AAK AB (publ.) (AAK) Earnings Call Transcript & Summary

Yes. If we start with the latter part. The ramping up will be starting early next year, and we should be up and running well towards the second half or the later part of next year. With regards to what it's giving us. It really gives us more capacity. So it is a capacity step-up that we could use globally. But certainly, China is the end consumer market for a large portion on what we are already producing and selling today. So with this, we also get local presence, regional presence in one of the most important markets for infant formula. So it's a very nice add-on that we're getting, capacity and in the right market.

Then coming back to you, Philipp Mettler, at ZKB. Your line is now open for your question.

While we are waiting for that, I might just add one thing to, Per, your question on Foodservice. One other part we have been doing apart from rightsizing in Foodservice is also that we are trying to leverage the capacity that we have and the production lines that we have to see if some of what we're selling, for example, in airline catering like small-portion bottles and so forth can go through retail or restaurants instead of airline catering. So also trying to kind of shift the business model a bit to adapt to the current situation and make the best out of it.

Okay. But it's fair to assume that -- sorry, is it fair to assume that the main part of the Foodservice capacity is mainly Foodservice. You can't use it in other categories. That's correctly understood?

That's correctly understood because our volume business is about refining oils and fats, and this is about blending sources and bottled products directly used in restaurants or airline catering and so forth. So it's a different business model.

We have one more question from James Targett at Berenberg.

Just one on M&A. One of the sort of the pillars of your M&A strategy was adjacent kind of ingredient products. So I was wondering if you could talk about where you see -- which categories you see most interest you and where you could perhaps leverage your portfolio and footprint the most?

Yes. So we're certainly targeting, and this is where we see the opportunity. Lecithin is a good example. It is very tightly linked to Chocolate & Confectionery Fats. So that is one adjacency linked to that industry, but it can be used in many others as well. And as we see invest for growth in Chocolate & Confectionery, in Special Nutrition, and our focus on both Plant-based Food and the whole health and nutritional space, where we are trying to build a platform, in those areas, that's where we really look for adjacencies that can play a role for nutrition, for health, and then leverage that through the industries where we are present, be that into chocolate, be that into infant formulas, be that into baked goods and that's how we see that. So it's certainly looking at ingredients that can play a role in the markets where we see the best opportunities. Further questions.

Let's do a new try with Kenneth Toll Johansson from Carnegie. Please open your line, Kenneth. Still seems like we have some issues with your line, Kenneth. So let's move on. And the next question is coming from Heidi Vesterinen from Exane BNP Paribas.

I have a few questions on plant-based. So you announced a new center of excellence in Europe. What will the center bring that you didn't have before? And is this similar to the setup that you announced in the U.S.? I think it was a year or so ago. And the second question on plant-based. When you work the mouth-feel of a product, you need other ingredients like flavors to combine with the fats. And together, it creates the juiciness, et cetera. So do you work with other ingredients' players?

Thank you, Heidi, and I'll hand it over to you, Niall, in a heartbeat. Just to comment on what are we trying to achieve. We know oils and fats. This is a new industry. What we are building now is to build in the capability and the strength like we have in Chocolate & Confectionery Fats. Some of you have been with us on our Capital Markets Day that we held in Aarhus in Denmark, and entered into our CI center and met our colleagues that help you get a picture on how we work with Chocolate & Confectionery customers to really improve their products. That is the knowledge base that we are now trying to achieve in plant-based food. And with regards to the further questions, Niall, please take it over from there.

Yes. So to answer the first question with regards to the center of excellence we have announced in the Netherlands. The center we have in San Francisco is a fantastic asset to have and supports us with our activities in that region from a customer innovation perspective. But the center of excellence in the Netherlands is where we have essentially upped our game with respect to customer infrastructure. And again, in terms of pushing forward how we engage with customers under the umbrella of customer development 2.0. So with that, we will have a more complete facility to engage with customers, where we can mock up prototypes of products, where we can put them through sensory testing, either internally with customers or with their focus groups, they can come into this facility. And then ultimately, we can replicate the cooking experience, whether that's the at-home cooking experience or whether that would be as the product may be used within the Foodservice channel. So all under one roof, we will be able to really step up our ability to offer a more complete service in terms of new product development. So it's quite broad in that essence. With regards to partnerships, you may also have noticed that we have announced a strategic partnership in California last week. That, again, is very much linked to the collaboration that we see as necessary in Plant-based Foods, as you alluded to, that there is other essential ingredients that contribute to the overall taste and sensory experience. And therefore, we are actively collaborating with our peers who have specialist ingredient knowledge in order to do a better job for our customers. So it's a win-win for everyone.

We have one more question from Per Jørgensen, I&T Asset Management.

Regarding this management ambition of plus 10% EBIT per year CAGR. It's no secret that 2020 will be a bit challenged in that respect. If I listen to you guys today and hear about the ambitions on special products and China and India and Food Ingredients, restructuring and so on. Is it fair to assume that we can include the 2020 in the calculation? So exactly from 2019 until 2022 that your ambition is to grow plus 10%. Or is it going too far?

Thank you, Per. And we usually have these kind of conversations. Certainly, happy to answer it. Well, our ambition, and it is a company ambition, of growing our operating profit by 10% year-over-year. It is an ambition over time. It is an ambition that stands longer than here and now. As you said, yes, who knew that COVID-19 would hit us. Of course, that's a kind of a significant bump on the road. And whether or not we can include it, our ambition is to really have -- achieve that as an average over years. And -- but is it possible to deliver that over a period '19 to 2022, is it '19 to '23 or is it from '21 and forward, let's see. But our stride is certainly to get back to a high-growth number as soon as possible. But as we all know, COVID is still here. It's still a high level of uncertainty in Q4, in Q1, in Q2 and then let's see. But we have also shown that we can react, and we are, to a large degree, resilient. But now we're speaking about a specific target and growing 10%. And of course, that's a bold target. And we need to deliver both on volume growth on our ambition in high value-added solutions with higher margins as well as getting our M&A pipeline to deliver into concrete M&A. So it is a combination of all that will give us this. So a bit of uncertainty still, Per, but certainly, we are striving for it.

[Operator Instructions] I will continue with the question from Philipp Mettler from ZKB. Please open your line Philipp. It seems like it will not work, so I will read Philipp's question. In order to reach your sustainability sourcing targets by 2025, what actions are necessary to take in your supply chain?

Thank you. And Tim, I'll hand it over to you in a bit. So we're certainly stepping up. We have been -- AAK has been, for many, many years, making impact in the supply chains where we operate. And specifically, to the palm oil supply chain, we are members, cofounding members of RSPO. We are driving and stepping up with regards to making impact. In order to succeed, it is crucial that we do that together with supplier development, commitments, monitoring, but we need to take it quite far in order to succeed. And Tim, please add to that.

Thanks, Johan. That's absolutely right. I think collaboration within the industry is absolutely key to those targets. If we take this deforestation target for 2025, clearly, we can measure that by satellite monitoring. But if we're going to have an impact, given our position in the supply chain as well, then we have to work with others, including in particular, our Tier 1 suppliers and working through them towards the upstream side. So as well as the RSPO, which Johan has already mentioned, we are participating in other cross-industry organizations like the palm oil collaboration group, which is -- which deals with more palm oil which is not certified by the RSPO, which is -- the RSPO being the -- effectively the gold standard. So we have to work with them in order to be able to achieve it, clearly, because the targets are not those which are directly within our control. They are -- they tend to be more upstream. Certainly, deforestation is not something which occurs on our sites. It's upstream with suppliers. And the same with other key areas like human rights, where -- which are less obvious from -- a lot more difficult to monitor through the satellite monitoring systems. We have to work with others in order to do that. That's absolutely key. Not -- and it applies to customers as well as NGOs. So we're developing more relationships with international NGOs as we go forward. And the sort of initiatives, which Anne Mette outlined on her presentation relating to satellite monitoring, relating to smallholder development as well, which is absolutely key, are going to be absolutely fundamental to achieving those goals. But -- and they are quite ambitious goals, but we are committed to getting there, and they will make a difference in terms of sustaining and also generating particularly the most -- probably the most difficult area and certainly, the most high-profile area of palm oil.

And just to add on that, and this is also a delicate balance where we're really trying to make impact across the whole. To achieve this, of course, we are looking at how to reduce number of suppliers, how to work with more strategic partners upstream. That in itself will improve traceability to plantation and so forth, but we also care a lot about smallholders and making the livelihoods of many better. So it is that delicate balance of doing the right thing long term and having an impact long term versus certain KPIs and perceptions around the world with stakeholders, consumers and so forth. And that's really where we try hard to strike the right balance.

And our next question is coming from Janne Kujala from Evli Fund. Please open your line, Janne.

Can you add a bit more color on setting the science-based climate targets? When do you think you can come out with these? And I'd be curious to hear your thinking on the ambitious level.

Thank you. I'll hand that one right over to you, Anne Mette. Thank you.

Thank you. Thank you for the question. What -- we've used the last year, as I also shared in my presentation, to align to the greenhouse gas protocol because, as you know, that's the foundation to be able to set the targets. And then we've actually done an assessment both within -- if you look at our assessment of where our footprint on greenhouse gases comes from, a heavy part of that comes from our supply chain. So we've actually worked with our sourcing and trading organization on making sure that we can commit to the ambitious targets within the science-based target. And we've also worked with our whole global operation organization, assessing where are we tracking, what would be the key next steps and so on. So we believe that we will be able to sign up on a more detailed plan beginning of next year. But we will definitely already before entering next year sign up to committing to sign for the targets, and then we're more making the detailed plans in the beginning of next year. I don't know if that covers your question.

Yes. That's what I was interested in basically the time line and when we get to hear more.

And our next question is coming from [indiscernible].

And I basically had the same question as Janne here before me. So I think my question was answered. But just to add to that in terms of science-based targets, is it safe to assume that these will be in line with the 2-degree scenario?

We are actually looking at the 1.5-degree target. That's what we are assessing ourselves against. So -- but we are -- we want to do the final detailed work before we come out with a more formal, but this is what we've been assessing ourselves against.

The next question is coming from Karri Rinta at Handelsbanken Capital Markets. You have a very strong balance sheet, and you want to be proactive with M&A. What is the main bottleneck? Lack of targets, limited management resources/time, COVID-19 or something else?

Thank you. Thank you, Karri, through Fredrik. I would say from a, call it, what is challenging a bit. It's certainly not the ambition as such. We have the capacity. It is that there is a mixed bag of opportunities out there, and I mentioned a little bit in a question before. And obviously, I cannot be specific on our pipeline. But there is -- it is a pipeline within oils and fats, or call it, our colleagues around the world is mixed bag, or call it, small, rather small to mid-sized companies, very local. And then quite some larger companies. So the larger acquisition, the, call it, more game-changer acquisitions that we're looking at. Those are not that many. And many things need to fall in place in order to make them happen. With regards to bolt-on acquisitions, we have continued to do that, and we will continue to make them happen. We have a pipeline. It's about -- a bit about getting the analysis and the relationship building to move on. And specifically, to COVID, we have felt that we can nurture our pipeline. It is quite easy to get contact, to get a virtual meeting going, most of the world, we're now used to a quick meeting over a certain platform, have a virtual meeting. So that is not the issue. But, of course, following through with an acquisition, the targets that come out and then getting through due diligence, being able to get to a facility for us. It's most often a production plant or several production plants within a company where we need to do due diligence and look at the assets and get a bit of a touch and feel around it. And that is, of course, more difficult with COVID all around. But certainly, we are managing our pipeline, and we are nurturing our relationship. So that ambition stands. But it is not, call it, enough opportunities out there to just cherrypick and make them happen overnight. It takes relationship building. It takes time for some of them to materialize. But certainly, we have opportunities out there.

[Operator Instructions] Now we will continue and see if we can get Kenneth from Carnegie on the line. Please open your line, Kenneth. It seems like we still have an issue with Kenneth's line. So let's move on with Alexander Jones, Bank of America.

Great. One more from my side would be on the kind of competitive landscape of ingredients overall. Do you worry at all about the ability to compete as a kind of small independent player as the larger players, Givaudans, the IFFs of this world, kind of, also expand into adjacencies and talk about offering solutions offerings? Is that a concern? Or do you think that doesn't really impact your ability to drive growth?

Thank you. Great question. I think for myself, I think I speak for many. We should always look at movements and development to one degree, as a concern, meaning that we force ourselves to really look at what we're doing and how competitive we are, but also look at them, and that's how we really strive in AAK. What is the opportunity in the change in the industry? And yes, we have chosen to be staying at oils and fats with adjacencies. We do not have the strategic ambition to be a one-stop shop for many ingredients. And that is partly because that space is taken by very successful and strong companies. We like to see those companies as potential partners. Some of them are partners to us today. For example, in Special Nutrition, we have partnered up with companies to develop solutions and deliver really strong value-adding products into infant formula, for example. We talked about Plant-based Food just now, also an area where collaboration will be key going forward. So we are certainly looking at what partners do we need to leverage our strengths and where can we team up in order to get a better solution to, at the end of the day, end consumers. But that specific example you mentioned, just now, we don't see as a concern rather than an opportunity. Then, of course, in the broader landscape, yes, we are one of the most specialized players. Some of our competitors in the oils and fat space are vertically integrated and much larger than AAK, but we have also focused to be a player in the high-end, value-adding oils and fats, and that's the niche where we want to operate, and that's what we are known for. So we're trying to really build on our strengths also going forward. But one should be humble. Every change could be a risk, but also certainly an opportunity.

And the next question is coming from Heidi Vesterinen, Exane BNP Paribas.

Again, a few questions on CCF, please. Could you share what you are seeing in the market at the moment? We saw IRI data suggesting a very positive trend ahead of Christmas. Do you see this as well? And could you also update us on recent innovations such as COBAO, please?

Thank you, Heidi. I'll start off, and then I'll hand it over to you, Fredrik, for the latter part. We certainly saw in Q3 a sequential pickup, and you saw that in our numbers, strong numbers for CCF on the back of the improvements we have made already our supply chain over the last 2 years. So more capacity, more efficient production setup as well as better-yielding kernels. That impacts our cost to serve. And then on top of that, getting volumes back after the quite weak Q2, as COVID hit in the middle of the Easter season and so forth. So confirming that trend, as you spoke about it, for Q3, not commenting exactly the trending at the moment, but yes, there has been a pickup sequentially and certainly targeting Halloween and Christmas. But there is the uncertainty again. How will Christmas evolve in terms of how will we, as the world population, consume chocolate and confectionery over Christmas, next year's Easter, that will, of course, drive our demand. So there is a big uncertainty out there, and I think it's a given to everyone of us. That's what it is. But certainly, the trend was good in quarter 3. And then with regard to the latter part of the question, I hand it to you, Fredrik.

Thank you, Johan. Regarding COBAO, there is a great interest from customers. And we are right now doing quite a lot of co-development with different customers, but it's still a little bit too early to see -- talk about the future potential, Heidi. But as far as we can see, there's been a very positive feedback from customers so far, but it's still in the development phase.

And while I have this line open, more a general question. Have you seen any changes in the competitive landscape given the pandemic? Q2 was clearly challenging, and I wondered if smaller competitors might have struggled more than you have.

I would say that we haven't seen a dramatic change -- not in our competitive landscape with regards to the broader spectrum of oils and fats, there's been, call it, nuances with regards to performance. Obviously, if we go into the -- our business area or segment Foodservice. Yes, there, we see differences, mainly at our customers, but certainly within more niche players. But that is also a smaller part of AAK and more of a niche part of AAK. So I wouldn't say that, in general, the competitive landscape is that much different. Anything to add to that, Fredrik?

No, nothing to add here.

All right. Thank you. Thank you.

Let's then do a final try with Kenneth. Please open your line, Kenneth.

Do we have you online, Kenneth, or otherwise write your question perhaps.

As we have no further questions, I hand it over to you, Johan.

Thank you. And let me just check with the control room if we have a line open or if we should just round it up. All right. Then first of all, I'd like to thank each and everyone of the colleagues with me today, Niall, Sten, Tim, Fredrik and Anne Mette. Thank you so much for joining me here in this live webcast also for presentations and so forth, leading up to this. And of course, to our whole team around us that has made this virtual meeting, virtual webcast, happening. It is an unprecedented situation. That's what it is. And this is a new way of doing a Capital Market Day for us. And with that, I would also like to thank every stakeholder, investor and other stakeholders that have listened to our presentations, that have been part of this webcast, and thank you for your question. Always like to get them and have a good dialogue with you. So I wish you all a very good rest of the day and see you next year, hopefully, in a physical meeting, but who knows, and we're all learning. So maybe there will be a combination of the 2, let's see going forward. Thank you very much. Bye-bye.