, when we look what had been happening, we had a very, very strong growth on the CPG side. We had record growth in the CPG side, both because people are cooking and spending more time at home, but as well go from more premium solutions where we have a disproportionate amount in our portfolio. But at the same time, clearly, we have had some impacts on our Away-from-Home business, which is on the coffee bar we have in the U.S. with Peet's, in Malaysia mostly with Old Town and a big coffee company in the Netherlands. This business has been suffering down to almost minus 60% as a deepest impact in the months of April and May and started to progressively recover. We are now more on the trend towards the minus 25% to minus 30%, and we see some improvements month after month and with differentiated recovery. We saw, for instance, on what is a coffee bar has been recovering the fastest. We are probably back to 85% in some area, even 90% of what were the revenue precrisis. We see on the small and medium enterprise on the out-of-home businesses, a very strong recovery. And obviously large offices -- or large enterprise, mostly recovery of the blue-collar area, much less on the white-collar space. But of course, the area which is still heavily impacted is all the channel related to travel and hotel and tourism. As you said, no crystal ball for the future. I don't believe in a V-shaped recovery, I believe in a gradual recovery. I think there will be some reassessment of why people come to work, not only to execute tasks, but are going to socialize, to create social capital. So there will be progressive recovery there. My, I would say, ongoing assumptions beyond which we are rebuilding, actually reassessing our business model, are probably more around between minus 15% to minus 25% for the next 18 months. And by that time, we'll continue to be agile and adjust further if we have to.

Okay. That's very helpful. Just maybe shifting gear to margin. The other part of the algorithm is the 5% to 8% EBIT growth. I'm just interested to understand why EBIT growth grows quicker than the revenue growth, especially given the margin is already up 200 bps in the last 3 years. I think it was up to 20% in the first half. The advertising was down. Is that increase that you're building in, is that purely a function of mix? Or is there underlying cost savings that will support the margin expansion into the midterm?

So I think very important first to highlight what's our agenda going forward. Our value creation agenda is going to come from both. I don't believe that you can, on the long-term, have sustained value creation from cost cutting. But of course, at the same time, you need to have a quality long-term growth, which comes from high margin because high margin is really necessary to enable continued investment to fuel further growth on talent, investment, on innovations, but as well on advertising. Because we are the largest owner of coffee brand in the world, we need to continue to fuel brand equity. It may take -- it may evolve over time from mass televisions to more online consumer reach. But we will continue to invest, that's the only way to have a long-term growth. Why do we have great opportunity to continue to have our bottom line growing at a much faster pace than the top line is just again because we have great consumer tailwinds, where consumer are more willing to have a better coffee at home, on what I would call indulgence premiumization. As reference point, about 10 years ago, an average cup of coffee at home was -- represents -- was costing around less than EUR 0.05 for a consumer. Today, it is EUR 0.07. And what is -- and we have in our portfolio offers from EUR 0.02 to EUR 0.60. And what is growing at a faster pace today is what is between EUR 0.15 to EUR 0.20, EUR 0.25. So on top of the operational leverage from incremental volume, which is as well very strong incremental margin from this premiumization agenda, and we will continue to do that. On the cost side, one of my learning over the last, I would say, 20 years in the CPG world is gross and profit pool don't stand still. So you always need to ensure that you remain cost competitive. So we do have, constantly, cost efficiency programs that do represent around 2% to 3% net of inflation that enable to fuel your growth investment, but as well to get part of that going on our bottom line.

Okay. Just pressing you a little bit on the margin. I mean, look, doing some of the modeling on your company, the thing that stands out is that 29% margin in CPG Europe is not many other companies that you see almost a 30% margin. I've had the question, is that sustainable? How do we get to that kind of high number? Can it even go higher? Just welcome any kind of color, reassurance on that point.

I'm a firm believer that it is totally sustainable, and this can be even expanded further. Actually, it is in a lot on a CPG industry, you always have stronger growth pool -- both growth pool and profit pool in Europe and in North America. I mean it is the case, it's quite universal. Although it's not always very visible because you are having players operate in multiple category and that visibility is not as expressed as when you are a pure player like us showing very transparently our profitability by region. But it is not very dissimilar than what we are seeing elsewhere, or what I have been seeing in the past. And the reason why we have higher margin in Europe is for, I think, 2 reasons. In the CPG world, the best proxy for profitability is relative market share. And we are a strong #1, oftentimes #2 in most of the territory where we are present in Europe. So it is a great factor because you have a lot of scale and efficiency coming from it. At the same time, Europe is really the area where there had been, I would say, an earlier trend around premiumizations. And it is where we have the stronger part of our portfolio towards the most premium area being premium beans and being single serve, which are operating at a much greater margin level than the rest of the portfolio, although they are all very profitable, which explain why we do have high margins. Going forward, I'm still expecting some potential improvements there. At the same time, we're getting an improvement on some other part of the world, such as the U.S., which I'm sure you have seen is at a slightly lower margin because we are replicating the same agenda to transform the company with retail heritage into CPG, with digital scale, with more premiumization, which will provide a higher level of gross profit margin and earning margins.

Okay. That's really helpful. Thank you for that color. Can I move to the topic du jour on e-commerce? Every company is getting the questions. So I'm going to have to ask you the same question. Can you just outline where you are in your e-commerce journey? What kind of growth are you enjoying in e-commerce? And do you need to make further investments in e-commerce to get the full potential from that key channel?

Yes. As you said, it's really the hot topic of the moment. So e-commerce for us represent about 5% of our revenue and is growing very, very fast. And it is already a trend that we have been seeing pre-COVID. I'm sure you have had that conversation multiple times over the week, that this pandemic is actually more accelerating trend than providing a lot of new trends. And it is something that we have been seeing already 2 to 3 years ago. And we have been decided to invest in corporate capabilities. We have decided to invest, in particular, in the U.S. and in China. And work much more closely with some e-tailers, such as Amazon or such as Tmall. And we are glad we've done that. Otherwise, we would have not been able to capture the incremental growth that we have been seeing during this pandemic. We have been doing between 65% to 70% over the course of the first semester, which is at a significantly higher growth rate than we had before. I do believe that it's a trend that will last and it's a trend where we need to continue to invest. I think we are at the early stage of the capability building on our side. Is it on the technology side? Is it on the consumer interaction side, but as well on the supply chain efficiency side? So we will continue to invest and in a greater extent than what we have been doing in the past.

Okay. And just shifting gears to the Peet's business. I mean some people have commented to me that it is a bit -- is it a bit strange that Peet's is going into this business? It's a very different operation in terms of the U.S. exposure. Can you just maybe give a little bit of the background around it? And then talk a little bit about the coffee shop business at Peet's versus the CPG business in the U.S. And then also Peet's in China seems to be an ambition for you to grow the number of stores that you have in China. Just interested to get the color and your thoughts about the future for Peet's.

So multiple questions. First, why Peet's, to the first part of the question. I think it's very simple. When you are a global company, you have the intention to be one of the world's largest pure player in that industry, not being present in the U.S., not having super premium brands, not being exposed to any craft roasters will never make you a global leader. So Peet's was providing geographic presence, capabilities and a super premium brands in our portfolio. So I'm really glad that we do have Peet's within JDE Peet's. And Peet's today is probably one of the most successful super premium brand in the United States because it has a very unique proposition, which is around freshness. It is a product that you can find around 16,000 points of distribution, 16,000 stores, for a product with a closeness to roasting between probably 5 to 30 days, which is much, much closer than what you can find in any other propositions. And consumers have been educated that freshness closest to roasting is one of the best quality and coffee experience you can have. But the other thing that Peet's do have is its own DSD system. And it is really what enable you to enter the stores and even during pandemic crisis, for instance, we were one of the few at the time of disruptions being able to offer a product on shelf. And we'll continue to invest in that field. At the same time, talking about -- coming back to your point on the stores, most of the coffee brands in the world have been building their equity to consumers Away-from-Home. That's why it's retail store part, the coffee stores were very, very important. But we were clear from the outset, when we acquired the company almost 10 years ago now, that we believe that the brand has had a strong equity and have the ability to travel cross-channel. So a company which was around $300 million when we acquired it is almost $1 billion now. And more than 50% of its revenue is to a CPG, which is on top providing a much greater level of financials and margin to us. But it's clearly what consumers now are demanding at home. That's why we believe today we don't need further store actually in the U.S. to expand, and the priority is really the CPG side. China is a bit different because China is at the early stage of education and coffee culture. And like in all of the other geographies in the world in the history, it always starts by an experience you have in a coffee bar. So our priority in the U.S. is actually to expand coffee bar, but in a very reasonable, very niche premium area, and we intend to open around 150 store in the next 5 years to build our brand equity, then that would have the ability later on to travel into CPG like we have been doing very successfully in the U.S.

Okay. That's helpful. We're running short on time. I'm trying to squeeze just 2 quickfire ones in at the end, if I can. One is just around the number of brands. It's been commented to me a few times you guys have about 50 brands in coffee and tea. One of your nearest competitors have got three. Do you have too many brands? Or do you need all of those brands given the fragmentation of the consumer?

We are very happy with the portfolio of brands we have. We believe it is one of our point of differentiations on top of being a pure player. It's really to have a portfolio of brands, which we believe convey multiple things for consumer. On one hand, I would say, 20 years ago, everybody was believing in globalizations. And we came with a point of view at that time, food is local and global. Yes, global because it's aspirational, but local because there are different taste profile and consumer heritage. So we believe we need to have a portfolio of global brands that -- where you start innovation, cascade down or aspirationally, if you go to new territories or how you drive premiumization. But at the same time, you need to offer various price point to consumer, various propositions and as well broader heritage to local brands. That is the first reason why we do have a portfolio of brands. And of course, the broader portfolio of brands you have in the country, the more it helps you to build your relative market. And that is the reason why we are #1 and #2 in most of our territories because we do have this portfolio of brands. Of course, we do not have 50 brands in 1 given market. But usually, we have between 3 to 6 brands per country. And at the same time, it is very hard with 1 or 2 or 3 brands to provide to consumer different price, but as well different taste profile. So I believe that if you are only looking at a very small set of portfolio, you might, by default, exclude yourself from some consumer taste or preference. So we are extremely happy with our portfolio. Of course, we are very disciplined on the way we execute them. We put a disproportionate amount of our investment towards the global brands, either on the marketing front and the innovation front. But they do all play a role in our portfolio.

Okay. And last one for you, Fabien, before we need to cut it. Just on tea, you mentioned it at the beginning, it's only 3% of your sales. Can you just talk a bit about how the vision for tea is and looking out a few years?

Yes. So first, I would say that we are, indeed first and before all, a coffee company, and coffee is a priority for us because I believe there is greater consumer tailwinds broader than tea. Having said that, tea is a very complementary proposition to consumer, from an occasion standpoint, but as well from a consumer and taste standpoint. Of course, as a corporation, it provide us well some go-to-market synergies, for instance. And actually, the way I look at tea is sometimes almost an enabler to expand coffee. I will give you one example of Turkey. 3 years ago, in Turkey, we had a very small business on coffee, not growing, not much profitable because we didn't have scale, we did not add capabilities locally. We tried to look at what would be the options. We could not find one which was suitable in our view. So we looked at the tea side. And just partnering and doing an acquisition with Ofçay tea, which is also a small player, we have been able to totally step change our scale there. And today, we do have a stronger than ever growth and profitable growth on our coffee business in Turkey. So we look at tea as very complementary for a consumer, very complementary as a corporation. But as well, a great platform to accelerate what is our priority being coffee.

Listen, Fabien, time has beaten us. It has been a really great conversation. I could spend hours talking to you about the category, but unfortunately, we do need to cut it there. I hope that you can join us in Boston in person in 2021. Have a good rest of your day. Cheers.

Thank you very much. Bye-bye.