AAK AB (publ.)

Hi everyone and welcome to the AAK quarter two earnings call. As you heard the presentation today will be run by myself as well as our CFO Thomas Bergendahl. On page two we have the agenda for today which is as usual highlights for the quarter, some key events, business and financial updates, some concluding remarks from myself and then we end with a Q&A session after that. So with no further ado, let's move into the updates. Start on page three, overall business. We continue to deliver another strong quarter, strong year on year growth in earnings, despite somewhat softer volumes. I'm really proud over the way our organization delivers in line with our strategy and that we also can adapt and manage a dynamic market environment. And the second quarter shows that like the first quarter this year did as well. We see operating profits being up 36% year on year at fixed FX. We have seen volumes down largely due to our optimization program in Bakery, as we have talked about before, and also our controlled exit out of Russia. If we look at the volumes excluding Russia, our exit from Russia volumes were down by 7% year on year. But keep in mind, we also drive a strategic agenda with it, which is focusing on delivering more high value added solutions. We're optimizing our productivity internally, et cetera. So having somewhat lower volume, but still being able to drive margin expansion is still within our strategic path forward towards our 2030 aspiration. The strong earnings growth was really driven by continued margin expansion. We focus on speciality solutions, productivity and price management. Very volatile raw material markets over the last one and a half years. And the organization has done a really good job in managing it, both in terms of securing supply in, but also managing prices accordingly. Very happy to see also that we get good traction now in networking capital coming down after the reduction in raw materials. So this quarter, strong earnings topped up with a reduction in networking capital leads to also strong cash flow and also improved return on capital employed now up to 15.9%. so all in all a strong quarter with profit growth as well as margin growth in terms of operating profit per kilo with those initial comments let's move to page four a few key events for the quarter we continue to invest for future food solutions we are committed to advancing ourselves in terms of innovation and looking at opportunities to produce more sustainable food in the future. One of these initiatives from AEK is to invest in the big idea venture Protein Fund 2. We were also in Protein Fund 1 and this becomes one of our ways to be staying close to new technology, new food solutions and then when we see this maturing over time we will also continue to invest further. We're also focused on doing everything that we can in order to improve the profile of the company and our delivery towards reaching a fully sustainable supply chain. In scope three, we're investing in a climate performance platform in order to track, trace and improve the way we operate and the way we source materials. As well, and linked to this, we engage ourselves and continue to engage ourselves in moving to a fully sustainable supply chain of palm. We are committed to deliver zero deforestation in our supply chain by, or 100% verified deforestation free by 2025. And we continue to really engage in order to move the palm oil supply chain to be fully sustainable because palm is such an important ingredient in feeding the world. a population that is growing over time, and where we know that the future of food will be finding a better way of eating, a better diet, where that includes most likely reduction of animal-based food and increase of plant-based food alternatives, as well as new ways of producing food with minimizing the use of the land to deliver this. So all in all, AAK is very committed to driving sustainable supply chain of food ingredients. With that into the different business areas starting with food ingredients page five. We have a strong result in food ingredients for the second quarter as well. This is driven by improved margins mainly due to a focus on our high value-added solutions in the product mix like infant formula fats and so forth. also continued productivity, as well as price management. And this will also have our optimization program for bakeries. So all in all, strong results. Volumes are down, mainly due to our exit from Russia and the impact of the bakery optimization program, and to some extent, weaker consumer demand. But all in all, a very strong result with operating profit per kilo up 63% at fixed FX and the result is up by 53% at fixed FX. Moving into chocolate and confectioner fats on page 6. Volumes decreased in the quarter by 15% as a result of our exit under Russia. Also, the negative impact of the very unfortunate and tragic earthquake in Turkey, where that has an impact on our volumes. We have good volumes in our business in Turkey for chocolate and confectionery fats ingredients, but also lower and weaker consumer demand in general. So all in all, low volume. But despite low volume, we have delivered a very strong earnings growth. We are growing our operating profit by 18% at fixed FX and operating profit per kilo is up 39% at fixed FX. And I repeat, we have a strategic agenda and I'm proud of the way the organization lines up to this. So we focus on high value added solutions. We actively disconnect some products where profitability is not good enough. So part of this evolution is, of course, letting go of some volume. So volume reduction per se, given the market condition that I just talked about, is not a big issue. Obviously, I would love to see slightly higher volumes and so forth. But in the long run, we are committed towards delivering on our aspiration 2030. And we see a good opportunity for AK to grow with the market and then some in the long run. But again, our strategy is about focusing on high value added solutions and driving margin expansion. With that, moving into technical products and feed, another strong quarter. We have, in a historic perspective, delivered very strong results and growth in earnings over some time. So even if you see a year on year lower volume, a year on year slightly lower operating profit, we have still an operating profit per kilo margin that is up by 6%. So call it a very strong quarter. Last year's quarter, quarter two, was also a strong quarter. So in that context, another good quarter for technical products and feed. The lower volume really comes within the technical products area where feed was flat or fairly good. The volume reduction is then linked to lower consumer demand on some of these products like candles and other technical products using plant-based also fats ingredients so we linked that more to the consumer demand profile but again a strong result as a whole for this business area and with those comments we hand it over to thomas for some more details on our capital profitability etc

Thank you, Johan. And good morning, everyone. Continuing on slide eight and moving straight into the cash flow development for the quarter. As you can see in Q2, we continue to see the positive underlying trend that we initially saw in Q4 and also then continuing in Q1 with a strong cash flow. This quarter driven both by a reduction in working capital and solid earnings, about half and half. The quarter generated a positive operating cash flow of 1.6 billion SEK. and the free cash flows you can see 1.4, which is significantly higher than in Q1. The reduction in working capital was 1.1 billion and year to date we've seen a reduction of 1.4 billion. uh and as expected and as communicated previously we see that lower raw material prices as well as improved inventory management has yield a positive effect on our inventories and our quarterly cash flow we saw a positive contribution from inventories receivables as well as payables in the quarter other operating capital which is negative includes accrued and prepaid expenses And there is a timing aspect to this. It moves and varies quite a bit quarter to quarter. Interest costs increased quarter of a quarter, mainly driven by higher interest rates, but decreased from Q1 as our debt level is reducing as well. And the average tax rate was 24% in the quarter. CAPEX, we spent 246 million SEK during the quarter. And as previously, it's related to production improvements, the bottlenecking capacity optimization and so forth. And the guidance that we give for 23 is that we'll have a spend of about 1.2 billion SEK. Other non-cash items had a negative effect as in the previous quarter. And this is again driven by unrealized hedging contracts of raw materials mainly. And during the quarter, as in Q1, the valuation of unrealized hedging contracts had a positive impact on EBITDA, offset by negative effect from realizing hedging contracts and inventory revaluation. And this is all as a result of our back-to-back hedging model. So the net P&L impact of these two items is roughly neutral. But in the cash flow, we then see that being deducted to get from the EBITDA down to the free cash flow. Between Q4 and Q2, Q4 22 and Q2 23, we have successfully decreased our working capital by roughly 2 billion SEK. And this is mainly due to the decline in raw material prices as discussed before. But we've also, over the past year and a half, made significant progress in how we manage our inventories and networking capital in general and remain committed to maintain this momentum going forward as well. Moving on to slide nine, return on capital employed reached 15.9%, as Johan mentioned before. And this is slightly higher than the last peak we saw in December of 21, where we reached 15.6% before it dropped. to 14.5% at the end of 2022. So good improvement there as well. On slide 10, the net debt EBITDA ratio reduced further in the quarter down to just about one, down from 1.36 in Q1 and down to about half from the peak we saw by mid-2022 of 2.03. And we're now below the level that we were at before the increase of raw material prices in mid 2020. And the improvement is of course driven by strong profit development as well as networking capital reduction and resulting in a net debt position that is lower. Johan, back to you. Thank you.

So on page 11, just some concluding remarks before we open up for questions. To sum it up, continued strong performance driven by predominantly margin expansion, resulting in strong operating profit growth. This is linked to continued sales of speciality solutions, value-added oils and fats ingredients to our customers, as well as internal focus on productivity and improvements, as well as strong price management. volume decline, mainly linked to our optimization program, the exit out of Russia, and to some extent, weaker consumer demand. But all in all, a strong quarter with good cash flow, reduced leverage, and without also improved return on capital employed. We are also on track with the compliance towards the EU deforestation regulation, which is a good move by policymakers, which we like to really focus on how to get fully sustainable supply chains. The EU regulation does require sub administration and proof points in order to comply fully and AIK has developed a good action plan for how to do that. And we'll come back to that later. Mindful of challenges ahead and a very dynamic business environment still in the world, we are optimistic. We are prudently optimistic about our ability to deliver. We have shown in the past that our organization is very agile, that we can cope with a dynamic business environment and we stay focused on delivering our 2030 aspiration. That is what our strategy is targeted towards. So with that, I open up for questions.