Ladies and gentlemen, welcome to the AAK Q1 2018 report. Today, I am pleased to present CFO Fredrik Nilsson. Afterwards there will be a question and answer session. Speaker, please begin.
Thank you very much. Hello, everybody. Ladies and gentlemen, please be very welcome to AAK's press and analyst conference call for the first quarter 2018. Let us move on to page two and have a look at today's agenda. If you look at today's agenda, we will start by reviewing our current performance for the first quarter. We will go into some more details regarding our business areas. That will be followed by an update of our company program, The AAK Way. By the end, we should have ample of time for questions. Let us move to page three and look at the highlights for the first quarter. The favorable trend we have seen in most of our product segments for some time continued during the first quarter. We are therefore very happy and proud to announce another good quarter.
For the 29th consecutive quarter, we achieved a record-high operating profit. This quarter was an all-time high for a first quarter with an EBIT of SEK 460 million, up 9% at fixed FX. Also based on initiatives and by focus on the selected segments and applications, the strong organic volume growth continued. We reached 7% volume growth in the quarter, and we are definitely gaining market shares. As I said, we achieved a record-high year-over-year operating profit of SEK 460 million, an improvement of 7%, and 9% at fixed FX. The fewer working days compared to the corresponding quarter last year, as well some harsh weather condition in parts of the U.S. lessened the increase in operating profit. Looking at operating profit per kilo, it was stable. If we adjust for the negative FX, it was up 2%.
Part of our management ambition for the coming years was to deliver a good and consistent earnings per share improvement. In this quarter we saw 15% increase to 7.42, comparing to 6.47. That was due to the good underlying improvement in operating profit. We have also been able to lower our financial costs in a few countries. We also have some positive support from the U.S. tax reform. I would also like to highlight, we have opened two new innovation center in U.K. during the quarter. One in Hull for bakery and one in Runcorn for food service. Let us move to page four. Let us look in the rear mirror for some seconds. We have now 29 consecutive quarter where we have achieved a record-high operating profit year-over-year. I think we could be really proud of this development.
Let's move on to page five, and I'll look at the FX exposure and the translation impact. We had a negative currency translation impact in the first quarter of SEK 9 million. SEK 5 million related to Food Ingredients and SEK 4 million related to Chocolate & Confectionery Fats. You can see that it's basically the dollar that is impacting us negatively. You can see on the slide both the average rate for 2017 and the average rate that we had during the first quarter into 2018. Let's move to page six and the financial summary and look at the trends. Total volumes continued to grow nicely, and we're up 7%. I would say this is the highest organic growth we have seen for a quarter. As I said, we are definitely taking market shares out in the market.
Also looking at the rolling 12 months trend, it's a nice trend here. It's the same with the EBIT, the best first quarter ever. You can see in the upper right corner the good evolution on operating profit. You have the operating profit per kilo, a little bit more stable with some negative FX. Let's move to page seven and look at the working capital days. You can see a small increase here of two days since year-end, and I will say that's mainly due to the improved product mix or specialty solution. We see some more pressure upwards on our accounts receivables. Inventory and accounts payable have been relatively flat during the quarter. Before we go into the cash flow, and now we are on page eight, we have seen some price increases in the raw material prices.
I would like to remind you that the modest increase in raw material prices will have an impact on our cash flow with a delay of six to nine months. We have also seen that the prices have flattened out, and we don't expect to see much more impact from raw material prices for the coming quarters. A 10% change in all our raw material prices will have an impact of SEK 300 million on working capital with a famous lag of six to nine months. Let's move on to page nine and the cash flow. Looking at the cash flow, we have a good EBITDA increase in the quarter of SEK 42 million. Paid interest is down versus last year, and that's due to the lower financial costs because we are optimizing the financing in a few high interest rate countries.
That's the same trend that we have now seen for three quarters last year, now continuing to 2018 as well. Paid tax is down. We're also seeing a lower reported tax cost in the quarter due to the U.S. tax reform. I would just like to remind you about our previous guidance on the tax rate, and that will be between 27% and 28% for the full year. Non-cash items are mainly related to the mark-to-market impact of our financial instrument we are using for hedging raw materials. You can see a quite significant amount from a change in working capital. It's negative SEK 643 million in the quarter. There is three reasons for that. The first one is the raw material price increases that I mentioned, which has impacted with full effect here in the first quarter.
We have also seen continued organic volume growth, which implies higher working capital, particularly on our accounts receivables. Finally, we are also tying up more working capital when we are ramping up our new factories in Brazil and China. If we now look at cash flow from the investments, it is an outflow of SEK 130 million. It is a combination of maintenance investments, but it is also some capital expenditure for increasing our capacity at existing facilities. Let's move on to page ten and return on capital employed. If we look at capital on a rolling 12-month basis, it was 15.4% in the quarter comparing to 15.6% at year-end. The reason for the decline in ROCE is entirely related to the higher working capital. With stable working capital and continued EBIT improvement for the rest of the year, we expect ROCE to increase again.
We go into page 11 and look at the business trends for the first quarter. Looking at the business trend page here, we try to give you a short update on each geographical area from an AAK perspective. We start with the Nordics, Nordic is an important part of AAK, and there is a good trend in many parts of the business. There is good momentum in most of the segments in Food Ingredients and a very strong Technical Products & Feed, and it is particularly a strong evolution here for the candle business. If we look at our business in Western Europe and U.K., the FI business is performing really well. However, we continue to be challenged in the bakery segment. CIS and Central Eastern Europe are continuing a good trend we saw during 2017, with Russia being the growth engine.
Looking at the U.S., they had a little bit of a challenging quarter due to some harsh weather conditions in parts of the U.S. We remain positive about the U.S. market. I would also like to highlight that Kal oil is continuing to develop according to plan. We continue with Asia, the good trend continue across the different regions from Turkey in west to China in east, China is ramping up according to expectations. Latin America, which in AAK is mainly Mexico and Brazil, but also some other countries. Food Ingredients continue to grow really nicely, CCF continue also to grow despite the economical situation, which is still a little bit tough in Brazil. We are ramping up the factory in Brazil with a little bit maybe slightly lower volumes, but with a much better mix.
We are definitely on plan when we are looking at it from a P&L point of view. We move on and go into our business areas and start on Food Ingredients on page 12. I will say Food Ingredients had another very good quarter. They reported high single-digit organic volume growth in the quarter of 9%. I think that is the best we have ever had. Also looking into the speciality and semi-specialities, it is 8% growth. That is definitely the best we have ever had. We go down into the different segments in Food Ingredients, we will start with the largest segment, the bakery segment. The challenge to change the product mix towards a greater proportion of high-end products remains.
I would like to highlight that we had a small organic volume growth in this quarter for the bakery segment, which I will say is a really important milestone. Let's wait and see now that this trend can continue into the rest of the year. It is only one quarter after a couple of years where we have struggled to have a growth in bakery, but some good signs here of improvement. This is despite Europe and U.S. continue to be weak for this segment. The good growth is coming from Asia and North Latin America. Looking into the dairy segment, the strong trend we are now seeing for more than two years continued, and we have a new quarter with double-digit organic volume growth. If we continue with Special Nutrition, it will be the same as with the dairy segment.
It is a double-digit volume growth, both for the Akonino product range and also our infant product range, which is sold through Advanced Lipids. Food service was a little bit of a challenge last year in the Nordic market. Now in the first quarter we had a small growth for the whole segment, and the Nordic segment also had a small volume growth. As we already communicated last autumn, we are getting back to growth again in food service. We had some good commodity volumes in the quarter, and we have 12% volume growth. If we continue and look at page 13, on that we can see the trend of the operating profit and operating profit per kilo. You can see that is the best first quarter ever for Food Ingredients.
Operating profit per kilo was stable, and that is due to the good underlying improvement, but it is offset by the strong growth in the commodity volumes and the negative currency translation impact. Also actually where we now see some growth in the bakery, because bakery has a little bit lower EBIT per kilo, has also a negative impact on the EBIT per kilo. At fixed FX, operating profit per kilo improved 3% for Food Ingredients. If we continue into Chocolate & Confectionery Fats, the organic volume growth for the business are continued. We had 4% volume growth in the quarter, and this was despite some production disruptions that we have already communicated, that we have said that will continue here into the beginning of the first quarter.
That has also had an impact on our product mix because we have seen a better volume growth on our lower-end products in the first quarter due to those production disruptions, which of course had then a negative impact on our high-end products. We are now back to a normal production in Aarhus since end of February, so that is good progress. Operating profit decreased 3% and at fixed FX, 1%. I think the important takeaway here is that we have, towards the end of the quarter, seen a much more stabilized output from the production and also some lower volatility in the raw materials. That is promising going forward. I would also like to highlight, we saw some more aggressive pricing from competitors here in the winter, and which has put some also pressure on our margins.
However, we have towards the end of this quarter seen a more positive effect and prices are coming back. That will be positive for the later part of 2018. Going to page 15 and looking at the cocoa butter price. The cocoa butter price, as you can see on the page, has increased quite significant over the last month and is now north of $7,000. That means that we are a little bit north of our sweet spot, which is between $5,000 and $6,500. I think this is still an okay level for the cocoa butter price. Let's move on to page 16 and looking at the trends. As you can see on both the operating profit and operating profit per kilo, we have had a somewhat more challenging quarter.
On operating profit per kilo, it's particular the mix and the negative FX and production disruptions that have put some pressure on operating profit per kilo in the first quarter. If we're then going into Technical Products & Feed on page 17, they had a very strong quarter. I maybe should say that the first quarter last year was maybe not the most impressive, but it's not taking away the good performance we are seeing here in the first quarter. We actually have a volume growth both for our feed business, but very strong growth for our fatty acid business. As you can see on this slide, operating profit is up 89% to SEK 36 million. Where we can see a particular good progress here is for our candle business, but there's also some progress on our crushing operation of rapeseed.
Let's move on to page 18. After the weak start last year, we have now seen a good trend for three quarters. From Q3 and onwards, that has been a good evolution here for our Technical Products & Feed. Let's move to page 19 and The AAK Way. I must say that the company program is progressing according to plan and yielding good results. As part of the program, we are currently conducting a global customer survey, which will support us in further strengthening our customer co-development approach. We have also developed important training tools for all our go-to-market teams in order to further extend our capabilities. Another important thing in the quarter is we are building a new global customer innovation center for plant-based dairy solutions, and that will be located in Richmond, California.
That center will be opened here during the summer, which is a really important milestone to continue the good growth in our dairy segment. If we then continue to page 20 and look at our long-term management ambition, that was to deliver an average EBIT year-over-year improvement of 10%. Looking at the CAGR after 15 months, we are up 11%, so we're a little bit ahead of our internal management ambition. Let's move to page 21. If we're looking at the future, we continue to remain prudently optimistic. I would also like to remind you that we have our annual general meeting May 30 here in Malmö. I think that was all from my side today, and I'm ready for questions.
Thank you. Ladies and gentlemen, we are now ready to take your questions. If you'd like to ask a question, please press 01 on your telephone keypad. Our first question comes from Karl Mellberg from Nordea. Please go ahead. Your line is now open.
Yes, hi. Thank you for taking my questions. My first one relates to the CCF division. You mentioned that we've seen some more aggressive pricing from some competitors. Could you elaborate a bit more in detail on this one? Secondly, if we should expect any negative impact from the production disruptions in the CCF division also in Q2, or if you say that this is now fully resolved. Thank you.
Thanks for your question, Karl. If I start with the production disruptions, we should not expect anything going into Q2. This we have behind us from now on.
Thank you.
If you look at aggressive pricing, you all know that particular for some of our products, we are going out and having a lot of tenders going on here in Q4 and Q1. We saw a little bit of more aggressive pricing from some competitors in the beginning of that tender season. We are seeing a more normal situation here at the end of the season. I think there's no drama. It was more for us to try to be a little bit more clear in the communication.
Okay, perfect. Thank you.
Thank you. Our next question comes from Kasper Bjørn from ABG. Please go ahead. Your line is now open.
Yes, thanks a lot. If I may just follow up on Karl's question there, this more aggressive pricing from competitors. Fredrik, first of all, do you think this is related to Bunge stepping into your kind of business also? Secondly, is this like a new normal that we are, from time to time, expected to see some competitors being a bit more aggressive, for example, in these tender rounds? Is this what we should expect in Q1 next year also? That's my first question, please.
I not necessarily see this is because there is some changes at our competitors. I think this has happened from the time to time in the past as well. It's more that we try to be a little bit more transparent in our communication. As I said to Karl, there is no drama inside. It was just we would like to be more clear on our communication than anything else.
Okay, fair enough. Just following up on your comment regarding cocoa butter price, which you now see around the $7,000 level. Have you seen any indications from chocolate producers that they are preparing for a round of price increases or anything like that?
I'm not aware, and I have not seen anything from my personal view.
Okay. Would you agree that where the potential negative from a high cocoa butter price could come for you would be if that was to be carried out by the producers?
As we have said before, the too high prices is not good because there could be a likelihood for price increases or there could also be that you downsize the packaging size. Of course, that normally have a negative impact on the volume, but it's normally positive from a pricing point of view because you can increase the prices when the cocoa butter price is a little bit higher. It's always difficult to see where is that limit.
Okay, if you haven't seen any signs of pricing being raised by the producers, have you seen any signs of them lowering the weights?
Not yet.
Okay. Thank you.
Thank you. Our next question comes from the line of Oskar Lindström from Danske. Please go ahead. Your line is now open.
Hi. Yes. Good answers on the competition topic. I have some other questions. First of all, is there any way you could put a number on the Easter impact and the U.S. weather impact on EBIT in the first quarter?
What should I say? It's clearly that we have 7% year-over-year, and it's always something that is going better than expected, something that is worse than expected. Clearly that has been double digits without Easter and the U.S.
All right. Thanks. Around the slightly higher CapEx levels, should we see that as an indication of where CapEx spending is trending for you guys? Or is it more a temporary thing?
What we communicated at the Capital Market Day last year was that we should have a little bit higher this year. We guided for SEK 850 million in CapEx for the full year. That's also due to that we are seeing that good organic volume growth. We will just like to secure we have enough of supply to be able to supply our customers when they are growing.
All right. We should see it in relation to that. Great. Then my final question is, you've commented this quarter and also previous about working cap being tied up in the ramp-up of the facilities in China and Brazil. Roughly how much working cap is being tied up due to the ramp-up?
I think we keep that internal because it's going a little bit up and down when you're ramping up a factory. It's following our own internal plan.
All right. It would be sort of visible in the numbers for us?
Yeah. When you start, you start with nothing, so of course you will need inventory and you will need receivables to give some credits to the customers.
All right. Well, great. Those were all my questions. Thanks.
Thanks.
Thank you. Our next question comes from Heidi Vesterinen from Exane. Please go ahead. Your line is now open.
Hi. The first question is on the aggressive pricing you talked about from competitors. Is this across the whole portfolio? The specialties as well as the semi-specialties and commodities? That's my first question.
No, I will say it's not true all kind of products. It's some specific products where we have seen it.
Okay. What happened in dairy in the U.S. and Nordics, please?
No drama at all. That's a little bit the pattern we have seen because that is also in the dairy segment, there are some low-end semi-specialties. With the good growth and good momentum we have, we have prioritized the high-end solutions.
The last question. In FI, we saw a pickup in commodity volumes. Is this a one-off Q1 event or will it remain this way for a couple of quarters because I guess you have a contract to fulfill?
No, this was more related to a good opportunity that we captured in the first quarter.
All right. Thank you.
Thank you. Our next question comes from the line of Kenneth Toll from Carnegie. Please go ahead. Your line is now open.
Yeah, thank you. Just to follow up on the CapEx questions here. You're spending more CapEx in order to cater for growth this year, but could you say a little bit where you stand on capacity utilization in China and Brazil? Potentially when you need even more capacity in China since you have good growth there?
I think there's two dimensions on this. The first one is, of course, as you said, ramping it up and get full utilization. Before you're starting to add more capacity, you will also like to have the right mix, because in the beginning, there is always a little bit more commodity volume. I think you are a year, a year and a half away until that question could be on the table.
Okay. Technically, the plants work well and so on.
Absolutely. Both in Brazil and China.
Okay. Thank you. Cheers.
Thank you. As another reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Okay, as there appear to be no further questions, I return the conference to you.
Thank you. I would just like to thank everybody for attending this call, and say thank you very much. Looking forward to see you soon. Goodbye.
Thank you. This now concludes our conference call. Thank you for attending. You may now disconnect your lines.