Ladies and gentlemen, welcome to the AAK Interim Report Fourth Quarter and Year End 2017. Today, I'm pleased to present CFO and acting CEO, Fredrik Nilsson, and Chief Marketing Officer, Anne-Mette Olesen. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question and answer session. Fredrik, 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 fourth quarter and year end 2017. I'm sitting here in sunny Malmö together with our Chief Marketing Officer, Anne-Mette Olesen. Let's move to page two and look at the agenda for today. We will start by reviewing our current performance. We'll go into some more details regarding our business area. That will be followed by an update our company program, The AAK Way. Also some important achievements we have done in the sustainability area. By the end, we should have ample of time for questions. Let's move to page three and look at the fourth quarter. We are happy and proud and almost satisfied for a few nanoseconds with a new good quarter.
For the 28th consecutive quarter, we achieved a record high operating profit. The EBIT achieved here was SEK 471 million versus SEK 435 million last year. We continue to have a good organic volume growth with +5%. We are clearly winning market shares with a +5%. Sales up 4%. Increase here was mainly due to a positive product mix and organic volume growth. However, this was partly offset by the negative currency translation impact of almost SEK 300 million. As I said, the operating profit was an all-time high of SEK 471 million, an improvement of 8%. In this result, we have been able to absorb negative FX translation impact of SEK 18 million. If we calculate it for fixed FX, operating profit improved by 12%. This is actually clearly a little bit higher than our long-term management ambition, which is 10% in average. EBIT per kilo up 3%.
Here we continue to see a continued underlying improvement in the mix. This was partly offset by the ramp-up cost for our greenfield investments. Also the negative FX impacted EBIT per kilo negatively. At fixed FX, operating profit improved by 7%. Part of our management ambition for the coming years was to deliver a good and consistent earnings per share. In this quarter, you can see 24% improvement in earnings per share. We have got some help from the U.S. decision to reduce the corporate tax rate in the fourth quarter. That has impacted SEK 0.86 per share. Adjusted for the U.S. tax, earnings per shares improved by 12%. You can see our net debt. We have continued to improve since the third quarter. Still it's slightly higher comparing to end of 2016.
That is mainly due to the higher raw material prices that we saw impacted our cash flow during the first and second quarter 2017. Let us move to page four. If we look in the rear mirror for some seconds, we have now 28 consecutive quarter where we achieved a record high operating profit year-over-year. Let us move on to page five. In this quarter, we had a significant negative currency translation impact of SEK 18 million. SEK 12 million of those was related to Food Ingredients, and SEK 6 million was related to Chocolate and Confectionery Fats. Based on the current currency rates, this will continue going into 2018. It is mainly, as you can see on the slide, the weaker euro/dollar that had a negative impact. You can see also some minor changes with the euro and the British sterling and the Mexican pesos.
Net-net, I will say the main impact in 2018, at least for the first quarter, will come from the U.S. dollar. Let us move then to page six, and looking at the trends. The total volumes continue to grow nicely, and we have 5% organic volume growth. If we then look at the specialty and semi-specialty volume growth, that was 7%, and that is definitely much faster than the underlying market. I will say the underlying market is growing 2.5%, roughly speaking. Good performance in the quarter. Also if we look at around the 12 months trend, you can see that the good trend continues. Operating profit we have touched upon, and you can see that the nice trend continues. The EBIT per kilo is actually the highest ever for fourth quarter.
This is despite the ramp-up cost for the new factories in Brazil and China and the negative FX. We also still have some challenges in the Chocolate and Confectionery Fats. In the down right corner, we have the EBIT year-over-year, and you can see we have 8% improvement year-over-year. If we look at fixed FX, it is +12% in the quarter. Let us move to page seven and look at the full year 2017. Volume-wise, up 8%, organically 5%, exactly the same as you saw in the fourth quarter. A very solid year from a volume point of view. Looking at sales, it is up SEK 4.4 billion. Here we, of course, see some impact from acquisitions, product mix, and increased raw material prices. That is partly offset by a negative translation impact.
Looking at EBIT, it is an improvement of 11%, and we reached an EBIT for the full year of SEK 1,786 million, which is a new record as well. That result includes SEK 19 million in negative FX translation impact. Strong improvement in earnings per share. You can see +20%. If I exclude the positive impact from the U.S. tax reform, we are talking about +16%. Strong underlying improvement in earnings per share. The board of directors propose a dividend increase of SEK 1 per share, which means SEK 9.75 in dividend for each share. The board of directors have also proposed that annual general meeting in 2018 resolves on a share split 6 to 1. For the annual general meeting 2018, the nomination committee has also proposed Georg Brunstam as new chairman of the board.
Let us move on to page eight and look at the working capital days on a rolling 12 months basis. You can see a very stable working capital development. Despite some improved product mix, which is normally ties up more working capital, you can see that we have managed to keep the days flat or actually improve one day since year-end 2016. The small improvement in the inventory partly offset by lower accounts payable. Let us continue on page nine and look at the raw material prices. We are starting to see a modest increase in the raw material prices since the beginning of the third quarter, which will have an impact on our cash flow with six to nine months delay.
We just like to remind you that a 10% change in all our raw material prices will have an impact on our working capital with SEK 300 million up and down. Let us go to page 10 and have a more detailed look at the raw material prices. As you can see on this page, the raw material prices started to drop a little bit during the first quarter 2017. That has had a positive impact here, both in the third and the fourth quarter 2017. However, as I have said, we have also started to see a little bit of an increase during the second half of the year, which will have an impact during the first quarters in 2018. We go to page 11 and look at the cash flow, I will say we had a good cash flow in the quarter.
If we go a little bit more into the details, you can see that we have an EBITDA improvement of SEK 23 million in the quarter. Paid interest is significantly lower than last year. That is mainly due to that we have continued to optimize the financing in a few high interest rate countries. We have also temporarily benefited from the structure in the interest market. Paid tax, I think it is more you should look at the full year because this is a timing issue. We have paid a little bit more during the first quarters. If you look for the full year, it is more reflecting the underlying paid tax. Of course, also, I would like to comment upon the tax rate going forward. With the new corporate tax rate in the U.S., we should expect an average tax rate around 27%-28% going into 2018.
Non-cash item, that is mainly related to change in pension provisions and mark-to-market impact of our financial instrument. You can see a good improvement in our change in working capital with plus SEK 262 million. That is mainly due to our strong focus on working capital management combined with the lower raw material prices. Investments turned out slightly higher for the full year, minus SEK 810 million. You should expect that we will have more than SEK 800 million in investments for 2018 as well. We go to page 12 and look at return on capital employed. The return on capital employed reached 15.6% on a rolling 12 months basis. You can also see in the spot value, which is the gray line, there is a significant improvement over the last quarters.
This is of course due to the continued improvement in operating profit, also to the lower working capital that we have seen over the last two quarters. If we go to page 13 and look at the business trends. When we look at the business trend, we are trying to give you a short update on each geographical area from an AAK perspective. The trends are very similar to what you saw after Q3. The main change, actually the only change in this slide, comparing to a quarter ago, is that we have a green arrow on Technical Products & Feed, where we've seen a strong improvement during the fourth quarter.
If we start with the Nordics, which is an important part of AAK, there is good trends in some of the business segments, there are also some challenges, that's mainly in the bakery and the foodservice segment. I really feel that we are doing the right activities in the foodservice segments in the Nordics, we should start to see an improvement here going into 2018. Looking at the Technical Products & Feed, which is also part of the Nordics, we had some challenging quarters in the beginning of the year, Q3 was almost back to historical levels. Now we have seen a very strong Q4, that's particular for our fatty acid business.
If we now look at the Western Europe, the CCF business continued to develop nicely, still struggling a little bit in the bakery segment, which is the same pattern you have seen now for more than 12 months. U.K., a stable quarter, a little bit challenging on the low end semi-specialities, good progress on the more value-added solutions. U.S. continued to do really well, I must say particularly the dairy plus, special nutrition, CCF is doing really well. Also, the foodservice business had had a really strong year in the States. A few words about CalOils. I would say it is developing absolutely according to plan, now also started to contribute to profit since late spring. Central Eastern Europe, improvements in both Food Ingredients and Chocolate and Confectionery Fats.
CIS continued a strong trend from the previous quarter, particularly Russia has seen a very strong momentum for the chocolate business. Asia, good trends from Turkey in the west to China in the east, we are ramping up the new factory spot on to our own internal plans. Finally, Latin America, which is mainly Mexico and Brazil in the AAK world, also some other countries. Here we see a good improvement in Latin America for the Food Ingredients and good performance as well for the CCF, that's particularly in Brazil where we have a strong presence. Here we're also ramping up the new factory according to plan. Let's move to page 14 and look at the Food Ingredients. Strong organic volume growth, 7%. I think that's a new record for Food Ingredients.
Particularly if you just look at the semi-specialities, where we saw a growth of 9% during the fourth quarter. Bakery, as I commented upon, continued to have a challenging quarter, and that's particularly in Europe and North Latin America, but also U.S. was a little bit weaker. We see also some good progress, particularly in Asia and Nordics and South Latin America. The dairy segment was more or less a copy and paste on the third quarter. Nice double-digit year-over-year improvement. In more or less all regions, we saw that same pattern. We see a really strong momentum for that segment going into 2018. We have special nutrition, which is mainly infant nutrition. Continue the same nice trend with good double-digit growth, both for the Akonino product range, but also for the infant product range.
Also a very strong quarter again for that segment. As I said, foodservice, strong quarter in the States. However, a little bit weaker in the Nordics. As you can see as well, commodity volumes down 1%. If we look at page 15 and the organic volume growth, it's just summarizing what I just said, 9% for semi-speciality. I think that's a remarkably strong number. The total growth of 7% is really strong. If you also summarize the year, 4% growth is definitely better than the underlying market. Looking at page 16, and looking at the trends for Food Ingredients, you can see that the fourth quarter was the best ever for Food Ingredients. If we look at operating profit per kilo, you have seen a more stable trend over the last 24 months.
The reason for that is we have seen an underlying improvement in the mix. This has been offset by the ramp-up cost for the new factories, but also the negative currency translation impact. If we look at the fixed FX, operating profit per kilo improved by 4% in the quarter. If we go to page 17 and look at Chocolate and Confectionery Fats, you can see a small volume growth of 1%, operating profit is up 4%, and if we look at fixed FX, it's up 7%. If we go a little bit behind those numbers, we can see that we have an underlying strong demand, but we still have had some production disruptions in Aarhus during the quarter. This has implied increased production costs, increased supply chain costs, which of course has impacted our operating profit in the quarter.
We are starting to see an improvement in our production, but still, we have some higher volatility in the variations in some of our raw materials. Also the backlog from 2017 will have an impact here during the first quarter of 2018. We feel good after the first quarter that we should have this behind us and be back to more normal for the Chocolate and Confectionery Fats. We can base that conclusion that we have seen less volatility in the variations of some of our raw materials that is on the way to Denmark. Of course, also, it's worthwhile to mention that we have absorbed ramp-up costs for Brazil and China into the operating profit. I would also like to highlight to you that we now have signed our first commercial contract for TROPICAO, our chocolate solution for hot climate markets.
This is a very important milestone for AAK. Of course, by signing one contract, that of course will not change the big picture, but it is definitely an important milestone and we will now continue to work with this concept to other customers as well. Going to page 18 and looking at the trends, you can see another good quarter despite some challenges. Operating profit per kilo improved by 3%, and this was due to the underlying mix continue to improve. You have an offset by negative currency translation impact, the production disruption cost, and the negative FX. If you just look at fixed FX, there was an underlying improvement of 7%. Let's take a look at the cocoa butter price on page 19. The cocoa butter price is still in the sweet spot between $5,000-$6,500.
I think there's not so much more to say about the cocoa butter price than it remains in the sweet spot. If we go to page 20, the Technical Products & Feed, they have a very good quarter, and this was mainly due to that they continue to improve the product mix for our fatty acid business, and we are also seeing much more stable raw material prices now for some quarters. Also the feed business developed positively in the quarter. Looking at EBIT per kilo, you can see an improvement of 29%. I will now hand over the microphone to Anne- Mette Olesen.
Thank you, Fredrik. If you move to slide 21, here you can see The AAK Way, the company program that we launched a year ago. We've just made a status a year into the execution of the progress there. As you can see overall, nearly all projects are on plan, and we even have two which is ahead of plan. If we first look into our go-to-market focus area here, we've developed an even stronger training for our salespeople, and we will be shortly conducting a customer survey to further learn how our customers look upon us and how we can improve. Within the customer co-development here, we launched a global lab system, which gives us a backbone both of efficiency, but also helps us with knowledge sharing across. If we look into operational excellence, here you have a project sourcing excellence.
Here we've seen some really good saving materialize, as well as good progress on implementing our multi-oil sustainability. Within cost-effective and flexible, we've established some global tracks which focus on best practice sharing within the key focus areas of our operation, and they're well up and running. Within world-class delivery, here we focused on improving our processes, both on how we handle products and customers, that have also led to an improved process backbone within this area. If we look into the special focus areas, as Fredrik shared, we've seen really good progress within special nutrition and also within the dairy plus. We're launching a few products, but also a really strong backbone on both the opportunity pipeline and also new product development.
Within the [inaudible] products, which rely a lot to our foodservice activities, we've seen a global network establishing so the local entities can support one another in strengthening our presence within this segment. On the innovation area, we've spent the last year to how can we further strengthen our approach to innovation. At the kickoff meetings we've held lately, we've launched this new strengthened approach to innovation. Last but not least, on the people area, we continue to strive to improve both the development and the engagement on all our colleagues locally, and also strengthen our approach to leadership, which is an important enabler. If we move on to slide 22, as Fredrik told, we will share just a progress within our CSR area.
Within CSR, we continuously work to improve our practices, how we do that is by benchmarking and monitoring our progress within the area to learn for how can we further improve. One of the tools we've used is the EcoVadis, which is a monitoring tool within sustainability performance, and which actually covers more than 40,000 suppliers globally. If we move to slide 23, the outcome our latest monitoring here is that we got recognized with a gold level of our practices, which actually means that within the platform that EcoVadis is running, we are among the top 5% of customers that they have serviced on sustainability performance. We take pride in this, but we also use this as to what can we do even better for the future. Now I'll hand back to Fredrik.
Thank you, Anne-Mette. I would just like to conclude this first part before we going into the Q&A. If we look a little bit for the future, we remain prudently optimistic. I think that was all from our side today, and we are now ready for questions.
Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad and you will enter a queue. After you are announced, please ask your question. The first question comes from the line of Carl Mellby from Nordea. Please go ahead, your line is open.
Yes. Hi, thank you for taking my question. My first one relates to the CCF division. If you could quantify what kind of impact we should expect for the product disruptions in Q1? Also continuing on the CCF division, if you could elaborate on your expectations for TROPICAO in 2018 following the signing of the first commercial contract in Q4. Thank you.
If we start with the TROPICAO, I will say you should not expect any impact that has a material impact on the numbers. This is just the first delivery. As we all know in this industry, everything takes a longer time than you expect. You should not expect any material impact going into 2018 from TROPICAO. We will continue to work and develop our solutions together with our customers. Looking at the production disruptions, I will say it should be similar to what we have seen here during the fourth quarter. A little bit challenging on volume as you saw here in the Q4, also a little bit lower on the profit side. That's what we expect.
Thank you.
Thank you. Our next question comes from the line of Casper Blom from ABG. Please go ahead, your line is open.
Thanks a lot. Two questions from my side as well. Fredrik, could you maybe dive a little bit deeper into the 9% growth in semi-specialty and specialty within the Food Ingredients? You mentioned that dairy was very good and special nutrition as well, but it's still quite a step up. Is there anything unusual in this quarter that sort of makes it an outlier? Should we also expect 9% growth in the coming quarters? That's my first question, please.
You're absolutely right that I highlighted dairy and infant nutrition, and they had a really, really strong quarter. If I look for infant nutrition, it was both for infant and for Akonino. We should also have in mind, of course, when we are ramping up the new factories in Brazil and China, they also impacted the organic volume growth, and that also contributed a little bit to the plus 9%.
Okay. Other than that, there is sort of nothing unusual in the number?
No, there is nothing unusual in the number more than that was extremely strong volume growth in dairy and special nutrition.
My second question, the new factories in Brazil and China, they are sort of being ramped up and has been so the last 9, 12 months, I suppose. Could you give any indication of what the utilization has been on those factories in 2017, and what levels of utilization you're expecting in 2018 to sort of get an impression of the, I would say, progress of the ramp-up?
What I can say is that it's a little bit like a hockey stick when you're ramping up new factories, because it's a lot of approvals you need from your customers in the beginning, and they are doing audits to secure that you're delivering according to the food safety legislation, and also their specific requirement for each customer. I will say, you start really low, and then you're ramping up it gradually. If I summarize it, I will say we have said after 2 years, we should be up at the more normal speed for the 2 new factories. I think we can still stick to that. Maybe China's a little bit ahead, and Brazil may be slightly behind the plan. If you combine those 2, we are following the business plan and what we also communicated earlier.
Okay. If you need all these sort of approvals to begin with, is it then fair to assume that the profile of this 2-year development is back-end loaded, so to say?
Absolutely.
Okay, a considerably larger contribution here in 2018 than we saw in 2017.
Not, I will say, largely. Of course China started in March with the first tiny volumes in March 2017. I think that's a little bit too early for putting that into 2018.
Fair enough. Thanks a lot.
Thank you. Our next question comes from the line of Heidi Vesterinen from Exane BNP Paribas. Please go ahead, your line is open.
Hi. Just to clarify on foodservice, first of all, do you already expect an improvement in Q1? What have you actually done to improve things in the Nordic region? The second question is on infant nutrition. Does Frutarom's acquisition of Enzymotec, your partner, impact anything here? Is there anything in the JV agreement that could get impacted by this change of control? Thank you.
Thank you, Heidi. Looking at the foodservice, the reason why I feel optimistic is, of course, when I looked into the product portfolio and also I know the customer projects that we have run in 2017 that now will materialize in 2018. That's the reason why I feel that we are doing the right thing in foodservice. Going into your question regarding the joint venture we have with Enzymotec, there is nothing that will be changed with Frutarom as a new owner of Enzymotec.
Thank you.
Thank you. Before going on to the next question, I would like to remind all participants to press 01 on your telephone keypad. The next question comes from the line of Oskar Lindström from Danske Bank. Please go ahead, Oskar, your line is open.
Yes, good afternoon. Two questions, really. The first one is coming back to this issue of the production disturbances at the Aarhus facility. You sound pretty certain that these should end by the end of the first quarter now of 2018. What makes you so certain about that?
We clearly see that the production is running now according to expectation, and also on the new raw materials that AAK has received to Aarhus, we can clearly see that it is yielding back to the more normal level we have seen historically.
All right. You would say that already now, sort of halfway into the first quarter, things have stabilized. The impact should be less negative in the first quarter than it was in the fourth quarter? Is that a reasonable sort of conclusion?
You have a little bit on stock as well that you need to blend together. I will say that we will need the first quarter to be really back on track. You have partly a point that gradually towards the end of the quarter, there will be a step-by-step improvement.
Okay. My second question is around the very impressive growth for specialty and semi-specialty products, and then continued very strong growth for special nutrition. Obviously a very sort of positive mix change component. To what extent is this already apparent in, let us say, profit per kilo? Or is that something that is going to be more visible going into 2018 if we look at profit per kilo development?
If you look at Food Ingredients, because I guess that's what you are asking around.
Yeah.
Of course, why you're not seeing EBIT per kilo improving Food Ingredients is, of course, you have the negative FX in the fourth quarter. You are also absorbing the ramp-up cost. That means that the underlying EBIT per kilo is improving. You have those two factors reducing the underlying improvement.
Right. About these ramp-up costs, and the better utilization level that we should expect in 2018 versus 2017. Is there any way you could put a magnitude on that? Or when should we expect that?
What I have said, at least in the beginning of the year in 2017, I commented upon at least during the first quarters, we have a low double-digit number in SEK million in ramp-up costs.
Did that continue per quarter during 2017?
That was more or less the trend we have seen over 17 years.
Can you be a little bit more specific about how we should see that or how you expect it, sorry, to develop during 2018? Is it a gradual ending or is it more dramatic, like a hockey stick effect that you mentioned there?
Of course, we expect that it will gradually reduce, if I put it that way. On the other hand, when you're running an oil refinery, of course, when you get up to a certain level of volume, that also will have an impact on the bottom line. You get that kind of scale of advantage when you're running oil refineries. There is some point of time where you really can start to see the impact. Clearly there should be a gradual improvement in 2018, and some point of time, there will be a little bit more coming onto the bottom line.
Right. If I may also, your guide here, a third question is around SEK 800 million in CapEx in 2018. Is that maintenance CapEx mainly, or is it continued facility build-outs?
I will say it's a combination of both. Of course, there is a base load on maintenance CapEx, but also due to the strong organic volume growth, we would like to secure that we can continue this interesting growth journey and have enough capacity. We will do the bottleneck in CapEx in some sites to be able to absorb the good underlying growth we have.
All right. Thank you very much.
Thank you, Oskar.
Thank you. Our next question comes from the line of Kenneth Toll Johansson from Carnegie. Please go ahead, your line is open.
Thank you. Yeah, I just have a question on the newer projects. We have discussed the new plants in Brazil and China, and also that CalOils is producing profits since this fall, so everything is moving in the right direction, and that really supports growth also in 2018. Since it takes some time to convert an old plant to newer products or build new plants, what are you doing in order to secure a good growth also in 2019, 2020, and further on? It was some time ago that you made your last acquisition, and so on.
Thank you, Kenneth. No, I will say part of the CapEx plan, why you saw SEK 810 million this year, and you will see more than SEK 800 million in 2018, is of course to secure that our existing factories can delivering on the growth we expect to see the coming years here, not only 2018, but also the coming years after that. Having said that, of course, we continue to look for interesting M&A, but there's always a need for two to be able to dance, to be able to close an M&A deal. We continue to work with our M&A pipeline in the same way that we have done over the last couple of years. There's nothing that has changed from that point of view.
At the Capital Markets Day, the head of infant nutrition said that you had invested so that you can make those infant nutrition products in more plants than you could before.
Yes.
That's really interesting. For the CapEx plan coming up now, do you also have any specific projects that you want to share with us?
No, there's nothing that is really dramatic in that sense that is like a greenfield. This is CapEx that will be distributed to different sites in the AAK production network.
Okay. Great. Thanks.
Thank you. Ladies and gentlemen, as a final reminder, should you wish to ask a question, please press zero one on your telephone keypad now. As there appear to be no further questions at this time, I'll return the conference to our speakers.
Thank you, and we would like to say thanks to everybody for attending this call. Thank you very much, and looking forward to see you soon.