SGS SA (SGSN) Earnings Call Transcript & Summary

Hello, everyone, and thanks for joining today's webinar. It's just a bit of introduction about the agenda of today and some instruction how to manage the panel. You will find in the application a panel for the URL. We also have given a link to provide a survey about -- with some questions, if you want to answer them, they would be anonymous. So we'll be happy to listen to your feedback and questions on this webinar. Also, during the webinar, at any time, you can open that panel. There is also, in the application panel, there is also a Q&A section where you can submit questions. Me and my team will reply as soon as possible about those questions, but most likely to go off-line because there's a lot of participants and attendees today, and we probably don't have time to answer all the questions. So today, we are planning a content to share together with -- we have a friend from Nestlé. So we're going to see first a retrospective of 2020 food safety data from my side, and then we'll go through a Q&A with Nestlé. Let's introduce, in fact, today's speakers. First of all, let me thank Paolo for joining. I really appreciate your effort for being here, contributing to today's webinar, which I hope will be an interesting one for all the audience. Would you like to spend a couple of words about yourself? Introduce.

Sure. Thank you, Nicola. First of all, really, thank you for having me here. And good morning, everybody, good evening, depending on where you see this. I'm working in Nestlé since quite some time now. I'm a senior specialist in food safety and quality and working in the digital food safety department. I'm really excited to be here with you today.

Thank you, Paolo. And about myself, I'm Nicola Colombo, the Global Head of SGS Digicomply. I've been working in the digital industry for many years and bringing digital solutions for regulatory compliance and food safety. Okay. So I think, Paolo, you're now going to have to listen to myself just for a bit. Basically, my idea was to set the ground for this discussion. And then based on what I share, also asking you a few questions that would give us a glimpse on how Nestlé is supporting and operating within the emerging risk process. So what we're going to see is a retrospective on 2020 food safety data. I'll try to be fast, keeping more time for the interactive conversation with you in the latter part of this meeting. What I'm going to show in the next 15 minutes are basically the data that we're constantly gathering from the Food safety intelligence platform we have to present the -- everyone a high-level picture of the food safety issues during the 2020, just, let's say, an overview. The sources of these data are basically public, and they come from authority sites, databases, scientific literatures on which we collect, transform and enrich this data so that we can provide a continuous intelligence to understand and monitor emerging risks. First, we have to -- one of the most and foremost fact is that we are -- we were and we are still, unfortunately, in the pandemic. So one of the first panel I want to share or the first slide I want to share, it's more about quantitative. That is already from comparing 2019 versus 2020 in terms of quantity of incidents and food safety issues, we can see that in 2020, we have less. But obviously, looking only on the number, it doesn't say much, okay? We can say, okay, interesting. But it's important also to try to find why this is happening. But this basically represents some numbers from about 1 -- more than 100, I think, 107 sources of data that report food safety alerts, recalls, outbreaks or, let's say, border controls and the like. What we can see, in fact, as I said, is that during the hard lockdown, you remember that most of the Western countries, after China, they went in hard lockdown in March. We can immediately see that within the March time frame, we see a drastic drop-down of the incident reported. And then we see a ramping up back from July onwards. But actually, also, we see a trend that even steadily increased even toward the end of the year. So what we see, for sure, in Q2, we can correlate the reduced number of records to a reduced also inspection activities within the authorities because they had to cope with the pandemic emergency. There was certainly other priorities. Nevertheless, for example, just making sure that respiratory and personal protection equipments were coming into every market. So that was just one of the crises of last year. So -- and also, for most, what was also important, you remember that in that time, we were actually seeing images of people queuing at the supermarket shelves, completely empty. So one of the main probably issue and emergency on the table of the authorities were definitely supporting the supply chain that did not get too much disrupted or that at least the primary goods were reaching the consumers. Although just a more funny note, I remember an image of the supermarket where the toilet paper was actually completely run out across the supermarket. So in general, the compulsive purchases of the consumer really showed some weird cases last year. But despite these funny facts, in fact, in the food safety, that's what we can observe. Just RASFF, in fact, in that time, RASFF alone, which is one of the sources, reported 200 less notification in 2020 than 2019. But if we move along to the curve, we can see that later in the year, in the latter part of the year, we have seen a restored capacity of inspection. And also, what we have observed was also new and immediate policies and guidelines from enforcement authorities to protect local supply chains. In that period, we observed cases like some export ban of wheat from Eastern countries or we have also seen amendment to standards like in France on some cheeses or some specific origin products that were changed or maybe even raised the barrier to protect more the supply chain to basically use more local produce or eventually to loosen up this to allow, let's say, or to avoid disruption in the supply chain. So this is a correlation that we have seen last year by observing the data. And again, I'm still looking more at the numerical facts and then see what the correlation can be. Just by giving you -- to give a bit more deeper insight on what are the risk and the incident we can observe last year by product categories where we see a general decrease in -- although an increase on beverages, especially alcoholic beverages, where we have seen an increase on fruits. That's probably also because of the fact that there was different consumption ways, more online purchase and so on. Meat and meat products sees a decrease. But actually, there was a strong increase on poultry-related products. That's where we've seen increases. But overall, yes, that basically represent the overall status by type of products. I don't go in details of every one, but in -- certainly, that's what we have seen. Just about the most common hazard that everybody -- or most everybody in the food safety knows, we have seen less reported incident cases of salmonella. We also saw pesticide residues to be less. I mean, basically, there has been, again, less incidents, but that means because less tests, less inspections performed, truly as a general trend, not just in one country, but everywhere, despite the fact that, for example, on Q4 alone compared to Q4 the year before, pesticide residues increased by 50% almost. So that means that there was a very strong push for authorities to make sure that there's -- the consumers' safety is restored. That's just to give some numbers and also some other type of hazard that we have observed. Mislabeled products, yes, we have certain amount of mentions. But more on the numbers, we see a decrease, just to say that over the last years, mislabeled products, especially missing allergens or missing declare of allergens, it's something that was always high, normally count up to 20% of the overall recall worldwide. But in fact, also, this was -- there was a very strong decline. That doesn't mean that there is more safety on the labels and on the information shared by consumers. But probably, again, that's a bit less enforcement. And also, what we have seen and we have observed, it's also related to the fact that there was also more online shopping that typically were -- the information to consumer, it's an area that present a bit more gray areas because consumers might not really foresee and get the same level of information when they buy online versus when they can really read the label printed on the packaging. Also, migration from food contact materials, so was a decrease, significant. So I'm just reporting the main facts, the type of hazard where we've seen the most relevant changes or facts in there. And between parentheses, you can see the decrease in terms of numbers from the previous year. Some relevant issues that I'd like to share with you. We have seen ethylene oxide spike at the end of the year, especially in Europe. That was -- pretty much the category was -- there was a presence of this unauthorized substance. In fact, in this period, ethylene oxide used as a biocide was often detected in high concentration. But again, this happened when the enforcement was restored after, let's say, the first wave of the COVID. So that doesn't mean that this issue was not around before. So probably with the same level of enforcement, we could have had a similar curve for this particular issue. But in fact, that's what we have observed, and we started to see a decline on these products because there is more testing going on, on this. The source of this contaminant was mostly India, mostly traded in the EU and using various products such as sesame oil or sesame seeds and so on and so forth. This is worth to mention, again, quantitative risk. We also see some other known issues like mineral oil. It's still currently predominant in the European Union. Despite still the number of used -- the number of incidents, it's still very, very low. What we have observed in terms of analyzing different type of data, including scientific paper, test methods and so on, we have seen that there is not yet -- I mean we can see also -- we, as SGS, we see an increased demand for testing. So we see more and more clients that are in need for testing of this contaminant, but there is not yet a fully agreed standard for testing. For example, in Europe, JRC has been working with the labs on a specific test method. So I think once that will be a more standardized testing method generally available, we won't see this high number of incidents because of this not -- there's not so much testing going on. So we will possibly see an increase over time as soon as these standardized testing methods will be approached. The usual, let me say, that interesting also to talk about E. coli outbreaks. Just to mention the frequency of mention also around also social media and not only official sources, we have observed in April a peak of mentions because there was the sprouts outbreak in the U.S. But also interesting to see a spike in mentions of these issues at the end of the year, where there was an outbreak in U.S., but it's -- normally, there is a general connection with a specific food. But one of the outbreak of E. coli of 2020, despite the deep investigation of CDC and also how, in general, FDA as an enforcement has tools to track and to monitor food safety, there was no specific food item that could be tracked back to the infection of E. coli outbreak at the end of the year. So that's just to say that this -- we see -- we observed that this has struck more in the conversation we have seen about this outbreak. We have observed also correlation with traceability, transparency and need for more immediate and faster actions to trace and to track the food safety issues. That is just to say that we always try to also find a correlation between these data, I mean, what we see the signals that we observe. And that's one of the most challenging part of data and technology. Now it's not just giving an inventory on the numbers of incident, which is what I've done in the last few slides, but what is also important is how to correlate the signals. I've shown quite a bit of numbers of occurrences, like an inventory of the risk and the incident, which is important to a certain extent. But what is also important is to capturing and connect different signals. So how can we derive certain conclusion as the ones I shared, no? There was a drop. Why there was a drop in that number? So this is something -- those are kind of hypotheses that you can also test using semantic technology, you can test the conclusion. Now was there any measure implemented to protect local supply chain? Having a knowledge, millions of documents that you can analyze, like we do, similarly to also what we are getting used with Google. Now we Google a question and we're trying to find an answer. But with specific knowledge around food safety, that's also what can be done in a way that we can correlate and explore new assumptions and conclusions exploring this big amount of information. But again, exploring a conclusion, that means that you still have a clue. Was there -- I see the number of incidents dropping and I can ask a question like, was there any new measure implemented to protect supply chain? Or how many was the number of inspections dropped in 2020? If there is a document that talks about this, you can certainly find it. But again, everything starts from something that you know or at least you try to explore because you have a clue to explore. That's one way of gathering a signal, already useful, already super powerful if you have this technology on hand because you can explore in a second. And that's also what Google has empowered us with an immense knowledge available for everyone, although Google maybe is not that specialized into knowledge that is related to food safety and the language of food safety. But what could be the next step? The next step that -- from a technology standpoint, what can we do to discover emerging trends? And here, I go a little bit more technological, let's say, in the talk. What we have done is using word embeddings to basically mathematically calculate the distance between keywords or sentences or tokens or even documents. To make it simple, let's think about these 3 examples. France and Italy are quite similar in the sense that, by the way, they are actually adjacent countries. They are actually sharing the border. But if we look at from a mathematical standpoint, you see that they are quite similar. They have a close credit. Ball and crocodile are not similar. So you see how mathematically I represent it. They are very distant. In terms of France, Paris and Rome, Italy, the 2 vectors that represent these 2 keywords are similar, but they are actually opposite in encodes. That means that they are basically far away from that, but it's close to 180, sort of different cities. So how can we apply this principle to a large corpus of data and structure it -- relate it to food safety science incidents, the news article, consumer journals, blogs, imagine a huge amount of data. That basically allow -- with this technique of word embeddings, you can basically create these maps of, let's say, vicinity at scale because machine can do it at scale. Nobody can read all of these documents even in their entire lifetime. And by creating this map, what we can do, it's basically by creating in this image that's basically billions of data points, which represent all these keywords, inside here, there might be 5,000 pesticides, 3,000 different type of products, that they are actually organized using this vectorial space representation in a multidimensional way. So it's really billions of data points that can be generated. This is a snapshot that represent a certain stage of the knowledge at a certain time. But what we have -- what we can start to use these maps to do is to find a new correlation. So for example, if within 2020, what we have observed, we have observed -- and here, I can go back one second. We have observed that certain keywords that were more isolated, they get closer to a certain cluster, for example, COVID and health food and transparent labeling. And this type of keyword started to get closer into this group. What this happened? Basically, it triggers the discovery that there are new correlation. Just by analyzing these keywords, we were able, and that's also where we published a blog article recently, we were able to detect a certain trend that basically gave us the capability to understand the correlation between the pandemic and the urge of policymakers to encourage consumers toward healthier choices. The output of this was also new policies and enforcement of new regulations and guidelines. We -- just to mention a few. I mean, with the new U.K. being in the Brexit, they -- from -- they just published a regulation that basically banned the sales of high-sugar and high-fat products to be sold near the cashier or the point of sales. So the effect of the pandemic among this huge amount of data gave us this correlation, thanks to this technique of keywords embedding where we can basically monitor the moving of certain distances of keywords, obviously, at scale and identify new pattern to recognize new potential issues. A similar concept can, for example, be applied to discover that in a certain product, there is a new contaminant. Let me say that if normally, we can observe in rice, arsenic. And probably, let me just say something that doesn't make much sense, but let's say that from -- we start to observe that there is a new contaminant that can be mineral oil, let's say, MOSH in rice, this -- by becoming closer these 2 terms, rice and mineral oil, they start to get closer, this movement of distance between these 2 terms trigger an alert and a discovery of a new fact. That's basically my first part. As I said, I wanted to be faster to finally leave Paolo that has been very patient waiting for his part. So I have some nice questions on this topic to ask Paolo. So thanks, again, for your patience. And I -- okay, so let's -- we can basically get started with your part. So first of all, I think, Paolo, you are part of the Nestlé Institute of Food Safety and Analytical Science. You just want to maybe give a few words to understand what is the mission of this institute within Nestlé, which I think its one of the excellence, I think. Especially for me being in Switzerland, it's something that I always been seeing as a very important thing.

Yes. Thank you, Nicola. And first of all, I mean, I was waiting this moment, but it was very interesting to -- interested to what you had just said. I mean, very, very interesting speech and very interesting overview of what happened in 2020. Thank you very much. So yes, I mean, no surprise, I mean, food safety is the #1 priority for us. And the Nestlé Institute of Food Safety and Analytical Science, it's a long name, helps indeed Nestlé to stay a step ahead and by ensuring that the safety of our products is never compromised. So the institute, our institute, so the food safety and analytical institute is part of the fundamental research entity that exists in Switzerland, as you just mentioned, in Lausanne to be precise. And in collaboration with our global R&D network research institute, other researches institutes and governmental agency, we focus on 4 main areas. The one is really develop powerful analytical method, which ensure that our products are free from contaminants. The second one is to optimize our process to ensure that our products meet the highest quality and safety standards. The third one is a support product innovation with scientific approach, advanced analytical tools and latest detection technologies. And last but not least, we also explore new digital tools that help to drive food safety. I like here really to emphasize that this is really part of a bigger machine, if you want, because all the methods that we develop in the Institute are actually implemented worldwide in the Nestlé factory. And just to mention a few figures, each year, we use these methods and tools to conduct over 4 million analyses in our quality analytical assurance center. And this effort is really to help to ensure the safety and quality of all our product worldwide.

Wow, impressive. And especially, I want to connect with your fourth point about digital tools. I've been sharing this emerging risk. And at the end, it's all about this huge amount of information. So how relevant is for Nestlé the emerging risk management process? I mean it's something that you have on the forefront?

Absolutely. I mean, again, I mean safety and the quality of our product is the main priority. And as you can imagine, such a big company like Nestlé that has to deal -- have to deal with a huge bite of product, for this kind of company, it's super important to be able to monitor all emerging food safety risk because this is really an essential part of our business to make sure that we can adapt and address according to the signal that we identify. Our organization has dedicated teams that are working on what we call early warning. And these are distributed across the world and with specific skills that are able to identify specific topics and work on specific subjects such as contaminants, fraud and regulatory.

Very nice, very nice. And where -- I mean, so you mentioned basically signals. I mean, is there a specific place where you look for those relevant signals? Or as I was also mentioning it, basically, you need to dig into this sea or huge big data lake or, let's call it, ocean of data to find the signals.

Absolutely. You mentioned -- and I think your slides before, I mean, was very nice and has helped really to figure like exactly the size of the problem. We have to go through any type of source. It's important that we have to consistent observation of input from what our authorities are doing, the science or scientific publication, but also the media. And basically, we collect and analyze data along all the value chain from farm to fork. So these inputs that we received are actually accessed by our experts who may identify potential emerging issue and basically connect the dots so that we can see and identify potential risk for our products. So that's why, as I mentioned before, we do have an early warning system that help us to really pinpoint the signal, the relevant signals that may develop into issues. And of course, the early we can support these potential issues, the better we can prevent and manage them.

Good, good. So -- and basically, in this context, you mentioned an early warning system, but how can you say for Nestlé the relevancy of the technology? I mean you mentioned teams and people that are definitely bringing and carry, I guess, an immense knowledge. But how relevant is also the technology for you to succeed with these challenges?

I mean the technology, especially the new one, the digital solutions are really like a fundamental companion of any human decision. Again, you have seen -- you have mentioned the volume of data information that we have to process and to understand. And of course, no expert can do it with this manner. That's why we are looking with more and more interested -- interest to these new technologies, such as big data, machine learning and AI because, yes, the world is changing rapidly and the data also. And so we have to -- we may continue effort to stay abreast of this changing environment and leverage indeed the latest digital solution that exists.

Yes. And I think it's a big challenge. And somehow, from our base, it's more -- let's say, our point of view, it's important also to find the proper alliances to achieve because the research and the amount of resources needed to overcome these challenges is big. Good. But among many topics, I think, talking more about not just, let's say, the technology side for managing emerging risk, but on a more specific topic, we heard a lot on the news that Nestlé is committing toward recycling packaging. And I guess this is also bringing potentially some new risk into the zone because there's going to be some new materials, new things that you don't know. So what Nestlé is doing to ensure that the recycled materials are safe as now you are basically on the race to achieve the goal, right?

Yes, absolutely. I mean packaging is one of the biggest commitment Nestlé has done lately and, definitely, one of the biggest challenge the world has today. And as you might be aware, and you just mentioned, by 2020, 100% of our packaging will be recyclable or reusable. And to achieve this, we have to evaluate new packaging material and also work with material that comes from recycled content. And of course, this material need attention from a food safety perspective because, as you mentioned, our new -- we are not that -- we don't have like all that history of working with this. So there is a strong collaboration within our food safety expert and the expert that we have in another institute, again, in Lausanne, the Nestlé Institute of Packaging Science. And we work together with them to ensure that our alternative packaging solution do not compromise the safety and the quality of our food. We have -- we are developing new tools, of course, to assess this new packaging so that we can ensure that they are safe for food contact application. And such a tool include, like, again, powerful analytical methods to detect potential contaminant at very low levels directly in the food. We developed like several bioassays that allow to assess the potential biological effect of packaging material. And also, we are creating food-grade recycled plastics and boosting packaging innovation. So with this approach to food safety, we ensure that the safety of the packaging is looked after from the very beginning.

Good, good. Just a clarification, by when you say that Nestlé will go on 100% recycled material?

2025, that's the commitment that our CEO made.

Wow, really -- that's really short term and interesting. So what definitely appear is that you are still in R&D concept. So your food safety culture, it's really going hand-in-hand within R&D. So it's really planting the roots into the R&D and then goes down to the manufacturing. So let me just ask the last question. How Nestlé builds these R&D capabilities to ensure food safety?

Okay. Absolutely. I mean R&D is very much involved in the food safety, and it starts there. But of course, we embrace food safety across the whole organization, so operations, factory, markets and so on. And R&D is part of the Nestlé organization. And that's why, I mean, the food safety include, of course, also R&D expert on ingredients, regulatory, chemical and environmental contaminants, so microbiology, microbiology and you name it. So we have an expert really in every little field of food safety. And basically, capitalizing on their expertise already at the very beginning of every project, so that's why we start -- we have a project that are -- that has quality and safety by design. We can assess the ingredient, the applied technology and the condition that has to be used for -- to produce our product so that we can ensure the finished product are safe and compliant. In summary, if you want, as an organization, we connect the dots. We anticipate how different factors interact, and we ensure that -- all the regulatory requirements.

Great, great. Thank you so much. This is really a nice insight. I think to all the audience, obviously, a symposium like this sitting on a face-to-face meeting would have been certainly nicer, but we have to stick with these digital interactions. Time-wise, I know, Paolo, you have to leave us shortly. So I just want to mention the audience that we still have a few minutes for Q&A that I -- but I will leave -- I will let Paolo go. But before we do that, again, there is a survey link into the panel -- webinar panel for the web links. If you want to play that will definitely be appreciated. And you can submit now your questions so that I can answer. Most likely, you can probably address most of the question to myself because, in fact, I -- for time constraint, I need to Paolo go. So thanks, Paolo, again, for joining. It was really nice talking with you, and I hope we'll have other opportunities in the future to discuss around this topic.

With pleasure, Nicola. Really, thank you for having me here, and giving this opportunity was super interesting. And yes, we'll stay in contact.

Thank you.

Stay safe.

Bye.

Bye-bye.

All right. Thank you, everyone. So we have let Paolo go for his next meeting. So it was difficult to grab him from his many priorities he has. There was really a lot of questions. I think we've been quite overwhelmed. So there's many of those and maybe just really use a couple of minutes to mention a couple of cases. I just picked them up randomly and read as I speak.

There was an interesting comment about salmonella cases from [ Hadeep ], in 2020, where we said -- yes, I mentioned basically less inspection. Yes, that could be a root cause. But I say his question is, wouldn't be then in effect to see more illness? Well, that's -- yes, it's probably a good clue that less inspection might have led with more potential illnesses. But I think my first reaction to that would be difficult to find the data, especially last year when the health system was so much under pressure because of the pandemic emergency. But good point. I mean it would be good to incorporate the insights on that piece of data. Another question that I just grabbed by crawling the hundreds we got so far, and we'll try to get back to all of you, it's about the -- we mentioned food safety risk signals. So besides official incidents from authorities, what do you consider a signal for a potential risk? I can actually total, let's say, what is our expertise, maybe also -- I'm sure maybe Paolo would have a slightly different or maybe certainly has his input. But basically, what we use, as I mentioned, as to the tech signals are very broad data set. It's not only including the official records like RASFF or FDA incidents, but also social media. We use general news and medias. We use also other data factors and correlate with the even raw material costs, the commodities. And so we correlate different data points to identify potential risk, but that still requires these threats to be then analyzed and discussed. I'm now pushing up on the screen the result of the result of the survey that we have online that everybody can do. And thank you for all the people that has already, I mean, already answered. I just captured -- and thanks, Jennifer, my colleague. She pointed out to this. It's -- one of the question is, if you currently perform a systematic scanning of many sources to perform emerging risks? Right now, we still get half and half. Interesting to see that probably, that's also due to the fact that it really requires, especially if you want to do it manually, it really requires an intense effort. So nobody can really read hundreds of documents, hundreds and hundreds of sources to stay up-to-date in -- no one can do, can really perform this because otherwise, we become an obstacle instead of an opportunity. So in fact, it's an area that becomes valuable if technology can perform this in a way that can distill the information and reduce the burden on each food professional. So good insight from here. So I think we are aiming toward the end for today. I hope you enjoyed the session. We've been -- I was really proud to have Nestlé, Paolo with us to share his feedbacks on this. We'll certainly organize future events like this. It's going to be a bit more interactive as how the, again, the technology allows also to make a bit more open to questions and to interactions on this type of virtual events. So thanks, everyone, for joining today, and wish you a good rest of the day whether you are, let's say, in the morning or in the evening, depending on when -- where are you watching this webinar. So thanks again, and talk to you soon. Bye.