AAK AB (publ)

STO:AAK

Earnings Call Analysis

Company Reports Strong Earnings and Cash Flow

The company showed remarkable financial resilience with strong cash flow, powered mainly by significant earnings. They delivered a positive operating cash flow of SEK 1.2 billion and a free cash flow of just over SEK 900 million this quarter. Their strategic focus on specialty solutions and internal improvement programs has driven robust profit growth, outperforming market expectations. Return on capital employed increased to 17.2%, and the net debt/EBITDA ratio shrank to 0.73, showcasing a healthy balance sheet. Despite volume pressures in some areas, the company still executed contracts with favorable margins and remained committed to a balanced approach to volume and margin moving forward. For guidance, the company aims for an absolute EBIT growth of 10% year-on-year and anticipates Q4 performance to align with the average of the first nine months of the year.

Strong growth and margin expansion in a challenging environment

The company has displayed remarkable agility in its operations, achieving a striking 39% profit growth and a solid improvement in operating margin. This achievement can be attributed to a strategy that prioritizes specialty solutions with high added value, productivity improvements, and an effective price and product mix.

Diverse industry engagement promising future growth

Marked by strategic projects, such as those in the Health & Nutrition sector targeting type 2 diabetes, the company's diverse engagement across various industries stands as a testament to its resilience and potential for sustainable growth.

Sector-specific performance highlights: Food Ingredients and Chocolate & Confectionery

There's a prominent upward trend in both the Food Ingredients and Chocolate & Confectionery sectors, with operating profit per kilo soaring by 59% and 58% year-on-year, respectively. These segments show robust underlying financial health, notwithstanding some volume reductions, indicating that quality and efficiency gains are driving profitability.

Facing volume variations with a positive long-term outlook

Even though there has been a slight volume loss, particularly in the Technical Products & Feed sector, the company remains optimistic about the long-term trajectory, bolstering growth opportunities in areas such as the candles business amidst a shift towards plant-based oils and fats.

Robust operating cash flow and strong return on capital

Sound management has yielded an operating cash flow of SEK 1.2 billion and a free cash flow of over SEK 900 million. These results contribute to a considerable return on capital employed which reached 17.2%, indicating efficient capital utilization. The company also managed to reduce its net debt-to-EBITDA ratio to 0.73, reflecting a strong balance sheet.

Guidance suggests maintaining average performance

Looking forward, the company anticipates concluding the year in alignment with the performance average of the first nine months. This projection is given as an indication, not a strict guidance, reflecting the management's intent to set realistic expectations in an environment marked by volatility and fluctuations in both margins and volumes.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the AAK Q3 2023 Report Presentation. [Operator Instruction.]Now I will hand the conference over to the speakers, CEO, Johan Westman; and CFO, Tomas Bergendahl. Please go ahead.

[Johan Westman, executive]

Good morning, everyone, and welcome to the Q3 2023 earnings call for AAK. It will today be me, Johan Westman, the CEO of AAK, as well as my colleague and CFO, Tomas Bergendahl. We will run this presentation as we normally do.The agenda for today we have on Page #2. We'll first run through some highlights of the quarter, even though we did release results early preliminary, but now the full report is out. We will also go through some selected events as well as the business and financial update, and then concluding remarks, and as usual, happy to take any questions afterwards. So with no further ado, let's go right into it on Page #4.As we released preliminary, now confirmed, we do see the continued strong trend that we have seen from earlier this year with a profit growth -- a strong profit growth up 39% versus last year, or 35% at fixed FX. This strong growth is driven by continued sales and focus on our speciality solutions with a high value added content and a good value proposition for our customers, as well as continued productivity improvements, quality, internally focused improvement activities, as well as a better portfolio and price match. And this has been a bit the tone of the voice as you've heard throughout the year, but we really get traction in our strategy and the way we implement [ them ].When we look at the operating margin, it was also strong in the quarter. So of course, volume is down 5% if you compare to last year, however, looking at it a bit more sequentially, we see volumes being up 5% versus the second quarter this year. But all in all, the strong result for Q3 was driven by margin expansion.Last but not least, we also have a strong operating cash flow at SEK 1.2 billion, and that in -- combined with also a strong result leads to a return on capital employed of 17.2%.Let's go through the -- some of the events this quarter. As a company we -- on Page 5, we continue to invest for the future. And one example is regarding Health & Nutrition where we are engaging into projects, in this case linked to type 2 diabetes, just to mention and exemplify some of the things we're doing on the more long-term rise.The second message here is a bit more of a sad one. We tragically, as you have seen, lost our dear Chairman, Georg Brunstam, earlier, and he has now been replaced with the election of Patrik Andersson. Patrik Andersson knows AAK well, and we know each other well. Patrik has been on the Board of Directors since 2019, and we are off to a good start.With that, let's go through the more details in our different business areas, starting with Food Ingredients on Page 6. As you can see to the right on this page, the strong trend continues upwards. We are growing our operating profit and that is on the back of margin expansion, or continued margin expansion. Our operating profit per kilo is up 59%, and operating profit is up by 55%. So all in all, a continued positive trend for Food Ingredients.When we dig one level deeper into this, we continue our optimization program in Bakery, somewhat weaker performance in Special Nutrition and Foodservice, but growth on the other hand in Dairy. So all in all, we're executing our strategy, and at the same time impacted by some of the market developments that we see across certain industry sectors.With that, moving on to Chocolate & Confectionery Fats. Again another strong quarter for Chocolate & Confectionery Fats, continued positive trends, both earnings growth and margin expansion. Operating profit up 58% year-on-year and -- sorry, operating profit per kilo up 58% year-on-year, which is driving the operating profit, which was up 41% or 32% at fixed FX.When you look at volumes, volumes are down and they are down 11% year-on-year, but that is again from a high level last year. So Q3 in 2022 was quite high. If you do a comparison a bit on a longer term horizon, we're actually up 14% versus pre-COVID level. So a bit on the longer term horizon, not too dramatic, but down versus a high last year. All in all, a very strong quarter for Chocolate & Confectionery Fats.With that, moving into Page 8 [ on ] Technical Products & Feed. In this area we see a bit more of a volume loss linked to a combination of what is happening around us, a bit on, call it inflationary pressure in certain sectors, and a bit lower volume in Technical Products & Feed.On the other hand, if you look at this on the long-term horizon, still on fairly good levels. When you look at the profits, per se, we had lower volume in Technical Products & Feed, and somewhat lower crushing margin, that in total leads to pressure on the earnings.On the other hand, when we look at candles business, for example, which is a promising area, combined with replacing mineral oils and other sectors, we were growing in the candles business.So underlying trend around the opportunities for using plant-based oils and fats is still positive, positive in the short-term, positive on the long-term. But the volume reduction in Technical Products & Feed was driving the change in result to the reduction in result versus last year.With that, I hand it over to you, Tomas, to some more comments on the working capital and further details on financials.

[Tomas Bergendahl, executive]

Thank you, Johan, and good morning, everyone. Continuing on Slide 9, moving into the cash flow for the quarter. Q3 we continue to see positive underlying trend that we've seen in the past 3 quarters with a strong cash flow. This quarter mainly driven by the earnings. The quarter generated a positive operating cash flow of SEK 1.2 billion, free cash flow of just north of SEK 900 million, and year-to-date, we have an operating cash flow of SEK 4 billion and a free cash flow just north of SEK 3 billion. We continue to see a positive contribution to the cash flow from inventories in the quarter, as you can see, and this is mainly driven by reduced inventory levels due to the reduced volumes as well as a favorable inventory mix.Payables continue to contribute on the negative side, and again mainly driven by the reduced inventory levels and volumes. Interest cost was slightly increased compared to Q3 '22 at around SEK 100 million, mainly driven by higher interest rates and mitigated to some extent by reduced debt level. The average tax rate was 24% during the quarter. Other non-cash items, as you can see, had a positive slight effect of SEK 86 million mainly driven by unrealized hedging contracts of raw materials.CapEx, very much in line with last year at SEK 207 million and continued to be related to production improvements. We're talking debottlenecking, capacity optimization and so forth. And our guidance for the CapEx for the full year of '23 is at SEK 1.2 billion, very similar also to last year.And we continue our focus and efforts to effectively manage our cash flow through different programs internally within the organization that so far yielded good results. And we remain committed to maintain momentum on our net working capital also going into the future.Moving on to the next slide, Slide 10. As Johan mentioned, return on capital employed reached 17.2% in the quarter, which is up from 15.9% in Q2 this year, and as Johan also mentioned, driven mainly by the improved profitability. And we're up from 14.5% at the end of 2022. And we're also now above the last peak we've had in December '21 of 15.6%. So at a very good level.Next slide, Slide 11. Net debt/EBITDA ratio. This was further reduced, as you can see, in the quarter, ending up at 0.73, down from 1.01 in Q2 and down from the peak of 2.03 in mid-2022. And we're now well below the level that we saw before the impact of increased raw material prices at the start of the pandemic. The improvement, again, here is driven by a strong profit development driving the cash flow and -- which has resulted in a reduction of our net debt position, as you can see as well.Johan, back to you.

[Johan Westman, executive]

Thank you, Tomas. Concluding remarks before we go into the questions and answers. Strong profit growth, including sequential volume improvement. We did see a year-on-year reduction in volume, but again, positive compared to the second quarter this year. Our strong profit growth was driven by improved profitability and that as a result of the focus -- continued focus on speciality solutions, our internal improvement programs, one being around productivity and also the portfolio and price management that we systematically have worked with for some time now. That combined also with a strong cash flow driven by increased earnings puts us in a good position for the future.We have one financial guidance as a company, and that is to grow our absolute EBIT by 10% year-on-year, and that has not changed. However, following a year in which our performance clearly have exceeded market expectations substantially and with 2 reversed profit warnings in this year, we believe it's important to make a one-time effort to better align expectations.So last but not least, as a concluding remark, we anticipate a finish to the year in line with the average performance of the first 9 months.And with that, we are happy to take questions.

[Operator]

[Operator Instruction.] The next question comes from Alexander Jones from BofA.

[Alexander Jones, analyst]

Three, if I may. The first on margins. Clearly, another very strong quarter. Can you give us a little bit of color on what you're seeing in sort of new contract signings and your discussions with customers? Is there any pushback towards lower margins, or is this trend sustainable into next year, in your view?The second question linked to that, can you talk a little bit about how you incentivize the local teams and salespeople? And in particular, did anything change around that in terms of margin emphasis when you gave the target to double EBIT per kilo by 2030 at the CMD last year? Just wondering whether the -- that's driving or not the trend that we're seeing this year?And then third quick question, just to clarify on the guidance. When you talk about sort of similar trend in line with the average in Q4, are we talking about year-on-year EBIT growth? Or is there any other particular metric that we should be thinking about in that context?

[Johan Westman, executive]

Thank you so much. First question around EBIT per kilo, new contracts, pushback and so forth. I think, first of all, let's remind us about the fact that we're living in an -- we're acting on a global market in serving several industries within Food Ingredients, everything from infant nutrition to Dairy to Bakery and we have Chocolate & Confectionery, we have Technical Products, I mean, there's a variety of industries that we serve, and that's the strength of the company. We have a broad platform, a broad customer base, many legs to stand on. I want to just make that clear before we go into this question.And with that, obviously, there is different dynamics in different industries, and we are not free from competition. We know that we have a strong [ position ]. We know that we're a very knowledgeable company that offers solutions to our customers often in a combined co-development setting around product development and new value proposition. That is the strength that we have.Then we have entered into a period of a lot of volatility, a lot of inflationary pressure, raw material dynamics, et cetera. And of course, we as a company have worked hard to make sure that we understand our business, understand the dynamics, take the necessary actions to develop. And at the same time, we've had a strategy on the line which is targeting margin expansion, targeting -- improving the way we operate and the way we grow the business.And coming from -- in absolute terms -- and let's not forget that our industry in general, coming from a low margin position. So if you look at our absolute EBIT margin, it's still moving into decent territory. So not dramatic per se, but when you look at this from an EBIT per kilo year-on-year, yes, very strong improvements.So I take it in that context, and in that context, I would say that we see a structural positive trend with regards to us and others in our industry being able to price products to take into account what we deliver, the risk that we have in our portfolio, the dynamics around us, and I think that's very healthy. So that, I think, has an element of [ cash ] to it.If you look at where we are contracting now, is there a pushback, of course, customers -- consumer goods companies are looking at price reductions, improvements on their end, but also [ them ] have been successfully moving this forward. So I think I wouldn't say it's too much drama and who -- what company would not go for asking their suppliers on better deals, better productivity, moving things into pricing.We've had that 10 years ago, we had it 5 years ago, we have it now. But we -- as you see in the numbers that we have delivered throughout 2023, there has been elements of this already 1 year ago. And there's been elements of this in Q1, there's been elements of this in Q2, and we have still been able to deliver.So yes, there is pushback. Yes, we are able to contract more -- to sign new contracts at good margins, but we also sign contracts at slightly lower margins to balance -- really strike the balance between volume and margin, and that is our focus going forward, how to strike that balance.Number two, did we -- with the new updated aspiration clearly targeting margin expansion as well as growing volume in our selected industries, did we change incentives, did we make anything there that would push our sales speed? No, we did not. But we made it clear to the organization that this is the strategic direction. We have implemented our strategy with critical enabler projects, et cetera, targeting portfolio management, product management, price management, understanding our business.So yes, there is an underlying positive momentum in our organization on understanding our business better, leveraging our opportunities better, including pricing our products the right way. But it's not like we have gone out and say, just focus on price, price, price, no matter what. But we have been very, very agile in terms of making sure we cover for inflation and so forth.When you look at the aspiration, I think it's key to keep in mind, it's not all about the margin. It's a margin expansion combined with volume growth, which, over time, eventually leads to an absolute increase of earnings over time, and with that, shareholder value creation. So we have not yet delivered on our volume and impact targets that we had.So strong start with regards to margins, but we also have a lot to do in terms of growing the volume. And if you look at that absolute EBIT, if you anticipate what that would be in 2030, still some way to go. So just keep that in mind with regards to incentives and so forth. We try to really manage the situation.Last question, our indication or perspective on Q4. As I mentioned, we did this one time in order to align expectations. And our guidance, it's not a guidance, it's just an indication. But the indication is -- as we have said, and we have it in the report, anticipate that we will run Q4 at the average performance over the first 9 months. And I would look at average from an EBIT perspective, I mean in combination of volume and margin.But also, let's be humble enough to say that in our business, like many others, there is some volatility. Everything is not a straight-line curve, so there might be ups and downs to the margin, ups and downs to the volume. But the indication is linked to average performance first 9 months and looking at that from an EBIT perspective.

[Operator]

The next question comes from Oskar Lindstrom from Danske Bank.

[Oskar Lindström, analyst]

Couple of questions from my side. First off, I mean, volumes in the quarter were down in Bakery, Special Nutrition, Foodservice, and still EBIT per kilo was driven by Bakery, Special Nutrition and Dairy. But I mean, could you walk us through the dynamics? I mean, is it only better pricing or more efficient production? I'm still -- I mean, I'm seeing your list here of what's driving earnings, but could you be a bit more specific as to what it is that has achieved the quite substantial earnings and profitability improvement that we've seen so far this year? That's my first question. Should I go ahead with my second question as well?

[Johan Westman, executive]

Yes, that's fine. Please do.

[Oskar Lindström, analyst]

Yes. So my second question is also regarding earnings growth. I mean, you've historically grown EBIT by around 10% per year. And I mean -- should we expect the exceptionally strong growth that we have seen at least so far this year to detract from the 2024 earnings growth? Or is sort of 2024 starting from a fresh base level? So that's my second question. Maybe they interconnect [ in action ], so, yes.

[Johan Westman, executive]

Thank you, I'll take them one by one. So please feel free to chip in there, Tomas. But if we go -- as you rightfully saw, yes, volumes being a bit pressure, however, not that much in Food Ingredients. So stabilizing, if you will, and the Bakery optimization is moving to the end. But I think it was not in Bakery. It's very good -- it's a good example of what we have as a strategy as a whole. If you look at -- there is some background noise. Could you please mute?If we start with Bakery and then extrapolate that into the other parts of the business, Bakery has been the champion of our critical enabler projects around product management, price management. And in that, as a whole, we have not only consolidated production units, which saves cost, if you will, but also worked structurally through the portfolio of Bakery products throughout the world.And with that, focusing on the products with higher value, repricing products with low or even negative profitability where we find that, and systematically going through our portfolio, but also establishing an ongoing practice and process for how to run this better in AAK, which hasn't been our strength in the past.So call it us finding really good opportunities for driving our business even more professional. So that's the [ beat ], if you will, which started a lot in Bakery, and we've highlighted that. But it also go into Dairy, it goes into Chocolates & Confectionery, it goes across AAK and there's more to do. But I think that's how we should look at Food Ingredients that, okay, we have it in Bakery, we have it in Dairy, we have it also in Special Nutrition.Now there are market dynamics in these sectors that puts pressure on volumes in Special Nutrition, but on the other hand, we're also focusing on really how to manage the portfolio of products. So with the combination of consolidating volume in Bakery, where we lose volume because of that, but we're on the other hand gaining good contracts with good margins in the parts where we are producing and delivering to the Bakery industry.We're also gaining momentum in Dairy. Well, also, if you remember, a bit -- 1.5 years ago and forward in Special Nutrition, we were also sitting with longer-term contracts where we could not adjust for inflation early, but we had to come in and do that later on the yearly renewal of contracts, and that also has a positive impact into the volume we do deliver, despite absolute volume being pressured. So it's really the sum of a lot of things combined that leads up to a position of good profitability or margin expansion.And of course, on top of that, being able to have a price discussion linked to volatility risk, quite some significant impact to many industries, including ours, has benefited us in a way where you can have a professional conversation on what is an appropriate price, how do we take into account this volatility and trying to structurally capture that also going forward. But having said that, of course, there is always a risk for pressure from customers, but that's the [ name of ] business.If we then go into the last question, which is, okay, with a very strong 2023, what is the -- how should we think about your overall guidance? I think that is important. We have put a 2030 aspiration that targets the margin growth. It targets growing faster than the market in the speciality markets that we target, including getting an even higher impact than recognition of that impact.Those are the 3 things on the long-term that we focus on. Even though margin has been very strong in 2023, look at it, what is the type of absolute EBIT that we want to deliver long-term. And that is then linked to a more short-term -- long-term outlook, which is generating 10% year-on-year EBIT for AAK.And what does that say by 2024? Well, we're not giving guidance, but we are, of course, also saying that it is after a very, very strong year -- look at it in a bit more longer perspective. Yes. Let's see where we go. We are certainly targeting as an organization to continue to grow. But might that be an -- maybe too high of an expectation to take a very, very strong record year and then you just put another 10% on top of that, or is there may be a consolidation phase versus continued growth where we need to strike the balance between margin and volume? Yes, again, I don't look -- I don't have the exact crystal ball, but I think it's worthwhile having a bit of a humble view on business dynamics in general.

[Operator]

The next question comes from Joan Lim from BNP Paribas Exane.

[Yuan Lim, analyst]

I've got 2 questions. So maybe just to build on the previous questions. On FY '24, do you still see all 3 growth drivers that you had mentioned, the better portfolio and price management, productivity improvements and higher sales of speciality solutions? And are they all contributing equally to it? So that's the first question.And then my second question is, given the higher cocoa and sugar prices in the market now, have you seen customers moving towards using cocoa butter alternatives?

[Johan Westman, executive]

So first question was growth drivers. And again, let's separate maybe what is the year-on-year, year-on-year, year-on-year versus what is an absolute strong performance. There's no doubt that the combination of us focusing on products with high speciality content or more value-added products -- That is part of our strategy. That is going to continue. Us working through our product portfolio, optimizing how we lower our [ plants ] and what kind of products we deliver, that's going to continue, and it's already at an established, good position, if you will.So in that, yes, we believe that trend will continue, but that is not the same thing as I am forecasting another doubling of EBIT per kilo in a short time frame. I mean, certainly, we -- our aspiration is strong, but we do believe that some of the established absolute levels that we have achieved, we're going to be able to keep that momentum.What we're going to focus on is striking the balance between pricing and volume in a way that we drive absolute EBIT over time. And that, again, is to make sure we deliver absolute EBIT growth, and with that absolute shareholder value creation through moving that through cash flow and the valuation of the company at the end of the day. So I think that is the, call it comment to the outlook that I can give.Do we believe that we have achieved a lot? Do we believe that there is still momentum in our improvement [ product ]? Yes, and we continue to focus on productivity, internal optimization on how we lower the [ plants ]. And we're going to be super agile in the market by striking that right balance together with our customers, and that's going to be the tone of voice for '24 and forward.If you then go to the second question, what about sugar, what about cocoa? Well, certainly, with prices moving upwards, that doesn't make -- I mean, that's, call it, positive in a comparison to our alternatives to cocoa butter, for sure. But we have also -- we have long-term experience within the industry. And I think it's fair to say that the most important thing for AAK is that we have a market demand from our customers, meaning the customers producing Chocolate & Confectionery, that is strong.And for that to be strong, they need to sell their product in -- to consumers. So if prices are too high, then consumers might be starting to look at, I don't want to buy that much. So we've always said that we don't want that price to be too high because we still have a very competitive offering versus cocoa.So I think, look at it from that perspective, what is driving consumer demand. We will still have a beneficial value proposition for a customer to use as much of our product as possible versus cocoa butter when they see that opportunity.I think the other piece is to see there has been some shrinkflation in our industry. I'm sure you have read about that and heard about that, that a product that used to be maybe a 100 gram now is 80 gram and so forth. That has, of course, impacted volumes. And again, as I mentioned in the call, if you look at Chocolate & Confectionery for AAK, we're still up 14% to pre-COVID levels. So as an industry still my view is on the long-term trajectory of growth. And certainly, our type of products are well-positioned.So I guess that's the way to look at it, maybe not just looking at CB, our cocoa butter equivalents or alternatives to cocoa butter, but rather what is driving the overall market, and are we may be at the point now where shrinkflation have had it to go where destocking -- had it go and from here, we grow with consumer demand. Let's see. But I think it's worthwhile looking at what is the absolute increase of price on the shelf for consumers rather than cocoa butter versus alternatives.

[Operator]

The next question comes from Aurore Tigerschiold from DNB Markets

[Aurore Tigerschiold, analyst]

I know that you already kind of touched upon this, but I was wondering if we could get a little bit more color on how we should think about EBIT per kilo development for the rest of 2023 and 2024?. And given that you have already achieved your EBIT per kilo target already in Q3, will you be updating your guidance? Any more color on that would be great.

[Johan Westman, executive]

Sorry, could you repeat question number 2 for us?

[Aurore Tigerschiold, analyst]

Yes. So question number two, given that you've already achieved your EBIT per kilo target, will you be upgrading your guidance?

[Tomas Bergendahl, executive]

When we look at the EBIT per kilo into 2024, we don't give guidance on this, as you know. But -- and as you've seen, we have grown our EBIT per kilo quite dramatically over the past couple of quarters. But we are looking at this long term. Back to our aspiration, again, that we want to double our margins by 2030, but that's not the only target. It also goes back to volume and the combination thereof, right? So I would say we've had 1 quarter now above SEK 2 per kilo, but this is, of course, not an indication that, that will continue forever at a very stable level. Things move. And it is the combination of volume versus margin.So I would say that, going back to what we indicate for Q4, when we say that the average performance of 2023 is what we expect for the last quarter without giving any further guidance on 2024, that is where you can lean back on, if you will.

[Johan Westman, executive]

And then to your second question, which is, of course, a very relevant question. So now, when you have achieved it -- and I guess might sound like a broken record, but yes, we are very happy. We are proud of the fact that we're able to drive margin, that we are able to move AAK and industry perspective into a more decent margin, absolute EBIT margin. So again, we're not excusing ourselves at all for the absolute EBIT margin that we have, we're moving it into a healthy territory. Again, very happy for what we have achieved.Now as Tomas said, there is a bit more to do, striking the balance between margin and volume as well as driving impact and getting recognition. But to your point, if we continue to perform on a faster pace in total with regards to total EBIT generation, total EBIT growth, and we start seeing a absolute long-term trend being even higher than 10% year-on-year EBIT growth, then we will also review our financial targets, and we will review our aspiration.But that is not something we do in quarter 3 just because we had a very strong delivery on one of the KPIs. But certainly, as we come into the second half of next year, if things continue to materialize in a very positive manner, we're happy to adjust our aspiration and to raise the bar and to raise our targets even further. But let's not jump to that too early. Let's rather applaud what has been achieved.

[Operator]

The next question comes from Alex Sloane from Barclays.

[Alexander Sloane, analyst]

I've got 3, if that's okay. Firstly, on the price management element of the margin improvement, Johan, if I understand correctly, the message seems to be that in some areas of the business you think that your sort of historic margins maybe were too low based on the value of your offering. And so maybe there's a structural opportunity to hold on to more of the COGS tailwinds versus passing back in pricing in some areas. I appreciate that's not a shift across the entire portfolio, but maybe you could help quantify what percentage of the portfolio you see now as cost plus versus more value-add pricing? And I guess, how should we think about potential renewed inflation pressure in that context? I mean, will it be any harder for you to pass through inflation given you haven't passed all of the deflation back this time? That's the first question.Second one, just on CC&F on the volume decline, I fully appreciate your nicely above pre-COVID levels. But in terms of the decline in quarter 3, do you think that's destocking? Or could that be share loss for AAK? I think minus 11% is lower than the market decline, so interested on your thoughts in terms of the key delta there?And then just finally, I mean, much longer term, but GLP-1 weight loss drugs have been making a lot of news, lot of headlines. Do you have any early thoughts on how AAK's end markets might be relatively impacted?

[Tomas Bergendahl, executive]

Thank you, Alex. And to the first one, yes, to your reading on that -- I think you're reading it right. Is there an -- is there a structural opportunity to price ingredients, high value of ingredients like oils and fats on a more fair, decent territory as an industry, including AAK? Yes, I think so, [ also ] since I came into this company. But let's not forget that is absolutely not all of it in this business, it's a lot about also optimizing the portfolio. And we're speaking a lot about what is -- so if we dig one level down, what is optimizing the portfolio. It's going, for example, through our factory, one by one in projects we [ call ] deep dive, where we look at how can we release capacity, how can we optimize how we lower the [ plants ], what type of products are we running in that plant, and that is sometimes optimizing portfolios versus Bakery, Dairy and Chocolate, but also within the Chocolate portfolio.So there is a lot of improvement activities that leads to this. So there's also a mix element, a portfolio element where we sell more of certain products versus others where the absolute price increase is not extreme just on that product, but rather that we sell more of a certain product than have release capacity on lower-margin products. That is also piece of it, and then overall productivity and improvements.But -- and also making active decisions in certain contracts where we see that we don't have what we would consider to be a good enough margin. And it doesn't mean we exit the segment, but we either renegotiate the contract or leave that contract for -- to make the capacity available for better contracts. And just from an average point of view, you take something out that's below the average, that will increase the average, of course, right? So that's a big part of this change as well.Pricing in the market is competitive. We can't set any price that we would like. We work innovation, we work with the offering of what we contribute with to the customers' end product. So there is some value sell in that, and we can probably get a lot better at that process, but it is a very competitive market. So what you see is, back to what Johan said, internal efficiencies, but also that active selection on volumes and margins, a lot better management than what we've had a few years ago in that area.

[Johan Westman, executive]

And then to the last part of question, one, which is so -- if you are here now, is there a possibility to manage inflation going forward? Yes, there must be. We are -- again, I repeat myself, if you look at the absolute margin in our industry and where we are today, that's not an extreme margin at all, rather than going into a such a decent territory. And we -- that's our dialogue with customers as AAK and as an industry. I mean, there must be an appreciation for that long-term that we manage risk, we manage volatility, and we need to manage raw material fluctuations. That's part of our business. But certainly, as a company, and I'm speaking for AAK now only, we are going to continue to professionalize our organization and to optimize our portfolio. So again, I want to take away the focus. I think the word price is probably mentioned a bit -- in balance to the total picture. This is professionally working with a market, with our offering and how we stack up against competition.Second question on CCF volumes. Is there a bit of destocking, is there a bit of market share? I think it is both probably because -- I read the same numbers as you do, and that's coming back to striking the balance on price. And so, of course, when we do optimization of portfolio, when we do -- as Tomas said, looking through our portfolio, what type of offerings do we want to send our customers, what type of products are we focusing on when we're releasing capacity by letting some business go and so forth. There is that element of sometimes actively losing market share for the benefit of a better mix, sometimes also, of course, losing market share because of our price being higher than competition. So that's the name of the game.So I think it is when you see the volume that you see, yes, we probably lost some market share. But on the other hand, we have improved the portfolio and the total profitability of that portfolio, and coming back to what is the key focus going forward. Of course, it's not to lose too much volume but keep the margins right, and that's a balance -- of course, striking the balance between price and volume, while continuing our improvement projects internally, and that's going to be the focus for the coming years.

[Tomas Bergendahl, executive]

And just as an additional view there, I think if you exclude Russia from the CCF volumes -- and I agree with Johan, we probably -- quarter-over-quarter in Q3, we probably have lost some shares. But if you look at Q3 from '20 to '21 and '21 to '22, we have an annual increase of volume of 11% [ per ] quarter comparison. And I would argue that was higher than the market growth at that time. So if you look short-term, yes, you will see some volatility in our volumes versus the market where we gain volumes, where we lose volumes. But over time, going back to, again, pre-pandemic, a 14% increase, I think we hold our own in terms of market share.

[Johan Westman, executive]

And last question was around overall future demand, I guess, for food linked to new innovations and pills, medicine that one could use, right? I -- this is the big talk at the moment. We're seeing market reactions to that from my point of view -- and this is often the question. My point of view is, will we as human beings dramatically shift our behavior on eating something, treating us with something, having that pleasure of having a dinner together, having a bit of snacking. I think there's no doubt that these kind of solutions has probably a positive impact on obesity and so forth, which we need to see as a positive, right, from a total ESG perspective, from the health of the population of the world. No, I'm very positive.Let's applaud that. But when you look at total demand and total demand for sustainable food solutions for the future, I think there is no doubt that we need to look at the world where we reduce the animal-based ingredients, reduce the eating of meat. And we see a long-term positive trend for the offerings that we have in our portfolio, which is based on plant-based oils and fats ingredients, be that continued replacement of a bit of animal-based ingredients in a certain product, or be that even a dairy and meat alternative in the future, and including new technology where AAK again is investing and well-positioned.So while these type of medicines, drugs could have an impact on the absolute intake per capita, yes, but we also have a growing population. We have a growing demand for -- a growing middle class that is going to eat more produced food, et cetera.So personally, I think it's an overreaction in the short-term. I think it's a positive, really on the long-term for the population of the world and health. But there is no doubt, I think, that the world will continue to eat and snack and treat ourselves. And with that, there's going to be a continued demand for sustainable solutions where AAK is well-positioned. Again, I don't have that crystal ball, but that's my personal take at the moment.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Johan Westman, executive]

Thank you. Thank you all for listening. Again, very good to have your questions and the ability to fine tune and debate some of the movements in our industry. We're closing a strong quarter. And with that, thank you for listening. Looking forward to talk to you again soon.