Earnings Call: Q4 2019

Jan 30, 2020

Welcome to the AAK Q4 Reports 2019. Today, I am pleased to present Johan Westman, President and CEO. For the first part of the call, all participants will be in listen only mode and afterwards there will be a question and answer session. I'll now hand the call to Johan. Please begin. Thank you. Good morning, and welcome to the Q4 2019 earnings call for AAK. I have today with me also Fredrik Nielsen, our CFO, and he will take part of this presentation today and also part of the Q and A session. We have on Page 2 the agenda for today's call. We will start with the Q4 and the year end report. Then we will do a business update by business area and some more financial details. We'll also make a short update on our strategic direction going forward, and we will end with a Q and A session. With that, Page 3, a few highlights on quarter 4. We closed quarter 4 2019 in a good way. It is another strong year for AK. In the last quarter, we did increase our operating profit by 9% year over year, and we reached an operating profit of SEK562,000,000. And with that, we have strengthened our margin. We continue to improve our operating profit per kilo, which was up 8% compared to last year. And the main drivers with regards to industry for this is our food ingredients sector as well as the chocolate and confectionery fats sector. All right. With that, heading into Page 4. Just a quick look at the trend. In short, we continue to see the positive trend. The 4th quarter was nicely in trend with what we have seen over the last years, and it was a record high quarter 4 with regards to operating profit. Page 5, a few comments to 2019 as a summary. When we look back, we want to highlight that we launched our AquaPlanet portfolio. It is a portfolio for plant based food solutions. We have seen a strong growth with regards to the plant based industry, and we also see a strong growth with regards to our opportunity pipeline. We doubled the pipeline between quarter 2 and quarter 3. And between quarter 3 and quarter 4, we doubled again. So it is, for sure, a strong pipeline development, and we do see fast movements within the industry of plant based foods. We also launched our Kebab Pure, which is an application within chocolate and confectionery industry, a high end solution that improves the application or rather improves the functionality of chocolate and confectionery products. We also ramped up our M and A activity in 2019. We closed 3 M and As during the year, one in Foodservice, where we expanded our portfolio of offerings. We also added new ingredients through our ingredients portfolio with the Quest acquisition of Soy International gave us lessity in our portfolio. And we also increased our capacity, strategic capacity in Europe with with sorry, Page 6. 2019, in a summary, was a good year. We did deliver in line with our management ambition with regards to operating profit. We increased it by 10% year over year, and our full year operating profit landed on SEK 2.157 billion adjusted for acquisition costs. Reported, it was slightly lower, SEK 15,000,000 lower, but all in all, a good year. We continue to see operating profit per kilo increase, up 8% year over year, and we'll add in a return on capital unemployed of 14.9%. Also positive is that we continue to strengthen our financial structure. So we have now a reported tax cost of 25% versus 27% last year. Heading on to Page 7, a few comments on earnings per share. We see on the back of, obviously, increasing profits and good tax cost, we see an increase of earnings per share. We will also, based on that, propose an increased dividend now at SEK2.10, which is an increase by 14% compared to last year. With those comments on quarter 4 and 2019 in a summary, we head on to Page 8 and do some more details by our industries or business areas. Food and Ingredients continued strong, a strong trend. We delivered a 9% year over year growth of profit, and we increased our operating profit per kilo by 7%. So again, a volume increase, an organic volume increase, but also and more importantly, we continue to sell more high value added solution on the back of our co development approach together with customers. We saw a really good growth of earnings in our dairy and bakery industries, and we also saw a mixed bag a bit within Special Nutrition. We see continued growth and strong growth with our local Chinese infant formula customers, while our global players in this market had reduced volumes for us. Our pipeline, as I mentioned before, for plant based food, which is part of this sector food ingredients, it continued to grow and we doubled between Q4 and Q3, the opportunity pipeline that we have, and it was also a good profit growth from an EBIT perspective. Page 9, chocolate and confectionery fats. It was a strong quarter, a really strong quarter for chocolate and confectionery fats. Our operating profit and operating profit per kilo turned around. So we have seen a slight decline over the last few years. As you have heard us commenting before, we've had a period of higher cost and lower yields, while still being able to really push the market for high end solutions. In this quarter, we did see a turnaround on EBIT per kilo, which was up by 30%, and our operating profit was also up by 13% year over year. It was on the back of a good mix of high value added solutions and also some spot business with really good mix. So that, all in all, drive the profitability. We continue to see a strong growth here for value added solutions. We have had higher costs during the year. We had higher costs also in Q4, but we have now completed our capacity, increased installments. We have also had a good season with regards to sourcing chi kernels, which are important for our high value added solutions. So with that in place, we do expect to get to normal cost base within the mid Q1 2020. We are at the moment, we have an ongoing planned maintenance stop that will be finished during the quarter. And from then on, we should be back to normal with regards to operations. Page 10, a few comments on our Technical Products and Feeds business. Continue to see good performance in a more historical perspective within Technical Products and Feed. Compared to last year, it was a drop profit by 8%, and our operating profit per kilo was down as well. But in the more long term perspective, this is still a good quarter, a high quarter 4, and you can see that if you look at the graphs to the right on Page 10. With that, I will turn it over to Fredrik, who will guide us with some more financial details. Thank you, Johan. Looking at the cash flow on Page 11. We have a good EBITDA increase of 13% or SEK 87,000,000 in the quarter. Cash flow from working capital was negative in the quarter and amounted to SEK 176,000,000. There was a strong positive cash flow from accounts receivables and accounts payable in the quarter. This was offset by strategic purchase of key raw materials to chocolate and confectionery fats, which had a significant impact on cash flow from inventory, but there are also some impact in inventory from ships with oils arriving slightly earlier than scheduled. As Johan said, paid tax is also down in the quarter. It's down to 24% compared to 26 percent last year. This has been helped by a lower corporate tax rate in Sweden and India, combined with further optimization of the capital structure in the group. Cash flow from investment activities amounted to SEK 326,000,000, where SEK 47,000,000 was related to acquisitions, and that's due to the minority purchase in India of additional 5%. Capital expenditure was mainly related to regular maintenance investment and capacity increases. Full year cash flow from investment slightly lower than earlier communicated. It's only a timing issue we have more carryover going into 20 20. Let's move to Page 12, looking at the raw material price development. We have during the Q4 and the beginning of the Q3 2020 seen a sharp increase in raw material prices, and this is particular for palm. This will have an impact on our cash flow, working capital and ROCE during 2020. And then I would like to remind all of you that the 10% change in all our raw material prices will impact working capital with plusminus 350,000,000 dollars And also, if you look into the graph, you will see that the palm oil price over the last month is up 50%. Let's move to Page 13, return on capital employed. As Johan said, we have a return on capital employed at 14.9, percent, but I think it's important to have in mind that the return on capital employed has been impacted by 0.5 percent from the new accounting standard for leases. And also, if we adjust for the strategic purchase of key raw materials, the return on capital employed is flat year over year. Loan duration profile. We have been able during 2019 to increase the average duration in our loan portfolio. We have also in the Q4 issued an unsecured bond for €2,500,000,000 which is part of our MTN program with a framework amount of SEK 4,000,000,000. At end of December 2019, we have committed credit facilities of SEK 7,000,000,000. Let's move to Page 15 and the FX exposure. We had a small positive translation impact in the Q4 of $12,000,000 $40,000,000 in food ingredients, dollars 2,000,000 negative in chocolate and confectionery types. I would also like to highlight that based on the spot rates end of December, we will start to see a small negative translation impact going into 2020. By that, would like to hand back the microphone to Johan. Thank you, Frederik. We now head into Page 16 and a few comments on our strategic direction going forward. We did, during Q4, launch our new strategic direction or updated strategic direction. And to start off, we have concluded that with a strong track record, the strong track record that we have in AEK. We also concluded on a few things that we really need to preserve, a few things that have really been the backbone of our growth up until now. We have a really strong passion and drive and entrepreneurship in our company, essential that, that is kept. We have an organization that is characterized by regional ownership and accountability. We build really business with our co development approach, a customer centric approach, where customers stand in the center and we help them apply new applications and enhance their products. Sustainability and responsibility to our stakeholders has been key for us, will be key going forward. And flexibility and agility in our sourcing, in our operations, also very key in order to help our customers improve their products and come with solutions also fast. These are elements that really need to be preserved. We call them the DNA of AK. In our strategic direction going forward, we have launched a portfolio based strategy in order to capture the specific opportunities and also the specific needs of certain industries. The industries that we serve with plant based oils and fats are very different. What it takes to win, what it takes to be significant and relevant in these industries are very different. So therefore, we also need to make sure that we manage our strategy going forward in that way that we invest, we prioritize and we find the solutions, innovations that are really the right ones for certain industries. We have a portfolio based on 4 main categories. It is the invest for continued growth where we have chocolate and confectionery fats and special nutrition. We will also make investments and priorities with regards to plant based foods. It is a growing industry. We are very relevant to that industry already today. We will make sure that we invest for also capturing these opportunities. We also aim at building a strong health and nutrition platform to really help drive health and nutrition through the industries that we serve. We will also focus on optimizing our performance within industries like bakery, dairy and food service. And we have certain industries that we serve where we say we have a strategy the current strategy that works well, and we will maintain that focus. In order for us to be successful, we also need to improve how we go to market, how we operate. And we have singled out 7 critical enablers that we will focus on in the strategic program going forward, in our road map going forward. The foundation, our people, that is so important. We will develop a purpose to become a purpose driven company. And with that, we will also build and adjust our culture. The backbone of our company is very much around product management and end to end supply chain plan. And we will differentiate versus competition with co development, taking our customer co development approach to the next level. And sustainability is and will be key, is key also with regards to the consumer trends that we see and will be key for us to differentiate versus competition and also driving the right behavior in our industry. Page 19, M and A. We have done a few M and As over last year. We have done several M and As in the past 8, 10 years. And M and A will be key for us going forward. In the strategy that we launched and that I just articulated, M and A play a role and can accelerate the way we build capacity, geographical expansion, but also how we add technology and capability to our company. And as you've seen in 'nineteen, adjacent product portfolios, when relevant, will be part of the acquisition pipeline, When relevant, we have concluded that we are in a market where we want to be. Plant based oils and fats is a growing market, favorable trends, but there are some adjacencies like lecithin that works well with oils and fats and enhances our product portfolio. That is how we look at adjacencies, not necessarily to just build a broader ingredient profile and portfolio. All right. With that, heading into Page 20 and some concluding remarks. We strongly believe that we are well positioned with our offering of plant based healthy and high value adding solution, our oils and facts solutions. We use our customer co development approach, and we continue to see favorable underlying trends. Not all of them are favorable, but when you net net look at the total consumer trends of the world, we do believe that they speak in favor of plant based oils and fats, plant based ingredients. And with that, we do remain prudent and optimistic about the future. With those remarks, we close the presentation, and we are happy to take questions. Thank you. Okay. We have our first question coming through now. It's from the line of Kenneth Thalhne Hansen of Carnegie. Please go ahead. Your line is open. Yes. Thank you. Just a small detailed question maybe on chocolate and confectionery fats. You're right that you used spot market to sell some volume there in the quarter, but you still had a very good sort of EBIT per kilo. So I thought that when you use the spot market, maybe you sold commodities at lower prices. So how do you explain that? Thank you, and good morning. Yes, good question. But it is really high value added solutions. So there is also an opportunity to sell spot volume in high value added solutions, and that is what we have done. So it is actually the opposite in this case. And we do see opportunity going forward. We have after a few years, as you know, we're struggling a bit with the capacity and the yield. We are now in a good position where we have managed to build up safety stocks. We have our operations into place and we can start moving volume even if it is specialty volume and took advantage of that opportunity. Okay. So we should expect some of that continuing at least from Q2222020 and onwards? Well, I think spot business is spot business. It depends on the supply and demand. But what is the fact is that we have our operations now completed our capacity increase. We have a good stock of chi kernels. So with that, we are in a strong position. We have been able to build up also safety stock of finished goods and work in progress materials. So we are in a situation where we have got supply. We have a stock at hand. And with that, we can follow the market and be active. But it's not the same thing as there will be in the spot business every quarter. And then you will have this maintenance stock in the Oeyhus facility during the first half of the first quarter. How much do you think that will affect your sales volumes in the quarter and also on EBIT? Well, we do have stock at hand, and we have planned for this. So this is a planned maintenance cost. So in terms of sales, it doesn't impact. But with regards to our cost level, it does impact because we're not processing anything during that maintenance stop. So there is a slight EBIT impact, but not necessarily on the sales side. On cost side, I would say, but not sales. Okay, great. Thank you. Thank you. Okay. We've just had 2 further questions come through. The first is from Heidi Adlixson. Please go ahead. Your line is open. Hi, good morning. So the first question is on CCF. You talked once again about pressures from customers, delaying contracts and so on. Can you talk more about what's happening there? Why are they doing this? And because there is lower demand, is there any impact on pricing? Is there price pressure from customers as well? Thank you. That's the first question. Thank you. Good morning, Heidi. Yes. So while this is a strong quarter, I think there's always the we always sit with a combined full picture, right? So we have been able during the year to contract good business focus on high value added solutions and with pressure on supply also price profiles are followed. So with that, you can say there's been an opportunity to use the value of what we sell. At the same time, there's been a pressure on volume a little bit because we could have sold more if everything was rolling according to contracted. So we've seen some customers due to probably lower volume expectations on their end and or trying to optimize their purchase by buying a bit cheaper when volumes are there. So that is what we mean with rolling contracts is that some customer choose to take a bit less compared to what the order was, but still we have a good business with good margins. And with that, we were able to improve our operating profit year over year, but as you saw, a limited volume growth. So obviously, if the contracts would have been pulled like they were ordered, then we would have seen an even higher sales in this segment. With regards to going forward, we see normal market behavior. As of now, there is a competitive market out there, but at the same time, we do have a strong portfolio, we and competitors. So there is a slight price pressure, but at the same time, we do expect our cost to go back to normal. So there's both a bit of a price pressure risk, but also the opportunity of our cost being improved. And with that, we can also be competitive in the market. And in terms of competitors, do you see new competitors in the market? Or is it just same people out there and because there are a few of you, there's some level of price pressure? It's not a big change in the market, I would say. So it is business as usual. Okay. And then we were talking about cost in CCF. Is it possible for you to quantify the headwind you had from the lower yielding kernels in full year 2019? We do not comment that level of detail. I think it's always important to see that this is we will always also going forward have fluctuations in yields and so forth. We did have an exceptional period, and you've seen that in the cost base. But at the same time, we have been able to manage our total portfolio, and we will continue to do that. So that is what it is. We do expect a cost improvement year over year, but there will also be margin pressure from the sales price. So but all in all, we are positive about the development that we see in our CCF business. And then the last one on infant nutrition, please. You talked about destocking by multinationals. How long do you expect this to continue? And with that backdrop or your backdrop, are you continuing with the infat expansion? If I start in the later part of your question, yes, we do continue with that. We see a strong demand. This market is a market that is growing. The spend by family, the need for high end solutions for infant formulas, it's there. The trends are clear. So in the bigger picture, this is a market where we are, as you saw in our strategy update as well, we will continue to invest to be strong in Special Nutrition as a whole, and infant nutrition is certainly very important segment of that industry. With regards to the destocking that is related to birth rates. Obviously, that is something that will develop over time depending on how China and other countries develop with regards to the number of babies born. And it is difficult at the moment to get full visibility into our customers' portfolio and their view on the market and when that flattens out. But we clearly see a link to birth rates with regards the multinational. But at the same time, it's a growing market with regards to spend by family. And with that, we're focusing on really winning it in China with local customers as well as with very strong value proposition to the multinationals and trying to drive this market forward. But it is difficult to forecast how much is destocking and how much is our customers winning or losing to competition on their end. Thank you. Thank you. Our next question comes from the line of Karl Johanter of Handelsbanken. Please go ahead. Your line is open. Yes. Thank you very much. Maybe starting with a follow-up to the last question on the infant nutrition in China. Firstly, what is sort of driving the culture change so that the locals are now acceptable suppliers of infant nutrition? Because historically, it was pretty much only multinationals, only imported products. So what is driving the sort of the success of the local producers? And are you pretty much agnostic whether you sell to the locals or multinationals in terms of what you sell and what kind of margins you make? That's my first question. Thank you. Yes, good question. And we do see that the industry or the consumer, the consumers in China see that the producers have good quality. So with quality being there, it is safe to buy. We also see from the political incentives and so forth that if anything, China becomes more pro Chinese players and suppliers and being in China. And that is also one of the reasons why we invest for this industry in China, as you've seen in our earlier communication. So with that, the short answer to your question, if we're agnostic, is it doesn't matter if we sell to multinational or a Chinese customer. And it is the same products and the same market in them that will receive this. But of course, there is a slight difference in dynamics and a bit how they act. But all in all, we are well positioned and this is how the market develops and we are in China. We have locals as well as multinationals as customers and with our operations now being also added into having capabilities of producing and supplying in China or supplying from Europe, I think we should be in a good position. But it's a competitive market out there as well, so nothing is a given, but we are doing the right things as far as we see it. All right. Thank you. Then the comments that you made on the plant based opportunity, Hamdi, the opportunity portfolio that you said doubled again after doubling the quarter before as well. So how should we for the first, what is opportunity pipeline? Is that a sort of a live project that is can be sort of also driving volumes or is at an earlier stage, so there's no volume there's no deliveries yet? How should we what is an opportunity pipeline? How do you define it? Our opportunity pipeline is a when we get an opportunity to work with a customer co developing, it is a real project, a real opportunity for sales, meaning that there is a sales opportunity linked to this. But it's co development could be a short one, a month or so, but it could also be a longer project over half year or a year. This is how our business look. This is what it looks like in dairy, in bakery, in infant nutrition, in chocolate and confectionery, so very similar. So opportunity pipeline is not a R and D project. It is a customer opportunity. So in other words, we do get more and more requests for, can you produce this? Are we able to supply us with this solution? So in that sense, it is a indicator of the growth of the industry, an indicator of the interest in plant based oils and fats in this industry. And then but we then have to convert it into a one business where we start supplying. So it's an indicator of how the industry is growing and our opportunity and how that is growing. And that has then a percentage that materialized into one business. So in other words, that's the best indicator we have about the growth going forward. All right. Fair enough. And then maybe a more broad question. You mentioned in your closing remarks that not all trends are favorable that you're seeing at the moment. So is there a flip side of the plant based trend from your perspective, I. E, maybe in the traditional dairy or in somewhat other category where you have been strong in the past? I know that overall, it's a positive trend for you, positive trend for you. But is there a flip side in any of your main categories from or some other trend? You could say an easy one to take is obviously dairy and dairy alternatives because there you could argue as a consumer, are you if you want milk in your coffee or you want the milk alternative in your coffee, you're not buying double the volume, right? So there is a that's the flip side. But at the same but we as a total and especially with regards to the plant based meat solutions, where typically we haven't sold plant based fats in the past into the meat industry, we would say for us the addressable market is growing. So for the time being, we do see a net interest. Then with regards to other trends, to piggyback on your question, what I mean when I say that is you could see the number of ingredients, sustainability. What is sustainer? Sustainability in organics, not always with regards to resources used and the efficiency, a bit competing. The same thing with plant based food, really a sustainable play. But then you start to look at the ingredient list, then there is a huge opportunity to improve the ingredients list of a plant based solution. So you could say that how much is that processed and the number, e numbers and so forth. So there are a few things that you could say are competing, but I do think that net net, as we say, it's positive and it also drives new product development and new solutions where we think that our co development approach is really good. Perfect. Thank you very much. Thank you. And we have a follow-up question from Kenneth Thal Johansen from Carnegie. Please go ahead. Your line is open. Yes. Thank you. So you have this management ambition to grow EBIT by 10% every year. And now this quarter, you reached around 9%. But you also had a tailwind from FX effects. And when we look forward, as you pointed out, those FX effects might not support earnings, well, less in the Q1 and then maybe even be a slight negative in from the Q2 and onwards. So are you still sort of standing by your 10% EBIT growth targets that you have? Yes, we are, definitely. We do not set them with we're not speculating currencies where it is. We have had some tailwind this year, but we also had, as you know, some headwind in our cost of CCF and so forth. This target stands, and this is what we want to achieve. And we plan like that and we have taken that into account. Currency will fluctuate over quarters and over years, but our target stands. Okay. Good. Thank you. Thank you. Okay. There seems to be no further questions at this time. So I'll hand back to our speakers for the closing comments. All right. With no further question, then we thank you so much for listening in to the earnings call for quarter 4 2019, and looking forward to talk to you again. Thank you very much.