Earnings Call: Q1 2019

Apr 23, 2019

Ladies and gentlemen, welcome to the AAK Q1 Report 2019. Today, I'm pleased to present Johan Wiesman, President and CEO. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Johan, please begin. Thank you very much. Good afternoon, everyone, and welcome to the AK Quarter 1 Earnings Call. Together with me for this presentation is also Fredrik Nielsen, our CFO, who will present part of the presentation together with me. We have the agenda for today's call on Page 2. We will start with comments on the Q1 2019 and then some comments on strategic initiatives, some business area updates and as usual, a question and answer session after the presentation. With that, turning to Page 3. We start with some highlights from the Q1. It was a good start to the year. We continue to grow organically and also through acquisitions. I will comment the 2 acquisitions later on in the presentation today. Volume growth organically up by 4% year over year. Our operating profit landed at SEK509 1,000,000 adjusted for the acquisition cost that we had in the quarter, up 11% year over year. Our operating profit also continued to go up by 5% year over year. And all in all, a good development in most markets. And I'm very glad to see also that we have seen a, call it, rebound in the U. S. Business where we last year had a little bit of a plateau or even reduced comparisons year over year. But now we see a better trend in the U. S. As well. We've also reached a lower tax level through continued optimization of our total setup, but also thanks to a lower corporate tax in Sweden. And Fredrik will comment more about that later on. If we turn to Page 4. Our operational profit continued to develop well. This quarter was a quarter that was steady, in line with last year's trend lines for quarterly results, continue with strong improvement year over year. On Page 5, further comments to the quarter. We continue to make significant investments in China. As you all know, we have opened up a new greenfield facility in China a few years back. We have loaded that with good volume and the business is improving. We now see that we have to invest for the future. So we're making add on investments to that plant. A new deodorizer will be installed, but we're also making a strategic investment on that side for our Special and Attrition business, where we have a strong position in the global market, supplied from our European footprint predominantly, but we now invest in China in order to be able to supply in China, but also for the rest of the world. Part of the volume growth is also driven by the bakery segment, where we in China have seen really good development over the last year. We have also, in the quarter, issued another SEK 500,000,000 in our bond structure, where we have a total frame of SEK 4,000,000,000, I should say, SEK 4,000,000,000, and we have now used or issued SEK 1,600,000,000 of that SEK4 billion. The last one, the SEK500 million is on a 5 year basis. Now moving into Page 6 and some further comments to the latest M and As that we did. We the number one is Mass Refinery in the Netherlands. This is an important acquisition in terms of adding capacity to our European footprint where we need an additional capacity to cope with our continued organic growth. But it also gives us a very good and up to date process facility where we can also process Skal Kosher and it is also certified for RSPO and so forth. Being able to increase the volume, but at the same time being able to produce organic oils and fats really strengthens our footprint and our ability to continue to grow with our high end value added oils and fats for Europe. It is also located strategically. It's located in the or next to the deep sea terminal in Rotterdam. That also gives us opportunities with regards to our total supply chain setups. With that, turning into Page 7, a few comments on the other acquisition we made in the quarter, Beedie Foods in the UK. Beedie Foods adds to our global foodservice expansion. We have a foodservice business currently operating out of Sweden, UK and the U. S. With this acquisition, we expand our product portfolio and with that also increases the, call it, strategic value proposition that we have within Foodservice. And we continue to focus on building this into a strong global business for us. With those comments on the latest acquisitions, I will hand it over to Fredrik for some further comments on our financial results. Thank you, Johan. Going into some more financial details. We had a positive translation impact of SEK 20,000,000 in the quarter, SEK 12,000,000 was related to food ingredients, SEK 9,000,000 to chocolate and confectionery and then we have SEK 1,000,000 negative in group functions. Based on current currency rates, we expect to see a continued positive impact in the next quarter, but slightly smaller than we had in the Q1. Let's move to Page 9 and looking at the working capital days. We had a net increase of one day in the quarter. Inventory, we have been able to improve by one day in the quarter. Looking into receivables, we have seen an improved product mix of our specialty solutions in the quarter, strong volume growth in chocolate and cofectionery effects. We see an underlying pressure upwards on payment days, but we have managed to keep them flat. So good job here. Accounts payable are down 2 days, and it's a focus area going forward to try to improve. Other working capital days is related to our changes in raw material derivatives. Going into Page 10, looking at the cash flow. We have a strong EBITDA increase of 12% or SEK 71,000,000 in the quarter. Cash flow from working capital was slightly negative in the quarter. Continued volume growth impacted cash flow from inventory and accounts receivables negatively. This was partly offset by higher accounts payable. Paid interest was up versus last year, but is entirely due to paid interest that was accrued in 2018. Paid tax is up as well, and that's due to the higher earnings. But I would like to highlight what Johan commented upon regarding reported tax costs. We are now down to 25% compared to 27% a year ago. It's a combination of lower corporate tax rate in Sweden, but we have also optimized the capital structure in the group to be able to reduce it from 27% to 25%. And we expect to keep this lower level going forward. Cash flow from investment activities amounted to SEK 296,000,000 in the quarter, where SEK 169,000,000 was related to the 2 Menchen acquisition. The remaining capital expenditure was mainly related to regular maintenance investment and capacity increase. Looking at the non cash items, that's mainly related to the mark to market impact from our financial instruments. But to summarize, we have a free cash flow that is SEK 600,000,000 better than Q1 last year. Moving into Page 11, return on capital employed. You can see it's going slightly down in the quarter, three reasons behind. We see an impact from the IFRS 16, new accounting standard for leasing, the 2 acquisitions and also, as I said, a little bit higher working capital. Let's move to Page 12, looking into the loan and duration profile of our loans. We have been able to increase the average duration in the quarter. As Johan said, we issued senior unsecured bond for a total of SEK 500,000,000 with a tenor of 5 years in the quarter. By that, I would like to hand back the microphone to you, Johan. Thank you very much, Fredrik. And we turn into Page 13, where we start a few comments on the industry segments and the business areas. We within Food Ingredients, we had a really strong quarter. Our operating profit increased by 14% year over year, so really continued strong development within our ingredients business. We do see some margin expansion since operating profit is higher than our organic volume growth. Bakery continues to perform well. That trend we've seen over the last year or so, and that is continuing also through Q1 2019. As I mentioned early on, also in the U. S, we start to see better momentum and a better year over year improvement. We had a bit lower volume development in our Special Nutrition business like we had the last quarter, but really we do see an improved mix. So the earnings result or the operating profit was still a good improvement year over year. This is mainly due to us selling more of the concentrated product versus the blended products. Turning into Chocolate and Confectionery. This business area pretty much trends as expected. A good operating profit of +8 percent year over year, where the volume growth was really strong. But as expected, our costs were a bit higher than normal due to our continued lower yield on raw material. Just as expected, our investments and so forth in the supply chain do progress according to plan, and we do expect to see a improvement towards the end of the year. Operating profit landed on 206,000,000 dollars Turning into Page 15, our Technical Products and Feed business. A stable quarter, pretty much at last year's level. So that was a flat development, but at the same time, we did see a fewer we had fewer production days, we could say, due to a longer maintenance stop. So all in all, we were trending quite well in the quarter, and we have now made these improvements to our operations, and we expect us to kind of continue on that new level that we have established. Turning into Page 16, our company program, the AK Well. We do continue according to plan. We're trending well in our focus areas. This is now the final year of the AKWAY program, and it's time for us to reap the benefits. We expect to fly into 2020 with a much better base going forward. This is also the year where we start to plan for the future. So we are making a strategic review, and we will come back to U. S. Investors with during the later part of 2019 with an updated strategy and a new company program. Page 17, we are reiterating our management ambition of growing our operating profit by 10% year over year. Since the program started, now 27 months into it, we are at plus 9 percent. So a little bit short of the target, but we still remain at 10% as our management ambition. With that, heading into Page 18, some concluding remarks from myself. As we offer plant based healthy high value adding oils and fats solutions by using our customer co development approach and at the same time seeing favorable underlying trends in our markets, we do continue to remain prudently optimistic about our future. With that, we end the presentation for quarter 1 2019, and we open up for questions. Thank you. Thank you. Ladies and gentlemen, we're now ready to take your questions. Our first question comes from the line of Oskar Lindstrom from Danske Bank. Please go ahead. Yes. Hello. Thank you for taking my question. Regarding the ongoing investments in your facility in China, to what extent and what timing should we expect those to have an impact on your volumes and earnings? So thank you. So this is, to some extent, call it plug and play, maybe that is making it a bit too easy. But part of the installation is increasing our, for example, the capacity where we have already, when we built the plant, made an installment so that we can plug in extra capacity relatively easy. So but it will still take 1.5, 2 years to complete it. And that in total with the also expansion of the special nutrition or infant nutrition facility, it will take 2 years until we start seeing that in our P and L sheet. You will, of course, see the cash flow from the investments earlier than that, but really the P and L effect should come in 2 years from now, basically. Is that right, Fred? That's right. And regarding your question regarding volumes, I've as it we are talking about impact, it's a relatively small volume if you compare it to the AK group. So you should no need to change the overall picture based on the new volumes coming on board. So we should see this as something that supports continued EBIT growth of 10% as growth forward rather than any bump in that? And then if I may also just follow-up on the ongoing investments in the Danish facility, which is more of a debottlenecking, if I understood correctly. How is that going? And what's the timing and possible effect of that? We are following plan. But it is as you said, it is a debottlenecking initiative. It's not like one bottleneck where we replace it and then we are a 1 and done. It is several steps that we take and that's why it's taking the year. And it is an incremental improvement as we go. But it also as we go, we're also improving our safety stock levels, getting us into a better shape to cope with the increased demand that we see. It's also including further efforts in our sourcing activities and so forth. So it's really getting the complete supply chain of these products up to a better capacity. If I just answer yes. I was thinking, I mean, is this something that's going to have a negative impact on earnings during the first half and then a positive effect in the second half? Is there any impact on production when you're making these debottlenecking investments? It is and it has been. So this is something that we take. It's not a step curve. It's not a step down and a step up that way. We stop one day, 2 day. We make improvements and then we continue, get a little bit better results and then fine tune and stop again. So this is more normal operations, improving, debottlenecking, stopping when we have to or doing it as we run-in other cases. So it's an incremental improvement, but it's not a step function improvement. All right. Thank you very much. Thank you. And the next question comes from the line of Heidi Westerling from Exane BNP. Go ahead. Hi. So the first question please on the U. S, it was nice to see an improvement in that market. Could you talk about which end markets you're seeing this in? You talked about food ingredients, but which areas of food ingredients? And do you think this is a market pickup? Or are you doing anything differently in that market? That's my first question. Thank you. So with regards to the U. S, it's more across the board. So it's not a single segment, I would say, and it has to do with us improving from where we were last year across the board with from sales to operations. So it's not a single and it's I should say, it's a turn of the trends, not a step up really. Very good sign. Thank you. And then secondly, on the dairy segment. So you talked about a good development in the plant based area. So could you talk about what proportion of that business goes into dairy versus plant based end markets? Because I think overall that segment was stable, right? So I think the dairy part maybe was declining. Have I interpreted that correctly? And then what happened to dairy outside of Latin America, please? Thank you. So for the first question, we do still have a plant based dairy still a small portion of dairy, if you call it that way. So you don't see major shifts between the 2. And with regards to dairy outside Latin America, Frederic? No, but you have a you have right, Heidi. We saw a stable quarter, but we also said no thanks to some more low end, seen especially close to commodity volumes in the dairy segment. And that was the reason behind where we were rather stable with volume in the quarter. So should we expect this trend to continue as we go into the next quarters? Or have you seen any changes in trends lately? We are not seeing any change in the trends. We continue to see a good development for the plant base. We see some good growth in some regions. So we definitely expect that trend to continue. Okay. And then lastly, a quick one on CCS. When Easter is late in the year, is there typically any kind of boost to Q1 that we should be thinking about? Or is that irrelevant? It's not irrelevant, but maybe with a slight twist to how you asked the question. With Easter being late, it means being now in Q2 in terms of operations and so forth. So it's rather that Q1 had less of a negative impact versus a normal year and Q2 now have that impact. So it's rather on rather than an upside, it's rather slightly a downside when Easter falls into Q2 or the quarter it falls into has a negative in terms of production and sales. So Q1 benefits and then Q2 is weaker, right, basically? The it's just a phasing issue, right? I think that's what you're saying. Okay. All right. Thank you. Thank you. Thank you. And the next question comes from the line of Kari Venter from Goldman Sachs. Please go ahead. Yes. Thank you. First, a clarification on the Special Nutrition investment in China. So have you had infant nutrition manufacturing in China before? And if so, how much more will you have once you are done with these investments? Or is this your first sort of investment or is this the first time that you will start manufacturing infant nutrition in China? That's my first question. Yes. So we have had part of our portfolio has been in China prior to this, but part of the portfolio has been only been produced in Europe. And now we expand that into China. Okay. So after this, you will have all of your portfolio also manufactured in China? Exactly. That's correct. Yes. Okay. And then secondly, a follow-up on Heide's question on the dairy side of business. Can you talk a little bit more about your plant based dairy? You're saying that it's still a small part of your dairy business, but there any way for us to get a handle of what's your, I don't know, maybe market share and whether that has started to have an overall impact on this of your EBIT per kilo in dairy? Because when you were still reporting the EBIT per kilo per category, dairy was still a relatively low margin business in terms of EBIT per kilo. Can you give us an indication of if there's been any change in that, in the EBIT per kilo from dairy and whether plant based dairy is has similar margin profile or better? Yes. Thank you. So in the total And we are part of that. With being a supplier plan that's focused on that, we are in that industry already. We are focusing on key players in that industry and with them we are growing. And the next question comes from the line of Peer Jorgensen from ING. Please go ahead. Yes, thank you. Two questions from my side. We can see this very nice development in EBIT per kilo in food ingredients. I know it's maybe early days, but is it due to the AAK way that's actually the last year of the AAK way, so you're actually really now seeing the benefits of all the investments on the FI? That's my first question. My second question is on the foodservice that you mentioned that you'll actually use this as a more global platform. Is it one of the ways that you will grow when the AK way is out of the way, so to say? Thank you. I hope that the AK way is not out of the way, but rather a new platform, but No, that's fine. Okay. So we most of the things we do, we do to have a stable better performance. But anyhow, you are right that obviously part of the AK way is about how we improve our it's improving our operation, special focus areas. So obviously part of this helps driving the EBIT per kilo. It is not easy to single out what is what action did have the most impact, but the combination of everything we do within our customer co development approach, with how we go to market, with how we price our high value added solutions and so forth. All of that combined really supports the EBIT per kilo growth. So in that way, yes, AAK Way is having an effect, but it's not like you would say that it's actually the last year that is doing that. If you look at the historic curve, we have improved EBIT for quite some time. I would rather say that it's an effect of the strategic work that AK has been doing for quite some time, where the AK Way is kind of the next step on that journey. With regards to Foodservice, we do recognize this as an interesting market with an opportunity for us to go broader. We have had 3, call it 3 sites before or 3 locations with Sweden, UK and the U. S. We're now expanding that and we have formed a global foodservice team that looks on opportunities globally. So that's where we can actually see some more acquisition in this foodservice, but that's a new growth platform for you going if I'm not correct, if I'm not wrong going more vertical in your industry? I would probably guide you to don't over leverage that. We rather acknowledge that this is a separate business. It's a bit different to our high volume oils and fats business. So call it more getting the right focus and the right industry learnings. And we made an acquisition to get a better platform, but it's not a sign of a new strategy, more recognizing that this is a separate focus area. Yes. Okay, great. Okay, thank you. Thank you. And the next question comes from the line of Kenneth Tull from Carnegie. Please go ahead. Yes. Thank you. So on chocolate and confectionery fats, the results were higher than I had expected. I had expected the Sienna yield to have a larger impact. And you're right about margin expansion in some high end products. So can you elaborate a little bit more on yes, on how that division did? What products are doing well? What are the drivers of those high margin products? Yes. So combined, you can see that actually operating profit per kilo is a bit lower. So this is again a mix of a portfolio of products where we have sold more volume of some of the low volume low value added Products and Solutions. Therefore, the EBIT per kilo is a bit reduced. But at the same time, we have seen an opportunity to expand margins in the high end segments. And it is as simple as that, that we the way we know the market, the high demand that is out there and the high demand for these specific products creates an opportunity to take care of that. And then it's nothing more, nothing less than that. Okay. So it's not related to any specific region or any specific products that are all of a sudden have increased in demand? Not really. This is maybe one of a more global business for us, where large players globally also source larger have larger tenders for this. Sounds good. Then on M and A, I noticed in the quarter that in the tables to your quarterly report that you don't state that you have any much impact on sales volumes from those acquisitions. Now they came in pretty late in the quarter, but what kind of volume contribution are you looking for in coming quarters? Could we take sort of the 40,000 tonnes and divide it by 4 and have that as an indication of what kind of volumes those could add? That sounds like a good starting point, Kenneth, to split the 40,000 tonne in 4 pieces. Okay. Great. And then over time, you will be able to increase. But what do you think could be a maximum capacity for this plant? Could it reach 100,000? No. And if you look for the mass refinery, it's rather much commodity volumes. It's a total pack a total refinery today. So what you will see is much more working with the mix and improved profitability than increasing the total volume. Okay, great. And then The volume was acquired, but we will then use it for better margin products. And that will take until you're really happy with the product mix? Is it 1 year or 2 years? I would say plus 2. Okay. Then on M and A, you didn't do M and A for some time, and now you've done 2 smaller ones. Do you see the M and A climate being better or prices have come down or sellers are more willing to sell? Or should we see those 2 acquisitions as an indication that you might do more going forward? To that, I would say yes, because M and As are clearly part of our strategy going forward. We do see but I would say, if you take a 5 year perspective on AK, it has been a story of acquisitions as well as organic growth. And this is really what we see going forward. We see us having M and As as an opportunity for new platforms, for geographical expansions and bolt on and also further improving in the high value added space of oils and fats. So we clearly have sharpened our pencils in terms of M and A strategy. But as you know as well, M and A is a bit of timing something is up for sale and when you can manage it all the way to the finish line and be the buyer in the end. So the time of not making M and A, I wouldn't focus as much on that more than focusing going forward on the fact that M and A is an enabler for us combined with our organic growth and the market growth. Okay. Sounds great. Thank you. And we have a follow-up question from Kari Ritzer from Hans Werner. Please go ahead. Yes, thank you. A question on sustainability on palm oil in particular because I was encouraged to see a recent statement from WWF where they stated that sort of for investors to divest everything that's related to palm oil plantations is not the right way to go. And that was, for me, a sort of a fresh voice of reason in this somewhat controversial debate. So how would you characterize the discussions that you have had in the last 12 months with, let's say, politicians, customers and investors when it comes to palm oil? And specifically, is there any stakeholder group that is sort of growing more concerned around this theme? Or is the situation, how would you say it, better than what it was 12 months ago when it comes to palm oil specifically? Thank you. I would probably start with or I will start with saying that you summarized it fairly well that it is quite a difficult debate, where some of the part of the debate you might or you could argue that is based on not having all the facts. But at the same time, it is also driven by consumers and what the market believes in and so forth. So if I switch to customers, which is easier to make a statement around, we do see the customers, some of them, especially if you look into the plant based sector, when you come with a brand promise and so forth, some of them ask for non palm solutions. But at the same time, if you look into the broader industry of oils and fats and vegetable oils and fats, it is an industry and a customer base that very much know the importance of palm oil and how to deal with that. So I would say that the dialogue with customers pretty much show exactly what you presented. It's a mixed picture. We all know the importance of it, and we all know how important it is to continue to do this responsibly. And but I wouldn't say that the climate has changed significantly to the weather, but on the other hand, it hasn't changed to the worse either. So I do I personally believe it will take some time before we have a more balanced debate. But I do think it is important that we and others continue to really focus on sustainability and responsible As there are no further questions, I'll hand back to the speakers. All right. Thank you very much for listening in. Thank you very much for your questions. And if there are no further questions, then we will close it for today. Thank you very much. This now concludes our conference call. Thank you all for attending. You may now disconnect your line.