AAK AB (publ)
STO:AAK
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AAK AB (publ)
Earnings Call Analysis
Q3-2024 Analysis
AAK AB (publ)
AAK reported robust performance with a 4% increase in volume and an 18% rise in operating profit year-over-year, factoring in fixed currencies. The enhanced profitability can be attributed mainly to efficient operational practices and favorable market conditions in their Chocolate & Confectionery Fats segment.
The company's strategic decision to divest its Foodservice facility in Hillside, U.S., is slated to close by the end of 2024. The move is expected to generate a one-time cash flow of SEK 600 million. This site accounts for about 5% of AAK’s total volumes but contributes only approximately 1% to operating profit. Therefore, its divestiture will enhance operating profit per kilo by around 4%.
Sustainability remains a key focus, with AAK increasing its verified deforestation-free palm oil from 83% in 2023 to 89% in the first half of 2024. This improvement reflects a strong commitment to sustainable practices amid evolving regulations. The proposed delay in the EU's deforestation regulation has raised concerns about uncertainty in the market, but AAK is well-prepared to adapt.
Operating cash flow for the quarter was SEK 514 million, impacted by higher working capital requirements. The net-debt-to-EBITDA ratio stands at a solid 0.39, reflecting financial stability and flexibility. AAK aims to achieve a long-term average operating profit growth of 10%, demonstrating confidence in maintaining profitability despite market challenges.
The three primary business segments contributed to growth: Food Ingredients saw a volume rise led by Bakery and Dairy, while Chocolate & Confectionery Fats experienced a significant volume growth of 12%. However, the Technical Products & Feed segment showed a slight decline in operating profit, which is being monitored closely for recovery in future quarters.
While AAK expects continued demand in its segments, there are uncertainties regarding consumer behavior due to inflation on retail shelves that may affect overall volume in the Chocolate & Confectionery market. The management emphasized their commitment to positioning the company effectively amid these risks, leveraging a strong product portfolio to capture potential opportunities.
To bolster its Foodservice operations in Europe, AAK plans to invest SEK 400 million over 2025-2026. Most of these funds will focus on constructing new facilities and modernizing existing sites. Such initiatives aim to enhance capacity and optimize margins, ensuring long-term profitability and market competitiveness.
As AAK navigates a complex market landscape, the company remains committed to driving growth and improving profitability across its segments. The combination of strategic divestments, strong sustainability practices, and proactive investment plans will position AAK for continued success in the face of emerging challenges. Leadership expresses a 'prudently optimistic' view of future performance.
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Good morning, everyone. Thank you for joining us today. Welcome to our Third Quarter Results Presentation. As you heard, joining me today here in Malmo is also our CFO, Tomas Bergendahl, and we will guide you through this presentation. If we move into Slide #2; this is what we will cover today. The Quarterly Highlights, some selected events. We'll also include the recently announced divestment of our Foodservice site in North America. We'll have a business and financial update and then some concluding remarks.
I will also take this opportunity to briefly review the agenda for our upcoming Capital Markets Day. And as usual, we will end it with a Q&A session. With that, we move into Slide #3. This presentation includes forward-looking statements that come with risks and uncertainties. These are our views on future events and financial performance, but actual results could be different. So please keep that in mind when digesting this material. Now over to Page #4; I'm proud to report strong growth across all our business areas. We have had a 4% volume increase and we have improved our Group profitability for the third quarter.
Our operating profit per kilo, our margin grew by 13% at fixed currencies, driven largely by our global optimization programs and favorable market conditions in the Chocolate & Confectionery Fats segments. As a result, our operating profit increased by 18% compared to the third quarter last year at fixed currencies. Operating cash flow amounted to SEK 514 million impacted by an increase in working capital. Our net-debt-to-EBITDA ratio was stable at 0.39 and our return on capital employed stands at a solid 22.1%.
And with that, we move to the next slide. Sustainability remains a key pillar of our strategy, and I am proud to report that we continue to make progress. We have increased our verified deforestation-free palm oil from 83% in 2023 to 89% in just the first half of 2024. The improvement was primarily driven by enhanced verification, higher RSPO purchases, stronger supplier engagement and satellite monitoring. This is not something new, but rather the result of hard work and our continued commitment to sustainable practices and protecting biodiversity, especially as regulations continue to evolve.
And speaking of regulations, as I'm sure many of you have seen there is a proposal to delay the EU deforestation regulation by one year. No final decision has been made yet, but we see the proposal as unfortunate as it risks adding unnecessary uncertainty. And worst of all it also risks shifting the focus away from the goal that we all should be focusing on, which is to stop deforestation.
On that note, I will now hand it over to Tomas, who will explain a bit about the rationale about the announced divestment of our Foodservice site in North America.
Thank you, Johan. Good morning, everyone. We're now on Slide 6. As announced yesterday, AAK has entered into an agreement to divest our Foodservice facility Hillside in the U.S. The transaction is expected to close at year-end 2024 and will generate a onetime cash flow of roughly SEK 600 million at the time of closing. It's anticipated that there will be no material impact on the profit and loss statement as a result from the transaction itself.
The deal logic is driven by the -- that the Hillside plant is geographically separated from the rest of our Foodservice business that resides in Europe and that the plant has very limited connections or synergies with the U.S.-based Oils and Fats business that we have in the Group, nor any synergies with the European Foodservice business. In addition, the site has for some time been challenged from a profitability perspective due to the lack of the above mentioned synergies, but also from the fact that it's a standalone site in a highly competitive local market.
The Hillside plant accounts for about 5% of the Group volumes as it stands today and around 1% of operating profit. As a result, the divestment will positively impact our operating profit per kilo, everything else equal by 4%. At the same time, to strengthen our remaining Foodservice operations in Europe we are making a capital investment in a total of SEK 400 million, spread over 2025 and 2026.
This will be invested in a new site to replace the existing facility in Dalby, Sweden. And as part of the investment focus in Foodservice we will also enhance and modernize our Hastings Foodservice site in the UK. The three remaining Foodservice sites after the divestment of Hillside in the U.S. that resides in Europe currently generate above average EBIT per kilo margins compared to the Group.
With that, I'll hand it back to Johan to go over the Q3 performance per business area.
Thank you, Tomas. And with that, let's move into Slide 7, some business area highlights. We start with that by looking into Food Ingredients. Volumes grew by 1%, led by Bakery and Foodservice. While Special Nutrition saw a slight decline due to a continued challenging environment in China. Operating profit per kilo increased by 3% to SEK 2.21 per kilo, primarily driven by Foodservice and Dairy, and it included a negative impact from currencies of SEK 0.18.
At fixed foreign exchange rates, operating profit per kilo increased by 11% year-on-year. Absolute operating profit for Food Ingredients increased by 4%, including a negative FX of SEK 62 million. At fixed foreign exchange rates, operating profit increased by 13%. And with that, please turn to the next slide. Chocolate & Confectionery Fats had a strong quarter with a 12% increase in volumes, somewhat helped by soft comparisons to last year and supported by favorable market conditions.
Result of this operating profit per kilo increased by 7% even after a negative currency impact of SEK 0.25 per kilo. At fixed foreign exchange rates, operating profit per kilo increased by 14%. And with that overall, this resulted in a 20% growth in operating profit or 27% at fixed currencies, a strong quarter for our Chocolate & Confectionery Fats business.
With that, we turn to the next page and our third business area. In Technical Products & Feed volumes increased by 4%, primarily driven by growth in Technical Products, while Feed was roughly flat. And with that operating profit per kilo declined SEK 0.65 and operating profit decreased slightly to SEK 46 million, down 4% year-on-year. But on the other hand, a sequential improvement from quarter two
And with that, I hand it back to you, Tomas, for some more comments on the financials.
Thank you. Please turn to Slide 10. Cash flow in the quarter was driven by strong earnings, offset somewhat by an increase in working capital, mainly driven by inventory. And as you can see, inventory increased by just above SEK 700 million. And the makeup of this is SEK 300 million coming from seasonality-driven sourcing of rapeseed and Shea; another SEK 200 million from the previously mentioned temporary ramp up of conventional raw material in preparation for the implementation of the EUDR, and an additional inventory value of just over SEK 200 million driven by an increase in raw material prices.
And this is then based on the 6- to 9-month lag that we have talked about before. Existing commitments of additional conventional inventory purchases aimed at the smooth implementation of the EUDR regulation is expected to add an additional SEK 200 million to SEK 250 million of inventory value in Q4. These are materials already under contract and was made before the announcement of a potential delay in the implementation.
The excess EUDR-related inventory totaling then just over SEK 400 million at the end of '24, conventional in nature. Without EUDR-related premiums is temporary and will be run down during the first half of '25, primarily in Q1. Accounts receivables increased slightly, driven by the 4% increase in volumes and cash flow from accounts payable were relatively flat in the quarter. CapEx, as you can see, amounted to just over SEK 300 million, which is similar to the level in Q2.
Year-to-date, we have spent a total of SEK 881 million and we continue to expect the '24 full year amount of CapEx just north of SEK 1.2 billion. Please turn to the next slide. Return on capital employed increased following the continued strong development of operating profit. EBIT for the last 12 months was close to SEK 4.8 billion, up roughly SEK 200 million sequentially from Q2, together with capital employed at SEK 21.6 billion.
The latter rather flat over the last few quarters. This resulted in a return on capital employed, as Johan mentioned before, at 22.1%, up from 21.5% in Q2. Next slide, please. Driven by the strong operational earnings net-debt-to-EBITDA remains at a level that provides us with financial flexibility. At 0.39 in Q3, it's a slight trend downwards from the 0.41 we achieved in Q2 and significantly down from the peak at 2.03 that we had in Q2 of 2022.
With that, I'll hand it back to Johan for some concluding remarks before we open up for questions.
Thank you. And please move to the next slide, please. I would like to take this opportunity to remind everyone about our upcoming Capital Markets Day on November 26 to be held in Karlshamn. During the day, we will be presenting a strategic update on the 2030 aspiration that we have. You will also hear from Tomas on the financials and from Niall Sands on our innovation pipeline.
There will also be opportunities to engage with other members of the management team during the afternoon where we will have some Q&A breakout sessions. And at the end of the day, we will have a transport back to Malmo and there will be a light and informal dinner at our headquarter offices. Most welcome to that Capital Markets Day. And with that, we move into the last page, some concluding remarks. To wrap up, our third quarter results demonstrate our ability to drive growth and profitability across our business areas.
Volume grew by 4% year-over-year, with improved operating profit per kilo, leading to an 18% increase in operating profit at fixed foreign exchange rates. We remain committed to achieving an average operating profit growth of 10% over the long-term. We're also humble about the dynamic market conditions and the increasingly tough year-on-year comparisons that we face. Our focus is to maintain a balance between value and volume, and we approach the future with a prudently optimistic view.
And with that, we are happy to take any questions that you might have. Operator, please begin.
[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG Sundal Collier.
Couple of questions from me. First of all, in the CEO statement, you write about approaching tough comps, Johan. In this quarter, you grew EBIT 10% year-on-year on a 40% EBIT growth comp. And one might argue that's a tough comparable as well. I was wondering what comparables are you referring to specifically in the statements, please?
Thank you. That's a great clarifying question. I think it's fair to say that when you grow on top of growth, it doesn't mean that the comps becomes an easy, right? So you should look at this in the long-term. We grew like 40% last year. We grow another 10% or 18% at fixed currencies. I mean, it's really strong growth. We're really delivering well. And at the same time, we have somewhat dynamic market conditions and risks and uncertainty is slightly higher than we were used to.
But on the other hand, as you know, AAK, we have a very strong organization. We are agile and we focus on being prepared to deliver in those environments. But so look at it more in the sum of the performance over the last couple of years. I think that's fair to say that that's a tough comparison. We have delivered a lot -- very strong results in a short period of time. That's impressive. But one should also be a bit humble about that.
Perfect. Thank you very much. Perhaps another clarifying question. You write in the report that you've reached one of your three 2030 aspirations, namely the EBIT per kilo target. And [ meanwhile ] analysts, colleagues sort of agree that it's unlikely that you'll drop below this [indiscernible] level anytime soon. Would you say this is your view as well or rather is this what you're saying in the report?
Yeah. Thank you for that. We, as you know, sound like a broken record. We won't not give the guidance meaning I'm not going to guide on firm. We're not dropping or we're going to continue above. What we -- the way we look at this is like strong performance. We remain focused on driving value over volume. In essence, we are not going to sit back, relax, quite the opposite. We are driving our organization, pushing our organization to continue to deliver.
But we recognize that we have in a short period of time actually reached our target and with that a reason to be proud of that. But at the same time, clear message that we're not backing off. We continue to focus on that. And at the same time, we have two other important parts of that aspiration, which is to grow our volume faster than the market and also to create impact and get recognition for that impact.
So we remain focused on our aspiration. We recognize that we reach one of the targets, but we also want to be clear that we're not backing down; quite the opposite. We are still pushing for the 2030 in terms of also reaching 10% year-on-year growth in the long-term, but we'll also come back to that and give you more clarity on our execution against that aspiration at our Capital Markets Day.
Perfect. Thank you very much. One final question. In the CCF segment, the market remains favorable with a high cocoa price in particular. I would like to ask you about your view of volume growth in the segment going forward assuming the higher cocoa prices will eventually reach consumer retail prices. Would you say growth in fillings, for example, where the cocoa price impact might be smaller, could offset the volume loss in chocolate bars, if that should be the case?
First of all, difficult to forecast growth of certain consumer segments. So whether a bar or a piece of chocolate or a gift box -- which segment is going to grow or shrink, difficult to say. However, if you look at it from a more of a helicopter view in the industry, what is favorable for AAK is that we have a very strong position in the Chocolate & Confectionery space. Our solutions bring functionality, bring cost efficiency to our customers.
So for example, when we replace cocoa butter be that -- in a chocolate bar or in other product or with filling fats and so forth. So I think it's fair to say that the risk on the volume side is whether consumer demand goes down due to, call it, inflation on the shelf in retail. But we have also seen many times that despite the downturns and so forth, consumers tend to want to treat themselves and snacking remains strong. On the positive side is that our solutions are really relevant in this market environment, which means that we have cost -- solutions that brings cost reduction for our customers.
We have solutions that are functional -- brings functionality to our customers. And with that, we sit with the portfolio that is very relevant for our customers. So there is an opportunity for AAK to grow volume even if the absolute snacking volume should be flat or down. But again, there are some uncertainties in that and at the end of the day the absolute volume is of course driven by consumer demand.
Perfect. Thank you very much. Those were all of my questions. I appreciate your point on consumer trends being difficult to forecast. I struggle every day it feels like.
The next question comes from Johan Fred from SEB.
Starting off on Food Ingredient, is there any chance that you could quantify the negative impact on volumes and profits from Infant Nutrition in the quarter?
I would say we do see some quarter-over-quarter reduction in volume. The situation is still, as it has been for several years, under pressure, primarily driven by the lower birthrates in China. The earnings levels, the margins per kilo are still well above the average for the Group. So it's still a very attractive segment for us.
But there are some natural challenges in terms of the birth rates and local strong competition, and we're focusing continuously to improve our product offering and also see if our products can be included in new end products if you will, outside of the existing product range. But it is a challenged situation, but again has been so for the past I'd say four, maybe five years.
Okay, got it. But so what was the volume growth in the in the other Bakery and Dairy, for example, in Foodservices, if you exclude infant nutrition?
The volume increase was slight. So the volume of Special Nutrition is fairly low to begin with, being high and complex products that take time to produce. So if you compare it to a Bakery and Dairy there's much more volume there to begin with as a share of the overall, so -- but there was a slight increase.
Okay, got it. And the question on the raw mat prices. We've seen the spread between palm oil and the cocoa widening thus far in Q4. Of course, you hedge your contracts and this mostly affect working cap, I would assume. But have you seen any impact from the higher palm oil prices on consumer behavior?
No.
Customer behavior, I should say.
No. Not as of yet. But as you say, we also see the increasing trend in the price of palm. You also see an increasing trend in price of Shea, for example. That's also part of the replacement cocoa butter equivalent product. So raw mats are on the rise. But from palm itself, we haven't seen any impact. No.
And I would argue that if you look at it, especially over the last five years, this increase in palm is moderate compared to the dynamics that you see on cocoa prices. And also if you look at premiums like we've just seen EU proposing a delay on the EUDR, that kind of uncertainty and fluctuation on companies like us being on the border of buying raw material with EUDR premiums and so forth, and then it goes away and it stabilizes a bit. That kind of uncertainty, I think has a greater impact on us and customers on when to lock in volumes or not and how to hedge versus a slight uptick in the palm prices that we see.
And there is still another 50% to 60% to go to reach in palm prices to reach the very highest that we had in mid-2022.
So to cut it short, I think this increase impacts our working capital. Yes, but this is a type of increase up down that we are used to dealing with and the industry as such.
Okay, very clear. And building on your answer there regarding the EUDR regulation, you mentioned that the -- a potential postponement of the implementation was unfortunate [ as it adds ] uncertainty but do you see any tangible impact on your operation besides potential working cap build up? You mentioned just now sort of a higher margin on the EUDR oils, for example. Could you elaborate a bit on that?
Yes, thank you. And first of all, to be crystal clear, very limited impact, but that is due to the way AAK has been operating. And that's what you have seen in AAK during other times of uncertainty, like COVID, like disruptions on supply chains. We are agile. We have a flexible organization. I'm so proud of the organization. What we have done also on the EUDR topic. We've been early on -- I think we were early on understanding the complexity of this regulation. So again, we really support the focus on no deforestation.
We have our goals already set for no deforestation. So with that we are aligned with EU, but we're not aligned with the way that EU proposed to implement this. And I think this is what now backfires. So to cut it short and I think that we have different government bodies that is now say, hey, this is so complex, it's so difficult and EU is now proposing a delay I think due to the complexity of the implementation. So what we think is unfortunate is that companies like us, we have been working hard, we are prepared and there is a good intent to stop deforestation.
This brings uncertainty in raw material prices. This brings uncertainty about when that is, when is it coming, what is it going to include? Will it be changed? And that uncertainty is never good. What I do hope is that there will be something coming here on a more simple way of implementing it that would be beneficial for especially European companies. We are ready and we would have been ready. Now we have to adjust and we have been able to dodge significant impact due to EU's change of mind, if you will.
So I gather you're comparatively to your competitors well-positioned for the upcoming regulation if it were to be implemented at the end of the year?
We have been working hard to be ready. I cannot comment on our competitors and I will not do. But AAK has been working with this for a long time. We would be ready for the end of the year and we will be ready before the end of next year. Now let's see where this moves.
The next question comes from Alex Jones from BofA.
The first one just to clarify your answer to the first question on comps. You mentioned higher risks than usual in the market. Can you clarify exactly what you mean by that, whether you are just referring to sort of the geopolitical and macroeconomic environment or whether there's anything sort of AAK-specific that's making you concerned about future quarters? And then just two more questions on the Foodservice side.
On the European operations, can you talk about the synergies that that European Foodservice business has with your broader Oil and Fats Ingredients business and therefore, the logic of you continuing to own that while selling off the U.S. site? And then on the SEK 400 million investment that you're now making, how much of that is sort of maintenance investment that we shouldn't think of as driving future growth versus how much will that help you optimize and then drive volumes and margins in the future?
Thank you. So what we see when we say when we look at your first question, what do we mean by risks and opportunities? And so I think coming back to what I just comment on EUDR, while we -- as we say, we have an agile organization, we're moving to be ready in the way, shape and form we can be, but also recognizing like the EUDR very vaguely written difficult to understand implementation of this regulation. What does that mean in operations?
That means that we are investing but also forcing investments depending on where the regulation go. We buy stocks to be ready or have safety stock. But we also then need to look at when do we buy stocks with premium for being segregated and so forth? So it just adds dynamic -- take that as an example. We're dealing with this now almost like on a monthly basis. Now I'm confident that AAK is strong with regards to dealing with this. But that uncertainty, as you can imagine, could risk having us having a bit of a higher cost that could not be offset in the short term, but also vice versa.
It creates opportunity for a company like AAK, and we've seen that in the past. So I guess what I'm saying that take that as an example the probability room, if we can call it that, is just a bit wider. So a bit higher risk but also more opportunities. And we are staying focused on being ready to deal with uncertainty, to be ready to grasp opportunities, but also to be humble and understand that there are -- we're not immune to risks and we're not immune to market dynamics. And I think that goes also into Chocolate & Confectionery. Again, we have a strong portfolio, we have lots to offer.
And in order to help customers formulate and to use our products, for example, to replace cocoa butter. But it's very difficult to foresee whether there's going to be a weaker consumer demand or not in snacking as a consequence of potential price increases on the shelf in retail. So if I take those two example that would exemplify that, yeah, there are probably more dynamic environment with higher risks, but in that environment there are also more opportunities. So I guess overall message is AAK is going to stay focused on being ready to deal with uncertainty and also being ready to grasp opportunities. So with that, we have a chance to really continue delivering strong, but there's also a risk for further headwind.
And when it comes to the questions you had on Foodservice, the difference lies in that in the U.S. we have one standalone unit in a very competitive local market. We have no or very, very limited connections to the Oils and Fats business there as I mentioned. In Europe, the picture is quite different. We have three units fully focused on the Foodservice business, two in the UK and one in Sweden. The connection to the Oils and Fats business is much bigger there. So if you look at the facility in Sweden, it gets a lot of its raw materials primarily rapeseed from our large unit, Carlson.
And in the UK, the connection to our Oils and Fats business in Hull is also significant in terms of supply and so forth. So the connection is there. In addition, as these units are fairly close to each other from a geographical perspective, serving sort of northern Europe and the UK, we also see a lot of bundling of products from the different entities into the markets as AAK. So there's a bit of a shared market there in certain products and so forth are bundled when we go out to customers.
So there is a lot more synergy and a lot more sort of presence in terms of critical mass. And as I mentioned before, the EBIT per kilo performance of those three units are actually above the Group average, which is not the case with the facility that we have in Hillside on the East Coast. When it comes to CapEx, the SEK 400 million that we're investing, most of its going into the new build to replace the Dalby facility. I'd say about SEK 350 million or so out of the SEK 400 million.
The remaining goes into the improvement of the existing facility in Hastings in the UK. And on your question, if that will then reduce future maintenance CapEx, I'd say to some extent, of course, if you build a new plant, as you know, maintenance will probably not be as high in the first couple of years as it is with a fairly old unit that we have today. So you will see some easement there over time. But in the scheme of things, if you look at the full total, SEK 1.2 billion of CapEx, of which sort of SEK 500 million to SEK 600 million is maintenance for the Group as a whole, the impact will not be significant. The units are fairly small. I hope that answers your questions.
The next question comes from Joan Lim from BNP Paribas Exane.
Three questions from me, please. So in Food Ingredients, you said volumes are driven by Bakery, but I noticed that in Bakery EBIT per kg was flat. Could you maybe provide more color as to why that is, please? And then my second question is on Q4. Can you remind me if there's any seasonality between Q3 and Q4 such as are there typically phasing of orders ahead of the Christmas season?
That's the second question. And the last question is we've heard chocolate producers talk about increasing price elasticity for consumers. So if overall chocolate volumes were to decrease, how does that impact AAK? What have you seen or heard from customers so far? Is that a concern?
Starting with your question on Food Ingredients and Bakery. I think we, as you mentioned also saw good volume increase in Bakery. We've done that over the last couple of quarters, which is really nice to see. If you look at a single quarter, there are mix effects, of course, what type of products we sell within the Bakery segment and the margins of the different segments in Bakery varies quite a bit from sort of mid to high end.
That said, the EBIT per kilo is flat with growth and I think mostly driven by mix. We are much more sort of focused on the long-term development. And there over the last two years you've seen great improvement of the EBIT per kilo in Bakery. So some quarters it may stabilize, you may even see a small reduction some quarters. But over time the trend has been very positive.
All right. And then on Chocolate & Confectionery, a bit back to I think what I mentioned before. The one parameter that we have less visibility on and obviously less impact on is the absolute consumer demand from the shelf in retail with regards to snacking. So that goes almost without saying, should there be a drop in demand then obviously there will be less products sold with AAK solutions inside.
However, our solutions are also sought after from our customers because they can help offset cost increases like cocoa butter. So we see an increased interest in reformulating products to use our solutions versus current solutions. And with that, that creates an opportunity. And that's what you've seen a bit in the results this year. And I think also structurally an opportunity going forward. But what is then the total residual mix of that?
Should there be a drop in absolute consumer demand but an uptick in the usage of our solutions? What is the net going to be? Very difficult to forecast, but positive, really positive that we have a strong portfolio, we have a strong position in the CCF industry. And with that we are ready to take these opportunities when they come. So yeah, a bit uncertainty on the absolute volume but still very strong position. Was there one more question or was that it?
There was one more on seasonality between Q3 and Q4, if there's any phasing of orders ahead of Christmas?
Typically, I mean, there's been five years of dynamics, if you will. So I go back almost to pre-COVID with the statement that we -- the seasonality that we saw was that Q1, Q2 was fairly stable on a level. And then Q3, Q4 was fairly stable on a higher level so seasonality being more volumes and better earnings for AAK in Q3 and Q4 versus Q1 and Q2.
And then we've seen fluctuations and market dynamics over the last five years and you've also seen AAK growing very strongly. So doing the right things, which has had a positive impact on our absolute earnings trend. So I guess going back to the short answer, not a big drama between Q3, Q4 typically -- Q1, Q2 being typically slower.
So I guess what I was trying to get at was it's the strength in Q3 wasn't really about customers stocking up or buying early ahead of Q4?
No. I don't think so. Typically not. Hard to say. I mean, we don't have full visibility on their production line. So there is always a bit of variation. You know, like in China, is the Chinese New Year coming that week or that week that has a bit of impact, the customer planning ahead of Easter or Christmas. Of course it has an impact, but I wouldn't say that we have seen any typical -- sorry, I wouldn't say that we have seen any abnormal behavior on stocking up in this Q3 versus other Q3s.
The next question comes from Priya Patel from UBS.
Hi. I have a couple of questions. So firstly, we've seen some inflation in raw materials and you can kind of hedge that in the rest of the business. But in Infant Nutrition, there are some contracts with a lag. Are you able to tell us when these contracts are signed and the typical length of these contracts? And then secondly, just in Food Ingredients so the EBIT per kilo improved in Foodservice and then also the volume growth. Was this mainly in the European business or the North American business?
I'll start with the Foodservice question, if that's okay. The improvement in EBIT per kilo there is broad-based. The performance has been much better historically as well in Europe than what we've seen in our U.S. facility. But the U.S. facility, Hillside, has actually performed much, much better in '24 compared to what it did in '22 and '23. So there has been a broad-based improvement I would say.
Yeah. Just want to repeat your question on raw mat inflation. Was the specific question on raw mat inflation impacting Special Nutrition or was it raw mat inflation in general?
Yes, Special Nutrition, just like the contracts.
Yeah. So in Special Nutrition, we do use raw materials that are also -- handle over a raw material stock, if you will, or market platform. So we are able to hedge lots of what goes into Infant Nutrition. On the other hand, the raw material piece of the bill of material, if you will, is lower because these are high value-added products with a great deal of refining and so forth, where it also includes premiums that we cannot hedge. So lots of hedgeable pieces in there and also some unhedgeable pieces. But I would say this is nothing new. This is business as usual, if you will.
The next question comes from Oskar Lindstrom from Danske Bank.
Yes. You've previously talked about having some free capacity in your plants following the almost two years of consecutive volume declines that you had. What's the situation now with regards to available capacity? And when will you have to start building new capacity or buying new capacity for that matter?
Great question. So maybe sounding like a broken record but try to bring clarity. We continue to optimize -- so we have put extra efforts over the last three, four years on -- you've heard us speak about optimization, but if I repeat, part of that is portfolio and so forth. But part of that is really working hard with our footprint, our refining footprint and having efforts like a deep dive are we structurally go in and look at every plant or plant by plant to see what is the opportunity here to run faster, smarter to debottleneck to optimize the portfolio within the plant?
And that has resulted in very positive results, i.e., freeing up capacity plant by plant. So during these last two years you have seen us adding capacity in the form of debottlenecking. We have added a bit of capacity also in making investments obviously to increase capacity. So with that and we're going to continue that, we expect to be able to grow volume and to free up capacity with these optimizations. At the same time then when volume growth grow even more and in certain plants, we then make stepwise investments to increase capacity and when we need to, we do a greenfield, brownfield or potentially an M&A.
For the time being, I would say that we can manage continued growth with the efforts that we have in place. There is some capacity still there, like 10%, 15%, still some opportunity for freeing up capacity through this optimization programs and debottlenecking. But when volumes grow more than that, there is certainly need for further expansion and we are continuously looking for opportunities for geographical expansion on bolt-on acquisitions, as you know. But this is where we are at the moment. Happy to invest -- when and if needed.
All right.
The next question comes from Alex Sloane from Barclays.
The first one, just going back to the raw material cost inflation. Obviously, we can track quite well what's going on in palm and rapeseed oil. Shea is a harder one certainly for me to have visibility on. So it'd be great if you could kind of give some color on the supply outlook there and the scale of inflation you're seeing and perhaps expecting going forward as demand for CBs has picked up.
And I guess more broadly on raw material cost inflation, I mean, it would appear that AAK and the industry hasn't necessarily given back all of the deflation over the last few years to customers. It's been part of the margin expansion. Does that make it any more difficult dealing with cost inflation from here in terms of negotiations with customers or is it kind of business as usual as regards to the pass through of raw mats into pricing? So that would be the kind of first question.
The second one; I guess very impressive return on capital employed improvement, which has been in large part driven by margin expansion. We have seen some of that margin expansion across some of the downstream peers. I wonder at these levels, are you seeing any of the kind of the upstream players in Oils and Fats thinking about adding capacity in some of these areas or is that not really a risk?
Thank you. I think I start by answering your questions from back to beginning. So the last two questions there on -- are upstream players adding capacity or, as we call it, one thing to eat our lunch? I think that is, again, business as usual. So the answer is yes, but that's been the case for many years and it continues to be like that. Meaning when you see opportunity downstream, there is a tendency for upstream players to want to look at that. But at the same time, we continue to focus on where we are and be the leader in specialty.
So I think that's where it is and it hasn't changed dramatically over the last couple of years. Same thing on pricing, there is always a competitor standing shoulder to shoulder to you and our customers are professional customers, professional players, consumer good companies, they have a great deal of focus on procurement and so forth. So that's where it is. And it hasn't changed a lot with raw material swings either. So I think that's the short answer is business as usual. Obviously there are always dynamics, but business as usual to a high degree.
Then coming into raw material inflation and as you said, you and we have good visibility on some of them with regards to Shea and the link to cocoa prices and the opportunities for our CCF solutions. With this market dynamics, there is a good demand for Shea-based products. Yes. And with that inflation on raw material, we see that. But on the other hand, that is also reflected in how we price and how the market is pricing that.
If you take all of that into account, the cost of goods sold is going to be at a level where it is still very competitive to cocoa butter. So we're back to having competition between competitors on selling Chocolate & Confectionery Fats solutions. But if you look at it in comparison to cocoa butter, you still arrive at a very competitive price level, even with Shea inflation or palm inflation. But for the time being, yes, prices are higher for Shea than last year.
That's helpful. And are you seeing actually Shea supply increasing as a result? And how long is -- how long does that sort of supply response typically take? Is it kind of similar to cocoa [indiscernible] process?
Yeah. Shea is a fantastic -- it's a fantastic raw material, unlike others. I mean, this is a wild -- it's a wild. The Shea tree is a wild tree in West Africa, so the beauty is there's plenty of trees, there's plenty of Shea to pick if one wants to. On the other hand, it's not industrialized, which is there is less easy to just flip the switch and say I need 20% more tomorrow. So it needs planning and this is what we are doing and also other players in this industry.
We typically source between late August up until early in the beginning of the year after. But there are possibilities to source more, source less in certain time periods, but you need to have a one to two year planning horizon to increase and decrease. And that's what we're doing and what we're used to. And that's where we also have our Kolo Nafaso Program with financing women. We have had between 200,000 to 350,000 women enrolled in our sustainability program, which is fantastic, massive.
And we have lots of AAK colleagues on the ground in West Africa to drive this. So we're on the ball, but it is a bit more long-term planning to go up and down. But if you look at it helicopter view, there are plenty of kernels to get but you can't get them overnight if you needed to, like you can do with some other products in society.
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you so much. As usual, very, very good questions. I like the engagement and thank you for taking the time to listen to our earnings call for Q3 2024.