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

Welcome to the AAK Q3 2026 Report Presentation. [Operator Instructions] Today's event will last for 45 minutes. Now I will hand the conference over to CEO, Johan Westman. Please go ahead.

Good morning, everyone. Thank you for joining us, and thank you for your interest in AAK. With me today to review our third quarter results is our CFO, Tomas Bergendahl; and Niall Sands, President, Commercial Development. With that, please turn in to Page 2, Slide 2. Today, we will cover quarterly highlights, selected events and the business and financial update, followed by some concluding remarks, almost so. The presentation is scheduled for 45 minutes in total, including a Q&A session at the end. Next page, please. 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 may differ. With that, let's go to Slide #4 and start some quarterly highlights for Q3 2026. Market conditions and consumer sentiment remains subdued during the third quarter of 2026. Against this backdrop, volumes proved resilient, remaining in line with last year. Lower volumes in food ingredients, particularly in food service and bakery, were offset by growth in Chocolate & Confectionery Fats and Technical Products and Feed. Looking at the regional development, we saw growth in Asia, the Middle East and Africa, which compensated for lower volumes in the Americas and Europe. While volumes remained flat, profitability was below last year. Operating profit per kilo declined by 8% to SEK 2.27. This reflects lower operating profit per kilo across all 3 business areas, including a less favorable regional volume mix. As a result, operating profit decreased by 8% compared to the same period last year, driven by lower profitability across the business areas. Moving to cash flow and our financial position. The quarter generated a strong operating cash flow of SEK 1.496 billion, and our balance sheet remains strong. Net debt in relation to EBITDA ended in the quarter at 0.56, providing significant financial flexibility going forward. Return on capital employed was 19.1%. And finally, regarding our long-term ambition. Our financial targets and our 2030 ambition or aspiration remain unchanged. We continue to target average annual operating profit growth of around 10% over time while outperforming the underlying market in volumes. At the same time, we remain committed to achieving an operating profit per kilo north of SEK 3 per kilo by 23. With that, let's move into the next page, Slide 5. Some key developments during the quarter. First, we have taken another important step in strengthening our health platform. AAK has started construction of the new lipid excipients manufacturing facility in India, aimed at serving the pharmaceutical industry. The investment strengthens our capabilities in 1 of the world's most important pharmaceutical markets. The facility will establish in India as a pharmaceutical hub within our health platform, complementing our existing strengths in personal care, medical and lifestyle nutrition. As 1 of the world's largest producers of generic medicines, India plays a central role in global health care supply chains. By establishing local production, we will move closer to customers in a market where quality standards and regulatory requirements are particularly important. The facility will be located at our existing site in Khopoli, outside Mumbai, and is planned to become operational late 2027. Turning to innovation and technology. During the quarter, we also reached an important milestone for 1 of our proprietary technologies. Our patented drive fractionation technology is now set for its first commercial deployment at the neuro specialty oils and fats plant currently being built in Malaysia. The technology will be used to produce specialty on mid fractions, a key ingredient in high-quality cocoa butter equivalents for chocolate and confectionery applications. Complementing our existing fractionation capabilities, this technology enables a solvent-free production process and has the potential to reduce initial capital investments, lowering operating costs, and reduce CO2 emissions, while maintaining the high-quality standards required for specialty fabs. As a reminder, NURA is the joint venture announced in our third quarter report together with the Kuala Lumpur Kepong Berhad. The facility, which will be located in Pasir Gudang, Malaysia, will strengthen our upstream access to sustainable, high purity feedstock for cocoa butter alternatives, broaden our supply base and further reinforce supply chain resilience. Finally, on sustainability. AAK was recognized as 1 of the top scorers on the RSPO Shared Responsibility Scorecard. The scorecard measures how members contribute to responsible practices and support the production and consumption of Certified Sustainable Palm Oil. The recognition reflects our efforts across sourcing, supply chain initiatives or activities, customer engagement and operational improvements. It is also particularly meaningful given that AAK was a founding member of the Roundtable of Sustainable Palm Oil, which continues to play an important role in driving more sustainable practices across the industry. These achievements reflect our continued focus on strengthening our business through targeted investments, innovation and sustainability leadership. And with that, I will hand it over to Niall for a review of the performance per business area. Please go ahead, Niall.

Thank you, Johan. Please turn to the next slide. Starting with Food Ingredients. Volumes declined by 1% compared with the corresponding quarter last year. The decline was primarily driven by lower volumes in Foodservice and Bakery. Looking at the regional development, volumes were lower across all 3 regions, with Europe accounting for the largest share of the decline, followed by the Americas. Volumes in Asia, the Middle East and Africa also decreased, albeit to a lesser extent. Looking into Bakery, volumes declined compared with the corresponding quarter last year. The growth we experienced in Asia, Middle East and Africa, mainly driven by Turkey was offset by lower volumes in the Americas and Europe, reflecting continued competitive pressure on softer demand. In dairy, volumes grew slightly following the weak volume performance in the second quarter of this year. Growth was driven by Asia, the Middle East and Africa, and it was partly offset by lower volumes in Europe on the Americas with the surplus of animal bus mill fat continue to have a negative impact on the business. Special Nutrition volumes declined compared with the corresponding quarter last year. The decline was driven by weaker performance in the Americas and in particular, the U.S., which more than offset the growth we experienced in Europe. Foodservice volumes also declined compared with last year, primarily driven by weak performance in the U.K. Turning to profitability. Operating profit per kilo decreased by 9% to SEK 2.18, including a slight positive currency effect. At fixed foreign exchange rates, operating profit per kilo decreased by 10%, mainly driven by lower profitability in bakery and dairy, reflecting a more competitive pricing environment as well as continued soft performance in foodservice. As a result, Operating profit decreased by 10% to SEK 67 million. Currency effects had a slight positive impact during the quarter. At fixed foreign exchange rates, operating profit decreased by 11% compared with the corresponding period last year. Let's turn to Chocolate & Confectionery Fats. Next slide, please. Volumes increased by 1% compared with the corresponding quarter last year. Looking at the regional development, performance was mixed during the quarter. We saw growth in Asia, the Middle East and Africa, supported by expansion into new markets, while volumes declined slightly in both the Americas and Europe. From a product mix perspective, volumes were relatively stable with a modest positive contribution from cocoa butter alternatives. Turning to profitability. Operating profit per kilo decreased by 6% to SEK 4.04. Currency translation had a positive impact of SEK 0.10 per kilo during the quarter. At fixed foreign exchange rates, operating profit per kilo decreased by 8%. While profitability remained at a high absolute level, it was below the very strong comparative last quarter. As previously favorable market conditions continue to normalize, the pricing environment became more competitive, which impacted profitability compared with the prior year period. Operating profit amounted to SEK 500 million, a decrease of 5% compared with the same quarter last year. Currency translation had a positive impact of SEK 13 million. At fixed foreign exchange rates, operating profit decreased by 5% compared with the corresponding quarter last year. Overall, the business delivered good volume growth and maintained a strong level of profitability despite a more normalized and competitive market environment. Next slide, please. Turning to Technical Products & Feed. Volumes increased by 1% compared with the corresponding quarter last year. Looking at the underlying performance, the development was mixed across the portfolio. Technical Products delivered volume growth during the quarter, while feed volumes declined slightly compared with last year. Turning to profitability. Operating profit per kilo decreased by 32% to SEK 0.45 in compared with SEK 0.67 in the corresponding quarter last year. The claim was driven by weak performance in the candle business during the quarter. As a result, Operating profit totaled SEK 32 million compared with SEK 46 million in the corresponding period last year, representing a decline of 31%. Overall, the business delivered modest volume growth, but profitability was negatively impacted by the continued weak performance in calendars. Back to you, Johan.

Thank you, Niall. Looking across the 3 business areas, we delivered resilient volumes during the quarter, with growth in Chocolate & Confectionery Fats and Technical Products & Feed, offsetting lower volumes in food in regions. While profitability was below last year's level, all 3 business areas generated solid results in a more competitive market environment. . And with that, I hand it over to Tomas for a review of our financials. Tomas?

Thank you, Johan. Good morning, everyone. Please turn to Slide 9. I Building on Niall's review earlier on the call, let me bring the performance in the quarter together at group level. Operating profit amounted to SEK 1.154 billion, down 8% or SEK 106 million from SEK 1.260 billion last year. Volumes were unchanged, while operating profit per kilo decreased by 8% to SEK 2.27. Profitability remained at a high level from a historical perspective, but operating profit per kilo was lower across all 3 business areas in the quarter. Food Ingredients was the main driver, accounting for SEK 79 million or around 75% of the decline, primarily due to negative price development in Bakery, Dairy and Food Service. Chocolate & Confectionery Fats accounted for SEK 25 million of the decrease. Profitability remained above SEK 4 per kilo, but declined from a strong prior year quarter, reflecting normalized market conditions and continued subdued chocolate consumption, which is driving price competition. Technical Products & Feed accounted for a further SEK 14 million, while group functions partly offset the decline with a positive contribution of SEK 12 million supported by Fit to Win. In summary, Volumes remained resilient with lower operating profit per kilo, particularly in Food Ingredients, resulted in an 8% decline in group operating profit year-over-year. Please turn to the next slide. Operating cash flow amounted to a positive SEK 1.5 billion in the quarter and close to SEK 4 billion year-to-date. This is the sixth consecutive quarter of positive operating cash flow. Working capital decreased in the third quarter, driven by inventory and accounts receivable -- accounts payable, while accounts receivable increased. The recent operating cash flow development demonstrates the strong cash generative nature of the business when working capital headwinds, for example, the raw material pricing increases that we've seen over the last few years are absolute. The decrease of inventory in the quarter of SEK 268 million was driven by lower inventory levels of both palm and seasonal inventory, primarily [indiscernible], partly offset by continued price increases on raw materials. CapEx amounted to SEK 402 million in the quarter, comprised mainly of investments related to maintenance, productivity improvements and capacity increases as well as debottleneck. Year-to-date CapEx amounts to just shy of SEK 1.1 billion. The CapEx spend for the full year of SEK 26 million is expected to be slightly higher compared to 2025 around or just below SEK 1.5 billion, in line with indications given in connection with the last 2 quarterly reports. The increase of CapEx spend in 2026 is mainly related to the new Foodservice plant in Sweden, which will be ramping up and up and running in the first half of 2027. Free cash flow amounted to a positive SEK 1.1 billion in the quarter and close to SEK 2.9 billion year-to-date. Next slide, please. Return on capital employed remains strong, as Johan mentioned, at 19.1%, slightly below last quarter. Year-over-year, the return on capital employed is down from 20%, partly driven by a slight reduction in EBIT and partly by an increase in working capital, driven by an increase in raw material prices as well as an increase in fixed assets. Next slide, please. The net debt-to-EBITDA ratio for the quarter was 0.56, slightly down from the second quarter at 0.68, and down from 0.60 at the beginning of the year. This is a very strong result given the ordinary and extraordinary dividend paid in Q2 as well as the initiation of the share buyback program in Q2 continuing into Q3. With that, I'll hand it back to Johan.

Thank you, Tomas. Please turn to the next slide for a few concluding remarks before we open up the line for questions. Overall, we delivered resilient volumes and strong cash flow in what remains a challenging market environment. Subdued market conditions and cautious consumer sentiment continued during the quarter, but group volumes remained in line with last year. We generated a strong operating cash flow and continued to maintain a strong financial position with a net debt-to-EBITDA ratio of 0.56 in and a return on capital employed of 19.1%. At the same time, profitability was below last year's level. Operating profit decreased by 8%, reflecting lower operating profit per kilo across all 3 business areas and a less favorable regional mix. While market conditions remain uncertain, there have been no fundamental changes to our long-term view of the business. Our financial target and our 2030 aspiration remains unchanged. Our target is to deliver average annual operating profit growth of around 10% over time. And the way we will get there is by outperforming the market in volumes and achieving an operating profit per kilo by plus SEK 3 by 2030. Looking ahead, our focus remains firmly on disciplined execution of our strategic initiatives, gradually improving profitability and delivering volume growth above the underlying market. With that, I will hand it back to the operator and open up for questions. Operator, please.

[Operator Instructions] The next question comes from Johan Fred from SEB.

Starting off with a question on CCF. Could you help us understand the drivers of the EBIT per kilo decline here in Q3 more in detail. So just based on what you said in Q2, you saw that CCF was easing up well besides similar market unions with subdued chocolate consumptions and the lower cocoa water price. But here now in Q3, volumes are up 1%, but EBIT per kilo is down 1% or so in fixed effect. Is this an effect of pricing pressure coming through contract renewal, Q3? Or is there anything cost that hit the CCF margin in Q3 specifically?

Thank you, Fred. Let us give us some color to that. I think, first, in an overall perspective, also SEK 4.04 is quite a high number in a historical perspective in Chocolate & Confectionery. So I think we should keep that in mind. But as we've also said, in a now 2 years almost decline of volumes, yes, it puts pressure in terms of the competitive landscape. And I think given that backdrop, reduced volumes, everyone wants to load their factories. Yes, there is a bit of price pressure, but still delivering a SEK 4.04 per kilo is a quite strong result. With that, Niall, maybe add a bit more to it. .

Yes. I think overall, when you look at the Chocolate & Confectionery market, consumers are buying less unit volume. On compounding that is the fact that those units actually were less as a consequence of strong inflation. So whenever we look at the Nielsen data across all time horizons, we do see that is translated into negative volume development across all markets. And I suppose against that backdrop, growing CCF volumes modestly year-on-year is somewhat encouraging. But as you allude to, the pricing competitiveness is a little more robust in the quarter. Cocoa butter is structurally higher versus historical prices, but market fundamentals suggest this will continue. And hence, we do see continued opportunities for cocoa butter alternatives as customers reduce their dependency on cocoa butter.

Okay. Got it. And then my second question, I guess what we're seeing across the board here in Q3 is pricing pressure across markets and segments. And as you alluded to, Johan, over time, yes, you may be able to gradually improve profitability and drive volume growth. But in the shorter term, if we assume that these pricing dynamics persist across Food Ingredient and CCF, what levers do you have at your disposal to sort of shift the trends? And yes, as you saw or as you reported, volumes were stable, but margins are down significantly. What can you do to offset that in the short term?

Thank you. And obviously, little in terms of changing markets in a heartbeat, right? But we remain focused on initiatives that are already in place. So we have quite a few optimization programs in place already that we expect to deliver. And we also have more to give on commercial excellence. But Tomas, maybe you want to give some color to that.

Yes. We see, of course, a quarter that we're not satisfied with. But our long-term aspiration and financial targets continue to be in place. And as Johan said, we have still the different programs that we've talked about before, up and running. One example is, of course, our fit-to-win program that we, in Q3, has now increased the annual run rate of cost reduction from SEK 200 million to SEK 250 million. And as we've also mentioned before, our annual financial target of 10% year-over-year increase is an average over time. So we are not happy with the quarter, but we have the programs and actions in place to continue towards our aspiration of SEK 3 per kilo plus.

And very short term, obviously, we are tightening the bolts on the things that are in motion like cost reductions like the procurement savings as well as absolutely leveraging our strength with our customers. We see examples over and over again where customers also come back to us when having tried a competitor in this environment and maybe then receiving a bit bad quality and returning back to AAK. And we clearly see that now a bit more competitive, you have to be there, but we also see signs of why AAK has been very successful. We do deliver a very high level of expertise in fats and oils chemistry in chocolate and confectionery applications. And we see evidence of that also in this market environment. So focusing on delivering in the front end, but also tightening our cost base and efficiencies.

And even if we, as I mentioned, see a disappointing quarter, we should also remember that we have a 6% EBIT sequential growth quarter-to-quarter this year, which is important to notice as well.

The next question comes from Setu Sharda from Barclays.

So I have a question on the CCF normalization. Like you described the normalization of previously favorable market conditions and a more competitive pricing environment. So how far through that normalization are we? Should we expect further sequential pressure on your CCF EBIT per kg into -- going into Q4 and 2027? Or is like SEK 4 per kg is broadly representative of the new environment?

Thank you for the question. And obviously, both we don't give forward-looking statements like that and difficult to forecast exactly. I think what is important in normalization, what we mean by that is that we are now in a more stable environment, both from a car prices development, but also a continued kind of subdued end market with volumes being down over time, hopefully turning back right to volume growth. But in that environment, we're highlighting the reality here, which is a bit of increased competition. It is in the light of that, we call it a normalized situation. But Niall, why don't you add a few comments to that?

Yes. I think that's important to capture that the normalization is versus last year. And again, if you look at especially in CCF and especially where we come into play with our cocoa butter alternatives, the normalization of cocoa butter when we say that in particular, relative to our CCF business is the fact that year-on-year cut butter is down around 30%, but it's still up more than 50% versus historical lows. So to that end, cocoa butter has reset at a structurally higher level, and it is stabilizing at that level. And again, as I said in the previous question, market fundamentals suggest that this will continue, especially as we look into the fears of an El Nino that's expected to impact yields in the upcoming season. And therefore, we do remain buoyant that there will be further opportunities for cocoa butter alternatives for the foreseeable future in that environment.

And looking up a bit at the horizon, we still stand, as we said, very firmly on our aspiration of SEK 3-plus per kilo. And the CCF development of improved profit over time is a big component of that, of course. And we are confident on our ability to deliver on that in the long term.

The next question comes from Benjamin Wahlstedt from ABGSC.

Sort of following on previous speakers' questions as well. Is it possible for you to share sort of what share of favorable CCF contracts have lapped if you see what I'm getting at?

I'm not sure, right? So we call it more favorable and normalizing market conditions. So we aren't speaking about specific contracts or margin levels in contract. It's more the general comment on the market environment. So maybe if you take the question, what's the perspective?

No, I'm thinking -- you talked about a normalization of markets. I would have assumed that sort of your contracts have fixed pricing terms, so to speak. So there's a natural lag in how a normalized market or a lower spread between cocoa butter and she, for example, would drop through to your CCF fee per kilo. Is that not a correct assumption?

Yes, good. Thank you. That's a good clarification. Thank you. So yes, indeed, there is a -- it could be between like everything from spot buy, which always happens, right? So typically, in CCF, repeating that, and you're correct, we do contract for CVs specifically, but also for filling fats and a few other applications. We do enter yearly contracts with some, but never -- typically, the customers never cover for more than 60%, 70%, 80%, and then they buy the residual over time. So there's a mix of call it, a monthly contract with contracts with a 9- to 12-month contract period. And yes, during that time, it's fixed and we typically hedge the raw materials against that backdrop and so forth. So there's a bit of stability in that. But as I mentioned then, you always have a competitive landscape throughout the year and then peaking a bit at the season of annual contracts. So you should see this comment on normalization as a bit of a nuance versus years of dramatic uptick in cocoa butters and everyone chasing risk mitigation in that on the customer side. Now a bit more stabilized environment with still a very good cost competitive and functional play with the cocoa butter equivalents versus cocoa butter. So still that market dynamic is there in a positive sense, but also a more normalized and competitive landscape where volumes have been low. all competitors want to load their factories. And with that, you get a bit more pricing -- price pressure, if you will, but not more than that and not less than that, if that clarifies.

Yes. Sure. I should one question on Food Ingredients as well. I was wondering if you could give some more color on the Food Ingredients EBIT per kilo, I guess, pressure by month. The per kilo figure is somewhat similar to Q2, but Q3 does not contain any Karlshamn impact. Should we understand this as gradually more price pressure during Q2 -- or gradually more price pressure versus Q2? Or is Q3 price pressure equal to the exit rate of Q2? Again, please advise if I need to be clear.

Yes. No, that's clear. I think, first of all, the Carlson issue, which we had, that's resolved and that's done. So that's there, right? And it did impact Q2. So you're correct in that, and it's not here in Q3. On the other hand, the development in Q3 versus Q2, I would say, broad-based very much in line because there will always be a bit of movement between quarters, et cetera. So I think your assumption there that the margins are fairly on par in terms of dynamics is more correct than anything else. And then there are obviously a bit of dynamics between different dairy, bakery. There are some mix changes always in the quarter, but broadly the same market environment in Food Ingredients as it was in Q2.

The next question comes from Joan Lim from BNP Paribas.

I've got 3 questions, please. So first one is, can you share more color on which region or product categories are you seeing this price competition in CCF? And as you go through the customer contracting rounds into the year-end, do you see this price competition worsening or becoming a greater headwind for CCF in 2027 and maybe in Q4 as well? That's my first question. The second question is -- can you help us understand the drivers of your EBIT decline in CCF? So are you priced on CBEs? Or is there more negative mix coming from your CBRs and CBS relative to the CBEs? And the third question is, what gives you that confidence of growing EBIT 10% over time when your underlying markets remain soft, you're seeing increasing price competition and you're starting to see EBIT declines?

Let's -- there was a few questions. We'll try to break them up in pieces. I take the last one first. I think why are we confident? Obviously, if we were to see over a long period of time, volume pressure left, right and center, that will be difficult market conditions. And obviously, that was not in that light that we launched the 2030 aspiration. However, at the moment, yes, there is a bit subdued market conditions, especially in Chocolate & Confectionery Fats, but we don't see that being a long-term real negative volume development. I cannot make any guarantees. But in the light of that aspiration that we put forward, we did that some years ago, 4 years ago, we had first a target of SEK 2 per kilo. We reached that very quickly. And in the light of that, we are, at the moment, even in a disappointing quarter at SEK 2.27, so well underway despite being lower than last year. Now we are shooting for SEK 3 per kilo. And when we put that SEK 3 per kilo down, we saw that we had plenty of opportunity to optimize the way we run our business as it is. That is from commercial excellence, operational excellence, cost efficiencies, et cetera, including pricing, where some of that has been implemented and some of that is still to be delivered. So in the light of that, we are confident. Now it will help a lot if structural volumes come back in both Food Ingredients and CCF, no doubt. But we have also more to give on the internal space, if you will, to further optimize. So that gives us the confidence. But having said that, of course, if things were to develop very negatively on the consumer trend side, that's difficult, right? And then we'll come back to that. But we will always take action in any market environment to deliver as best we can. But we are confident that we can still deliver on that aspiration. With that, maybe over to you, Niall, a few comments on the CCF regions and categories.

Yes. So Joan, just to answer your first question there in terms of the region. So whenever you look at the Middle East, Africa and Asia, that was primarily a driver, especially in the Middle East, quite specifically, a new distributor did a great job on opening up new markets for us there. In the Americas, we've seen slightly lower volumes in the quarter, and that's more of a reflection of the consumer market space. So quite often, we may have the contracts in place, but the customers maybe do not call off as they should. So to that end, that is a reflection of just soft consumer sentiment, and we see that in particular in the Americas in the quarter.

And on the customer contracting round, do you see this price competition being a greater headwind for Q4 and 2027?

So first, confirming that, yes, this time around, and you know this, the ones that follow us closely, yes, we are in the contracting round. And I will not comment this specifically. I can only say that we see versus how we are running today and contracting both on the spot business side and yearly contracts versus today's sentiment, we don't see material changes worsening or improving. So we are contracting in the current environment and holding up well.

The next question comes from Oskar Lindstrom from Danske Bank.

Yes. Three sets of questions for me. The first one is following up on the previous analyst here. You said some of the pricing initiatives are still to be delivered. How large are they, and/or when do they land? And specifically, how do they hold up sort of in the year-end CCF contract round? And what customers or regions worry you most on price? -- not sure if you're able to answer any of those, but I wanted to give it a try anyway.

Thank you, Oskar. I was about to say, did I understand your question? And yes, I did perfectly well. But you know where I'm going with this. We will never comment a customer or a customer -- that will not happen. So I think you heard me before.