Ladies and gentlemen, welcome to the AAK Q1 Report 2019. Today, I'm pleased to present Johan Westman, President and CEO. For the first part of this call, all participants will be in the listen-only mode, afterwards, there will be a question and answer session. Johan, please begin.
Thank you very much. Good afternoon, everyone, welcome to the AAK Quarter 1 earnings call. Together with me for this presentation is also Fredrik Nilsson, our CFO, who will present part of the presentation together with me. We have the agenda for today's call on page two. We will start with comments on the first quarter 2019, then some comments on strategic initiatives, some business area updates, as usual, a question and answer session after the presentation. With that, turning to page three. We start with some highlights from the first quarter. It was a good start to the year. We continue to grow organically and also through acquisitions. I will comment the two acquisitions later on in the presentation today. Volume growth organically up by 4% year-over-year.
Our operating profit landed at SEK 509 million, 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. All in all, a good development in most markets. 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. 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, also thanks to a lower corporate tax in Sweden, Fredrik will comment more about that later on. If we turn to page four. 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 five, 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. The new deodorizer will be installed, we're also making a strategic investment on that side for our Special Nutrition business, where we have a strong position in the global market, supplied from our European footprint predominantly, we now invest in China in order to be able to supply in China, 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 million in our bond structure, where we have a total frame of SEK 4 billion, and we have now used or issued SEK 1.6 billion of that SEK 4 billion frame. The last one, the SEK 500 million, is on a 5-year basis. Moving into page six and some further comments to the latest M&As that we did. The number one is MaasRefinery B.V. 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.
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 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 seven. A few comments on the other acquisition we made in the quarter, BD Foods in the U.K. BD Foods adds to our global food service expansion. We have a food service business currently operating out of Sweden, U.K., 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 food service. 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 million in the quarter. SEK 12 million was related to Food Ingredients, SEK 9 million to Chocolate & Confectionery, and then we are SEK 1 million 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 first quarter. Let's move to page nine and looking at the working capital days, we have 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 & Confectionery Fats.
We've seen an underlying pressure upwards on payment days, but we have managed to keep them flat, so good job here. Accounts payable are down two 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 million in the quarter. Cash flow from working capital was slightly negative in the quarter. Continued volume growth impacted the 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. That's due to the higher earnings.
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%. We expect to keep this lower level going forward. Cash flow from investment activities amounted to SEK 296 million in the quarter, whereof SEK 169 million was related to the two mentioned acquisitions. 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. To summarize, we have a free cash flow that is SEK 600 million 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, the new accounting standard for leasing, the two 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 million with a tenure of five years in the quarter. By that, I would like to hand back the microphone to you, Johan.
Thank you very much, Fredrik. We turn into page 13, where we start a few comments on the industry segments and the business areas. Within Food Ingredients, we had a really strong quarter. Our operating profit increased by 14% year-over-year, really continued strong development within our Food 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 have seen over the last year or so, 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, 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 & Confectionery. This business area pretty much trends as expected. A good operating profit of +8% year-over-year, where the volume growth was really strong, 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, we do expect to see improvement towards the end of the year. Operating profit landed on SEK 206 million.
Turning into page 15, our Technical Products & Feed business. A stable quarter, pretty much at last year's level. That was a flat development, at the same time, we had fewer production days, we could say, due to a longer maintenance stop. All in all, we were trending quite well in the quarter we have now made these improvements to our operations, we expect us to continue on that new level that we have established. Turning into page 16, our company program, the AAK Way. We do continue according to plan. We're trending well in our focus areas. This is now the final year of the AAK Way program, 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.
We are making a strategic review, we will come back to you as investors 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 +9%, a little bit short of the target, 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, 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 one 2019, we open up for questions. Thank you.
Thank you. Ladies and gentlemen, we're now ready to take your questions. If you wish to ask a question, please press 01 on your telephone keypad now. Our first question comes from the line of Oskar Lindström from Danske . 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?
Thank you. This is to some extent, call it plug and play. Maybe that is making it a bit too easy. Part of the installation is increasing our, for example, deodorizing capacity, where we have already, when we built the plant, made an installment so that we can plug in extra capacity relatively easy. It will still take one and a half, two years to complete it. That in total with the also expansion of the Special Nutrition or infant nutrition facility, it will take two years until we start seeing that in our P&L sheets. You will, of course, see the cash flow from the investments earlier than that. Really the P&L effect should come in two years from now, Bjoern. Is that right, Bjoern?
That's right. Regarding your question regarding volumes, we are talking about infant, it's a relatively small volume if you compare to the AAK Group. We should not need to change the overall picture based on the new volumes coming on board.
We should see this as something that supports continued EBIT growth of 10% going forward.
Yes
rather than any bump in that. 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. It is, as you said, it is a debottlenecking initiative. It's not like one bottleneck where we replace it and then we are one and done. It is several steps that we take, that's why it's taking the year, and it is an incremental improvement as we go. 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. It's really getting the complete supply chain of these products up to a better capacity.
If I just may, is this something that's going to have a negative impact on earnings during the first half and then a positive effect during the second half? Is there any impact on production when you're making these debottlenecking investments?
It is, and it has been. 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, two day, we make improvements, we continue, get a little bit better results, fine-tune and stop again. This is more normal operations, improving debottlenecking, stopping when we have to, or doing it as we run in other cases. It's an incremental improvement, but it's not a step function improvement.
All right. Thank you very much.
Thank you.
The next question comes from the line of Heidi Vesterinen from Exane BNP. Go ahead.
Hi. 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? Do you think this is a market pickup, or are you doing anything differently in that market? That's my first question.
Thank you. With regards to the U.S., it's more across the board. It's not a single segment, I would say. It has to do with us improving from where we were last year across the board from sales to operations. It's not a single, and I should say it's a turn of the trends, not a step up, really. A good sign.
Thank you. Secondly, on the dairy segment. You talked about a good development in the plant-based area. Could you talk about what proportion of that business goes into dairy versus plant-based end markets? I think overall that segment was stable, right? I think the dairy part maybe was declining. Have I interpreted that correctly? What happened to dairy outside of Latin America, please? Thank you.
For the first question, we do still have a plant-based dairy, still a small portion of dairy, if you call it that way. You don't see major shifts between the two. With regards to dairy outside Latin America, Fredrik?
You have a right idea. We saw a stable quarter, we also said no thanks to some more low-end semi-specialty close to commodity volumes in the dairy segment. That was the reason behind why we were rather stable with volume in the quarter.
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-based. We see some good growth in some regions, so we definitely expect that trend to continue.
Okay. Then lastly, a quick one on CCF. 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 ask the question. With Easter being late, it means being now in Q2 in terms of operations and so forth. It's rather that Q1 had less of a negative impact versus a normal year, and Q2 now have that impact. 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.
Q1 benefits and then Q2 is weaker, right? Basically, it's just a phasing issue, right? I think that's what you're saying.
Yes.
Okay. All right. Thank you.
Thank you.
Thank you.
The next question comes from the line of Kari Winter from DNB. Please go ahead.
Yes. Thank you. First, a clarification on the Special Nutrition investment in China. Have you had infant nutrition manufacturing in China before? If so, how much more will you have once you are done with this investment? Is this your first sort of investment, or is this the first time that you will start manufacturing infant nutrition in China? That is my first question.
We have had parts of our portfolio has been in China prior to this, but part of the portfolio has only been produced in Europe, now we expand that into China.
After this, you will have all of your portfolio also manufactured in China?
Exactly. That's correct.
Okay. Secondly, a follow-up on Heidi'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 is 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 the sort 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 the EBIT per kilo from dairy and whether plant-based dairy has similar margin profile or better?
Thank you. In the total scheme of things, plant-based is still a lower proportion, if you call it, part of the dairy business. Plant-based dairy is still a smaller portion for us, but also in the world. It is for sure a very interesting segment. It is a segment that is growing. It's growing with investments globally. We are part of that. With being a supplier of plant-based oils and fats, we are in that industry already. We are focusing on key players in that industry, and with them, we are growing. It is an industry or a segment of the industry, if you call it that way, that also calls for more high-end solutions. That's where our co-development approach comes in handy.
Yes, it is positive to us. It's still a small portion. Therefore you don't see it immediately in our results. It does incrementally increase our EBIT per kilo and our profit. Fredrik, anything to complement?
No, I think you summarized it very well.
Okay. All right. Thank you very much.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. The next question comes from the line of Per Jørgensen 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 benefit of all the investments on the FI. That's my first question. My second question is on the food service that you mentioned, that you will actually use this as a more global platform. Is it one of the ways that you will grow when the AAK Way is out of the way, so to say? Thank you.
I hope that the AAK Way is not out of the way, but rather a new platform.
No, that's fine. Okay.
Most of the things we do, we do to have a stable, better performance. Anyhow, you are right that obviously part of the AAK Way is about how we improve our operation, special focus areas. Obviously, part of this helps driving the EBIT per kilo. It is not easy to single out 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. 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 it's doing that. If you look at the historic curve we have.
Sure
been improving the EBIT per kilo for quite some time. I would rather say that it's an effect of the strategic work that AAK has been doing for quite some time, where the AAK Way is the next step on that journey.
With regards to food service, we do recognize this as an interesting market with an opportunity for us to go broader. We have had three, call it three sites before or three locations with Sweden, U.K., and U.S. We're now expanding that, and we have formed a global food service team that looks on opportunities globally.
That's where we can actually see some more acquisition on this food service. That's a new growth platform for you going, if I'm not wrong, going more vertical in your industry.
I would probably guide you to don't over-leverage that. We'd rather acknowledge that this is a separate business. It's a bit different to our high volume oils and fats business. Call it more getting the right focus and the right industry learnings. We made an acquisition to get a better platform, but it's not a sign of a new strategy. It's more recognizing that this is a separate focus area.
Yeah. Okay, great. Thank you.
Thank you.
The next question comes from the line of Kenneth Toll from Carnegie . Please go ahead.
Yeah, thank you. On Chocolate & Confectionery Fats, the results were higher than I had expected. I had expected the shea nut yield to have a larger impact. You write about margin expansion in some high-end products. Can you elaborate a little bit more on how that division did? What products are doing well? What are the drivers of those high-margin products?
Yeah. Combined, you can see that actually operating profit per kilo is a bit lower. This is again, a mix of a portfolio of products where we have sold more volume of some of the 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. It is as simple as that 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. Then, it's nothing more, nothing less than that.
Okay. It's not related to any specific region or any specific products that 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 tenders for business.
Sounds good. On M&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. 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 tons and divide it by four 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 ton in four pieces.
Okay, great. Over time you will be able to increase, what do you think could be a maximum capacity for this plant? Could it reach 100,000?
No. If you look for the MaasRefinery, it's rather much commodity volumes. It's toll refinery today. What you will see is much more working with a mix and improve profitability than increasing the total volume.
Okay, great.
Volume was acquired, we will then use it for better margin products.
That will take until you're really happy with the product mix. Is it one year or two years?
I would say plus two.
Okay. On M&A, you didn't do M&A for some time, and now you've done two smaller ones. Do you see the M&A climate being better or prices have come down or sellers are more willing to sell or should we see those two acquisitions as an indication that you might do more going forward?
To that I would say yes, because M&As are clearly a part of our strategy going forward. We do see, but I would say if you take a five-year perspective on AAK, it has been a story of acquisitions as well as organic growth. This is really what we see going forward. We see us having M&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. We clearly have sharpened our pencils in terms of M&A strategy. But as you know as well, M&A is a bit of timing when 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.
the time of not making M&A, I wouldn't focus as much on that more than focusing going forward on the fact that M&A is an enabler for us, combined with our organic growth and the market growth.
Okay. Sounds great. Thank you.
We have a follow-up question from Kari Røise from Handelsbanken. Please go ahead.
Yes, thank you. A question on sustainability and palm oil in particular, because I was encouraged to see a recent statement from WWF where they stated that for investors to divest everything that's related to palm oil plantations is not the right way to go. That was for me a fresh voice of reason in this somewhat controversial debate. 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 in specific? Is there any stakeholder group that is growing more concerned around this theme or is the situation, how would you say, better than what it was 12 months ago when it comes to palm oil specifically?
Yeah. Thank you. 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 it is based on not having all the facts. At the same time, it is also driven by consumers and what the market believes in and so forth. 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.
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. I would say that the dialogue with customers pretty much show exactly what you presented. It is a mixed picture. We all know the importance of it, and we all know how important it is to continue to do this responsibly. I wouldn't say that the climate has changed significantly to the better, but on the other hand, it has not changed to the worse either. I personally believe it will take some time before we have a more balanced debate. I do think it is important that we and others continue to really focus on sustainability and responsible sourcing and development.
Great. Thank you.
Thank you.
As there are no further questions, I'll hand back to the speakers.
All right. Thank you very much for listening. Thank you very much for your questions. If there are no further questions, 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 lines.