AAK AB (publ)
STO:AAK
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
207.9369
340
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
AAK AB (publ)
You don't have any saved screeners yet
Welcome to the AAK Q2 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Johan Westman; and CFO, Tomas Bergendahl. Please go ahead.
Thank you. Good morning, everyone, and welcome to the AAK Quarter 2 earnings call. As you heard in the presentation today, will be run by myself as well as our CFO, Tomas Bergendahl.
On Page 2, we have the agenda for today, which is as usual highlights for the quarter, some key events business and financial updates some concluding remarks from myself and then we end with a Q&A session after that. So with no further ado, let's move into the updates, start on Page 3, overall business.
We continue to deliver another strong quarter, strong year-on-year growth in earnings despite somewhat softer volumes. I'm really proud of the way our organization delivers in with our strategy and that we also can adapt and manage a dynamic market environment. And the second quarter shows that like the first quarter this year did as well.
We see operating profit being up 36% year-on-year at fixed FX. We have seen volumes down largely due to our optimization program in bakery, as we have talked about before, and also our controlled exit out of Russia. If we look at the volumes, excluding Russia, our exit from Russia volumes were down by 7% year-on-year. But keep in mind, we also drive a strategic agenda. We're just focusing on delivering more high value-added solutions. We're optimizing our productivity internally, et cetera.
So having somewhat lower volume, but still being able to drive margin expansion is still within our strategic path forward towards our 2030 aspiration. The strong earnings growth was really driven by continued margin expansion. We focus on specialty solutions, productivity and price management, a very volatile raw material markets over the last 1.5 years. and the organization has done a really good job in managing it, both in terms of securing supply in, but also managing prices accordingly.
Very happy to see also that we get good traction now in net working capital coming down after the reduction in raw materials. So this quarter, strong earnings topped up with a reduction in net working capital leads to also a strong cash flow and also improved return on capital employed now up to 15.9%. So all in all, a strong quarter with profit growth as well as margin growth in terms of operating profit per [ kilo ].
With those initial comments, let's move to Page 4, a few key events for the quarter. We continue to invest for future food solutions. We are committed to advancing ourselves in terms of innovation and looking at opportunities to produce more sustainable food in the future. One of these initiatives from AAK is to invest in the Big Idea Venture's Protein Fund II. We were also in Protein Fund I. And this becomes our -- one of our ways to be staying close to new technology, new food solutions.
And then when we see this maturing over time, we will also continue to invest further. We're also focused on doing everything that we can in order to improve the profile of the company and our delivery towards reaching a fully sustainable supply chain in Scope 3, we're investing in a climate performance platform in order to track trace and improve the way we operate and the way we source materials.
As well and linked to this, we engage ourselves and continue to engage ourselves in moving to a fully sustainable supply chain of palm. We are committed to deliver 0 deforestation in our supply chain by -- over 100% verified deforestation free by 2025. And we continue to really engage in order to move the palm oil supply chain to be fully sustainable because palm is such an important ingredient to feed in the world, a population that is growing over time and where we know that the future of food will be finding a better way of eating a better diet where that includes most likely reduction of animal-based food and an increase of plant-based food alternatives as well as new ways of producing food with a minimize in the use of the land to deliver this.
So all in all, AAK is very committed to driving a sustainable supply chain of Food Ingredients. With that into the different business areas, starting with Food Ingredients, Page 5. We have strong results in Food Ingredients for the second quarter as well. This is driven by improved margins, mainly due to a focus on our high value-added solutions in the product mix like infant formula fats and so forth, also continued productivity as well as price management, and this will also have our optimization program for bakery.
So all in all, strong results. Volumes are down mainly due to our exit from Russia and the impact of the [ Bakery ] optimization program and to some extent, weaker consumer demand. But all in all, a very strong result with operating profit per kilo up 63% at fixed FX, and the result is up by 53% of fixed FX.
Moving into Chocolate & Confectionery Fats on Page 6. Volumes decreased in the quarter by 15% as a result of our exit under Russia, also negative impact of the very unfortunate and tragic earthquake in Turkey, where that has an impact on our volumes. We have good volumes in our business in Turkey for Chocolate & Confectionery Fats ingredients, but also lower and weaker consumer demand in general.
So all in all, low volume. But despite low volume, we have delivered a very strong earnings growth. We are growing our operating profit by 18% at fixed FX, and operating profit per kilo is up 39% at fixed FX. And I repeat, we have a strategic agenda, and I'm proud of the way the organization lines up to this.
So we focus on high value-added solutions. We actively disconnect some products where profitability is not good enough. So part of this evolution is, of course, letting go some volume. So volume reduction per se, given the market condition that I just talked about, is not a big issue.
Obviously, I would love to see slightly higher volumes and so forth. But in the long run, we are committed towards delivering on our aspiration 2030, and we see a good opportunity for AAK to grow with the market and then some in the long run. But again, our strategy is about focusing on high value-added solutions and driving margin expansion.
With that, moving into Technical Products & Feed. Another strong quarter. We have, in a historic perspective, delivered very strong results and growth in earnings over some time. So even if you see a year-on-year lower volume, year-on-year slightly lower operating profit. We have still an operating profit per kilo margin that is up by 6%.
So call it, a very strong quarter. Last year's quarter, quarter 2 was also a strong quarter. So in that context, another good quarter for Technical Products & Feed. The lower volume really comes within the Technical Products area, where Feed was flat or fairly good. The volume reduction is then linked to lower consumer demand on some of these products like candles and other technical products using plant based [ and such ] ingredients.
So we link that more to the consumer demand profile, but again, a strong result as a whole for this business. And with those comments, we hand it over to Tomas for some more details on our capital profitability, et cetera.
Thank you, Johan, and good morning, everyone. Continuing on Slide 8 and moving straight into the cash flow development for the quarter. As you can see in Q2, we continue to see the positive underlying trends that we initially saw in Q4 and also then continuing in Q1 with a strong cash flow this quarter, driven both by a reduction in working capital and solid earnings about half and half.
The quarter generated a positive operating cash flow of SEK 1.6 billion. And the free cash flow, as you can see SEK 1.4 billion, which is significantly higher than in Q1. The reduction in working capital was SEK 1.1 billion. And year-to-date, we've seen a reduction of SEK 1.4 billion. And as expected and as communicated previously, we see that lower raw material prices as well as improved inventory management has yield a positive effect on our inventories and our quarterly cash flow.
We saw a positive contribution from inventories, receivables as well as payables in the quarter. Other operating capital, which is negative includes accrued and prepaid expenses. And there is a timing aspect of this, it moves and varies quite a bit quarter-to-quarter. Interest costs increased quarter-over-quarter, mainly driven by higher interest rates, but decreased from Q1 as our debt level is reducing as well. And the average tax rate was 24% in the quarter.
CapEx, we spent SEK 246 million during the quarter. And as previously, it's related to production improvements, debottlenecking capacity optimization and so forth. And the guidance that we give for '23 is that will have a spend of about SEK 1.2 billion. Other noncash items had a negative effect as in the previous quarter. And this is, again, driven by unrealized hedging contracts of raw materials mainly.
And during the quarter, as in Q1, the valuation of unrealized hedging contracts had a positive impact on EBITDA offset by negative effect from realizing hedging contracts and inventory revaluation. And this is all as a result of our back-to-back hedging model. So the net P&L impact of these two items is roughly neutral. But in the cash flow, we don't see that being deducted to get from the EBITDA down to the free cash flow.
Between Q4 and Q2 -- Q4 '22 and Q2 '23, we have successfully decreased our working capital by roughly SEK 2 billion and this is mainly due to the decline in raw material prices, as discussed before. But we've also, over the past 1.5 years, made significant progress in how we manage our inventories and net working capital in general and remain committed to maintain this momentum going forward as well.
Moving on to Slide 9. Return on capital employed reached 15.9%, as Johan mentioned before, and this is slightly higher than the last peak we saw in December of '21, where we reached 15.6% before it dropped to 14.5% at the end of '22. So good improvement there as well.
On Slide 10, the net debt-to-EBITDA ratio reduced further in the quarter down to just about 1, down from 1.36 in Q1. And down to about half from the peak we saw by mid-'22 of 2.03. And we're now below the level that we were at before the increase of raw material prices in mid-2020. And the improvement is, of course, driven by strong profit development as well as net working capital reduction and resulting in a net debt position that is lower. Johan, back to you.
Thank you. So on Page 11, just some concluding remarks before we open up for questions. To sum it up, the continued strong performance driven by predominantly margin expansion resulting in strong operating profit growth. This is linked to continued sales of specialty solutions, value-added oils and fats ingredients to our customers as well as internal focus on productivity and improvements as well as strong price management.
So volume decline, mainly linked to on track with the compliance towards our -- towards the EU deforestation regulation, which is a good move by policymakers, which we like to really focus on how to get fully sustainable supply chains.
The EU regulation does require sub administration and proof points in order to comply fully and AAK has developed a good action plan for how to do that, and we'll come back to that later. Mindful of challenges ahead and a very dynamic business environment still in the world. We are optimistic, we are prudently optimistic about our ability we believe we have shown in the past that our organization is very agile that we can cope with the dynamic business environment and we stay focused on delivering our 2030 aspiration.
That is where our strategy -- that is what our strategy is targeted towards. So with that, I open up for questions.
[Operator Instructions] The next question comes from Simen Aas from DNB Markets.
A few questions. I'll do them one by one. So the first one here on the volume side. So they came in a bit below expectations out there. But how should we think about volumes going into H2 here? Will there be an impact on the bakery optimization? If I'm not mistaken, the Russia effect should be out. So how should we think about that going into the second half?
First of all, maybe one reminder there when looking at volumes, look at it a bit sequentially, because the first quarter and the second quarter is typically from a seasonality point of view, the lower quarters. So in relation to estimates, we are not that surprised if you look at Q1 to Q2 quite aligned, but estimates were a bit higher than that. And so maybe take a look at that going forward. With regards to the impact, as you mentioned, the bakery effect will have a fading down effect in Q3, Q4, but we will not see the end of that effect until the end of quarter 4 because we continue to produce during last year before we moved all the volumes and closed down the contracts. With regards to Russia, you are correct, that was a controlled exit and very limited impact after Q2.
Okay. That's very helpful. And just, Johan, on the plan you have for the deforestation regulation. You said that you have a plan to reach this target. Do you expect any financial impact or higher costs? Or how should we think about the implementation of this plan?
Yes. So first of all, I mean, we are on the same page with EU, and we are hoping that more policymakers will join the line of act -- taking real actions towards a fully sustainable supply chain of important raw materials. As you know, we have already targeted before this on fully deforestation-free supply chain. So -- but then EU has chosen a way to how to prove this. And then it becomes a bit more cumbersome because they are demanding that we can show geolocations linked to where the material is sourced from. And that is a bit cumbersome, probably more than you would have needed to. But nevertheless, now that is what it is. And we take charge on how to do that. And what we will do is that we will in-source some of the components that we buy directly.
So by more volume of less refined oil and then refine it ourselves within EU and that we will do with tweaking our existing capacity as well as investing in certain processing capabilities. We will also use, of course, supplier engagement. We have already good traction there to get some help from our suppliers to document and verify it so that we can just get the verification of the things that we're already buying. And then we will also do some reformulations together with our customers, where we can use another ingredient, be that palm oil within a slightly different spectrum. We can still buy from existing suppliers and/or using alternative raw materials that we already have in our portfolio to make an equally good product but taking away the issue of documenting how it is imported into EU.
So the combination of these three is what we are targeting to do, and we already have done a detailed analysis internally, and we have made an action plan. And we're confident that we will be able to deliver and so forth. There will be bumps on the road, and there could be a temporary impact depending on how this is implemented. We have to wait and see a little bit on how EU and the different countries are implementing the, call it, government body to look after this and so forth. But we are on top of this plan.
Yes. Okay. That's very, very helpful. And just one final one here. So obviously, you talked about the volumes being a bit below, but now you see that the profitability per kilo was very strong. So just to get a feel for how we should think about this going forward? Is this kind of the new level in AAK now? Or is it anything that we should be aware of on that side just to make sure that we don't do any mistakes going forward as well.
Yes. And not to sound too conservative or prudent. We're proud of being able to drive margin expand. It's clear that it's in our strategy. It's clear that it is in our tone of voice, value over volume, if you will. But of course, there needs to be a balance. And I think we have put out an ambitious 2030 aspiration and one could argue we're well on our way. But I think this should also be seen in the light of competitive landscape and so forth. So of course, if we are forced to follow competition and so forth, depending on where they move, there might be a pressure on margins in certain times. But we're quite confident that, overtime, we will deliver in the combination of price management or focusing on higher value-added solutions and targeting our portfolio towards that. So obviously, it's been a strong move in EBIT per kilo over the last quarters, but that should be seen in a longer-term perspective.
So I'm not guiding they will go down. I'm not saying that they can grow with another 40%, 60% in the next quarter. I'm just saying that we're operating in a business environment where we're not the only one. So I hope that we are able to, as an industry, showcase that this is the level and then up because our industry is still somewhat low-profit, low-margin business versus other ingredients for no good reason. Oils and fats are key ingredients in food and the other applications. So our ambition is to continue to drive margin expansion, but we have to be cognizant of the fact that we operate with competitors around the corner as well.
The next question comes from Alexander Jones from Bank of America.
I'll go one by one as well. And maybe I can start on price management. You mentioned this as a sort of factor in helping the margins. Can you talk about your ability to continue doing that and sort of [ Walmarts ] continue to deflate and maybe some of your customers have pressure even from their customers on reducing pricing? Are you seeing any pushback from them or indeed from your competition starting to change their pricing behavior?
Yes. I mean, first of all, what is it that we are doing, what we can impact is our focus. So we are driving an active agenda on portfolio management, price management, being professional in how we operate; and analyze our business going through plant by plant and looking at what type of products we run; the profitability by product; making sure that we don't build capacity for low-margin business, commodity type business but really targeting to fill our plants with the right type of business. So that is an ongoing piece of our strategy that we launched some years ago. So our organization is targeting that and that we can impact ourselves. Then when you move into the external world, of course, you have a customer on one side that should always ask for lower prices, longer payment terms, we would do the same. And that's a constant pressure that we see now, and we've seen it before, and we'll continue to see it again. But I repeat, we are not as an industry and AAK is not yet on a very, very high margin.
So I think we should dare to stay in there because we need to have a decent margin to continue to develop new products and invest for -- in our capacities to deliver, and that is something our customers in the end will appreciate. And then, of course, you deal with competition, right, and that's where sometimes you have to follow a bit. But that is how we target this. And the result that you see in AAK is the combination of doing the right things internally and being able to push through on key ingredients. But I wouldn't put too much drama behind it either. Look at our absolute EBIT margin. It's not staggering in that way. It's still room to improve.
And on premiumization, you clearly talked about that as another driver this quarter. Are you seeing anything in the outlook in terms of down trading or reformulations from your customers that mix will be less positive going forward? Or are you confident that sort of the internal changes and the offerings you have to the market can keep driving that?
Yes. So what we -- the premiumization trade -- trend has been there for long. And then over the last four years, we've seen something which we haven't seen before. We have seen COVID. We have seen rapid inflation, et cetera. So call it, I call it dynamic business environment for a lack of a better precise work. I think we should all in our industry and in other industries, right, one should be a bit humble, right? Things will change, but at the same time, we know that AAK we have strong organization, we're quite agile. So we still have opportunity to improve our productivity internally. We can still deliver more value-added products to the market, and that's where our focus lies. That's our strategy going forward. And that's why we are confident and committed to deliver. But I don't see any dramatic change in the business environment with regards to premiumization. I think premiumization will continue to be there. But for the time being, there is no doubt that we have a consumer market that is impacted by higher interest rates and inflation. So of course, consumer demand and demand patterns will change a bit.
We have, though, in the history also seeing that food is quite stable, confectionery is quite stable. And AAK has also in our portfolio, some of our advanced solutions ingredients help our customers to reduce costs compared to the alternative, which could be an animal-based fat or could be a cocoa butter, for example. So that's why we have seen sometimes even in a down trading situation, we are able to help our customers with their down trading, if you will. So I think we have a few legs to stand on. So that gives us comfort. It could, of course, vary over the quarter -- quarter-over-quarter, year-by-year. But again, looking at 2030 and our aspiration and the activities we have ongoing such a strong path for us.
And just one quick final follow-up for me on the deforestation part. You mentioned some investments that might be required to increase your capacity. Could you quantify those at all for us? And sort of your confidence on being able to pass through the cost of any CapEx to your customers eventually?
Yes. So first of all, a lot in this plan is linked to in-sourcing, which doesn't necessarily mean a cost up that could be cost equal or even lower cost if we bring things internally, where we've had a sourcing strategy in the past to source component by component. Now this is pushing us to change a little bit, but that could -- might as well be cost neutral or even a cost benefit to us. So -- and part of this in-sourcing is not really CapEx related either. We also have some capacities internally. Then, of course, with regards to buying certified fractions, et cetera, to some extent, there are premiums in the market to buy this type of fraction. It is today as well. And that's where we might need to push prices through in the supply chain towards our customers. And we will do that, of course, like we have done when raw materials go up for other reasons like market dynamics we've seen over the last year.
But again, we'll see how that plays out. So it is quite cumbersome what the EU regulation is asking on us as suppliers to document and that we are fully on to do. We don't agree with all the practices to do that. We think there could have been smarter ways and more efficient ways to do it. But we see that it's possible. We see that we will find solutions to it. and we are fully on to deliver on that. So I cannot give any guarantees, but we have a really strong lineup as we see it, and we have actions that will take us there.
And I would also just add that some of the CapEx that we are looking at to manage this development also will bring other benefits to our production lines and other opportunities, not just to comply with the deforestation, but it also allows us to produce other types of products that we can do today. So there are other benefits to this CapEx than just complying with deforestation.
So it's not just like an administrative cost burden that we just have to pass through. This is operational. It's dynamics. There is a bit of administration improving the geolocations. But again, some of the solutions to -- for us to comply will also be that we have a stronger footprint in Europe and better capabilities to deliver different factions.
The next question comes from Oskar Lindstrom from Danske Bank.
Three questions from my side, and I'll take them one by one. So maybe starting off on input costs. I mean to what extent have Q2 earnings benefited from lower distribution and logistics costs and other input costs, which you -- which have come down and which you don't hedge. And should we expect maybe that benefit to fade? So I guess this is sort of attacking this part of this EBIT per kilo question from a different perspective.
I mean, of course, when costs go up, you have to push to do your price management forward. And when costs go down, it's the opposite way around. And you're right. I mean some of every cost we have, we cannot hedge, we can only hedge certain raw materials. So you're completely right. But on the other hand, we try to manage in our total product calculation, we have -- we try to manage all the costs, of course, both up and down. But there has been some relief on logistics and utility is right, and that's positive, but that's also something we always discuss and negotiate with our customers as well at the end of the day, but net-net positive, I would say, at the moment. And if that is fading away, if you see it as a quarter-by-quarter percentage, yes, but at the same time, staying here is staying at lower cost.
I mean your costs, let's say, during Q2 for this, are they sort of back to where they were a couple of years ago? And was it sort of that you were being punished a year ago and now the impact versus your pricing is kind of neutral? Or is it that you're actually in an unusually beneficial position at the moment in relation to these distribution of logistics costs.
Well, I would say, I mean, certain costs have come down. You see container freight, for example, coming down to some extent. But there's still other input costs that are high and impacted by the increase in inflation. So I would say it's a mixed picture, but it's not like we buy freight on a day-to-day basis either. We do try to have these inputs on a sort of a 6- to 12-month basis as well. So if we see sharp movements in the market, we're not impacted on a daily basis by these changes. So there is some lag in this as well. But I would say freight, yes, maybe to some extent, but other input costs see continued impact from higher inflation. Well, so it's not like we're back to where we were sort of pre-pandemic on those type of costs, and even if you look at maintenance, for example, as well, those types of things, costs are up, and it's more expensive than it used to be.
And CapEx are typically more expensive today as well as linked to stainless steel and engineering.
Right. Yes. Okay. And my second question is on the lower volumes and your comments around weaker demand. To what extent is this sort of -- has there been any inventory reduction among your customers? And is the weaker demand situation, whether it's inventory reduction or not, is that getting worse? And should we expect it to sort of continue and accelerate into H2?
A bit low visibility. I mean it's not that significant. If you strip out Russia or bakery optimization, when you look at market data and consumption and then you overlay that maybe with inflation where our customers produce the same packet, but with a lower kilo content or so. If you take that into account and then look at, okay, we also have a strategy that has to do with more high value added and daring to let go of lower-margin business. If you look at all of that, I think there's not a big drama around volume. So then is there destocking? Yes, maybe. If there is a weaker demand, there might be a bit of destocking with some of our customers. But I don't see it as major destocking moves and [ major ] fluctuations and you see that in our numbers as well. We're not talking 20% reduction or 40% reduction.
So it's difficult to say how much this has been destocking and then it will pick up. I don't see consumer demand being dramatically low going forward. I mean, we're still talking predominantly food ingredients as well as confectionery, typically is fairly stable even in downturn. But I think it's worthwhile at least reflecting on the fact that we have a high interest rate environment, high inflationary environment. But that's where, again, food ingredients and confectioners stands out strong compared to other industries. So I forecast no drama, but that doesn't mean it will go up by 2% next half year. It could still continue to go down a bit. But in the long run, it shouldn't be to dramatic.
My third and final question is on the productivity and efficiency program, where -- I mean you've mentioned your actions in the bakery segment in Europe, closing down production facility. How much more is there for you to do in this program during, let's say, H2 and into next year? And are they of a similar magnitude to what we've seen? Or was that really the sort of low-hanging fruit, pardon the expression that you took during the -- that you've taken already, and now it's more a sort of minor impact. I'm trying to get a feel for the magnitude and timing of impact from this productivity program going forward.
If we start with the bakery optimization, that is a clear one. That's why we also have articulated, clearly, we're closing a plant. We're leaving volumes behind that we're not -- that's quite, call it, isolated, if you will. But there's a broader program that I mentioned before, there's a part in our strategic path going forward that articulates our productivity measures and cost per kilo measures. So not only are we focusing on high value-added solutions and price management, we're also focusing internally on optimizing our plans. We're doing structured walk-through of almost every plant over the next one to three years, where we do what we call a deep dive. We go in, we look at the plant, what are the opportunities to drive operational efficiency, what is loading on the plant, whether it's the portfolio mix of the plant [indiscernible] .
So we have all it a structured program for how to optimize our capacities and so forth. And there's clearly more to do in term also in purchasing savings and the way we operate. So AAK has been growing for a long time. We have typically been focused on the go-to-market activities and the customer co-development and so forth. So we do believe that there's more to give in tightening the bolt a bit and the incoming more professional and apply more operational excellence type of methods around the globe in AAK. But I cannot give a clear guidance on how much, but that's clearly part of our path towards our 2030 aspiration. So if we have more price management this year, there might be more productivity next year to give you that [indiscernible]
The next question comes from Joan Lim from BNP Paribas.
I have two questions. One is maybe just sort of wrapping up all the previous questions that have been asked on your EBIT beat. So you said it was driven by specialty solutions, productivity improvements and price management. For the full year, do you expect these three to continue driving the strength in your EBIT in the same proportions? That's my first question.
Just so that I understand the question. Sequentially, you could see that Q1 and Q2 are strong quarters with high operating profit per kilo, as an example. When you then relate to year-on-year and percentages, then of course, it depends on what we had last year. So I do foresee that we continue to have a strong EBIT per kilo development, yes. But -- but are we forecasting another 40% to 50% lift in operating profit and operating profit per kilo year-on-year. I think that is a bit overambitious, but rather look at the strength in the underlying business, that is forecasted to continue, yes.
And the three factors that you mentioned will be a continued focus for us in the second half and into next year as well, of course.
Okay. And my second question is on the higher cocoa prices as there were news about heavy rains in Ivory Coast. What -- how do you see it impacting AAK? So for example, you had previously spoken about a sweet spot in cocoa butter prices and vegetable oils could benefit as a cocoa butter equivalent. Are you seeing any reformulations of customers as well in terms of that?
And you're right. And what we refer to as the sweet spot, it's not a one to one per day execution that sweet spot, but I'll give a bit of context that what we are referring to is that for the Chocolate & Confectionery industry, if the input materials are too high when they get too high so that prices need to be changed on the shelves, of course, that impacts consumer patterns. But as long as it isn't and our customers are able to have a total production of chocolate that, including cocoa butter, including our ingredients that replace cocoa butter, et cetera, then we call that the sweet spot where chocolate is still consumed by consumers, and we have a good opportunity to sell our ingredients to our chocolate customers.
So I see that the risk would rather be on the consumer side. Is there something that would have consumers buy less chocolate because of a too high price increase on the shelf? That is where you can see the risk on the downside. With regards to our ability to deliver and replace cocoa butter, we are still delivering a solution that is price competitive to cocoa butter and functional, by the way, delivering functionality in products. And then we have all the other solutions that we sell into the chocolate & confectionery markets with strong functionality, cost benefits and so forth. So the cocoa butter per se doesn't impact those ingredients and the way we sell them. It has more of an impact towards the total price of a chocolate bar.
Okay. So you haven't actually seen customers try to reformulate more because of the higher cocoa butter prices?
Not at the moment, no. But we were already being able to replace cocoa butter. Potentially, could there be a bit more on that, but actually that should benefit us from a reformulation point of view. But if it impacts the prices on the shelf, it could be a negative impact on volumes. And that's difficult to forecast exactly where that point is.
The next question comes from Kenneth Toll Johansson from Carnegie.
So the first question is in line with what most people have asked already. But in terms of profitability and pricing of your products, if I remember correctly, the length of the contract is typically 6 to 9 months or thereabouts. But are there any times during the year where you -- when you are renewing a lot of those contracts like January 1 or July 1 or something? And when you are renewing contracts now during Q2, for example, do you see that you can keep a good pricing level also in the new contracts that you are signing?
And most of what we sell is, call it, on a continuous basis. There is the kind of seasonal contracting is more linked to global industries like chocolate & confectionery with big customers, global tenders, and that's typically the second half of the year. And -- but then to your second part of the question, when we have entered into new contracts, yes, we have seen our -- that we are still able to contract to the margin levels that we see as of now.
Okay. Great. Yes. And then also a question on the balance sheet. It's starting to get really strong now. I mean net debt to EBITDA around 1. You have a target to be below 3. And at the worst point, it reached 2 and I mean worst point from a sort of working capital point of view. So if you don't make an acquisition or a big CapEx program or so on, you will be a bit below 1% during the end of the year. So are we likely to see an acquisition? Or do you prepare for share buybacks or extraordinary dividends? So what's your thoughts around that, please?
Yes. I mean, first of all, we are happy that we have a strong balance sheet, and that gives you opportunities to strategic freedom. We would really like to see if we can make some really good bolt-on strategic acquisitions. But as you've heard me say before, our industry is not that fragmented. There's not that many deals per year. So we got to be a bit patient. So that is still the number one priority for us as a company. If we -- if there's going to be a share buyback or extra dividend that is, of course, a Board decision at the end of the day. But I would -- we would look into that and see what's more beneficial to AAK. Could the share buyback program be good? Maybe so. There's fairly low liquidity in our share today, but number one priority is to see if we can make strong acquisitions and/or greenfield growth for AAK with that capital. But as you say, if things continue and there is no use of capital in that context, I'm sure that there will be discussions around share buyback and/or extra dividend.
Okay. And do you think those discussions could be ongoing towards year-end already? Or do you think you can keep a strong balance sheet [indiscernible] a year?
Let's not speculate. Of course, everything is on our radar, and that's our task to do and the task of the Board of Directors. So I can assure you things will be discussed in an appropriate timing.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you very much. So that sums it up. I thank you all for the questions. And I wish you all a good reporting period and for those who have vacation coming up, wish you a great summer. Thank you so much for listening into another strong quarter for AAK. Goodbye.