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

Welcome to the AAK Q2 2026 report presentation. [Operator Instructions]. Today's event will last for 45 minutes. Now I will hand the conference over to the speakers CEO, Johan Westman; and CFO, Tomas Bergendahl. Please go ahead.

Thank you. Good morning, one, and thank you for joining us for today's call and also for your interest in AAK. With me today to review our second quarter results as our CFO, Thomas Bergendahl. Also joining us for today's call is Niall Sands, President, Commercial Development and Innovation and a member of our Executive Committee. . Niall is here to share additional perspective on our commercial development annuation agenda as well as the role of our Cocoa and Confectionery Fat Solutions in the current market environment. Good to have both of you with me on the call. With that, please turn to Page #2. We will cover quarterly highlights, selected events and the business and financial update, followed by concluding remarks. The presentation is scheduled for 45 minutes in total, including a Q&A session at the end. Page #3, as usual, a bit about the forward-looking statements. 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 move to Slide #4, the quarterly highlights for Q2. Market conditions remain cautious during the second quarter, broadly in line with the business environment we saw in the first quarter. Following a strong start to the year, both volume and credibility were somewhat softer in the second quarter. However, for the first 6 months, both volumes and operating profit at fixed currencies remained above the last year, representing a solid first half performance. Grew volumes declined by 1% compared with the second quarter in 2025. The decline was mainly driven by dairy and food service, which continued to be affected by challenging market conditions. In addition, we had some production-related challenges at our site in cotton that negatively affected volumes in food ingredients and Technical Products & Feed. The estimated impact on group volumes was approximately 1 percentage. Production at Carlson has since returned to normal levels. Volumes in chocolate and confectionery effects declined slightly, but continued to outperform the broader chocolate market, which remained challenged. Operating profit per kilo amounted to SEK 2.25, a decrease of 5% compared with last year, excluding items affecting comparability. The decline primarily reflected price pressure in food ingredients together with the production-related challenges in our site costs. The core some challenges had a negative impact of approximately 2 percentage points on group operating profit per kilo. Currency effects were neutral. Profitability in Chocolate & Confectionery Fats remained strong in the quarter. Operating profit declined by 6% compared with the corresponding quarter last year, excluding items affecting comparability. This was driven by the lower operating profit per kilo and slightly lower volumes. The production-related challenges in Carlson amounted for approximately 3 percentage points of the decline. Currency effects were neutral on operating profit. Our operating cash flow remained strong and amounted to SEK 1.081 billion, supported by profitability and an improvement in working capital. Net debt to EBITDA was at 0.68, reflecting our continued strong financial position. Return on capital employed amounted to 20%. And with that, please turn to the next page. Turning to a few strategic and sustainability highlights from the quarter. AAK became the first company to achieve gold status in the sustainable coconut charters assurance system audit with a score of about 95%. The result reflects strong performance across governance, traceability, risk management, reporting and verified chain of custody processes. This recognition supports our continued work to strengthen responsible coconut sourcing, improved traceability and support small holder pharmas, farmers and help prevent deforestation. It also provides our customers with independently verified assurance on supply chain transparency and the diligence supporting their own sustainability reporting and compliance requirements. In May, we held AAK's Annual General Meeting in with shareholders representing 75% of total votes. The AGM approved the proposed share buyback program as part of our updated capital allocation framework. The program amounts to SEK 1 billion per year over 3 years subject to annual AGM approval and is intended to support long-term shareholder value while maintaining financial flexibility. The AGM also approved an extraordinary dividend of SEK 3.85 per share. Finally, we announced a collaboration with Savor, a food technology start-up to explore a new type of fat solution for dairy and bakery applications. The partnership combines Savors carbon to fat technology with AAK's expertise in liquid chemistry and application development. The aim is to develop novel ingredient solutions that deliver on taste, texture, functionality while supporting supply chain resilience through more diversified sources. The collaboration is initially focused on niche, but growing customer demand, particularly in the U.S. and Europe for innovative fat solutions produced without the need for animals or farm lands. With that, let's turn into the next slide for a review per business area, starting with food ingredients. Volumes were flat compared with the second quarter of 2025 with mixed performance across our segments. Dairy and food service declined, while either parts of the business offset the majority of the decrease. Volumes were also negatively affected by the production-related challenges at the calls on site. Operating profit per kilo amounted to SEK 2.14 compared with SEK 2.487 last year, representing a decrease of 14%. Currency had a slight negative impact at fixed exchange rates, operating profit per kilo decreased by 13%. The decline mainly reflects the price pressure in Food Ingredients, together with a negative impact from the production-related challenges also. Operating profit decreased by 14% to SEK 658 million, mainly due to the lower operating profit per kilo. Currency effect on operating profit were neutral. And with that, let's turn into the next page and the highlights for Chocolate & Confectionery Fats. Volumes declined by 2% compared with the second quarter of last year, even though we continue to outperform the broader chocolate market, which remained challenging. Operating profit per kilo increased by 11% to SEK 4.36. Currency effects on operating profit per kilo were broadly neutral, and this was achieved despite a modest negative impact from the production-related challenges at the cost of site. Overall, operating profit increased by 9% to SEK 491 million, driven by the higher operating profit per kilo and partly offset by the lower volumes. Currency translation was neutral. And next slide for highlights in Technical Products & Fleet. Volumes declined compared to the second quarter of last year with a mixed performance across the 2 segments. Technical Products grew while feed declined. The decline in feed was mainly related to the production challenges at the Carlson site following the annual maintenance of where production remained offline longer than expected. Production since restarted and returned to normal levels, and we do not expect any lasting impact beyond the quarter. Operating profit per kilo was at SEK 0.37, broadly in line with last year. And overall, operating profit decreased by 3% to SEK 24 million. With that, we have now covered the 3 business areas. And before handing it over to Thomas for a review of the second quarter financial results and an update on our 2030 strategic initiatives, I would like to invite Niall to provide some perspective on how the dynamics in the chocolate market are impacting our business. Niall, please.

Johan, please turn to the next slide. Given the interest in cocoa butter equivalents and cocoa water, I'd like to spend a few minutes on how we think about this from an AAK perspective. Our first glance cocoa butter and cocoa butter equivalents may appear to address the same need delivering a snap, gross and melt that consumers expect from grid testing chocolate. But from a specialty fats perspective, we are fundamentally different. The key is in the triglyceride composition. Nutshell cocoa butter is a strong benchmark. Its functionality is largely driven by a narrow group of triglycerides, primarily POP, POS and SOS, which crystallizes in a way that gives chocolate it's characteristics structure chain and wealth. However, cocoa butter is also a natural raw material. This means it comes with variability linked to origin, season and crop conditions and therein potential for significant price and supply volatility as we have seen of late. This is where cocoa butter equivalents play an important role. In AAK, we do not view CBE simply as substitutes, but rather as precision designed specialty fats. By fractionating, blending and even enzymatically adopting selected beds of oils and fats, we can closely replicate the key triglyceride profile of cocoa butter while also tailoring functionality for specific customer needs. This gives us the ability to support customers in areas such as crystallization speed, hardness and snap, bloom resistance, viscosity and performance for all climates as well as production efficiency. Our objective in AAK, therefore, is not only to match cocoa butter, but to optimize performance for each customer's product, process and market requirements. Cocoa butter will continue to play an important role. It offers authentic flavor release, strong life feel, consumer familiarity and premium position. But at the same time, CVs offer a complementary value proposition of more consistent quality, improved supply resistance, functional customization and better process control. The important point is that this requires deep lipid chemistry and application know-how. Small differences in triglyceride composition can have a truly meaningful impact on tempering behavior, crystallization and long-term bloom stability. This is where AAK has a clear role to play. It's our heartland. Our competitive advantage is not simply supplying oils and fats, but helping customers engineer for desired crystallization rates and functionality. By combining advanced vegetable oil processing, application expertise and a deep understanding of triglyceride architecture, we help customers maintain sensory quality, improve productivity and to build more resilient supply chains. So ultimately, the discussion is not simply cocoa butter versus cocoa butter equivalents. The real question is how can we engineer fat functionality to deliver the consumer experience expected from chocolate while giving manufacturers greater process control, supply resistance and cost competitiveness. For AAK, this is where we believe the value creation really lies. With that, I hand it back to you, Johan.

Thank you, Niall. I think this provides a good perspective on the role AAK can play in what has been and likely will continue to be a fascinating and dynamic in chocolate market. As Nialls explained, AAK's cocoa butter equivalents are not simply substitute for cocoa butter. They are specialty-fat solutions where functionality, consistency and application know-how are critical. For our customers, this is about more than managing input cost. It is about maintaining the right consumer experience while improving process control, supply resilience and flexibility in formulation. At the same time, we should also recognize that market dynamics and raw material movements can create some pressure on margins over time, which makes our focus on value-added solutions and disciplined execution even more important. . And with that, I will hand it over to you, Tomas, for a review of our financials. Go ahead. .

Thank you, Johan. Good morning everyone. Please turn to the next slide. Operating cash flow amounted to a positive SEK 1.1 billion in the quarter. Working capital decreased driven by a reduction in inventory as well as accounts receivable, an increase in payables, all contributing to a reduction in overall working capital. This was partly offset by negative cash flow from other working capital. The decrease of inventory in the quarter of close to SEK 200 million was driven by lower inventory levels, mainly related to seasonal inventory primarily see. CapEx amounted to close to SEK 400 million, comprised mainly of investments related to maintenance, productivity improvements, capacity increases and debottlenecking. The CapEx spend for the full year of '26 is expected to be slightly higher compared to '25 close to SEK 1.5 billion in line with indications provided in connection with the last 2 quarterly reports. The increase of CapEx spend in recent years compared to historical levels is mainly related to larger installations such as the Buy Borders in Denmark and the new food service plant in Sweden. Free cash flow for the period amounted to a positive SEK 681 million. Next slide, please. Return on capital employed remained strong at 20%, slightly below last quarter. Year-over-year, the return on capital employed is down from 21.9%, mainly prompted by working capital, largely driven by an increase in raw material prices as well as an increase in fixed assets. Next slide. The net debt-to-EBITDA ratio increased from 0.39% in Q1 to 0.68 in Q2, on par with Q2 last year. The increase in the ratio since Q1 2026 is mainly driven by dividends and the initiation of the share buyback program approved by the AGM, totaling roughly SEK 2.7 billion in the quarter to some extent, offset by the positive cash flow for the quarter. Next slide. As many of you will recall, we introduced our updated 2030 aspiration at our Capital Markets Day in Carlson in -- at the core is a clear objective to achieve operating profit per kilo of SEK 3 plus and outgrow the underlying market on volumes. Together, this will support continued delivery of our financial targets to grow EBIT by an average of 10% per year over time. The road map remains centered on 6 key strategic programs, production process optimization, portfolio and price management, procurement excellence, working capital management and cash generation through the cash to grow program, cost performance, including our Fit to Win program as well as commercial and innovation excellence. Before handing it over to Niall, I'd like to provide a brief update on the current status of the broader product portfolio, project portfolio, sorry. As it has been 1 year since the last update in connection with the presentation of the Q2 '25 results. Starting with production process optimization, we have completed the ninth and final deep guide in China at the end of last year. The next step is to scale the learnings from all 9 deep types across AK through 1 global operational excellence program with the continued focus on reducing inefficiencies, waste, complexity and value leakage. This effort is currently ongoing. Portfolio and price management has, as previously communicated, completed the project phase and has been an important contributor to the profitability improvement that we've achieved since 2021. The tools and processes are now implemented across the relevant sites and the focus is on sustaining the structure and the results already achieved. Similar to the production process optimization track, price management is now being formalized into 1 global excellence structure. Procurement excellence also continues to progress well with category management and category strategies playing an increasingly important role in our procurement decisions. Cash to grow has now entered into its next phase with ownership of transitioning to local organizations within AK. Despite significantly higher raw material prices over the past 3 years, the program has delivered structural improvements, including lower inventory levels and reduced overdues. Turning to cost performance, which includes Fit-to-Win. The program performed well in 2025, but has in the second quarter of 2026 falling behind plan. As a result, we have not yet reached the targeted SEK 300 million in annualized savings, currently at SEK 200 million, on par with the level achieved at the end of Q1 2026. This area requires renewed focus going forward. Finally, turning to commercial and innovation excellence. I will hand it back to Niall to give an update.

Thank you, Tomas. We are seeing progress across a number of key business processes, capabilities and systems. On the commercial side, the commercial excellence initiatives are focused on strengthening price management, contract management, and go-to-market capabilities to enhance our customer experience as well as internal knowledge sharing and better product play cycle management. Our pricing maturity assessment is underway and to help shape the road map for how we further develop price management towards 2030. In Contract Management, a global standard process and governance model have not been identified supporting by a 2030 improvement plan. We are also investing in commercial capabilities. A creating customer value, CTV program has been relaunched, including a needs-based value proposition framework. All commercial teams are enrolled and a dedicated ambassador team isn't pleased to coach and develop the program locally after training to extend and embed the go-to-market skills more broadly across the globe. The 2026 customer survey also shows encouraging progress. Customer satisfaction improved in every region with a Net Promoter Score increasing by 13 points to 43. Our customers continue to value AAK highly for team expertise, local innovation, service and sustainability. That's embedded in our recognized customer co-development approach. To improve knowledge sharing, we are developing an AI-enabled commercial cockpit to support commercial operations with launch planned for Q3. In parallel, investment has been made in a product late sale management system design now underway ahead of initial launch in November this year. On innovation, we are building on our strong customer co-development model while broadening the agenda towards the AAK inspired innovation anchored in science, technology and application development and validated market insights. We also strengthened the innovation governance through a revamped NPD dispute process with a similar process for new technology development being established later this year. Intellectual property also remains an important part of protecting value from our discovery and innovation in AAK. And in 2025, we -- and in 2025, we faced 31 new partner applications across our core platforms. Taken together, these initiatives are helping build a more systematic and scalable commercial innovation platform, supporting stronger customer relevance, better execution and progress towards our 2030 aspiration. With that, I'll hand it back to Johan.

Thank you, Niall, and thank you, Tomas. To summarize, we continue to make progress on the alignment and optimization projects that we outlined as a part of our 2030 aspiration. These initiatives are not isolated projects. Together, they are about building a stronger, more scalable operating platform for AAK, improving how we run our plants, how we manage our portfolio and pricing, how we produce, how we manage cash and working capital, how we control costs and how we strengthen our commercial and innovation capabilities. . Several of the programs have now moved from project phase into a more embedded way of working. That is important because the real value comes when these capabilities become part of how we operate every day across the group. We are doing this in line with AAK's decentralized but aligned operating model. With clear group-wide priorities and methodologies while keeping ownership and execution close to the business. Taken together, this gives us confidence in our continued journey towards the 2030 aspiration to grow volumes ahead of the underlying market and to reach an operating profit per kilo or more than while continuing to deliver on our financial target of around 10% EBIT growth over time. Please turn to the next slide for a few concluding remarks before we open up for questions. Let me conclude by summarizing the quarter. We delivered resilient volumes, softer profitability and strong cash flow. Looking at the first half as a whole, the performance remained solid despite the cautious market. Both volumes and operating profit at fixed currencies were ahead of last year, although the second quarter was softer following a strong start to the year. The softer performance in the quarter was concentrated in a few clearly identifiable areas, mainly dairy, price pressure include ingredients and the production-related challenges at the Carlson site, which has now been resolved. Shopping effects continued to hold up well despite subdued chocolate consumption and lower cocoa prices. With that, I will hand it back to the operator and open up for questions. Go ahead.

[Operator Instructions] The next question comes from Benjamin Wahlstedt from ABG.

I'll start by directing question to Niall. So I was wondering perhaps if you could discuss the road innovation could have in turning the trend in Dairy, specifically, perhaps where your technical advantage compared to in the CCS segment appear to be quite a bit lower. .

Indeed, dairy innovation and what we can do there. Obviously, our focus is in key application areas around process cheese, ice creams, et cetera. And therefore, whenever we look at the functionality that our customers are looking for as well as the experience customers are wanting that is very much in line with what we deliver when it comes to the experienced pillar of our innovation platform and others around texture, smoothness, creaminess, melt, et cetera. So our inherent understanding of application development with the essential role of that. One of our key focuses is to enhance the overall customer experience of those applications, in particular, in dairy.

All right. And then turning to the Carlson impact. Are there any sort of residual costs, any catch-up production or any insurance recoveries which you expect in H2? Or is Q2 sort of the full P&L effect? .

Clear question. I hand it on to you, Tomas. .

Yes. Thank you for the question. No, the impact -- the negative impact that we saw in Q2 was the full and final impact of that extended stock. So -- we don't see any continued additional costs into Q3 in the second half. On the other hand, the volume that we were not able to deliver to our customers will not be moved into the second half, either that has been resolved by the customers to other suppliers and so forth. So no further effects from it. .

The next question comes from Johan Fred from SEB.

Follow-up on the -- well, the cause and disruption and the decline in EBIT per kilo in food Ingredients. Do you think that you could sort of elaborate a bit on how much of the EBIT per kilo decline was driven by a cost of disruption specifically and how much was due to underlying price pressure and the follow-up there, what's the run rate in food ingredients in terms of EBIT per kilo based on this in Q3? .

Thank you. And with regards to run rate, we do not give forward-looking guidance, specifically like that, but still being able to answer your first question, as we highlighted, it was a bit half in relation to how much was coming from Carlson, how much was coming from the competitive landscape. But Tomas, maybe to expand a bit .

Yes, the impact from the extended maintenance stop in calls and as we mentioned before, on volume was about 1 percentage point on the overall group. The bulk of that ends up as calls very much focused include ingredients and TPF. On the total bottom line EBIT impact on the group. We're talking about half of the drop from last year, about 3 percentage points, about SEK 40 million, mainly also divided by the majority into food ingredients and also into TPF. .

Okay. Got it. Very clear. And I'll have to choose my questions wisely here. But on the high animal fat availability in Europe and the Americas, which was a clear headwind into Q2 for food ingredients -- what is your visibility on when this potentially normalizes? Are you seeing any early signs of a reversal here in H2? Yes, that's my second question. .

Yes. I mean very difficult to give a complete forecast. We have seen variability in the past, if we go back in a longer history where meat prices fluctuate and things adjust over time. At the moment, the situation is as we outlined. I don't think it's going to be a quick change. But I don't know, Niall, if you have any further comments to that.

Just building on, I think that's for reflection, John, in the sense that we do see strong cooking formulation, reformulation, innovation coming through great across many segments of the supermarket and further this surplus. So with this protein consumer trend very much in vogue -- we expect this to be run for a little longer.

But keep in mind that as with many of our products, there are certain products where there is an interchangeability between dairy and nondairy fat, if you will. But in many cases, our solutions just like the chocolate and Confectionary, also in Bakery and other products are linked to specific applications, specific functionality and the specifics of the chemistry, the lipid chemistry that we stand for like Niall highlighted. So -- and that's what it is. So this is more where it is more of a one-to-one opportunity for a customer to switch between the 2. And then from a longer-term perspective, we want to also review from a sustainability perspective. Is that the path to go or we need to adjust that also from a sustainability perspective as more in a longer-term perspective.

The next question comes from Setu Sharda from Barclays.

So I have a question on CCS. Our margins improved materially despite weaker volumes and a slight decline in but alternative. So what's doing the heavy lifting here? And given like Q2 is supposed to be a seasonally weak quarter. So do you -- do you think we could see continued margin improvement in CNCF through the year? And also earlier, you had mentioned about the sweet spot of cocoa prices. If you can remind what was it? And is it still applicable? And my second question is on -- about the food service, which remained like weak, particularly in the U.K. Are you seeing any stabilization in demand trends? Or does the consumer environment remain challenging as we move through the second half? And did you see margin pressure in food service channel as well .

Thank you. Clear. So first of all, commenting on the CCF and the performance in the quarter. We have seen over several quarters, a strong margin development, right? So we are holding up well given the total shop at market. So total Cocoa and Confectionary demand is slightly more subdued than what we present in terms of volume. And then looking at the margin, we have seen being able to deliver strong results on the back of our total portfolio optimization on the back of our strong position within cocoa butter equivalents, et cetera. So that is kind of the explanation to why Q2 delivered wallet delivered, right? And then with regards to the sweet spot, I think it's important to keep in mind, we'll get -- I'll give you the hands to what the sweet spot was, but I'll tell you more conceptually the dynamic in that which is that as long as if cocoa butter goes too high, and that is something that you have seen absolutely now in recent 2 years. If cocoa butter goes too high, then the total prices of cocoa and confectionary Solutions on the shelf in retail become so high that it might impact the consumer demand, and that's what we have seen, if it gets too low, then -- and it gets really low, then you get into the situation where customers could ask themselves, why would I use substitute 1 way or the other. And that is where we come into a sweet spot, right, not too high because it then impacts consumer demand, but also not too low because then you could start challenging whether you should use an alternative or not. Having said that, as Niall explained very nicely, many of our solutions go into the shop life and protection space also have functionality and the improvement of the consumer product that we can do with cocoa butter. So that's important to keep in mind that, that goes for like forever going forward. And then the sweet spots can move up and down depending on what the overall market development is on the underlying raw materials. But the sweet spot was before between 5 and 6. So Tomas?

And going into your second question on foodservice. And as you correctly stated as well, we see the weakness within foodservice in the U.K. Our stand-alone foodservice business has primarily focused on the U.K. market and in Scandinavia, and the markets are developing quite differently. Scandinavia has had a stable quarter with good margins. In the U.K., the situation is somewhat different. The general economy in the U.K. is challenged, and we see quite a deteriorating market in terms of dining out and pubs and so forth. This has been a trend for some time, and this is also affecting our foodservice business in the U.K. We don't see any immediate recovery of this. My estimation is that we will continue to see a challenged environment in the U.K. for the remainder of the year.

The next question comes from Erik Sandstedt from Kepler Cheuvreux. .

A couple of questions, please. Could you elaborate on the source of the pricing pressure in food ingredients that you saw in this quarter? Is it purely competitive pricing or anything else like customer mix, contract renewals, input cost dynamics and so forth.

Could you repeat that, please?

I'm just wondering if you can share some more details on the pricing pressure that you saw in Food Ingredients in the quarter. Is it just competitive pricing basically?

Yes, it's a competitive environment, which we have commented on before that while we have very, very strong position like Niall also highlighted our customers rank as high. At the same time, the whole industry is looking for an offset to inflation, optimizing, et cetera. And that's where we are always up for competition in basically all the segments, specifically to food ingredients, in this case, in the dairy subsegment, it is very much linked to most of the dairy fast development that we just talked about. In Bakery, it is more pressure across the board, if you will, with subdued volumes and customers seeking for price offset when they can, and that's what is -- so very bit boosted, but a portion that more generally across the world.

Is there a risk that the pricing pressure that you now see in food ingredients eventually translate also in the CCS business? Or are those sort of 2 completely different businesses and end markets.

Thank you. Great question. it's not a translation impact between the 2. It is absolutely different than market, different application, different recipes, et cetera. And in many cases, different customers, although some has both. But there's no translation between the 2. As we said many times, of course, we're not alone in any of the segments where we operate. So there are different market dynamics and different competitive landscape dynamics in the different submarkets that we delivered to just like there is difference in bakery as far as different to CCF. And also within CCF, there is a difference between different kinds of solutions, but there's no translation between the 2. So we need to look at them stand-alone.

The next question comes from Matthew Yates from Bank of America.