AAK AB (publ)

STO:AAK

Earnings Call Transcript 2020-Q3

[Operator]

Hello, everyone, and we to the AAK Q3 report 2020. [Operator Instructions] I will now hand the call over to your speaker President and CEO, Johan Westman. Please go ahead.

[Johan Westman, President & CEO]

Thank you very much, and welcome to everyone to this earnings call for quarter 3 for AAK. With me today, I have Fredrik Nilsson, our CFO. And together, we will guide you through the highlights of Q3.If you go to Page 2, we have the agenda for today, a short update from myself, a bit of business area updates as well as an update from Fredrik, a bit more on the details of the financials. And then some concluding remarks and as usual, a question-and-answer session in the end.With that, we're heading into Page 3, a few highlights of the quarter. We have seen a good continued sequential pickup in volumes compared to quarter 2. As you might recall, we had quite a drop in April, May and then saw a starting of a rebound in the end of quarter 2. That came into quarter 3 with a good bounce back in the beginning of quarter 3, and then continued sequential pickup of volumes. Volumes in total are still not at last year's level, but again, a good recovery compared to Q2. We have been able to deliver a strong operating profit, a year-on-year growth of 6% and that is really linked to a few drivers, which is, one, the rebound of the volume, of course, but also the quickly adapting to the situation. So as you know, the Foodservice segment, selling into restaurants, hotels and airline catering and so forth in those segments, we have really adapted to the new situation and reduced our cost as well as launching our optimization program that we have started to implement will reach full effect by mid next year and forward. And then also a good sales development for our high value-added specialty solutions. So that in total really has led to a strong operating profit. And a record-high operating profit per kilo our margin is now at SEK 1.07, and that is up 7% year-on-year. With that continuing into Page 4 and a few more comments during the quarter. With regards to COVID-19, we all know it's still here. It's still impacting people, societies, business operations across the globe. We have had from the get-go, a strong focus on business continuity, on acting safe, being able to operate, since we are an important part also of the food supply chain, that has been working extremely well, and we have been able to operate all our facilities through COVID. We are in the middle of COVID. At the moment, we are living with COVID-19 and dealing with that additional risk. That puts a challenge also to the way we operate. We are a co-development company. We are used to sitting face-to-face with customers in our innovation centers, looking at new solutions. I'm so proud of the way we have also adapted our way of working, trying to find ways to interact in a virtual setting and making things happen in our innovation centers together with customers, but in a more virtual setting.Also coming back to the optimization program. We launched in the end of Q2 a optimization program that is expected to give us savings of around SEK 150 million on an annualized basis, expecting to reach a full run rate by the second half in 2021, so next year. That has started well. We have started to see that being implemented. So that in combination with short-term cost reduction measures adapting to the situation and also more mid to long-term actions. That in total has been working well for us through the quarter.We have also announced this morning that we continue to strengthen our position in the Indian market. We are acquiring the last bit, the 31% remaining shares of AAK Kamani our joint venture with Kamani Oil. And now AAK is 100% owner of that business.If we move on to Page 5. A few comments to some key events. We continue to push forward in sustainability in many areas. One example is a partnership with Saha Global where we really tried to make a difference, in this case, in Northern Ghana, where we're helping women to find a -- and implement a cost-efficient way to get water treatment going and with that get clean and safe drinking water.We have also signed -- I've signed up to a renewed commitment, you can call it, to the UN Global Compact, and that's super important for us. It is for many of my colleagues in the world. Also happy to see that we continue to launch our AkoPlanet range, which is targeting solutions for plant-based foods. And now we have launched that also in China, an important step forward in that.With that, we head into a few more comments on our business areas, the industries that we serve. First, at Page 6, Food ingredients. A good quarter for Food Ingredients. Quarter 3 was a pickup in operating profit of plus 5% versus last year. We continue to strengthen our operating margin. So that's really good to see that the combination of cost improvements as well as focusing on our high value-added solutions, really give the results that we want. And now we have reached a milestone. We are above SEK 1 per kilo in operating profit per kilo. The main drivers here is really a continued strong development for special nutrition and then specifically for infant formulas, high-end solutions for super premiums into that sector. Also a good recovery within Bakery and a continued good development for plant-based foods. And in this quarter, specifically, into plant-based dairy solutions or dairy alternatives.We still see a pressure on our Foodservice business, where we sell to restaurants, hotel chains, airline catering. Those volumes are still significantly lower than last year, but we have seen a pick up during the quarter from a very low level in quarter 2.With that, we're heading into Page 7 and comments to Chocolate & Confectionery Fats. In this segment, we continue to strengthen, again, our operating profit. We had that in a negative direction, call it, some years ago. But really, since last year, we started to see a return to profit per kilo growth. And that is a combination of, if you recall, our improvements in the supply chain with better -- we now have better-yielding shea kernels, we have installed our capacity improvements in our crushing facility in orders and that with a volume recovery, gives us a strong result in quarter 3.Organic volume growth is up 2% year-on-year. And our operating profit is up 7% year-on-year. So all in all, a good development. And in this sector, also like for the total AAK, it's also a good sales mix where we keep on selling more of the high value-added solutions, our specialty fats, oils and fats for this industry.Then Page 8 and a few comments on Technical Products & Feed. Quarter 3 is another solid quarter for Technical Products & Feed. We have a slight improvement year-on-year in spite of the COVID impact and that is specifically due to a strong performance in our fee business as well as a strong execution in our crushing operations.We then turn to Page 9. Just to give you some more light to what are we doing, call it, short term and long term. We have, as I mentioned earlier, focus -- number 1 was the focus on our business continuity. As an organization, we also really came together in a successful way to adapt to the new situation, specifically a strong execution in our Foodservice business where volumes dropped almost overnight. A quick adoption to the new situation cost reductions and rightsizing has led to that we are now managing that business in a good way. Also an overall cost reduction and, call it, short-term measures, adapting to the new situation across AAK but more importantly, also launching the optimization program that we talked about in quarter 2, which is really targeting us having the right structure, the right cost base, an optimized cost base for the different industries that we serve and the products that we launch into these industries. That has started well.So the combination we're seeing in Q3, more of the short-term savings in Q3 and a bit less of the long term, and the long-term savings are then expected to take over as we come into the second half of next year.But all in all, a good execution that has led us to see production costs being down 4% and SG&A being down 9%. Part of the SG&A reduction is, of course, some of the -- call it, short term, almost by design savings in travel and entertainment that will, of course, come back to some extent as we start acting more and more normal. But some of that will also be permanent savings because I do believe we will manage our business. We and other colleagues in our industries and other industries, we've learned a lot through COVID and some of those improvements and new ways of working will stay. But certainly, to some extent, the temporary savings will come back later on when we act more normal.All right. With those comments, I'd like to hand over to our CFO, Fredrik Nilsson, for some further comments.

[Fredrik Nilsson]

Thank you, Johan. Let's move to Page 10 and look into the cash flow. If we look at the EBITDA, it's increased by SEK 53 million in the quarter or 7% due to the improvement we saw in the operating profit that Johan just mentioned. Looking into cash flow from working capital, negative SEK 73 million in the quarter. If we're then looking into the more details behind the minus SEK 73 million, we have seen increased accounts receivables due to the sequential improvement in sales during the quarter, but also that we are selling more specialty solutions to customers with longer payment terms. Inventory has increased as well due to normal seasonality but the good thing here is that the inventory increase has been fully offset by increased accounts payables, which had a positive impact from a cash flow point of view.Looking into the raw material prices. They have increased during the summer. That will impact working capital negatively in the beginning of 2021. As always, there is a 6 to 9 months time lag until we will see the cash flow impact from the change in raw material prices.Looking into paid interest and tax, up versus last year, but I think I would like to highlight here that an average tax rate of 24% is actually a real reduction versus last year where we had 25%, so if you have the timing where you see an increased tax payment in the third quarter.Looking into CapEx, amounted to SEK 226 million in the quarter, whereof SEK 53 million was linked to our acquisitions. And then that was, of course, linked to the Russian acquisition that we paid during the third quarter. For the rest, the capital expenditure was related to regular maintenance, investment and capacity increases.Looking into return on capital employed on Page 11. We saw a little bit of a pickup here in the quarter. So it was 13.7% on a rolling 12-month basis, and that was due, of course, to the sequential improvement we see from the second quarter.Looking into Page 12, the net debt. AAK has a really strong balance sheet. We have an equity asset ratio of 48% by end of September. Looking into our net debt end of September, we have 2.9 -- SEK 2.9 billion. And if you look at the debt ratio, net debt, our EBITDA, it was 1.04. So a very good position here as well.Let's move to Page 13 and looking at the loan and duration profile. Almost 70% of our loans have a duration more than 12 months, which is, of course, is a strength in this volatile world. We have total credit facilities of SEK 8.2 billion, whereof almost SEK 6.9 billion is committed credit facilities.Let's move then to Page 14 and looking at the FX exposure. I think it's also important to highlight here that we have negative currency translation impact in the quarter of SEK 43 million. SEK 20 million of those was related to Food Ingredients, SEK 23 million was related to Chocolate & Confectionery Fats. And based on the spot rate end of September, we should expect to see continued negative translation impact in the fourth quarter as well.Then I would like to hand back the microphone to Johan.

[Johan Westman, President & CEO]

Thank you so much, Fredrik. With that, we are at Page 15. So almost needless to say, what's still so important uncertainty and volatility will -- it is high, but it will remain high. So we have seen a clear sequential pickup from Q2 into Q3. But we also know looking around us that the COVID-19 is there. It's going to stay for a while. We clearly do not have a clear picture on when there will be a vaccine, when we will return to something more normal or the new normal. So clearly, the uncertainty is there, and it is high. At the same time, as a company, AAK, we have shown that we are resilient, we can handle the situation that we're in. But of course, when looking at volumes and certain segments, of course, we're still impacted in the Foodservice Business, where we are not in the world eating at restaurants. We are not flying like we used to do. We're not using hotels like we used to do. But on the other hand, we also see other segments where we perform strong.So the main message here is uncertainty will remain high. And COVID is there, impacting us the way we act, the way consumers act and the consumer patterns as of today. This will continue as long as restrictions are there, and we will continue to see uncertainty and volatility until consumer patterns return to more normal.Having said that, with our stable position, we are very confident in our position and that we stand strong in this context. And with that, just as a concluding remark on Page 16, we do offer our plant-based, healthy, high value-adding oils and fats solutions based on our co-development approach. And in spite of these short to midterm effects that we talked about, the impact of COVID-19, we see no reason to adjust our view on the more long term, strong, favorable underlying trends in our markets. The short to midterm is still a high uncertainty, but we do remain prudently optimistic about the future, and we see those underlying trends being there also post-COVID.With that, thank you very much for listening to the comments to quarter 3. We're happy to take any questions.

[Operator]

[Operator Instructions] And the first question is from Alexander Jones from Bank of America.

[Alexander Jones, Analyst]

3 questions, if I may, please. First is on the Indian JV where you've taken the full 100% stake now. Could you talk a little bit about what owning that full stake will allow you to do and how that helps kind of the acceleration of AAK's growth in India? Then the second question would be following on from that more broadly on M&A. I would appreciate a comment on kind of how you see the pipeline now? Is travel restrictions still kind of delaying due diligence, or is that getting a little bit easier? And then the final question would be on infant formula. So clearly, a very strong result today, but some of the multinational customers in the past couple of days have talked about a tough outlook in next year with perhaps birth rates continuing to fall. So could you give your outlook into next year and whether you think you could offset any end market weakness through winning new customers amongst the kind of local Chinese players, that would be great.

[Johan Westman, President & CEO]

Thank you, Alexander. And starting with the first question there on our, we call it, former JV us now taking the final piece of the shares. In this case, it's a successful JV. We entered in. It has been a good journey together with our partner. So I see this more as a natural step, a confirmed strong execution in India and strong expectations for us being able to continue that journey. So the last piece of ownership is not necessarily changing the game for us. I would say we are now continuing on very good journey that has been a good journey since we entered into this joint venture.With regards to our M&A pipeline and the question you had more on how are we able to do due diligence, of course, COVID-19 puts things in a bit of different perspective. We are still geared towards: one, having a strong balance sheet, so we are able to do M&A. We are certainly focused at doing M&A with regards to our strategic direction. Meaning accelerating our strategy with the help of M&A, that has not slowed down at all. We are really trying to map out and to nurture that pipeline of opportunities.Having said that, yes, it's a bit more difficult because the M&A we look at are typically M&As with operations, with assets and physical assets that we would like to walk the floor and have a bit of touch and feel kicking the tires. That is, of course, more difficult, but we are finding ways to do that as well. But of course, that has a bit of an impact, and it makes it a bit more difficult. But I wouldn't say it would lead us to not doing an M&A, but it certainly forces us to think a bit differently and to find pragmatic ways to get there and slows down a little bit the processes, I would say, on a general perspective.Then with regards to the infant formula outlook. We have seen -- and this is the positive, yes, we've seen -- we are certainly a part of the total markets, meaning that birth rates going up and down has an indirect, of course, impact to AAK because we sell to these customers that in terms sell to the consumers. What we have seen here, which is positive, is that we are successful with our higher value-added solutions, with our premium solutions into this market. We have seen an increased demand or for those. So within this industry, we have seen an increased demand on the super premiums as well as seeing more engagement from local customers in China. So there is a bit of shift there and within that we have been successful, and that's our, well, strategy going forward to be that.So with that, partly being able to offset potential volume reduction. But of course, the best players when birth rates are up as well as the demand for super premium. So let's see where birth rates go, but we have had a strong execution within the market given those volumes that are there.

[Operator]

[Operator Instructions] Next question is from Oskar Lindstrom from Danske Bank.

[Oskar Lindstrom, Senior Analyst]

Three questions from me. The first one is on the Special Nutrition segment. And you had some problems late last year, beginning of this year, despite a COVID sort of it seems to have stabilized. What is the situation in the Special Nutrition segment? And in particular, the Baby Nutrition in -- or Infant, sorry, in China?

[Johan Westman, President & CEO]

Yes. Thank you. And I wouldn't call it necessarily had problems. To me, that speaks more operational problems and so forth. Yes, we're part of the industry. So when birth rates were falling, of course, that impacted the overall market. And when volumes are down, it's -- from a year-on-year perspective, that becomes more of a challenge to deliver the increase in profit that we want to see.But having said that, we still have had a continuous development towards focusing on high value-added solutions and specifically to this market-important segment like organics, organic infant formulas and so forth. We have been able to make that happen and to move volumes there and that helps us.And looking forward, it's a focus for AAK to maintaining those high value-added solutions and then grow with the market when the market will grow.

[Oskar Lindstrom, Senior Analyst]

Okay. A second question, if I may. I mean we've had some currency weaknesses in a lot of emerging markets, partly related to COVID-19 and its effects on raw material markets. What can you say about how this has impacted your business and especially the CCF segment. You're selling less, selling lower sort of value-added products, or what has been the impact?

[Johan Westman, President & CEO]

Yes. Thank you. So overall, as you've seen in the report, I mean, still showing organic volume growth in CCF, still showing increased profit in CCF. But yes, as Fredrik mentioned, also with a negative currency impact. So there is a bit of negative currency there in the result already. But with regards to the business and our customer contract, I would say, overall, not really impacted by currency as such, apart from the fact that in a situation like this, call it, more of a downturn triggered, by in this case, COVID, but we have also seen it in prior downturns that regions like the Swiss region or the countries there, start looking for, call it, more cheaper solutions or less costly solutions.Those shifts can be there, and they could, of course, be triggered by currency or by downturn. So there is a slight movement there. But all in all, since we also sell this globally, we have been better in some regions and works in other regions. And total, as you see in the result, it's still been a good development for CCM.

[Oskar Lindstrom, Senior Analyst]

Just a little bit to continue on that topic. I mean you've managed to, as you highlighted, continued to improve your EBIT per kilo despite sort of a downturn in a lot of markets, is this sort of a development which you expect to be able to continue to drive in your business? Or should we expect this effect to slow down to a more sort of normalized rate of, I don't know.

[Johan Westman, President & CEO]

Let -- yes. Let's split them up, I think, also in a bit of a time perspective. It is bull's eye in the middle of our strategy. So our strategy is about that. We're focusing on high value-added solutions, having the right cost to serve, optimizing the structure depending on the industry that we serve in and selecting the segments where we have the best possibility to serve it with high value-added solutions. So yes, in that, and implicit and distracted is about moving towards better EBIT per kilo or higher-margin products. What you see now is, of course, also an effect of being able to adapt the structure, the cost base quickly. And on top of that, seeing volumes coming back, so call it, managing the cost base and at the same time, seeing a volume recovery. So that really helped push, of course, the EBIT per kilo.And as I mentioned before, part of the cost saving today, like travel and other things, will, of course, come back. But at the same time, myself, the management team and the whole organization, we're certainly going to try to make the best out of this and really focus on not allowing cost to come back faster than volume and EBIT growth.

[Oskar Lindstrom, Senior Analyst]

Okay. Actually, one more question. I mean at the CMD, a year ago, you spoke about focusing more on -- I don't know, more [ base ], but you just talked about focusing on sort of technical capabilities, I think you called it, and you talked specifically about the speciality less items when it came to acquisitions as well. Has this strategy of sort of acquiring more R&D-focused businesses taken on greater urgency with COVID-19 and some of those challenges? Or is that really sort of independent of what we're seeing with COVID-19?

[Johan Westman, President & CEO]

I would probably say it's -- if you really look at it on an overall perspective, COVID hasn't really changed. It hasn't changed our strategy. It hasn't changed our belief in the strong underlying [indiscernible]. Part of the underlying strategy is a focus on health and attrition. And that has certainly -- I don't think COVID has put a less demand on nutrition and health. So in that context, you could say that COVID might boost the interest for these kind of solutions. But our strategy hasn't really changed with that.

[Operator]

And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.

[Johan Westman, President & CEO]

Okay. Thank you very much, everyone, that listened to this, and thank you also for your questions.And with that, we end the call. Thank you so much.

[Operator]

This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.