Ladies and gentlemen, welcome to the AAK Q2 report for 2019. Today, I am pleased to present Johan Westman, President and CEO. For the first part of this call, all participants will be in listen-only mode, afterwards, there will be a question and answer session. Johan, please begin.
Thank you very much. Good afternoon and welcome everybody to the AAK Quarter 2 2019 report and presentation of our results. Together with me today, I have, as previous quarters, Fredrik Nilsson, our CFO, we will run this presentation together. On page two, you find today's agenda. We will start with comments on the second quarter 2019. We'll comment on a few strategic activities, some information by business area, we will end with a Q&A session as we usually do. With that, turning to page three, some initial comments on the quarter and our results. We have continued with a very strong momentum with regards to our operating profit. Our profit is up 14% year-over-year, adjusted for currency, we're up 10%, right at the target of the management ambition. We closed the quarter at SEK 518 million in operating profit.
We saw some softer volumes, but really good development with regards to our margins. Our operating profit per kilo continued to improve, up 11% year-over-year, now at SEK 0.92 per kilo. Our earnings per share grew even further, grew by 18% year-over-year. Behind this, we had a really good trend and good development in Food Ingredients. As expected, we had higher than normal costs or rather lower than normal yields with our shea kernels in the Chocolate and Confectionery business. That's basically nothing new compared to the latest quarters, so that was more or less an expected result. Strong volume growth, but offset a bit by increased costs for every produced kilo in CCF. If we turn to page four, our trend quarter-over-quarter. With Quarter 2 2019, we continue this nice trend.
A really strong quarter where the management ambition was delivered right on target. Some quarters obviously lower, some higher, this was a good quarter for AAK. On page five. During the quarter, we've also introduced or launched two important products or one product portfolio and a product to the market. Starting with AkoPlanet. AkoPlanet is a portfolio of products for plant-based alternatives to meat and dairy products. We are very proud to launch this, we do believe that this is a market space that will continue to have a very positive outlook for the future. We see a really strong trend in the consumer market with regards to using or starting to eat plant-based alternatives to dairy and meat. Today, at small volumes in the market as a total, we do expect this trend to continue for quite some time.
We also launched COBAO Pure. COBAO Pure is a unique and patented solution that will deliver really good bloom-retarding effects, and it will also extend the shelf life of the products our customers produce. So both these launches were really good in quarter two, and we do hope that this will deliver nice growth going forward. Again, starting though from small volumes. With those comments on the quarter results and our launches in quarter two, I will hand it over to Fredrik Nilsson, our CFO, for some further comments on the financials.
Thank you, Johan. Going into some more financial details, we have a positive FX translation impact on SEK 19 million in the quarter. SEK 12 million was related to Food Ingredients, and SEK 7 million was related to Chocolate and Confectionery Fats. Based on current currency rates, we should expect to see continued positive impact going into the third quarter, but most likely slightly smaller than we have seen during the first and the second quarter. Let's move on to page seven, looking at the working capital days. Inventory days, we have been able to improve by one day during the quarter, and that's due to good inventory management. The improved product mix on more specialty solution and the strong volume growth in Chocolate and Confectionery Fats put some underlying pressure upwards on our accounts receivable days, but we have to good work manage to keep them flat.
Accounts payable are the main disappointment here, down three days, but it's also an area where we focus a lot and try to improve. Let's move on to page eight, looking into the cash flow. We have a good EBITDA increase of 16% or SEK 93 million in the quarter. Cash flow working capital was slightly negative in the quarter. Lower raw material prices had a positive impact on the inventory and accounts receivable. However, that was offset by lower payables. Interest costs paid to banks are down in the quarter. That's positive. Paid tax is also down despite that we have a higher earnings before tax. And I would like to highlight that we have also been able to continue to reduce the tax rate from 27% down to 25%, and that's due to the lower tax rate in Sweden, combined with further optimization of the capital structure.
Looking at cash flow from investments, we had an outflow of SEK 280 million. SEK 111 million of those was related to acquisition, and that was the minority shares increase in India. And the remaining capital expenditures was related to regular maintenance investments and capacity increases. And then you can also find other non-cash items, and that's mainly the mark-to-market impact from our financial instruments. So to summarize, the free cash flow of SEK 128 million in the quarter. Let's move to page nine and return on capital employed. Looking at the 12 months rolling, we have 15.5% in the quarter comparing to 15.8% at year-end, and that's explained by the impact of IFRS 16. As you can see on the light blue line, we are at 15.8%, the same as the year started if we adjust for the IFRS 16 impact. Moving to page 10 on loan duration profile.
We have, during the year, been able to increase the average duration in our loan portfolio due to our MTN bonds, which has been a positive to increase the duration in the portfolio. I would like to hand back the microphone to you, Johan.
Thank you very much, Fredrik. We head into page 11 and further comments by our business areas. Food Ingredients first. Food Ingredients improved profit by 18% year-over-year, on the back of a solid margin expansion and a good product mix, more or less across all subsegments within Food Ingredients. We saw continued improvement in bakery and dairy and really a strong product mix in special nutrition. In spite of, call it only 1% volume growth, we grew profit by 18%. Also, food service had a good development with really strong margin improvement in the portfolio. Page 12 on Chocolate and Confectionery. Very strong growth in the Chocolate and Confectionery business area, the highest growth was within the low-end and semi-specialty products in this product group.
You saw an impact on operating profit per kilo. Also impacting operating profit per kilo is the increased cost that we have due to the lower yields in our shea-based solution. In spite of that, we saw a stable quarter with increased operating profit, although we still have the, call it challenge, with capacity as well as lower yields resulting in higher cost per produced kilo of high-end chocolate and confectionery solutions. We reiterate what we have said before. We have capacity expansion activities ongoing. They follow plan. We see good results, and we have to use our stock with somewhat lower quality kernels throughout the year, therefore we are expecting improvements by the end of the year, and that is still a plan that we stick to. On page 13, Technical Products and Feed. A strong quarter again for Technical Products and Feed.
We had volume growth in the fatty acid business, we also improved mix. In the total business area, we are focusing on operating profit per kilo, really driving value in that portfolio as well. A solid quarter for Technical Products and Feed. Page 14, our current company program, The AAK Way, is progressing really well. We are now literally on the final stretch, one half of a year left in this program. As I mentioned before, we are now also making a strategic review, we are about to create the next company program for 2020 and forward. This is running well with good progress. We see that we are in a good space in the market. We have a good position in our market.
We do expect our direction for AAK to continue, but with a more laser-sharp focus with adding a segment or two, but we do not expect a 180-degree turnaround with the new strategy. More about that as we go further into 2019. Expect feedback by the end of 2019 with regards to the updated strategy in our new company program. Page 15, our management ambition. We have the ambition to grow our operating profit by 10% year-over-year, adjusted for currency and acquisitions. As I mentioned earlier, we did that this quarter. As a consolidated view, after two and a half years, we are at +9% with regards to operating profit improvement. We continue to progress well, and we reiterate our ambition as an average.
Some quarters might be higher, others are lower, we reiterate our target by growing 10% operating profit year-over-year. As concluding remarks, we do offer plant-based, healthy, high-value adding oils and fat solutions, and we're using our customer co-development approach. We see favorable underlying trends in our markets, and thus, we continue to remain prudently optimistic about our future. With those comments from myself and Fredrik, we would like to open up for questions and answers. Thank you very much.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. Our first question comes from the line of Oskar Lindström from Danske Bank. Please go ahead. Your line is now open.
Yes. Good day, gentlemen. I have three questions or three sets of questions. The first one is on Food Ingredients, and what's the reason behind the rather weak volume growth in that division in this quarter? Yes.
Hi, Oskar.
Hi.
I will say what's explaining in Food Ingredients is, of course, we have lower commodity volumes in the quarter, also as we have seen a little bit lower volumes in food service, despite we see a good evolution with more high-end specialty solutions. We are a little bit softer on the volume side. Also on the bakery side, we continue to work with the mix, but we have maybe also said no for well to some of the low-end semi-specialty volumes in the bakery segment.
All right. Are these sort of developments with lower commodity or fewer commodity volumes and being more selective in terms of bakery, is that related to sort of a lack of capacity in your facilities?
In some areas, yes, we need to optimize, we have continuously invested in capacity increase in AAK for many years. If anything, we continue to really push forward for our high-end solution. That's where we want to play. That's where we should play. We are challenging our teams to go for that type of sell and not just taking volume for volume. In other words, when the mix is improving and if that is on the back of missing a contract or two, that is the priority. At the same time, we also focus on growing organically our volumes, but it has to be with the right type of products.
Okay. My second question is moving on to Chocolate and Confectionery Fats where you sort of have the opposite situation. You have very strong volume growth, perhaps weaker or not as strong earnings growth. What is behind that sort of development there?
Yeah. A few things in the dynamics here. If we take the volume first. We had volume growth across the board, proportionally higher volume growth in the low end and semi-specialty versus the high end. In other words, higher volume growth on lower margin products versus the growth on higher margin products. Adding to that with our high-end products, that is where we also have the challenge with the lower yield. The cost per kilo goes up, in that case, impacting the net margin even in that segment for this time when we have the lower yield. The combination of those two impact the profit per kilo. High volume growth and significantly higher volume growth in the lower end and semi-specialty.
Is that a situation which we should expect to continue in coming quarters or, let's say, the second half of the year?
At least the cost per kilo produced shea-based solutions, we know that we will continue to use our stock of lower quality kernels throughout the year, we are ramping up our capacity improvements towards the end of the year. We know that that will stay, then we need to trust the new crop and so forth coming in during the fall. That should be expected. If we can maintain a significant high growth on the lower end and the semi-specialty, let's see. It was a really strong growth in this quarter.
Okay. My final question is on those two effects, which we should see next year. You mentioned one of them is the more normal shea bean harvest or kernel harvest, and the other one being your capacity or your investment projects, which should also, you said, wrap up next year. On the harvest, do you know already that that is a normal harvest and that you are going to be sort of not have this effect next year as well?
No, that is too early. We have just started to source.
To be more specific, it is not a real issue about this harvest or the last year's harvest. It is about the worst yield we get is from the old safety stock that we have. So that has not as much to do with the new harvest. Obviously, every harvest has its quality of the kernels with higher or lower FFA values that impacts our yield. The really low yield that we have comes from older kernels that we have had in safety stock and that we have used and need to use during this year. If we get a normal crop or normal kernels, we will get a normalized yield going forward and with capacity improvements, that should give us opportunity to increase volume as well as reduce cost.
All right. Very interesting. Thank you. Those were all my questions.
Thank you very much.
Thank you. Our next question comes from the line of Kenneth Olsson from Carnegie. Please go ahead. Your line is now open.
Thanks. I'm curious about the COBAO Pure introduction. You introduced the TROPICAO solution that should solve similar problems for chocolate from a couple of years ago, that solution didn't really take off in a big way or haven't done yet. Could you talk a little bit about the difference between those two, between TROPICAO and COBAO, please?
Yes, I will. Thank you, Kenneth. I will comment it from a business point of view rather from a technical point of view. For TROPICAO, it's still a good solution with regards to what it solves. The issue with TROPICAO has been the commercialization of that project due to that it includes a change in the customer's process, an increased investment by the customer, and also change to the process, which limits how many that wants to go that route, so to say. The COBAO Pure is a solution that our customers can use much more easily directly into their processes. With that, we do hope that this will be a better success from a commercial point of view.
Okay. It's basically solving the same thing, is it the same sort of chemicals or the same solutions in the back end somehow?
It's two different products. Yes, it has some of the same improvements to the chocolate, to the product of our customers, it's not the same product as such. The COBAO has a positive impact on blooming and a positive impact on shelf life.
Okay. How is pricing for these two products? Is TROPICAO much more expensive, or is this one more expensive? Is one of the products targeting more the high end and the other one the low-end chocolate products or?
We are targeting our main customers with both of these products. We do believe COBAO will have a smoother ramp-up and commercialization, and industrialization, we have already started. I just mentioned why I believe TROPICAO had a somewhat tougher start. We'll see in the future how we can possibly ramp up TROPICAO. Pricing, we will not comment in the public domain.
Okay. Then, does the introduction of COBAO, does it take some years because you need to test it and then is the testing phase also long so that the volumes of shipment for COBAO is not going to take off until a year or two?
That's a good assumption. It will be some one to one and a half, two years of testing and before call it serious production, what we expect.
Okay. Thank you.
Thank you. Our next question comes from the line of Heidi Vesterinen from Exane BNP Paribas. Please go ahead. Your line is now open.
Yes, I've got three questions as well. Maybe going back to Food Ingredients, where we talked about the very high EBIT per kilo, do you think that the sort of level we saw in Q2 is sustainable, or were there any positive mix effects, do you think, this quarter?
Well, the sustainable, without commenting specifically on the 0.91, what's sustainable is the focus that we have and the work that we do to lead us to this. That is sustainable, meaning that we as AAK, we focus on improving the value creation, improving on the higher end solutions, and higher end solutions and high margin product has a higher priority versus commodity low-end products. That is sustainable. Obviously a quarter can be, depending on the exact volume mix and product delivered, obviously operating profit per kilo can fluctuate a bit. There was a really strong pickup, as you've seen. Difficult to make a very precise forecast, I do expect us to be able to continue a high level, and our efforts are clearly targeted on improvement.
Okay.
And then-
To add to that, it's about looking at the long term. We have clearly the ambition to improve EBIT per kilo year-over-year. As Johan said, there could be a quarter that will be a little bit better, and there could be a quarter that will be a little bit lower. Definitely long term, Heidi, we have an ambition to continue to improve EBIT per kilo.
Okay. Last quarter, we had talked about the U.S., how you said there was a pickup in momentum. I think the quarter before was weak, last quarter was quite reassuring. You said trends are improving. Can you update us on the U.S., please?
Yes, it continued. We have a good improvement year-over-year in U.S., really on the back of, again, like the segment as such, a good mix, so a good improvement of the margin also for U.S.
Last question. I think, Johan, when you were talking about the strategic review, you talked about potentially adding a leg or two. Does this refer to splitting out a new segment from your existing businesses or adding something potentially through M&A?
Obviously, if anything more specific like what you're asking is going to be there, we will come back to that when we communicate and launch the updated strategy going forward. For example, as I mentioned, I don't expect us to have a 180-degree turnaround or expect us to focus on the segments we have, but we can focus on sub-segments more or less, and I expect us to do so. We need to be more laser sharp in where we focus, and that fits well to what we talked about and how to improve our margins and focusing on the right product segments where we can compete better. We also see continued good momentum and market trends within chocolate and confectionery.
Obviously plant-based, we are already 100% plant-based, but as an industry, you can call it, or a part of our Food Ingredients industry, plant-based is an area of market space we expect to grow significantly going forward. With that, we need to take the right actions and have the right structure to support that. That type of focus, how we focus and what strategy and tactics we use in certain business areas and segments, that is what the major part of the strategic direction will be about. Then potentially we might add a adjacency through an acquisition or a focused effort, but that we will have to come back to later.
Does M&A remain a big focus? Because that's the impression we got last November. Is it still a big focus for you? You had talked about acquisitions of all sizes, so very big ones as well as small ones. Is that still the case?
That is still the case. We continue to push forward. We have a good pipeline of M&As. We always look at M&As. We will continue to really look at M&As out there in the market for geographical expansion as well as for potential adjacencies, and we're really strengthening our high-priority business areas.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Alexandra Bogdanovsky from . Please go ahead. Your line is now open.
Yes, hello. I have two questions so far. Could you just similarly Tell us a bit more about AkoPlanet and where the product is available right now and what customers you're targeting, and also what potential you see from that product going forward.
Just so that I understand correct, was the question about COBAO and AkoPlanet or about the two-
Mainly AkoPlanet since you just talked about COBAO.
Okay. Absolutely. With AkoPlanet, I think it's worth, I mentioned it before, it's crystal clear if you look at our product portfolio, everything we do is basically plant-based. We use a variety of raw materials. We have a multi-oil product offering to the total food ingredients space. With the development that you see in plant-based dairy as well as plant-based meat, there is obviously a high demand for ingredients and combination of ingredients to get to the right structure, the right taste, so that we as consumers really see it as a high-quality product, a good-tasting product, and potentially even a better product. With that comes also the drive supported by sustainability. How do we reduce the use of animal-based products? Many of the customers, the producers of plant-based meat and plant-based dairy, also have a brand promise very much linked to sustainability.
When we look at these product offerings, on the one hand we do the same thing as we do with any customer within the food ingredient space. It's customer co-development. It's finding out what oils and fats you could use for the right taste, for the right texture, for the right applications. That is something that we have a strong track record of doing. That fits very well with the need with this industry, where a lot of changes are happening. The development and the pace of the development is really strong, and the need of also improving the product quality is high for us as a consumer to really use it. With that, we expect the plant-based market space to require lots of co-development, product improvements, innovations going forward. We are one of the companies that are geared towards doing that.
That is basically what we do. With that regard, the AkoPlanet portfolio is grouping together products that serves the purpose but also has sustainability promise to it. This is something we will continue to develop. Also we as a supplier will focus on development, co-development, innovations for this market space.
Sure. Also my second question would be in regards to your increased ownership in your joint venture with Kamani. You now own 64%, if I'm correct. Is this a level that you're comfortable with now or do you see yourself increasing this level potentially going forward?
This is a joint venture we have, has been working out really well for us. It continues to do that, and these acquisitions are more on the back of the joint venture agreement that we have with put call options that the counterpart has decided to trigger. We are happy with this change, and we will be happy with buying more or staying where we are. It's a company and a operation in India that fits well to AAK, and we continue to deliver good value in India.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Karri Rinta from Handelsbanken. Please go ahead. Your line is now open.
Yes. Thank you. Karri Rinta, Handelsbanken. A follow-up on the AkoPlanet™ question. Firstly, when we think about future potential for maybe a few years down the road, should we focus more on the non-dairy segment or on the non-meat segment in terms of total addressable market and maybe total addressable market specifically for AAK? Where do you think that you will put your laser sharp focus in that respect? Secondly, how should we think about the competitive dynamics in that? Is this more of a similar to bakery where you have a large number of players both competing with you as well as in terms of customers? Or could this be more like infant nutrition, which is dominated by few multinationals and thereby also the number of suppliers to them is limited, and that therefore the EBIT per kilo is significantly higher than in more commoditized categories.
Thank you.
Thank you. If we start with the first one, we focus on both plant-based alternatives to meat and plant-based alternatives to dairy. At the moment, they are both very important for us. We see great opportunities in both, and we are delivering to both segments as we speak. In our laser sharp focus going forward, I expect them both to be in the portfolio focus. With regards to the competitive dynamics in the industry, I think, if you have followed the development over the last few years and quite significantly this year with regards to attention, we see a mix of established food ingredient companies and startup companies. The dynamic through some of these startups are like startups in some other high growth industries.
I think it's too early to determine what kind of product it is, I think it's fair to say that in an industry where a lot of change is happening fast and demand is growing fast and the interest from consumers is growing fast, there are dynamics around improving product quality fast, improving product characteristics fast, and being able to deliver that in a steady pace and being able to also ramp up and be agile enough to do that. That is suited for certain type of companies and maybe less suited for others. Exactly, with regards to delivering oils and fats to this industry, we and others can do it. I believe AAK is well-positioned as one of the companies that can do it and one of the companies that has the co-development approach and the speed to market to do it.
Okay, maybe a quick follow-up on that. How would you summarize AAK's unique selling points when it comes to AkoPlanet compared to, for example, compared to startups and then maybe compared to your more established ingredient competitors?
Well, what we are good at in AAK is our co-development approach, where we are able to take our customer needs, our customer pains, our customer's application need, and turn that into solutions. We do that often together with our customers, and that is really what I see plant-based meat, plant-based dairy needing as well. That is the type of work we're doing as we speak with customers in this space. That is what we will use, that is what we are using. In addition to that, obviously there is a focus in the total industry. What are the best solutions for making the taste and the structure mimic or develop an even stronger value proposition in the eyes of the consumer.
All right. Thank you. That's very helpful.
Thank you.
Thank you. Ladies and gentlemen, just to remind you that if you wish to ask a question, please press 0 or 1 on your telephone keypad now. There will be a further pause while more questions are registered. Our next question comes from the line of James Targett from Berenberg. Please go ahead. Your line is now open.
Hello, good afternoon. My question is really came back to Food Ingredients. I think you've made it clear that one of the reasons for the weaker or softer, sorry, volumes is the shift towards higher margin product. I wonder, however, within that slowdown, are there any end markets or custom segments which have seen any softness, which is also a reason for the slowdown in volumes, or is it just this mix shift? Regarding the dynamic between lower volumes and the higher EBIT per kilo, based on the visibility you have into your customer pipeline, how long do you expect this level of volume and margin improvement to continue? Thanks.
Hi, James. If you look for Food Ingredients, I will not say that the market as such, the underlying demand, has slowed down. I will say the shift you have seen towards a higher EBIT per kilo is driven by the mix. That is a quite significant change if you compare one kilo of high-end or semi-specialty comparing to one kilo of a commodity from an EBIT per kilo point of view. If we look at more, you talk about the pipeline, I think it is more important to look also at our track record and also what the ambition going forward with our ambition to improve year-over-year. I would not like to promise you that there will be a Q3 at a certain level or Q4 at a certain level, but we clearly have the ambition to continue to improve the EBIT per kilo.
To be able to do that, we need also to improve the mix.
Okay. Maybe perhaps this is something you'll cover when you do the new strategy update in Q4. Have you changed your view towards what your volume grade potential is in Food Ingredients?
No, I will not say that there's that kind of a change. This is the result of work we have done for quite a long time to work towards more specialty solutions and more customer co-developed solution.
Okay, thank you.
Thank you. There doesn't seem to be any more questions registered at this time, so I'll hand the call back to you speakers for your closing comments.
All right. With that, we conclude the earnings call for AAK quarter two. A strong quarter with a really strong operating profit growth and an earnings per share growth. I thank you very much for listening in and for good questions. Thank you very much.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.