Earnings Call: Q4 2017

Feb 5, 2018

Ladies and gentlemen, welcome to the AAK Interim Report 4th Quarter and Year End 2017. Today, I'm pleased to present CFO and Acting CEO, Fredrik Nielsen and Chief Marketing Officer, Anne Mette Olesen. For the Fredrik, please begin. Thank you very much. Hello, everybody, ladies and gentlemen. Please be very welcome to AK's present analyst conference call for the Q4 year end 2017. I'm sitting here in the sunny Malmo together with our Chief Marketing Officer, Annemite Olesen. Let's move to Page 2 and look at the agenda for today. We will start by reviewing our current performance, then we will go into some more details regarding our business area, and then that will be followed by an update of our company program, the AK Way, but also some important achievements we have done in the sustainability area. And by the end, we should have ample of time for questions. So let's move to Page 3 and look at the Q4. 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. And the EBIT achieved here was €471,000,000 versus €435,000,000 last year. We continue to have a good organic volume growth with plus 5%, so we are clearly winning market shares with a plus 5%. Sales, up 4%, and the 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 €300,000,000 As I said, the operating profit was an all time high of SEK 4.71, an improvement of 8%. In this result, we have been able to absorb negative FX translation impact of EUR 18,000,000. Euros So 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. EBITPA kilo, up 3%. Here, we continue to see an continued underlying improvement in the mix. This was partly offset by the ramp up costs for our greenfield investments and also negative FX impacted EBIT per kilo negatively. So 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. And 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 Q4, and that has impacted SEK 0.8 per share. But adjusted for the U. S. Tax, earnings per share improved by 12%. You can see our net debt, we have continued to improve since the Q3, but still it's slightly higher comparing to end of 2016. And that's mainly due to the higher raw material prices that we saw impacted our cash flow during the 1st and the second quarter 2017. So let's move to Page 4. If we look in the rear mirror for some seconds, we have now 28th consecutive quarter where we achieved a record high operating profit year over year. So let's move on to Page 5. In this quarter, we had a significant negative currency translation impact of EUR 18,000,000. EUR 12,000,000 of those was related to food ingredients and six was related to chocolate and confectionery fats. And based on the current currency rates, this will continue going into 2018. And it's mainly, as you can see on the slide, the weaker U. S. Dollar that had a negative impact. Then you can see also some minor changes with the euro and the British sterling and the Mexican pesos. But net net, I will say the main impact in 2018, at least for the Q1, will come from the U. S. Dollar. So let's move then to Page 6, 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, semi specialty volume growth, that was 7%, and that's definitely much faster than the underlying market. I will say the underlying market is growing 2.5%, roughly speaking, so good performance in the quarter. And also, if we look at the relative 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 4th quarter, and this is despite the ramp up cost for the new factories in Brazil and China and the negative FX. And we also still have some challenges in the chocolate and confectionery fats. And then in the down right corner, we have the EBIT year over year, and you can see we 8% improvement year over year. And if we look at fixed FX, it's plus 12% in the quarter. Let's move to Page 7 and look at the full year 2017. Volume wise, up 8%, organically, 5%, exactly the same as you saw in the Q4. So a very solid year from a volume point of view. Looking at sales, it's up $4,400,000,000 And here we, of course, see some impact from acquisitions, product mix and increased raw material prices. And then that is partly offset by a negative translation impact. Looking at EBIT, it's an improvement of 11%, and we reached an EBIT for the full year of EUR 1,786,000,000, which is a new record as well. And that result includes $19,000,000 in negative FX translation impact. Strong improvement in earnings per share, you can see plus 20%. And if I exclude the positive impact from the U. S. Tax reform, we are talking about +16%, so strong underlying improvement in earnings per share. The Board of Directors proposed 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 results on a share split 6:1. For the Annual General Meeting 2018, the nomination committee has also proposed Jirael Brinstone as new Chairman of the Board. Let's move on to Page 8 and look at the working capital days on a rolling 12 months basis. You can see a very stable working capital development. And 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 improved one day since year end 2016. The small improvement in the inventory partly offset by lower accounts payable. Let's continue on Page 9 and look at the raw material prices. We have started to see a modest increase in the raw material prices since the beginning of Q3, which will have an impact on our cash flow with 6 to 9 months delay. So we just like to remind you that the 10% change in all our raw material prices will have an impact on our working capital with SEK 300,000,000 up and down. So let's 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 Q1 2017, and that has had a positive impact here both in the third and the Q4 2017. However, as I just 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 1st quarters in 2018. If we then go to Page 11 and look at the cash flow, I will say we had a good cash flow in the quarter. And if we go a little bit more into the details, you can see that we have an EBITDA improvement of €23,000,000 in the quarter. Paid interest is significantly lower than last year, and that's mainly due to that we have continued to optimize the financing in a few high interest rate countries, and we have also temporarily benefited from the structure in the interest market. Paid tax, I think it's more you should look at the full year because this is a timing issue. We have paid a little bit more during the 1st quarters. And if you look for the full year, it's 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% to 28% going into 2018. Noncash item, that's mainly related to change in pension provisions and mark to market impact of our financial instrument. And then you can see a good improvement in our change in working capital with plus EUR262 1,000,000. And that's 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 €810,000,000 and we should expect that you will we will have more than €800,000,000 in investments for 2018 as well. If we then go to Page 12 and look at return on capital employed. The return on capital employed reached 15.6% on a rolling 12 month basis. And you can also see in the spot value, which is the gray line, there is a significant improvement over the last quarters. And this is, of course, due to the continued improvement in operating profit, but also to the lower working capital that we have seen over the last two quarters. If we then go to Page 13 and look at the business trends. And when we look at the business trend, we are trying to give you a short update on each geographical area from an AAK perspective. And the trends are very, 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 in technical products and feed, where we're seeing a strong improvement during the Q4. If we then start with the Nordics, which is an important part of AK, there is good trends in some of the business segments, but there are also some challenges, and that's mainly in the bakery and the foodservice segment. I really feel that we are doing the right activities in the Food Service segment in the Nordics, and we should start to see an improvement here going into 2018. Looking at the technical products of FEED, which is also part of the Nordics, we had some challenging quarters in the beginning of the year, and Q3 was almost back to historical levels. And now we have seen a very, very strong Q4, and that's particularly for our fatty acid business. If we then look at the Western Europe, the CCF business continued to develop nicely, but 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 specialties, but good progress on the more value added solutions. U. S. Continued to do really well. And I must say, particularly, the Dairy, Special Nutrition and CCF is doing really well. And also, the food service business had had a really strong year in the States. A few words about Cal Oil. I would say that it's developing absolutely according to plan, and I also started to contribute to profit since late spring. Central and Eastern Europe, improvements in both food ingredients and chocolate and confectionery facts. CAS continued a strong trend from the previous quarter, and particularly Russia seeing a very, very strong momentum for the chocolate business. Asia, good trends from Turkey in West to China in East, and we are ramping up the new factory spot on to our own internal plants. And then finally, Latin America, which is mainly Mexico and Brazil in the AK world, but also some other countries. Here, we see a good improvement in Latin America for the food ingredients and good performance as well for CCF, and that's particularly in Brazil, where we have a strong presence. And here, we're also ramping up the new factory according to plan. So 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. And in particular, if you just look at the specialties, sema specialties, where we saw a growth of 9% during the Q4. 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. But we see some also some good progress, particularly in Asia and Nordics and South Latin America. The Dairy segment was like more or less a copy and paste on the 3rd quarter, nice double digit year over year improvement. And in more or less all regions, we saw the same pattern. So we see a really strong momentum for that segment going into 2018. And then we have Special Nutrition, which is mainly infant nutrition, continued the same nice trend with good double digit growth, both for the aconino product range but also for the infat product range. So also a very, very strong quarter again for that segment. And then as I said, Foodservice, strong quarter in the States. However, a little bit weaker in the Nordics. And then as you can see as well, commodity volumes down 1%. If we then look at Page 15 and the organic volume growth, is just summarizing what I just said, 9% for Specialty, CMEC Specialty. I think that's a remarkable strong number. And then the total growth of 7% is really, really strong. And 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 4th quarter was the best ever for Food Ingredients. If we then look at operating profit per kilo, you have seen a more stable trend over the last 24 months. And 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. So if we look at fixed FX, operating profit per kilo improved by 4% in the quarter. If we then 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%. And 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 Oros during the quarter. This has implied increased production cost, increased supply chain cost, 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. And also, the backlog from 2017 will have an impact here during the Q1 2018. But we feel good after the Q1 that we should have this behind us and be back to more normal for the chocolate and confectionery facts and that 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. Then of course, also it's worthwhile to mention that we have absorbed ramp up costs for Brazil and China into the operating profit. Then I will also like to highlight to you that we now have signed our first commercial contract with Tropicao, our chocolate solution for hot climate markets. I will say this is a very important milestone for IK. And then, of course, by signing one contract that, of course, will not change the big picture, but it's 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. And operating profit per kilo improved by 3%, and this was due to the underlying mix continued to improve. Then you have an offset by negative currency translation impact, the production disruption costs and the negative FX. So if you just look at fixed FX, there was an underlying improvement of 7%. So let's take a look at the cocoa butter price on Page 19. And the cocoa butter price is still in the sweet spot between $5,000 $6,000 $5,000 So I think there's not so much more to say about the cocoa butter price than it's remained in the sweet spot. If we then go to Page 20, the technical products of feed, they have a very, 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. But also, the feed business developed positively in the quarter. And looking at EBIT per kilo, you can see an improvement of 29%. I will now hand over the microphone to Annemeth Olesen. Thank you, Frederic. So if you move to Slide 21, and here you can see the AAK Way, the company program that we launched a year ago. And we've just made a status a year into the execution of the progress there. And as you can see, overall, nearly all targets are on plan, and we even have 2, 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. Then 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 Within cost effective and flexible, we've established some global tracks with 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're focused on improving our processes both on how we handle products and customers, and that have also led to an improved process backbone within this area. If we look into the special focus areas and as Frederic shared, we've seen really good progress within Special Nutrition and also within the dairy plus. We're launching of new products, but also a really strong backbone on both the opportunity pipeline and also new product development. Within the Inovo products, which rely a lot to our food service 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. And at the kickoff meetings, we've hoped lately, we've launched this new strengthened approach to innovation. And lastly, based on the people area, we continue to strive to improve both the development on all our colleagues locally and also strengthen our approach to leadership, which is an important enabler. If we move on to Slide 22. Then as Frederic told, we will share just a progress within our CSR area. Within CSR, we continuously work to improve our practices. And how we do that is by benchmarking and monitoring our progress within the area to learn for how can we further improve. And one of the tools we've used is Ecobatis, which is a monitoring tool within sustainability performance and which actually covers more than 4,000 40,000 suppliers globally. So if we move to Slide 23, then 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 Equivadis 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. And now I'll hand back to Frederic. Thank you, Annemeth. And then I would just like to conclude this first part before we're going into the Q and A. And if we look a little bit for the future, we remain prudently optimistic. And I think that was all from our side today, and we are now ready for questions. Thank you. So the first question comes from the line of Karl Melleby from Nordea. Please go ahead. Your line is open. Yes. Hi. Thank you for taking my question. My first one relates to the CCX division you could elaborate on your expectations for Tropicao in 2018 following the signing of the first commercial contract in Q4. 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. And as we all know, in this industry, everything takes a longer time than you expect. So you should not expect any material impact going into 2018 from Tropico, but 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 Q4, a little bit challenging on volume as you saw here in Q4 and also a little bit lower on the profit side. That's what we expect. Our next question comes from the line of Kasper Blom from ABG. Thanks a lot. Two questions from my side as well. Frederic, could you maybe dive a little bit deeper into the 9% growth in semi specialty and specialty within the Food Ingredients. I mean, 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? And I mean, should we also expect 9% growth in the coming quarters? That's my first question, please. You're absolutely right that I highlighted dairy in infant nutrition and they had a really, really strong quarter. And if I look for infant nutrition, it was both for infant and for Aquinina. But we should also have in mind, of course, when we're ramping up the new factories in Brazil and China, they also impacted organic volume growth, and that also contributed a little bit to the plus 9%. Okay. But other than that, there was sort of nothing unusual in the number? No. There is nothing unusual in the number. More than that, it was extremely strong volume growth in Dairy and Special Nutrition. Okay. Fantastic. And then my second question, the new factories in Brazil and China, they are sort of being ramped up and has been so over the last 9, 12 months, I guess, I suppose. Could you give any indication of what the utilization have 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? Now 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 approval that 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. So I will say you start really, really low and then you're ramping up it gradually. But if I summarize it, I will say we have said after 2 years, we should be up at a more normal speed for 2 new factories. And I think we can still stick to that. Maybe China is a little bit ahead and Brazil maybe slightly behind the plan. But if you combine those 2, we are following the business plan and what we also communicated earlier. Okay. But if you need all these sort of approvals to begin with, is then fair to assume that the profile of this 2 year development is back end loaded, so to say? Absolutely. Okay. So a considerable larger contribution here in 2018 than we saw in 2017? Not, I would say, largely, of course, China started in March with the first tiny volumes in March 2017. So 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? And what have you actually done to improve things in the Nordic region? And then the second question is on infant nutrition. Does Frutarom's acquisition of Enzymotech, your partner, impact anything here? And 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 'seventeen that now will materialize in 'eighteen. 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 Enzymotech, there is nothing that will be changed with Frutarom as a new owner of Enzymotech. Thank you. Thank you. Before going on to the next question, I would like to remind all participants to press So the next question comes from the line of Oskar Lindstrom from Danske Bank. Please go ahead, Oskar. Your line is open. Yes. Good afternoon. Two questions really. I mean, 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 Q1, now 2018. What makes you so certain about that? Because we clearly see that the production is running now according to expectation. And also on the new raw materials that has received to Auris, we can clearly see that it's yielding back to the more normal level we have seen historically. All right. So you would say that already now, sort of halfway into the Q1, things have stabilized. So the impact should be less negative in the Q1 than it was in the Q4. Is that a reasonable assumption? You have a little bit of stock as well that you need to blend it together. So I will say that we will need the Q1 to be really back on track. But you have a path to your point that gradually towards the end the quarter, there will be a step by step improvement. Okay. And my second question is around the very impressive growth for Specialty and Semi Specialty Products and then continued very strong growth for Special Nutrition. So I mean, obviously, a very sort of positive mix change component. To what extent is this already apparent in, let's say, profit per kilo? Or is that something that's going to be more visible going into 2018 if we look at profit per kilo development? If you look at Food and Green, it's because I guess that's what you're asking around. Yes. Of course, why you're not seeing EBIT per kilo improving Food Ingredients is, of course, you have the negative FX in the 4th quarter. You are also absorbing the ramp up cost. That means that the underlying EBITA kilo is improving, but you have those two factors reducing the underlying improvement. Right. And 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? No, what you said, at least in the beginning of the year in 2017, I commented upon at least during the 1st quarters, we have a low double digit number in SEK1 1,000,000 in ramp up costs. And did that continue sort of per quarter during 'seventeen or? That was more or less the trend we have seen over 'seventeen, yes. And can you give me a little bit more specific about how we should see that or how you expect it, sorry, to develop during 2018? Is it sort of a gradual ending? Or is it more dramatic like a hockey stick effect that you kind of mentioned there? No, 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. So 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. But clearly, there should be a gradual improvement in 2018. And at some point of time, there will be a little bit more coming on to the bottom line. All right. If I may ask, I mean, you guide here a third question is around about $800,000,000 in CapEx in 2018. To what extent will that is that maintenance CapEx mainly? Or is it continued sort of 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, Johnny, and have enough capacity. We have. All right. Thank you very much. Thank you, Oscar. Thank you. Our next question comes from the line of Kenneth Poljuvan from Carnegie. Please go ahead. Your line is open. Thank you. Yes, I just have a question on the newer projects. I mean, we have discussed the new plants in Brazil and China and also that Caltech is producing profits since this fall. So everything is moving in the right direction. But if and that really supports growth also in 2018. But 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, 'twenty and further on? It was some time ago that you made your last acquisition and so on. Thank you, Kennet. No, but I will say part of the CapEx plan, why you saw €810,000,000 this year and you will see more than $800,000,000 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. And having said that, of course, we continue to look for interesting M and A, but there's always a need for B2 to be able to dance, to be able to close an M and A deal. But we continue to work with our M and A pipeline in the same way that we have done over the last couple of years. So there's nothing that has changed from that point of view. So 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. So 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, Waha. It'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 AK production network. Okay. Great. Thanks. Thank you. And 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. And thank you very much and looking forward to see you soon.