Earnings Call: Q1 2021

Apr 23, 2021

Good afternoon, everyone listening. This is the quarter 1 earnings call for AAK. We have the agenda available at Page 2. I will cover some highlights for the Q1 of 2021 And then some key events, business and financial updates, and we end it with some concluding remarks and the Q and A as usual. So with no further ado, let's get into Page number 3, some quick highlights on the Q1 of the year. AAK has continued a strong development into 2021. Of course, we are in a COVID-nineteen situation still in the world. That is no surprise to anyone. But really, we have maintained a good momentum. And if we look at our operating profit reported at SEK 551,000,000 for the quarter, it is up 11% at fixed FX and adjusted for comparable items. So really a strong start to the year. And this came from a good development within Food Ingredients with regards to our high end solutions like infant nutrition solutions as well as a very positive development for our plant based oils and fat solutions into the plant based food space. We were on the negative side, of course, still having a volume impact on Foodservice, but that was very much expected. Shocker than Confectionery, Fats, we continue to grow nicely with some 13% year on year volume growth and a good operating profit as well. So all in all, a good quarter, a good start of the year for AK. With that, we head into Page number 4. A few highlights. So in this quarter, we announced that we are investing for the future. Big Idea Ventures have started a fund, new protein fund, which is targeted towards accelerating helping start up companies developing new solutions alternative for meat and dairy products. And this is, of course, an interest for AK. So we have invested in that fund to get Closer to these companies help accelerate these companies bringing our expertise to them, but also to collaborate with ingredient partners and really players that help develop better solutions into the food space. So a very important step for us to do that. We also continue our focus on sustainability and investing in better supply chains, better sourcing and help achieving a sustainable supply chain as a whole. We have invested in satellite monitoring in order to support 0 deforestation in our supply chains. Our cooperation here is together with Earth, Creizer and Sotelligence. With that, let's get into the business areas, starting with Food Ingredients on Page 5. We have had a good volume growth, increased volume and good earnings growth as well within our Specialty Solutions within this space, particularly for infant nutrition as well as our plant based solutions. And it's been a strong growth across the board in plant based, but really standing out is plant based dairy. Foodservice volumes were, as expected, significantly impacted by COVID-nineteen, being down 20% year on year. So in that context, we have reported an operating profit, which is down 4% versus last year. But if we do the math on fixed currency or local currency and Foodservice, the growth is actually 15% in earnings on the remaining segments in Food Ingredients. So a bit of a mixed bag, but really the underlying performance in the bigger segments of Food Ingredients is really moving ahead and had a good quarter. Moving into chocolate and confectionery fats on Page 6. Very promising. We continue to grow. Our volumes are up 13% year on year, which really shows the strength of AK. As I have commented earlier, we have are Delivering to our customers, we have a strong foothold in this industry. And with that, we are growing our volumes. We're growing our operating profit reported by 5% and even 18% at fixed FX. We still see a bit of competitive intensity in the market with higher raw materials, causing customers to be a bit more short term in how they look at the market, when they want to lock in volumes, etcetera. But we are dealing with that and we're used to that. And again, promising that we see that volume growth. And if anything, the competitive intensity is slightly lower at the moment versus quarter back. So all in all, we are showing strength, and we are securing a profitable growth for shop build and confectionery facts. With that, let's head into Technical Products and Feed. We have seen a good contribution also from this business area with good cost control and continued high performance as we crush in our crushing operation. That has really led to the operating profit being up by 16% year on year and also the operating profit per kilo is up 16% year on year. Just a reminder, in Q2, we typically do maintenance stop. And for this quarter, we expect to do a slightly longer or more extensive maintenance stop, which impacts the number of production days compared to last year, so slightly lower or fewer production days compared to last year. With that, into Page 8. Those of you who follow AK know that when raw materials go up or down, it also impacts our working capital and with that cash flow. So with the increased raw material prices we've seen during the latter part of last year, it has also impacted now our working capital, and you see that in this picture. And we expect this to continue also in the Q2 and potentially into the Q3. So reminding you all that there is a 6 to 9 months delay or lag before higher prices or lower prices make themselves into our cash flow net working capital. With that, a few comments on return on capital Floyd, we are rolling 12 months now at 14.4%, given our earnings and the capital employed. And we target continued gradual improvement for the future. Looking at Page 10, our net debt structure. We are decreasing slightly our net debt then our net debt to EBITDA is now at NOK 0.93. Continue on to Page 11. We just to remind us, I spoke a bit about FX exposure or rather reported our business areas with and without FX or fixed FX. We are exposed to U. S. Dollars, euros, British pounds and other currencies, but really the dominating one is U. S. Dollars. So that's why we've had a negative FX impact in the last part of last year as well as the beginning of this year, and we expect it to be in Q2 and potentially Q3, depending on how currency develops as we go forward. With that, we're moving into the last Page of this presentation, Page 13, concluding remarks. We do offer plant based healthy value adding oils and fats solutions based on our customer co development approach. We're continuously focusing in our strategy on our portfolio solutions that they are with a good impact for both people and the planet. Despite the short term uncertainty that we see, there is no reason to adjust our view on the trends, the long term trends that we see in our markets. And therefore, we remain prudently optimistic about the future, and we are committed to making better happen following our purpose in the future. So with that, we conclude the presentation. A strong start to the year, and I am happy to take questions from the audience. AAK. AAK. We have a question from the line of Alexander Jones from Bank of America. Please go ahead. Your line is open. Thank you and good afternoon, Johan. Three questions, if I may, please. The first is on your OpEx levels. Looking at the P and L, the remuneration and other expense lines look particularly low this quarter. Could you just give us a bit of an explanation for that and How we should expect that to evolve going forward? In terms of the second question on chocolate margins, clearly, there's some FX pressure in the chocolate margins this quarter. But is there anything else that you would call out in terms of compressing those? How much did competition weigh on those? And then the third question would be around the volume growth in chocolate. Could you just give us an idea from your perspective acknowledging the visibility is low around the sustainability of the volume growth that you saw in the Chocolate division this quarter? Thank you. Thank you, Alex. Good afternoon. And first of all, with regards to the cost side of things, yes, what's lower? We are still operating there are a few things impacting it. To some extent and in parts of our world, FX has an impact, of course, on cost side as well as on sales side. But we also have we're running low on SG and A and a few other things. Part of that will stay and part of that will come back, as we know, with travel entertainment. And then we have our savings program or optimization program that continue to yield a better position for us. So there are a few things impacting that. And if we compare now quarter 1 to quarter 1, then of course, we are now in a situation where we're reporting a quarter with AAKCOVID and with all the actions we've taken, including some of the by design savings on not traveling and so forth, comparing to a quarter which was pretty much a normal quarter last year. On our CCF margins, yes, of course, as reported, FX has an impact in CCF as well. So if you flip it around, we reported operating profits of 18% at fixed FX. Of course, FX weighs down on the margins. But as I called out as well before, when guiding a bit for Q1, we saw that there was a bit more competitive intensity on closing yearly tenders. And of course, the higher raw material prices focus our customers on the cost side of things and tactics around that. So yes, there is a bit of pressure. But at the same time, we're showing our strength in the market and that we are competitive and also securing our volumes, securing growth. And with that, we try to keep a balanced approach going forward, not giving away too much, but at the same time, defending and growth of the business. And that brings us in, I guess, to the forecast going forward. I have repeatedly called out an uncertainty with myself and from the business that given that we in quarter 2, when COVID came, we saw a hit on chocolate and confectionery volumes or in our case, ingredients to chocolate and confectionery production. And with that in mind, it's been it's impossible to kind of look away from the uncertainty over how volumes come back and how Christmas was going to present itself, how the consumption was going to be over Easter and so forth. And what we can now conclude is that we have had a stable and good sequential improvement of volumes in TCF from quarter 2 and forward. So Q3 was better, Q4 was better, and now we're seeing a good volume growth year on year in CCF, which is promising. To some extent, that has a market dynamic into most of the markets where we or all showed volume growth, but a bit of different dynamics in different parts of the world. For example, Eastern Europe with Russia coming back strong. And there is a bit of mix in this as well impacting our margins because there is a bit of different mix between the high, high specialty fats and the more semi specialty fats distribution in some of these markets. So there is a bit of kind of rebound effect impact in volume as well as margin as well. So call it a bit of a mix effect into that. But all in all, it's been a good progress and slightly better volumes than I think that I expected going into the quarter. Great. Thank you. Our next question comes from the line of Alex Sloane from Barclays. Please go ahead. Hi, good afternoon, Johan. I've also got a couple of questions, if that's all right. Just firstly On the cash flow dynamics, I think you've been quite clear in terms of raw material inflation having a drag on working capital. You also referenced the increase in receivables being in part driven by longer payment terms on Specialty Solutions. I was just wondering if you could sort of elaborate on that perhaps. And is that a trend that we should expect to endure? That would be the first one. And then just secondly, just in terms of Special nutrition, within the statement, you talk about a bit of a mixed performance, so growth in the higher end solutions that you're selling there, but some softness in the semi specialty Solutions. I just also would be interested in your thoughts in terms of the outlook there. Thanks. Thank you. Yes, let's start with cash flow. And yes, so for example, good volume growth, as you've seen, in chocolate and confectionery And shockers and contraction effects is, to a large extent, being sold to global multinational players with longer payment terms in general than some of the local markets around bakery and other solutions. So with that, you get that mix. So no drama and not a megatrend, but rather an effect of the growth in that segment with regards to the cash flow impact and accounts receivables. And if that's okay with you, then I'll go to Special Nutrition question. And yes, as mentioned, a bit of a mixed bag. So in essence, you can say that there is a strong demand and especially in China for premium products. And we have a good position on premium products for multinationals as well as for our local Chinese customers, examples of that being organic infant formulas, for example, and good growth for our product in fat, which is higher end infant formula fats. But on the other hand, lower demand, especially to multinationals outside China for same specialties. So that's why there's a mixed bag and why the profit kind of holds up in spite of a bit of pressure on birth rates and other Thanks. If I could maybe just squeeze in one more, just final one. Just in terms of The competitive intensity in CCF, in terms of what's AAK. Driving that, is that at all related to the lower cocoa butter prices where I think historically you've sort of talked about a kind of A sweet spot range where we're maybe towards the lower end of that? Or is it related to other factors? It's 2 other factors, I would say. There is always a link, of course, to Concobar Enterprises, but we are still in that range. So that is not The reason, it is more as simple as we are a select few that can operate with specialty solutions. So these are specialty solution, high value added solutions, but we're not free from competition. And it's as simple as that. So a bit more well, more people don't want to eat the cake, and we are defending what can and we have a strong position. And with that, we get volume and we continue to take new contracts in Shoppers and Confectionery, but with a bit of squeeze on the margin and also imagine the significant uptick in raw material prices, of course, puts any purchase for any customer almost in any industry focuses a bit on what we purchase. So I think it's nothing more, nothing less. Thanks very much. AAK. We have a question from the line of Oskar Lindstad from Danske Bank. Please go ahead. Your line is open. Good afternoon, Johan. Two questions from me. The first one is, you mentioned here that higher raw material costs are impacting how your customers act in terms of purchasing, etcetera. Do you also see any impact on end consumers consumption of these products given the raw material cost increases? That's my first question. Yes. Thank you. Now I think it's more in this case, it's a lot let's state the obvious. The raw material prices are coming up, and we have a model for that. And we're obviously repricing So and then as we go further downstream, there is, of course, for any supply chain, the balance for the customer selling to the end consumers, where do we draw the line? Are you increasing prices in retail, in restaurant, etcetera? So we do not have on our end a perfect visibility on that. But we cannot say that we have seen a significant impact so far, but I think this will be a general answer. If our customers decide to genka prices significantly on products where customers can choose not to buy, that's a risk. But that's not typically what's happening across the board. So I cannot say we have seen a lot of that. And as you see in volumes so far, we're now still holding up well, I would say. Right. And following up on that, I mean, in the past, when we've seen rapid and significant raw material cost increases, which you have passed on to your customers, have we seen volume impacts of any meaningful size for you? We haven't really done that. We are at You could also flip it around and say, in chocolate and confectionery fats, if you see, it could be an even more reason why you should buy more or less of a cost the solution where you might step away more from a premium kalkwabutter solution or so. But and that could also have a mix shift within us with some customer choosing a similar specialty versus high end. So it can be a bit of a mix shift, but we're still operating again most of what we sell end up in food or chocolate solutions or skincare solution, which is again helped by COVID. So all in all, usually not a big drama around it. But of course, there can be incremental ticks up or down. Yes. Thanks. My second question is around return on capital employed. I mean, It's not come back from the lows that you had at the depths of the pandemic, but you're still Below where you were a couple of years ago and that's below where you were a couple of years prior to that. I mean, this sort of I don't want to call it a trend, but the lower return on capital that you had despite growing EBIT quite impressively. Is that something that you can foresee turning around and sustainably raising return on capital levels from where you are now as you continue to grow? Not really. I think, well, 15% plusminus is a fairly good space to be. And we have not set a target, a financial target around growing that for, let's say, 20%. So what we forecast and what we task ourselves with is to grow it a bit, but we also want to maintain good momentum for future growth in new CapEx organically, but also allowing us to make acquisitions when those materialize. So that's the guidance we can give. I don't see it as necessarily low if you compare it to it's slightly lower, but but on the lower return on capital. Right. I see your point. Thank you very much. Those were my questions. Thank you. We have a question from the line of Kari Ryinsdas from Handelsbanken. Please go ahead. Your line is open. Yes. Thank you very much. Hi, Johan. I had a question on the comment that you made in the report saying that the plant based Dairy volumes or deliveries increased by double digit rates. Could you help us to put this into proper context? So I. E, I don't know in which way, but if you can help us quantify the whole plant based opportunity, both in terms of dairy and meat, That would be very helpful, either rank it with some of your other categories, just to give us a sense of that a ballpark sense of that, how big this market is for you today? Yes. And with the risk of repeating myself, and you know the answer, I guess, we're not repeating the segments separately. So and that we do that and we'll continue to do it like that. When that becomes significantly bigger or a significant part of our earnings than we will report it in more detail. But it is growing, as we said before, from a low base, but that base is now getting bigger. With regards to how it's growing, plant based dairy, as far as I can see, has been a slightly maybe easier way forward also through COVID, with products a bit more mature, a bit more volume play around the world, where some of the plant based meat projects want to go out through a restaurant or want to launch it maybe in a different setting compared to the one we have today. So slightly impacted maybe the new launches, but we expect that to really come as a catch up effect when COVID fades away with regards to restrictions and get restaurant eating going. So both segments grow. We have a good traction with new projects, significantly increasing our number of customers, not only the volume and the EBIT generation, but also the number of customers, the importance of AK in their products and so forth. So we see good momentum in this. And the investment, as I mentioned, also in the New Protein Fund is another example of how we are building strong relationships and try to accelerate the growth. So I will not comment any more specifics on the Q1 with regards to that. But what I can say is, if we start to see the world changing from animal based food into alternatives. This is a massive volume opportunity for AK and other is in this for plant based solutions, for potentially new solutions going forward around lab grown and fermented solutions. So a really promising opportunity, but now I'm speaking in the 5 to 15 years time frame. Of course, interesting in the short term, but we're starting alternative protein fund. How should we, to revisit the first part of the presentation? So you maybe already commented on this, but any additional color that you can You're behind the decision to invest into this and that would be helpful. And is it a strategic shift? Or is it a sort of dip your toe in the water kind of move? I will call it both. It's certainly keeping our close in the water, keeping close to the development. This is the fast growing industry. This is an industry where you see lots of start up, lots of investments. FoodTech is really something that is on the agenda today for many investors, for many companies in our industry. And many of our current customers, the ones with a long history in the food space, they are investing. They are making new product lines coming on board. As well as we see start ups Around the world, new start ups on plant based meat, plant based dairy, different types of alternative solutions. So and we are already in the space. As you know, we are already there as an expert and specialized on plant based oils and fats. Now we want to get even closer to the development. One way of doing that is to invest in this new protein fund, where we will be part of Accelerator programs, allowing our It is to flow through to certain companies, but also allowing us to screen for new technology and allowing us to get a fast forward opportunity to make further investments when when appropriate, but also to learn about what's moving and what's not moving. So it's certainly strategic. It's certainly a way of tipping our toes in the water, but also to build strong relationships with other fund partners also being significant players in the food ingredient space. So there's many things that we want to get out of this, but the main reason is that we strongly believe in the future for meat and dairy alternatives. Right. And then maybe just a final follow-up on that front because there are some companies that are both in the best clause directly competing with you and then they also have started to invest Also organically in the alternative proteins, so something that I don't know. I haven't looked into it more closely. But what are the They have the customer relationships, so they have that. But on the sort of the back end side of things, what are the strengths and synergies that they have from their sort of oils value chain that they can then utilize in when they expand into alternative coatings. Do you have any thoughts on that? What do you mean by other companies or for AK? For those companies that already have started to sort of expand into alternative proteins. So the other companies that you track can see, so I'm just well, we can talk about AAK. So what do you believe Are the AKs strengths and assets that could be helpful if you were to decide to Step into alternative proteins in a more meaningful fashion. Yes. So I mean, our obvious strength is that in order to create a product, a plant based burger or a plant based dairy drink, many, many of the Food Solutions, we are having on the table today and that we will have tomorrow, will include fat, fat for structure, fat for energy, fat for taste, etcetera, etcetera. So fat plays a very important role in many Food Solutions as well as in Plant Based Food Solutions. So we have we are there, right, as an expert. And this is all about how can we get more healthier Fats on the table, a better mix of ingredients into it, how can we blend, how can perhaps structure and taste and so forth, particulation, etcetera, whatever we can do to the structure, the taste and the health profile of these products that are, of course, having a positive impact on also from an environmental point of view. That is where we come in today. That is where we will come in going forward. So our obvious strength is our expertise around the functionality and the need of oils and fats into Food Solutions. And with that, you bring fat to the protein and with the other ingredients you create the food, whether that is then a plant based meat solution or plant based dairy solution. Okay. What I'm sort of trying to get at is that is there Instead of having a fat silo and protein silo, if you would have a company that would do both, what kind of magic can you create by Combining protein and that and that's already early in the process and in the same company. That is, of course, possible like it is already in food today. You can argue in some solutions in chocolate. How far do you go? Do you want to be broad? Do you want to be special? That is a strategic dialogue we're having. Where do we draw the line? Are we entering into a partnership with a few to make the best play possible or do we want to own the space completely on our own? As of now, this is a way for us to continue to and the investment in the new protein fund is one way of getting closer to these companies. And then we have to decide whether we make investments to broaden AK or whether we stay where we are and focus on being the go to player, which we are today for a really strong solution, including other ingredients, not only protein, but the other ingredients for taste, flavors and fragrances, etcetera, that can make a really strong play into the plant based food space. All right. Thank you very much. Thank you. Our next question is a follow-up question from Alex Sloane from Barclays. Please go ahead. Hi, Eirhan. Thanks for the follow-up. Yes, I was just on in your appendix, you obviously show that the raw material prices and Talk about levels for palm oil and rapeseed oil that are unusually high. I appreciate you don't have a crystal ball to necessarily predict the future on these oils. But in terms of the drivers behind the run up that we've seen, I'd be interested in your view as to how much is just kind of cyclical factors, weaker dollar and reopening versus maybe more structural factors in terms of kind of increased demand for these oils from Alternative Industries. Yes, that would be great. Thanks. Yes. With the risk of being a long We can certainly take a few things offline in case of more interest, but there are a few things impacting. And I one, I don't have the crystal ball, but don't have all the pieces of the puzzle, but I'll give you a few. So for example, a bit due to COVID, there is bit impacting supply, meaning that the possibility to get workforce into Malaysia, Indonesia and so forth is to some extent impacting, so there's, call it, a bit of disturbance into the supply chain and supply. But also you have with regards to palm and biofuel, there are dynamics between subsidizing for biofuel versus food, etcetera, that also has an impact, which we are not controlling ourselves. And then you have a general, call it, impact from volume flows and dynamics, partly linked to COVID and partly linked to just normal business dynamics. So there are a few things impacting it due to that. And then when you look at this going forward, there is an expectation that prices will come down, but that has been rolling a bit. So at the moment, we're moving we're sliding sideways. But for sure, historically, when prices have gone up steeply, they also start to come down eventually, usually slower pace. But again, I don't have that crystal ball. Okay. Thanks. There are no further questions registered. So I hand back to the speaker. Thank you very much. Thank you for listening to the AK quarter 1 earnings call for 2021. Thank you for your questions. And if there are no more questions, then we end it for today.