Ladies and gentlemen, welcome to the AAK Q3 2018 report. Today, I am pleased to present the CEO, Johan Westman, and the CFO, Fredrik Nilsson. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speakers, please begin.
Thank you very much. Good afternoon, everyone, welcome to the AAK Q3 2018 earnings call. Together with me today, I have Fredrik Nilsson, our CFO, we will jointly do this presentation today. On page number two, you will find the agenda for today. We will obviously cover the third quarter, some information per business area, our company program, The AAK Way, in the end, we will take any questions that you might have after today's call. With that, turning into page three, a few highlights from the quarter. All in all, a solid quarter with continued growth for the company. Some 4% year-over-year volume growth with an operating profit of SEK 526 million, which is an increase year-over-year by 11%. Our Return on capital employed is at the moment at 15.7%. Continuing into next page number four.
Also within the quarter, we have taken an important step in our Southeast Asia operations with a grand opening of an innovation center in Singapore. Singapore is really an important hub for us in Southeast Asia. With this innovation center, we are well located. We are equipped to support really our co-development business model, where we, together with customers, continue to work closely together. We can now invite them to us. With this innovation center equipped with what we need within Chocolate and Confectionery, bakery, ice cream, dairy, Special Nutrition, we can continue to develop new solutions for our customers and together with our customers. On the next page, just very quickly, our trends continue. A strong earnings growth in absolute numbers will continue to grow at a steady pace, so also in Q3 of 2018.
Page number six, looking at the overall trends for volume, operating profit, operating profit per kilo. All in all, a stable continued positive trend. Page seven, we will now go into some more details on our P&L sheet, balance sheet, so forth, I hand it over to Fredrik Nilsson, our CFO.
Thank you, Johan. We start with the FX exposure and the translation impact we had in the quarter. We had a positive of SEK 16 million in the quarter, whereof SEK 9 million was related to Food Ingredients and SEK 7 million related to Chocolate and Confectionery Fats. Based on our current currency rate, we should expect to see a small positive impact in the next quarter as well. We then turn to page eight and look at the working capital days, we can see an increase with four days since year-end 2017. Starting with inventory, we have been able to keep it flat. Accounts payable down one day, as you can see, and that's mainly related to the mix from new markets. Looking at the receivables, up one day, and here we can see also a mix issue, and that's mainly related to getting more specialty solutions.
We see a pressure upwards. You have plus four days in other working capital item, and that's mainly related to changes in our raw material derivatives. With decline in raw material prices, you will get a cash outflow when you're rolling the hedge portfolio, and then the positive cash flow will come back when we're getting paid by our customers. We then turn to page nine and look at the raw material prices, you can see in the chart that the palm and the rapeseed price has turned a different direction during the quarter. The palm oil price has decreased during the quarter, while the rapeseed oil has started to increase.
I would also like to remind you as well that the change of 10% in all our raw material prices will have a working capital impact of around SEK 300 million with a time lag of six to nine months. We now move to page 10 and look into the cash flow, we have a good EBITDA increase in the quarter of SEK 69 million. Paid interest is slightly up in the quarter. There's two reasons for that. It's increased borrowings in high interest rate countries, but we're also seeing increased interest rates in a few markets, and it's mainly Turkey which have a material impact. Pay tax is down. We are also seeing a lower reported tax cost in the quarter, which is mainly related to U.S. tax reform.
I would also like just to remind you about the guidance we are giving for the tax rate, we remain at the 27%-28% in that guidance. Non-cash items mainly related to the mark-to-market impact of our financial instruments. Looking into the cash flow from working capital, you can see a slightly negative number in the quarter. It's mainly the receivables that has driven the negative working capital, and that's due to the continued volume growth, but also normal seasonality. Looking from an inventory point of view, we have a good inventory control and had a good inflow from inventory that was partly offset by reduced payables, which was a consequence of the lower raw material prices. Looking at the investments, I will say it's mainly regular maintenance investments, but also related to increasing the capacity at our existing facilities.
Let's move to page 11 on Return on capital employed. We see a good increase in the quarter. We are now up to 15.7, as Johan said. We were at 15.6 at the year-end, and it's also good improvement versus the second quarter. The main reasons here is the good profit growth combined with a very stable capital employed. By that, I turn back the microphone to Fredrik.
Thank you very much, Fredrik. We are now heading to page 12 in the deck, and as mentioned in the beginning, all in all, solid quarter for AAK in Q3 2018. Now some details and further comments per business area or segment. We start with Food Ingredients, some more meat to the bone here. We have seen a organic growth of 3% in the quarter. The operating profit increased steadily by 11% year-over-year. This is really on the back of a good margin improvement, where bakery continues in a positive trend, as mentioned earlier in the last two quarters. Very happy for that. Also, Special Nutrition continues to contribute nicely. Also within this segment, we see as well the region Europe with a really strong performance on the back of both product mix and margin improvements as such.
Operating profit per kilo for the segment was 8% year-over-year, an 8% improvement year-over-year, I should say. On the next page 13, you see the trends, not a lot to say more than a continued positive trend on earnings and earnings per kilo. Page 14, heading into Chocolate and Confectionery. We've seen a continued growth and organic growth in the quarter, also growth in operating profit, but a slight reduction in operating profit per kilo. A few comments to that. We've seen a slightly positive development on pricing or our prices, especially on the high-end product segments. However, at the same time, we are at the moment pretty much on capacity within this segment. The really positive thing is that the demand keeps pushing us forward. There is a higher demand compared to our current capacity.
At the moment, we're also experiencing a lower than average raw material yields, and that leads to a lower output and a higher cost, and that is really what you see in the higher cost per kilo that we've seen in the quarter. All in all, a stable segment, stable performance, and with the high demand, the good opportunities, we keep investing. We have taken new investments into operations during the quarter, and we also have decided on further capacity improvements in the quarter. At the same time then, keeping in mind that in this segment, we are also using raw material that comes from a wild crop in West Africa. With that, at the moment, we are running at below average. We expect this to be better in the future, but that might take a bit of time. Next page, just quickly.
The cocoa butter price has been coming down through the year, now at around $6,000 US dollar per ton. Next page 16. Again, the trend per business area segment for Chocolate and Confectionery, a slight improvement year-over-year with operating profit and a flat to slight reduction in operating profit per kilo. Heading into the next page 17. In our Technical Products and Feed business, we saw a significant growth, a good growth in our organic volume growth, a significant growth in operating profit and operating profit per kilo. With that, this has been mainly due to a solid performance in our crushing operations and also a very good development in our feed and fatty acids business. Page 18 shows the trends for TPF or Technical Products and Feed.
As you can see, a steady improvement from last year where we had some operational difficulties during the quarter two and quarter one, since then, a really steady improvement. With that, I conclude the further comments to the different business segments. Heading into page 19, just quickly on our company program. We see a steady performance here. Most of the activities are on track or ahead of plan. This program is now a little bit more than halfway through, we continue to push forward and to push forward into 2019 where we are finalizing this program and developing the next company program. Page 20. Comments on our earnings growth. We have a management ambition of growing our EBIT by 10% on average, and we are currently 18 months into the program at 11%. Page 21.
We continue to see positive underlying trends in the food industry, with that, we also remain prudently optimistic about the future for AAK. Before we move on to questions and answers from our side, I would also like to take the opportunity to remind you all about our Capital Markets Day that is coming up on November 21st this year. Very soon we will have the chance to meet again for those of you that take that opportunity. With that, I will end this presentation, we are now happy to take any questions from our listeners. Thank you very much for calling in.
Thank you. Ladies and gentlemen, we are now ready to take your questions. If you wish to ask a question, please press 01 on your telephone keypad. We have a question from Kasper Blom of ABG Sundal Collier. Please go ahead. Your line is open.
Thank you very much. Gentlemen, three questions from my side, please. I'll try and mention all the three, then you can always revert. First of all, regarding Food Ingredients, you mentioned that Special Nutrition is, as usual, doing well. Could you give maybe a little bit of more granularity on where you are on senior and medical? I understand, of course, that these are not big areas yet, maybe sort of a bit more guidance on when we would expect to see that as something that sort of stands out and can really impact the numbers here. Secondly, on the Chocolate and Confectionery Fats, you did mention that it might be a little bit of while before you return to sort of a normal here after the investment you're doing. How long would you sort of expect us to have to wait here?
Is it that we will get back to normal in 2019, or is it more like a 12-month period we'll have to wait? Finally, a question I pretty much find myself asking all companies at the moment, are you seeing any kind of potential impact on your business from the mentioning of trade wars that you have all the time in news? Maybe also if you could give a bit more comment on certain emerging markets like Turkey, Argentina, those kind of areas where there seems to be a bit of turmoil at the moment, if that is in any way impacting your business. Thank you.
Thank you very much, Kasper. Good questions, all of them. Starting with the question on senior and medical. I might disappoint you by not giving you all the details, what I can assure you is that these are two areas of importance for us. We continue to push in these areas. We have a specific focus on these areas in parallel within Special Nutrition, obviously, as you know, infant nutrition is a large segment for us already. Personally, I would say nutrition is a key area for AAK. Nutrition is an area where we can contribute with our co-development approach, with our innovations, with the capabilities and the knowledge that we have within our company. Within that, senior is very interesting, medical is very interesting, there are other areas as well. What we are doing is that we are continuing to move forward.
We are organizing ourselves to be able to take advantages in these segments. Before, when can you get something significant and so forth? We have to wait and see a bit. Our organic growth is obviously happening, from very small numbers. We, as you know, we are a company that also looks at M&As. Maybe the first big reaction might be with an M&A coming up, in parallel, we are growing it, from low levels. If that is okay as an answer for the first question.
I wasn't hoping for very specific numbers, but maybe you could shed a bit of light if this is something that you will maybe get a bit more into detail on at your upcoming CMD.
We will talk about it. I will mention, but I wouldn't expect us to be more detailed compared to what was now, because we are at low levels today. The numbers, the earnings are not significant to AAK at the moment, but it is a significant focus area for us going forward. In other words, we believe in this in the long-term perspective, but not in a short-term perspective.
That's fair.
CCF, as I mentioned, two things to bear in mind or three things to bear in mind. First of all, a strong underlying trend in Chocolate and Confectionery. We strongly believe in this market. It has been a growth driver for us in the past, and we believe it to be a growth driver for us going forward. We have had a lagging capacity strategy in this area. We have reached a capacity ceiling now that we are investing in. We're investing in bottlenecks. Some of that has already been taking place, but we have to do more and just decided on that. Some of these investments take nine months to a year to get implemented.
On top of that, as I mentioned, we also have a raw material, and I am talking about shea from West Africa, a wild crop that has to be collected once a year, and we are in that season now. We are storing that in our warehouses before we use it in production. At the moment, we are seeing and experiencing a somewhat lower than average yield. We are trying to get as much out as possible by mixing and using the best possible mix that we can. I foresee us having to use raw material input with a somewhat lower yield a bit into 2019. By the end of 2019, we will see capacity increases coming in.
On top of that, most likely an improvement in yields as well, but that is nothing that I can promise since this is a wild crop and we have to see what we can get in our sourcing programs. Again, mentioning that we are a significant player in West Africa. This builds nicely into our sustainability work as well with our women program in West Africa. We are investing in the back end of this. We are investing in our own operations. As of now, is it a problem or is it something positive? We can debate that, but I would have liked to be able to sell even more.
At the same time, we are glad that we are looking at a high demand that we now have to balance with how we can get our capacity increase moving, and at the same time, getting as much output as possible. It is limiting us a little bit at the moment. With regards to financial impact in some countries, you mentioned Turkey, Argentina. Obviously, that is impacting us for our South Latin America operations. Yes, Argentina is impacting us, but not to the degree that you would see that in the numbers we present today. Same thing for Turkey. We have had the strongest quarter and the strongest month in September ever in Turkey. We are doing well. We are growing. We are well established in the market, so we are there to stay. Obviously, everything around that in the economy is impacting us.
The most important thing is our business is growing. We are there to stay, and we are taking actions to mitigate any risks that we have, and I am feeling very comfortable about how we do that. Of course, there might be, as Fred mentioned, we see some interest rates impacting immediately, but we are taking actions to that as well. The long-term impact on the business in terms of what is the earnings we are getting after currency translation and so forth, we will have to see. At the moment, I am confident about us doing the right thing in Turkey. Not a major impact to us as of now, since we are a truly global business with many markets that builds into our total results.
That's very clear. If I may just follow up a little bit. Do you see any potential hit from introduction of tariffs between any countries or, yeah. You know the drill, I guess most is between China and the U.S., is there anything anywhere that can potentially have an impact on you?
Short answer is yes. Obviously, anything can have an impact, if I rephrase your question, is there anything we see today.
Thank you
that we have a significant impact? No. We don't see that today. We don't see that with the way we're spread and the way we operate. We don't see significant impacts. Is that due to visibility or to our business model? We have to see a little bit, again, I think our setup is pretty well-balanced.
That's great. Thanks for all the answers.
Thank you.
Thank you. Our next question comes from the line of Carl Mellby of Nordea. Please go ahead. Your line is now open.
Yes, hi. Thank you for taking my questions. My first one relates to the financial net, which was high in Q3 versus previous quarters this year. Should we expect this level to remain also for Q4? Secondly, I noted that you removed the comment on outlook for each individual segment. If you could comment on the reasoning behind this. Thank you.
If I start with the financial net. Yes, you should expect to see the same level into Q4.
All right. Thank you. With regards to guidance, we are giving the type of guidance that I personally think that we should do, and in a way that it builds to our story and at the same time, don't bank on too much guessing. Really the underlying driver that we comment also in my comments, in the CEO comments, is really the growth in the food industry. With our exposure, that is really the main driver. We will see certain segments being stronger and/or weaker in certain quarters. Therefore, we believe that this is the best and the best balanced view that we can give, and we're also commenting a bit more specifics on why we're operating the way we are in certain segments. Nothing more, nothing less.
Okay, understood. Thank you.
Thank you. Our next question comes from the line of Oskar Lindström of Danske Bank. Please go ahead. Your line is now open.
Yes. Hi. Three questions from my side. First off, in the Food Ingredients business area, the bakery recovery has been going on for a while now, also you mentioned Europe is improving. What's driving these improvements? Anything specific, how long-term should we expect them to be?
Thank you, Oskar. What we are doing and what we have been doing, this fits very well to our overall strategy as well. What I'm very pleased with is that within these segments, it's really the result of a purposeful and strategic move within the segments. As you know, we're focused on customer co-development. What is it that we want to achieve? Well, we want to achieve high value-added solutions, that's also where we focus. We have been better in, call it the mix, selling high value-added solutions, also better in communicating the value that we deliver, meaning that we have been able to drive margin improvements based on the true value that we deliver, not just adjusting the price, really delivering a higher value and also charging for that.
In that sort of mix change, is it that you're sort of getting rid of some less attractive contracts moving into more attractive contracts that shift comes to an end, you're back to the normal continuous mix improvement? What I'm trying to get at is there a specific shift going on that's finite within this part of the business?
The short answer would be no, there's not a specific shift where anyone, including myself, went in and said, "Cut the tail." That is not the majority of this. A part of this is obviously we don't want to do bad business that is not the right one for us. A little bit of that is looking at the tails and focus on where we want to be, a lot of it is really driving the value within our current portfolio focusing on the high-value-added business opportunities and increasing the price on the back of a value proposition throughout the portfolio more than really a short-term shift by cutting the tails.
Okay, thank you. My second question is in the CCF business area. You mentioned these debottlenecking investments that you will do, which will take, if I understood correctly, 9-12 months, and then after that they'll be done. Should we expect this to drive CapEx more than usual in this period?
No, you should not. They are not the heaviest investments we are doing. They are bottleneck investments, not driving CapEx, nothing. This is really normal business. We have had for some period of time overcapacity fluctuations in the yields and so forth we've had in the past as well. Now we just reached capacity limit in certain areas of the value chain. We have to debottleneck this. These are not heavy investments. In parallel, we're looking at other opportunities to balance capacity between our plants and so forth. It's not as simple as to say it's a one-process step and this is a one-and-done investment. We are debottlenecking as we speak and finding ways to improve slightly. We have a very important debottlenecking that we just took a decision on that will come in in Q4 next year.
Besides that, we're still working on smaller steps by optimizing the manufacturing footprint that we have.
Okay, thanks.
It's not driving investments and CapEx over anything that is normal for us.
Should we expect a lower organic growth for the coming nine to 12 months then, or an impact on earnings?
Well, obviously, it impacts since when you have a capacity limit, it impacts our total volume and with that sales. We're also seeing a strong demand in the market, and this is not AAK unique. We're seeing a strong demand in the market within Chocolate and Confectionery, and especially within our high-end solutions. We have also already seen improvement in pricing and so forth. With regards to earnings, there is also an opportunity to get more out of this market for the coming period, as I see it. The net effect on earnings, we'll have to see. We are continuing to pushing for the high-end solutions for pricing our value propositions to our customers. With that, we'll see what we get. Obviously from a volume perspective, it is limiting a little bit the growth for, call it 2019.
Okay. We should think perhaps earnings shouldn't be so much volume driven, but perhaps mix driven.
Yes.
Is that okay.
Yes.
My third and final question is that in the Food Ingredients segment, you mentioned the U.S. market being slightly continued to be weak. Could you shed a little bit more light on that? What are the reasons? Where is it being expressed? I think you mentioned food service. Is this something that we should just think of as temporary, or is it an accelerating problem? Is it company specific or more market driven?
A few things. First of all, we are commenting what we are seeing, meaning that this is a shift. We are still doing well in U.S. and North America. We are not doing as well as we want to. We are taking actions on that. Part of this, as we mentioned, is the food service business where we see increased competition. We are reviewing this business model and see how we can get back on track and come back to the earnings levels that we want to see in North America or U.S. in this case, specifically. We do not see an accelerated problem. We see we have actions to take us back up to the profit levels where we want to be, to continue to grow in U.S., and we see significant and good opportunities to do so.
At the moment, we have seen for some quarters that we are weaker compared to our plan. That is really what we are mentioning. We are not accelerating this downwards. We are taking actions to turn the trend around to the positive one again.
Is there any way you could give us the magnitude of the loss versus desired level, or the difference between where you are now and the desired level in terms of-
We're not going-
No.
We're not commenting the details on specific markets and/or factories. This is nothing to panic about at all. It's just a little bit weaker than our plan, and we are taking actions to get back to our, call it normal growth trend in U.S.
All right. Thank you very much. Those were my questions.
Thank you.
Thank you. Our next question comes from the line of Oliver Knobloch of Pictet. Please go ahead. Your line is now open.
Thank you very much for taking my questions. Most of my questions have been asked already. I have one, maybe you can comment it, but probably not. Has Loders, under the new ownership, different commercial approach now? Do you see them more aggressive or less aggressive, more rational in the market in their behavior?
Thank you for your question, Oliver, and I will never comment my competitors and friends in the industry in any specific way. I leave that to your judgment whether they are or not. We are focused on being a highly valued partner to our customers, and if we can beat competition, then we're happy to do that. I am more focused on driving the market together and really focusing on delivering good value to the food industry.
Thank you.
You're welcome.
Thank you. Our next question comes from the line of Per Jorgensen of I&T Asset Management. Please go ahead. Your line is open.
Yes. Thank you, gentlemen. Just coming back to the new investments that you did in Brazil, in China, in Canola Oil, and so on. You mentioned that the U.S. situation was teasing you a bit. How are they doing, the new plants, compared to your expectations, and especially compared to EBIT per kilo from the new factories? That's my first question. Coming back to the CapEx plans, I know Fredrik has before been very specific about the CapEx plans. Do you see any change? It's basically compared to what you mentioned about Karlshamn, important investments, upgrades significantly in Louisville and so on. Will you keep the CapEx plans for 2019, 2020, or will we actually see an acceleration in the CapEx going forward? Thank you.
Thank you, Per. Very good question. Thank you for reminding the nuances to the U.S. To start with Canola Oil. Canola Oil is doing well, and we're doing better. My comments on U.S. is more to the, call it the historic AAK USA, where we're a bit lagging our own plan. Canola Oil as an investment is doing well, better than planned. That's all good, and we see continued opportunities throughout the U.S., and I'm especially glad for us now having a footprint in California and reaching the market around California, and I think there are great opportunities there and good market trends that fits us well, if you look at the mega trends and with our end consumers in our industry. That fits well. Canola Oil, we're very happy with.
With regards to China, Brazil, we're now moving. Nothing has changed really compared to what we mentioned before. We see both plants doing well in a slightly different setup, where we get slightly more volume in China and working on getting to the value-added piece of it, and slightly better margins in Brazil, but with slightly weaker volume. Good opportunities there, both moving on well, without being specific on EBIT per kilo. These are investments in the right locations, but with different market dynamics.
Johan, it's fair to assume that when you look back from the investments when you made them, I know that's before your time, but when you look at the product mix, one should argue that the EBIT per kilo, when the factories are up and running, that they should actually be enhancing to the group level. That's my understanding as I remember it.
Well, at least, it's difficult to I don't know all the comments being made in the past. I think fair to say that when we have them up and running and with a good utilization and delivering the type of business that we normally do, it should be accretive to our earnings and so forth. Whether the Chinese plant is higher in EBIT per kilo than another plant, that is not something you can assume because we are delivering to the same type of customers and markets to a large degree. Not the same markets, but the same type of customers and products. Then you had also questions about CapEx plans. We don't see any big shift at all in our CapEx plan with our ongoing operations.
I think that what we communicated before pretty much holds. Fredrik is nodding here in front of me. With regards to Kalshamn, Louisville, and so forth, these are just examples of continuous improvements and investments that we are doing to meet demand and to improve our operations. That will continue with the other plans going forward.
Yeah. Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Kenneth Toll Johansson of Carnegie. Please go ahead. Your line is open.
Thank you. Continuing to discuss CapEx plans and so on. The balance sheet is pretty strong right now. You have a good cash flow, and you haven't made acquisitions for a couple of years. Are you more active to look for acquisitions now, or are you more prepared to do acquisitions, or do you wonder about doing something else with the cash?
Good question. I'll leave the last question, I'll leave that to shareholders, and future decisions if we do something else. To focus on our business, yes, it's in the eyes of you whether we have a strong or not balance sheet, but the balance sheet definitely allows us to make acquisitions. Are we focused more or less? I cannot judge whether we are more focused or less focused, but we are focused, and it is a very important part of our growth journey in the past. It is a key part of our growth journey going forward.
Yeah.
Yes, we're looking at acquisitions, and whenever we find the right one, we will try to engage and do those. We believe that we have both the way the company is performing, but also our standing or rating in the market, and our balance sheet supports an acquisitive growth combined with an organic growth.
Great. Thank you.
Thank you. Just to remind everyone, if you want to ask a question, please press 01 on your telephone keypads. There are no further questions at this time. Please go ahead, speakers.
All right. Thank you everyone again for calling in, and thank you for these questions. Good questions. I hope that our answers fulfilled what you wanted. With that, I will close today's earnings call. Thank you very much. Again, don't forget our Capital Market Day coming up within a month. All right. Thank you very much.