Earnings Call: Q1 2018

Apr 23, 2018

Ladies and gentlemen, welcome to the AAK Q1 2018 Report. Today, I'm pleased to present CFO, Fredrik Nielsen. For the first part of this Speakers, please begin. Thank you very much. Hello, everybody. Ladies and gentlemen, please be very welcome to AK's present analyst conference call for the Q1 2018. Let's move on to Page 2 and have a look at today's agenda. If we look at today's agenda, we will start by reviewing our current performance for the Q1, then we'll go into some more details regarding our business areas, and that will be followed by an update of our company program, the AK Way. And by the end, we should have ample time for questions. So let's move to Page 3 and look at the highlights for the Q1. The favorable trend we have seen in most of our product segments for some time continued during the Q1. We are therefore very happy and proud to announce another good quarter. For the 29th consecutive quarter, we achieved a record high operating profit, and this quarter was an all time high for our 1st quarter with an EBIT of 4.60 1,000,000 dollars up 9% at fixed FX. And also based on our initiatives and by focus on the selected segments and applications, the strong organic volume growth continued, and 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 $460,000,000 an improvement of 7% and 9% at fixed FX. Fewer working days compared to the corresponding quarter last year as well as 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. And 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. And in this quarter, we saw 15% increase to 7.42% compared to 6.47 percent. And that was due to the good underlying improvement in operating profit, but we have also been able to lower our financial costs in a few countries, and we also have some positive support from the U. S. Tax reform. I would also like to highlight we have opened 2 new innovation center in U. K. During the quarter, 1 in Howe for bakery and 1 in Rancorn for foodservice. So let's move to Page 4. Let's look in the rear mirror for some seconds, and 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 5 and I'll look at the FX exposure and the translation impact. We had a negative currency translation impact in the Q1 of $9,000,000 $5,000,000 related to food ingredients and $4,000,000 related to chocolate and confectionery and fats. And you can see that it's basically the dollar that is impacting us negatively. And you can see on the slide both the average rate for 2017 and the average rate that we had during the Q1 into 2018. Let's move to Page 6 and the financial summary and look at the trends. Total volumes continue to grow nicely and were up 7%. I would say this is the highest organic growth we have seen for a quarter. So as I said, we are definitely taking market shares out of the market. And also looking at the Roanoke 12 months trend, it's a nice trend here. It's the same with EBIT, the best first quarter ever. So you can see in the upper right corner, the good evolution on operating profit. And then you have the operating profit per kilo, a little bit more stable with some negative FX. So let's move to Page 7 and look at the working capital days. You you can see a small increase here of 2 days since year end. And I will say that's mainly due to that the improved product mix of Specialty Solution. We see some more pressure upwards on our accounts receivables. And then inventory and accounts payable have been relatively flat during the quarter. Before we're going into the cash flow, and now we are on Page 8, we have seen some price increases from in the raw material prices. And 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 6 to 9 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. But a 10% change in all our raw material prices will have an impact of €300,000,000 on working capital with a famous lag of 6 to 9 months. Let's move on to Page 9 and the cash flow. Looking at the cash flow, we have a good EBITDA increase in the quarter of 40 $2,000,000 Paid interest is down versus last year, and that's due to lower financial costs because we are optimizing the financing in a few high interest rate countries. That's the same trend that you have now seen for 3 quarters last year and 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. And I would just like to remind you about our previous guidance on the rate, and that will be between 27% 28% for the full year. Noncash items are mainly related to the mark to market impact of our financial instrument we are using for hedging raw materials. And then you can see a quite significant amount from changing working capital. It's negative $643,000,000 in the quarter. There's 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 Q1. But we have also seen continued organic volume growth, which implies higher working capital, particularly on our accounts receivables. And then finally, we are also tying up more working factories in Brazil and China. If we then look at cash flow from the investments, it's an outflow of $130,000,000 It's a combination of maintenance investments, but it's also some capital expenditure for increasing our capacity at existing facilities. So let's move on to Page 10 and return on capital employed. If we look at capital on a rolling 12 month basis, it was 15.4% in the quarter compared to 15.6% at year end. And the reason for the decline in Orocke is entirely related to the higher working capital. With stable working capital and continued EBIT improvement for the rest of the year, we expect ROCCAT to increase again. If we're then going into Page 11 and look at the business trends for the Q1. And looking at the business trend page here, we try to give you a short update on each geographical area from an AK perspective. If we then start with the Nordics, Nordic is an important part of AK, 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 and feed, and it's 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 trend we saw during 2017 and 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, but we remain positive about the U. S. Market. And I would also like to highlight that cattle oil is continuing to develop according to plan. If we then continue with Asia, a good trend continue across the different regions from Turkey in West to China in East. And China is ramping up according to expectations. Latin America, which in AK is mainly Mexico and Brazil, but also some other countries. 3rd Ingredients continue to grow really, really nicely. And CCF continue also to grow despite the economical situation, which is still a little bit tough in Brazil. And we are ramping up the factory in Brazil with a little bit maybe slightly lower volumes, but with a much better mix. So we are definitely on plan when we are looking at it from a P and L point of view. So if we then move on and going into our business areas and start on Food Ingredients on Page 12, I will say Food Ingredients had another very good quarter, and they reported high single digit organic volume growth in the quarter of 9%. I think that's the best we have ever had. And also looking into the specialty and semi specialties, it's 8% growth that is definitely the we have ever had. If we then go down into the different segments in food ingredients, we'll start with the largest segment, the bakery segments. The challenge to change the product mix towards the greater proportion of high end products remains. But 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. But let's wait and see now that this trend can continue into the rest of the year. It's only 1 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. So 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 2 years continued, and we have a new quarter with double digit organic volume growth. Then if we continue with Special Attrition, it will be the same as with the Dairy segment. It's a double digit volume growth, both for the Canino product range and also our infant product range, which is sold through advanced lipids. Then foodservice was a little bit of a challenge last year in the Nordic market. And now in the Q1, we had a small growth for the whole segment, and the Nordic segment also had a small volume growth. So as we already communicated last autumn, we are getting back to growth again in Foodservice. And then we had some good commodity volumes in the quarter, and we have 12% volume growth. If we then 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's the best Q1 ever for Food Ingredients. Operating profit per kilo was stable, and that's due to the good underlying improvement, but it's offset by the strong growth in the commodity volumes and the negative currency translation impact. But also, actually, where we now see some growth in the bakery because bakery has a little bit lower EBITAKilo has also a negative impact on EBITAKilo. So at fixed FX, operating profit per kilo improved 3% for Food Ingredients. If we then continue into chocolate and confectionery fats, the organic volume growth for the business area continued. So 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 Q1. 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 Q1 due to those production disruptions, which, of course, had then a negative impact on our high end products. However, we are now back to normal production in Ouro since end of February. So that's good progress. Operating profit decreased 3% and at fixed FX, 1%. But 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. So that's promising going forward. However, 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. So that will be positive for the later part of 2018. Turning 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 USD 7,000. That means that we are a little bit north of our sweet spot, which is between $5,000 $6,500 But I think it is still on okay level for the cocoa butter price. So let's move on to Page 16 and looking at the trends. And as you can see on both the operating profit and operating profit per kilo, we have had a somewhat more challenging quarter. And 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 Q1. If then going in to Technical Products and Feed on Page 17, They had a very, very strong quarter. I might maybe just say that the Q1 last year was maybe not the most impressive, but it's not taking away the good performance we are seeing here in the Q1. And we actually have volume growth both for our feed business, but very strong growth for our fatty acid business. And as you can see on this slide, operating profit is up 89% to $36,000,000 And where we can see a particularly good progress here is for our candle business, but there's also some progress on our crushing operation of rape seed. So let's move on to Page 18. Then after the weak start last year, we are now seeing a good trend for 3 quarters. So from Q3 and onwards, that has been a good evolution here for our technical products and feed. Let's move to Page 19, the AK Way. I must say that the company program is progressing according to plan and yielding good results. And as part of the program, we are currently conducting a global customer survey, which will support us in further strengthening our customer care 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 our plant based dairy solutions, and that will be located in Richmond, California. And 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 division, and that was to deliver an average EBIT year over year improvement of 10%. And looking at the CAGR of the 15 months, we are up 11%. So we're a little bit ahead of our internal management ambition. So let's move to Page 21. If we're looking at the future, we continue to remain prudently optimistic. And I would also like to remind you that we have our Annual General Meeting, May 30, here in Malmo. I think that was all from my side today, and I'm ready for questions. And our first question comes from Karl Melavey from Nordea. Please go ahead. Your line is now open. My first one is related to the CCF division. You mentioned that you've seen some more aggressive pricing from some competitors. Could you elaborate a bit more in detail on this one? And then secondly, if we should expect any negative impact from the production disruptions in the CCF divisionals in Q2 or if you say that this is now fully resolved? Thanks for your question, Karl. If I start with the production disruptions, we should not expect anything into the going into Q2. This, we have behind us from now on. And 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. And we saw a little bit of more aggressive pricing from some competitors in the beginning of that tender season, and we are seeing a more normal situation here at the end of season. So 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 Buren from ABG. If I may just follow-up on Karl's question there, this more aggressive pricing from competitors. Frederic, do you see first of all, do you think this is sort of related to bungee stepping into your kind of business also? And secondly, is this sort of 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 kind of what we should expect in Q1 next year also? That's my first question, please. No, I not necessarily see this is because there is some changes at our competitors. I think this has happened from time to time in the transparent in our communication. So as I said to Karl, there is no drama inside. So it was just like we would like to be more clear on the communication than anything else. Okay, fair enough. Then 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 a personal view. Okay. And would you agree that sort of where the potential negative from a high crude coal bottle 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 and that could also be that you downsize the packaging size. And of course, that's 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. So it's always difficult to see where is that limit. Okay. But if you haven't seen any signs of pricing being raised by the producers, have you seen any signs of them lowering the waste? Not yet. Thank you. Our next question comes from the line of Oskar Lindstrom from Weddansky. Please go ahead. Your line is now open. Hi. Yes. Good answers on the competition topic, which I have some other questions. First of all, I mean, is there any way you could put a number on the Easter impact and the U. S. Weather impact on EBIT in the Q1? What should I say? But it's clearly that we have 7%. We have 7% year over year, and it's always something that is going better than expected, something that is worse than expected. But clearly, that has been double digit without Easter and the U. S. All right. And then your comments around the sort of slightly higher CapEx levels, is that sort of 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 Capital Market Day last year was that we should have a little bit higher this year as we guided for $850,000,000 in CapEx for the full year. And that's also due to that we are seeing that good organic volume growth. So we will just like to secure. We have enough of supply to be able to supply our customers when they are growing. All right. So we should see it in relation to that. Great. And 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 internally because it's going a little bit up and down when you're ramping up the factories. So but it's following our own internal plan. All right. But it would be sort of visible in the numbers for us, I mean, or Yes. I mean, when you start with, you start with nothing. So of course, that will you need 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. So the first question is on the aggressive pricing you talked about from competitors. Is this across the whole portfolio, so the specialties as well as the semisepecialties 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. And then what happened in dairy in the U. S. And Nordics, please? No drama at all. That's a little bit the pattern you we have seen because that is also in the dairy segments, there are some low end semi specialties. So with a good growth and good momentum we have, we have prioritized the high end solutions. And then 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 Q1. Our next question comes from the line of Kenneth Towle from Carnegie. Just a follow-up on the CapEx questions here. The yes, 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? And potentially, when you need even more capacity in China since you have a good growth there? No. I think there's 2 dimension on this. The first one is, of course, as you said, ramping it up and get full utilization. And then before we'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 volumes. So I think you are a year or 1.5 years away until that question should be or could be on the table. Okay. But technically, the plants work well and so on? Absolutely, both in Brazil and China. Okay. As there appear to be no further questions, I return the conference to you. Then I would just like to thank everybody for attending this call. And say thank you very much. I'm looking forward to see you soon. Goodbye. Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.