AAK AB (publ.)

Thank you and welcome. Good morning everyone. This is the AAK Q4 earnings call. As you heard together with me, as usual, I have our CFO, Thomas Bergendahl. We will take you through the presentation today and then as usual, we are happy to take all your questions afterwards. On page two, you will see the agenda for today. And with that, I suggest that we jump right into page four and start our presentation of the Q4. We are really closing the year with strength. It's been a strong year for AAK in total and quarter four was no exception to that. Our operating profit increased by 50% at fixed FX rates. This was very much driven by internal process optimization. We've talked about that earlier, but very much in line with what we have been doing and executing throughout the year. Also better portfolio and price management, including a continued focus on selling more of our specialty solutions. And that is a focus that will continue with AAK. Our volumes, however, declined 4% year on year, but worth mentioning is that we continue to see a sequential improvement, which we also saw in quarter three. So really good to see that the volume loss to last year quarter four is lower than the losses to the previous quarter that we saw during 2023. And if you then go in and look at that sequentially, Q2 to Q3 to Q4, we did see improvement in volume. Further to the operating results, we also had a very strong cash flow and the strong cash flow was really driven by the increase in earnings in the quarter. We have a proposed dividend from the board of directors, which is sick 3.70 per share. This corresponds to an increase of 35% compared to last year. So a nice increase also driven by our increased earnings. In summary, a strong quarter, very much in line with the trend for the first nine months of 2023. With those comments, let's move on to page five. A few comments to some events during the quarter. We are very happy and proud that we have now got our targets, our sustainability targets, reduction targets have been approved by the Science-Based Target Initiative, SBTI. And that marks a milestone. It shows that AAK is really moving ahead. We are also an early adopter with regards to the SBTI targets because we have now as one of the first companies also secured approval for the flag part of SBTI, which is focusing on forest, land and agriculture. So our emission reduction targets have also been approved with regards to scope three under the flag directly. Further to this, we have launched a new product, CBIS Choco 15. It has received good recognition at the Food Ingredients Europe. We were in November at this conference, Food Ingredients Europe, we were one of the finalists with regards to or in the category for Sensory Innovation Award. It's an affordable, it's targeting affordable indulgence. So in essence, living our purpose, making better happen. In this case, making it an opportunity for the consumer to enjoy indulgence to an affordable price. Moving on to page six. With regards to our three areas, starting with food ingredients, volumes were down 3% year on year, but also in this area, we improved volume sequential. Baker's special nutrition volumes declined, but was somewhat mitigated by a strong performance within dairy. Coming back to bakery, our bakery optimization that we have talked about earlier this year had a negative impact on order. But that was again very much according to plan. With regards to our margin EBIT per kilo, it increased to 1.96 SEC per kilo, which is a 52% increase versus last year at fixed FX rate. This increase was mainly driven or rather broad-based driven throughout the sub-segments. Pretty much all of them improved with the exception of special nutrition, which decreased slightly due to lower volumes and lower leverage on that lower volume. Sequentially, the EBIT per kilo declined a little bit compared to a very high 2.15 SEC per kilo in quarter three. With that, we're moving into chocolate and confectionery on page seven. For the chocolate and confectionary fats, volumes decreased by 2% year on year, but grew 3% versus quarter three, 2023. The performance was a bit mixed within the total chocolate and confectionary space. We saw a bit of a decline for solutions to products like chocolate bars and so forth. But on the other hand, compensated by nice growth for solutions where we target ingredients towards spreads and fillings within the chocolate and confectionary space. With regards to margin EBIT per kilo was strong. It increased by 67% at fixed FX. It's very much in line with the rest of 2023 where we have seen a strong performance driven by internal optimization, continued portfolio and price management, improving the way we operate. This also includes our continued focus on selling more of our speciality solutions into various sub-segments of the chocolate and confectionary space. To name an example, speciality solutions that we sell to spreads and fillings did very well and had a positive mix effect for the quarter or in the quarter for chocolate and confection. With that, I move into technical products and feed. The volumes declined by 12%. When looking at that, it is a high comp in 2022 Q4. It was very high volumes. But again, we grew sequentially versus the second quarter. For the second quarter in a row, we grew sequentially. Really from Q2 to Q3 and now from Q3 to Q4. Again, a slightly positive trend versus Q2, Q3. But when comparing to Q4, it was negative 12%. The year on year decline was mainly driven by lower sales or lower volumes in the feed business, which again had a strong quarter for 2022. With regards to technical products, including solutions where we replace paraffin to candles, it declined slightly, but still on a good level in a historic perspective. EBIT per kilo declined on lower volumes, so lower leverage. Also lower margins into our solution for biofuel and slightly lower crush margin also in our crushing of rapeseed. From a rolling perspective, the Q4 results were very much in line with Q2 and Q3, both when looking at volumes and EBIT per kilo. With that, I hand it over to you, Thomas, for a bit more details on the financials.

Thank you, Johan. Good morning, everyone. Continuing on slide nine. During Q4, we saw continued positive underlying trend that we've seen in the previous four quarters with a strong cash flow driven in Q4 as in Q3, mainly by strong earnings. The quarter generated a positive operating cash flow of 1.4 billion SEC and a free cash flow of 1 billion. For the full year of 2023, we've generated operating cash flow of 5.3 million SEC and the free cash flow of 4.1 billion. As it relates to working capital, we had a slight positive overall impact on cash flow in the quarter. We see a positive contribution primarily from accounts receivable, which is driven by a seasonal reduction towards the end of the year. Inventory values grew and had a negative impact in the quarter. This is also driven by seasonality and primarily related to the sourcing of sheet kernels. Interest cost paid in the quarter was 59 million and this was a fairly significant decrease compared to the same quarter the year before, mainly driven by reduced debt levels. Tax rate was 19% in the quarter and 23% for the full year. The tax rate in the quarter, the reduction was mainly related to the utilization of tax losses carried forward and they are applicable for the full year of 2023. That's average to look at. Other non-cash items had a positive effect of 241 million SEC and mainly driven by unrealized hedging contracts, raw materials and valuation of pension commitments. For the full year of 2023, the effect from other non-cash items was a negative 65 million SEC versus a positive effect 63 million in 2022. Moving on into capex, the quarter totaled 325 million SEC, slightly below Q4 of the previous year. This as before is related to production improvements, de-bottlenecking, capacity optimization, as well as the completion of the year. For 2023, the capex spend ended up at 1.2 billion SEC, which is in line with our guidance for the year. For 2024, we expect capex related to maintenance, production improvements and capacity optimization to reach roughly the same level, 1.2 billion SEC. Our focus and efforts to manage our cash flow has yielded good results as you can see and we remain committed to maintain this momentum in the future through our cash to grow program. I will get back to this later on in the presentation. Next slide, slide 10. Here we see return on capital employed, which in the quarter reached .1% up from 17.2 in Q3 the same year. This is driven mainly by improved profitability. Capital employed has remained roughly flat in absolute terms despite ongoing inflationary pressure. The rock is up from 14.5 at the end of 22 and well above the last peak we saw at .6% at the end of 2021. Slide 11 please. The net debt EBITDA ratio was further reduced in the quarter ending at 0.49 down from 0.73 in Q3 and significantly down of course from the peak that we saw mid 2022 at just above 2. And now well below the level before the impact of the increased raw material prices that we saw started off in mid 2020. The improvement primarily driven by a strong cash flow which has then resulted in a reduction in net debt position as well as a strong development of profits. Back to you, Johan.

Thank you, Tomas. Before wrapping up I would like to review the structural drivers behind our profitability improvements. As I'm sure most of you are aware or already aware, AK is a decentralized operation or have a decentralized organization. We're very close to the market and our customers. In the decentralization lies also our strength and it is a reason for our success. Nevertheless, the decentralized nature of our operations presents certain challenges, particularly in ensuring consistent implementation of best practices and capitalizing on synergies across our production sites and regions. To tackle this, we have over the last couple of years been building an increasingly aligned organization on top of a decentralized structure. And while we have made significant progress, as shown by our results in 2022 and 2023, there is still work to be done on further aligning our organization and our culture. And Tomas, can you give a bit more color to that?

Yes, I will. Thank you. Please turn to slide 12. As I'm sure most of you remember back in November of 22 at RCMD, we updated our strategy and set our aspiration for 2030, which from a financial perspective is a commitment to double our operating profit per kilo and while outgrowing the underlying market on volumes. And for 2024, we remain committed to this aspiration. 2023 was, as you've seen, a very strong year for the company with an operating profit per kilo at 1.94 sec. And despite decline in volumes, we surpassed our target of having an average operating profit growth of around 10% per

year.

In addition, and following lower raw material prices, we saw strengthening over our balance sheets, which in combination with higher earnings than resulted in the rocket that we just showed of 19.1%. As Johan mentioned, we have over the last couple of years been working towards an increasingly aligned organization to strengthen the decentralized structure that has served us so well over time. The strong growth in operating profit per kilo has mainly been driven by a few key strategic initiatives that reflect our commitment to making better happen as one globally aligned and decentralized organization. And going through some of these initiatives, firstly, we continue our efforts to optimize our production processes, implementing best practices, bottlenecking across our global footprint of some 20 production sites. The result of this effort is an increase in capacity, improved product quality, increased service levels, general cost savings to mitigate inflation and CO2 reductions. At the end of 2023, we had successfully addressed about 55 to 60% of our installed capacity across our five largest sites. And while there is still roughly 40% of installed capacity left to address, this entails mostly medium to smaller units. And that means that from an initiative point of view, a majority of the impact is finished. The deep dives are expected to continue and be completed by mid 2025. Further significant impact from this effort will be driven by an increase of volume. And building on the learnings from the bakery optimization effort, we also launched an aligned product portfolio and price management structure. This initiative and alignment was based on the revised portfolio strategy presented also at the CMD in 2022. And has a key driver and was a key driver for the improvements across both our production and commercial organizations. We primarily focus on product SKU rationalization and product tail management, introducing portfolio based value pricing. And while the process of portfolio and price management is an ongoing effort and will continue to be so, the project itself was successfully concluded at the end of 2023. And the initiative contributed to the operating profit per kilo through improved product mix and also pricing. Looking ahead, we are during 2024 set to apply a similar program structure to align the procurement processes of our non-oil components and inputs. Although we do not anticipate that this will yield an impact of the same magnitude as the two other initiatives that I just mentioned, we are proven to be optimistic about its potential. We're also so far we have enrolled four sites in our cash to grow program. And this is a process similar to the production related deep dives. And the project is expected to be concluded going through all sites by mid 2025, same timeline as the deep dives on the production site. The initiative aims to locally drive cash flow improvements, broaden the financial focus from volume and EBIT to also include working capital and cash flow. And the process includes bringing together local teams with competences throughout the entire value chain from sourcing through production and sales as well as finance to get a cross-functional understanding of how working capital and cash flow affect our financial results and identify improvement areas to work with locally. The first deep dive took place in India in March of 2023. And during 2023 we've also run the deep dives in sites in the UK, the US and Brazil.

Over to you, Johan. Thank you, Tomas. And to sum it up, we closed out the year, we closed out 2023 with strength. We delivered strong profitability with an improved EBIT per kilo driven by our internal processes, our optimization and better portfolio and price management very much in line with what was now mentioned by Tomas. Our volumes declined year on year but continued to improve sequentially. And we had strong cash flow mainly driven by our increased earnings. We remain committed to deliver on our 2030 aspiration. We are excited about the internal as well as the external opportunities that we see and that we have. We are well positioned to continue to grow and expanding our business. And last but not least, we remain prudently optimistic and we are fully committed to living our purpose, which is all about making better happen. That sums up the presentation from our end and we are now happy to take questions from the audience.

Thank you. If you wish to ask a question, please dial pound key five on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key six on your keypad. The next question comes from Joan Lim from BNP Paribah Exane. Please go ahead.

Hello, congratulations on the strong 2023. I've got two questions. So just maybe on the 24 outlook, the structural drivers have been very helpful. But you also said previously that given strength in 2023, absolute EBIT growth is unlikely to be at 10% for 2024. So how should we think about EBIT development this year? Is it likely to revert back to 2022 levels? And then the second question is on food ingredients. So Q4 pricing looks like it's declined significantly by around negative 18%. Can you maybe provide some color on what drove this decline and how we should think about price mix into 2024? Thank you.

Thank you. When we look at 2024 and the developments we've seen from 2021 to 2022 and 2023, we don't provide guidance for 2024. But we, as we've mentioned, remain committed to our aspiration to generate a 10% EBIT growth in absolute terms over time. So it may, of course, vary over time as well. But we are committed to that aspiration for 2030. And we'll continue our focus to generate improvement on the bottom line year over year.

And then the second question was about pricing in food ingredients. And as you know, if you refer that question maybe to net sales being down and so forth, keep in mind that we do adjust pricing over time. And we look in pricing based on where we see raw material cost in the market. And we take away those impacts as far as possible with hedging. So we look at the price mix, so our sales price do vary, sorry, our sales in absolute terms do vary over time. And that's why we do report our earnings and our margin in operating profit per kilo looking at the volume price. And if you see there on food ingredients, we see a slight volume decrease, but still a good strength in our operating profit per kilo and our absolute operating profit. So I would say the sales reduction or price reduction that you referred to is very much linked to following the market and the pricing of the raw materials that we have. And maybe further to Thomas' comments on the outlook for 2024, we have reached high levels, right? We have executed very well with the improvement initiatives. I think it's fair to say that we are now really focusing on the balance between continued optimization internally, as well as looking at pricing in relation to how we get loading, get volume, get the contracts that will fill our plans. So it's really a great opportunity to continue on very high levels and to continue to grow, but also needs to be a bit realistic about how to win volume going forward. So I think that's just where we are.

And further to the food ingredients question, as you also see on operating profit per kilo, it actually drops a bit in Q4 versus Q3. But if you look to the history on page six of our quarterly report, you also see that that's a seasonal trend. You can go back and look at the previous two, three years

as well. So in essence, with the right balance act on pricing versus volume and get good leverage over fixed cost of loading plans, there is a good opportunity for us to continue to deliver strong margins and continue to expand our business over time. But again, as a company, we're focused on investing in the right activities that we deliver on our long-term 2030 aspiration.

Right? Okay, thank you. The next question comes from Simon A. A. from DNB Markets. Please go ahead.

Good morning, guys, and congratulations on a very strong end to 2023. I have a few questions, so I think I'll start with the first one. So I know you said that you stick with your 2030 ambition. Now that you have delivered on this target two quarters in a row, just remind us, how should we then think about it? Is it this is sort of the new EBIT per kilo level, and then you will grow your profits by growing volumes, and you will remain at this level? Or how should we think about that? So that's my first.

Yeah, thank you. And as we mentioned before, the aspiration is, at least from a financial point of view, twofold. One is the operating profit per kilo, the other one is volume to outgrow the market, and that we haven't done over the past couple of quarters. So it's again, back to what Joanne said about striking the between price margin and the volume, and that will continue going forward. We remain committed to our aspiration, but we also need the volume growth to be able to reach the aspiration in full.

Okay, so yeah, so that's, you know, so we should think that, you know, EBIT per kilo, then maybe should come down a bit while volumes recover. Is that how we should think about that? Or because if I remember correctly, you have a pretty much very good visibility on, you know, six to nine months going ahead. So just remind us how is the price level on the contracts that you see in 2024? And is it, you know, the same level as Q4? Or are those prices down?

Yeah, again, we're getting into forward looking guidance, which we are not doing, but I understand the interest in the question. But if we look at this very operationally, they're always like, you got to balance yourself, you there are contrasts that you can actively choose to take or not to take depending on the market. What we're saying is that there is a great opportunity for us to continue to load our plants, we have capacity, we have optimized, as Thomas said before, so there's an opportunity to balance that if we do that well. That means that maybe with a slightly lower or lower price, we get more volume, but that volume will also load our fixed cost, meaning that there is an opportunity to continue on a high margin basis. So while I respect that there is a lot of interest, will it be high, will it be lower, or just keep it? We're going to try our best, we're going to continue to focus on optimizing our structure, getting the contracts to the best possible pricing. But we might give some to win volume, but doing it the right way, that's even an opportunity to continue on high margin or even strengthening them. But again, in relation to our transit 30 aspiration, we have delivered more on the margin side over the last couple of years than the volume, which is actually decreasing. So in terms of focus, it's really about winning in the market.

Okay, that's clear. And then just one final one here. So the very high coca butter prices that we have seen now in tandem with palm oil and CIDL coming down, just can you just give us your thoughts on how this has impacted you? Is it making it easier for you to keep the prices high for your solutions? Or how should we think about that? Because you know, they have accelerated now into 24 as well. So is this a sticky trend in the you know, the confectionary side?

It is a great question. It has a few angles to it, right? Obviously, we have solutions that do replace cocoa butter. So in that context, you could argue that everything else equally, it's helping rather than anything else if the competitive solution is more expensive. But on the other hand, this is an open market where we compete with competitors. So it's not a direct link to say, well, if cocoa prices rises, it's easier to just sell our products to a higher price. But of course, there is that gap is, if anything, helping. But there's also the consequence of the consequence, meaning that if we have too high cocoa prices and or sugar prices and so forth, it makes chocolate and confectionary products more expensive on the shelf. And that typically leads to our customers trying to optimize their portfolio. And in many cases, we have solutions that can help reduce the cost of the end product by using more of our components and so forth. And or the consumer actively choosing, which has been a trend over time, called chocolate bakery, where you have a baked confectionary item coated with chocolate or with a chocolate confectionary filling that on the shelf is lower price or lower cost for the consumer, but still is an indulgence. And again, that's where when you look at the total mix within chocolate and confectionary, some of these single trends, if you will, on let's say cocoa prices, leads to follow on trends, where they many of them have a positive impact for a case. So it's not a straight line between high cocoa prices and ups and or downs in our business. It has follow on ripple effects that are sometimes a challenge, but often also an opportunity.

And that's why you see our spreads performing fairly well now in the quarter as well with increasing prices on cocoa going into sort of

the

proper branded chocolate, if you will.

Yeah.

And that also helps our market development when we sell more of those advanced solutions for e.g. spreads and fillings.

Because advanced solutions for us doesn't necessarily mean that it's the very high end product for the end consumer. We do replacements, if you remember.

Yeah. OK. That's very helpful to them. Yeah. It's fair to assume that that trend, there's no change in that trend than in 2024 given how the prices have moved. And OK. And then just one final one I have here on the positive working capital effect. Could you just remind us, is this all these effects out now or should we expect positive working capital in the second or first half of this year as well?

We consider the working capital effects from the increased and then increasing raw material price to be worked through the cash flow in 2023. So we don't expect any significant working capital contribution, everything else equal to the cash flow in 2024. It's going to be driven by our profit levels.

OK. Thank you. Thank you so much. I'll leave others to the questions now. Thank you.

The next question comes from Oscar Lindstrom from Danske Bank. Please go ahead.

Good morning. Three questions from my side, if I may. Just the first one on the CCF segment and your customers there. I mean, they must really have been hurting from high raw material prices. You know, was it all mixed and that enabled you to achieve such a strong result, I mean, really throughout the year here in this segment? Or were you also able to sell more expensive products? So perhaps I'm just wondering a little bit more about the details on the very strong result in that segment, given the weak market in that segment. Our

visibility into our end customer is sort of limited in terms of what their cost levels and so forth look like for their products. But we do see the raw material prices, of course, that have been mentioned before. But to me, it's a couple of things. One is that Q4 actually saw a good pickup again on volume year over year. If you compare the full year of 23, we're actually down 9% versus 22 and only down 2% in Q4. So we saw some pickup there, which of course helps with using the free capacity that we have in our plans. The other one that is the structural initiatives that we initiated, that we've talked about before to improve efficiency, looking at the product portfolio, but also pricing and so forth that helps our operating profit per kilo. So it's a mix of the two, I would say, that helps in the quarter.

Right. And my second question is on this topic of volume and available capacity, which you mentioned here. I mean, you talked about wanting to drive volume growth during 2024. Is it possible for you to sort of give us a rough figure of how much available capacity do you have in your plans at the moment, given the current product mix?

Yeah. And as you say, it's all about the product mix, right? And it varies, of course, during the year. But we would say roughly, a good estimate would probably be that we have around 15% capacity available in our plans. And again, you don't want to be at 98 to 99% either because that starts to hurt product quality, service levels and so forth. But there is available capacity. And back to your statement there, focusing on volume, our focus is on finding the balance between volume growth and our margin levels. So that's the way forward in 2024. But there is available capacity. Yes. Right.

Thanks. And then my final third question is on your very strong balance sheet with quite rapid deleveraging during the past year. Are you saving up money for a big acquisition or investment? Or are you uncertain about 2024? What are your thoughts about capital allocation going forward?

Yeah, great question. We are certainly not uncertain. I mean, we have been living through quite significant uncertainty over the last four years. And look at AK. I'm so proud of the organizations. I think it's fair to say we need to be on our toes and anything

could

happen. But we also have an enormous strength in our decentralized structure that is getting more and more aligned. So with regards to no, we're not saving money for being disproportionately uncertain about the future. Definitely not. We are certainly targeting a combination of organic growth and acquisitive growth. So we are looking at continued investments organically for AK. But we are also actively managing our pipeline of potential acquisition. There are not that many in our industry. So you need to be there when the time comes. But I would ideally see that we could have a balance between organic growth and acquisitive growth and using our strong balance sheet for that. So in essence, we are more ready than ever to do that with a strong balance sheet.

Just if I may follow up question on that, you've now reached 19% RoC here for 2023. If you're looking to make acquisitions or organic growth investments, are those going to be at that level of return on capital? Or would they by necessity be dilutive because you'd be building a base for future growth? How should we think around your return requirements on capital

allocation? Obviously, we have seen a good pickup in return on capital driven by lowering the capital base and at the same time improving our earnings. That's a good map and we're happy with that. It becomes a bit speculative to say, will we by default be dilutive or accretive? We're going to always look at how we can make investments and acquisitions that would be accretive. But of course, in certain timeframes in a bigger green field investment, it will be dilutive in the beginning, but eventually it will kick in an acquisition. The same thing depending on the characteristics. So I think it becomes a bit speculative. But still, we are operating at a high return on capital employed at the moment. So I think it gives opportunity to find a good growth mechanism.

And I would say, organic growth through capex builds and things like that, that would follow the current trend of return on capital, I would say, because that's supporting the continued journey that we're on. And we have very good control over those type of things when we build something in an existing plant and so forth to increase capacity or add new capabilities and things like that. And when it comes to M&A, it's very difficult to say, but historically we have been buying or making acquisitions at a lower multiple than we are valued at ourselves. And then growing the business from a fairly basic, maybe bakery, a little bit dairy into the higher end products that we offer, thereby again driving the improved profitability of the acquisition over the first one to three years.

Right. Thank you. Thank you very much. Those are my questions.

The next question comes from Alex Jones from Bofe. Please go ahead.

Morning. Thanks for taking my questions. Three as well, if possible. The first is just following up on this pricing discussion. Are your comments of recognition that perhaps you lost some market share as a result of your optimization efforts? Or is this more about you now wanting to sort of take a bit of market share, given the volume capacity you've unlocked with your optimization? Then the second question just around the sort of portfolio and price management that you very helpfully talked about. Are you able to give us any more detail on sort of how to think about that from the outside? What did you find at the low end of the portfolio that you've now sort of chopped off? And how are you able to quickly find customers to take the sort of more specialty solutions that you've been shifting into? I don't know if there's any quantification of that sort of rotation of volumes. It would be very helpful. And then finally, just quickly on the biomass boilers at Confirm that the sort of net saving number is still 100 million sec or has that changed at all given the volatility in energy prices? Thank you.

Thank you. Back to pricing. Of course, one could argue did we lose or not lose market share? I might not like to work, but when you make active choices like in a portfolio optimization in a plant, you find the lower end of the tail, low margin business or even loss making business that we cut out or we reprice it in such an activity, you can argue you lost market share or you actively walked away from a piece of the market. And then on the other spectrum, when you drive specialties, solutions or trying to really maximize your opportunity, of course, there is a risk that you win some, you lose some. I think the fact that we did lose a bit of volume is a combination of active choices or lost deals where we're just saying, you know, we've done really well, but we need to strike that balance. Are we having an opportunity to take market share? Yes, of course we have, but we have no intention to be very volatile in our behavior. So there is no activity within AK where we say go just load, load, load and steal market share, if you will. That's not the game. We're really trying to find and continue a good momentum, selling high value added solutions, protecting good margins, but striking the balance, which is sometimes maybe give a bit on price securing that volume, but not in a way where you just go after any volume.

And then when it comes to your question on portfolio, it depends on the market, of course, but I would say that it's not necessarily so that we close or chop off a complete product segment. We look more to how much that volume is in terms of the overall and we look at the customers as well. And if we have a strong big customer that buys from most of our segments, we will continue to support them with a full product range. But if we have a customer that either over time or that's just the way it is that they buy the lower end products at fairly high volumes, that's something that we look at to say, do we want to continue with this customer and so forth. So we adjust the volumes in the different segments rather than saying we're shutting something down completely. When you go to Mark's, I'm in the close down there, of course, there we took out volume back to Johan's point as well and stepped out of a portion of the bakery volumes in Europe. We reduced them. We moved what we thought was a good continued future business into van Dyck and our whole facility, but we left about half of the volume that was in the Marks and facility to begin with. And that was more or less even

loss making business.

Yeah. And then if you go to South America, for example, that same business could be very profitable based on the bio and mass boilers. They are now being ramped up to full capacity. It takes a while, as long as I expected, so it's a few weeks, understanding the technology on my end. But that's what it is. So we expect them to be fully up and running by the end of March, early April. And the full annualized value is still 100 million SECs. Yes. But you have to prorate that for 2024 based on that they're not up and running on January 1st. But everything else is where it should be on those.

Thank you. And again, maybe just reminding us that apart from saving money, that is also the biggest impact is that we are reducing our CO2 emissions by 90% in the power generation for that plant. So it's a fantastic opportunity to reduce our scope one, scope two emissions also the science-based target initiative.

So very happy about the investment.

The next question comes from Alex Sloan from Barclays. Please go ahead.

Yeah. Hi, morning all. Thanks for taking the questions and congrats on the very strong margin performance in 23. I guess maybe starting there, the trend of softer volumes, but very strong margins also appears to be quite common across your listed peers in 23. So I just wonder, is your sense that they've also been optimizing factories? And to what extent do you think customers are maybe looking at this and might want to share in some of that benefit in 24 as perhaps they have to fund higher promotions with retailers to drive their own volumes? That's the first question. The second one, I guess related, but just going back to the price decline in food ingredients, I mean, obviously the big pullback in raw material prices took place in the middle of 2022. So, you know, just be helpful in terms of, you know, maybe if you can give any color of how much of that big pullback has now been passed back and is reflected in contracts versus how much more this could be a drag on top line in 24. And then just finally, any update on preparations for the EU deforestation regulation kicking in end of this year? I think, you know, are you confident that you and customers will be ready and any chance in your view that the regulation could be delayed? Thank you.

Thank you. On your first question, we don't have the transparency into our competitors that way. We don't comment their activities either. But when you look at us, and you also mentioned the our customer and our improved margins, I would say our improved margins is not necessarily just a price hike. We're in a very competitive market. So we don't have any product where we have a monopoly like situation where we can set the price. It's very, very competitive. Our improvements have been done on more on the internal arena, in my mind, where we have the efficiency gains, but we also have the portfolio management and don't underestimate the mix change in going from a lower end product, adding on higher end product doesn't mean that the price goes up to the higher end product customer. It just means our margin goes up. Right. So that mix is very powerful in our EBIT per

kilo development, I would say. And maybe adding a bit on that perspective, you do take on the hat of a customer, look at our absolute, we measure the EBIT per kilo as a better view on our development, but you also got to overlay it with the absolute margins, because that's how you fund and invest going forward. Our absolute margin is approaching 10%, but not above, right. And that's just a healthy margin. So if I look at this from a customer angle, or if I'm to be in their shoes, I would look at AKS, very healthy, strong partner, and I would love for my partners to be driving innovation going forward, bringing new solutions. And we need to be able to invest. So I'm not shy about that. And we don't excuse ourselves for having that kind of margin. If that would have been significantly higher, you could maybe have that perspective, but we don't. We have healthy margins, so we sell to healthy customers. And I think that's where we are at the moment.

Could you please repeat the question?

Yeah, it was just a kind of a follow up on the pricing, the big price decline in food ingredients. And I appreciate that, as you said, mainly reflective of passing back raw materials. But I mean, just looking at the kind of Bloomberg screen on raw materials, the big pullback took place quite a while ago now in the middle of 22. So just really a question on is that a trend we expect going forward for the next few quarters, or are we kind of there in terms of pricing?

Thanks. No, I mean, we don't see any concerns in that area. You also have to remember the six to nine month lag rolling through in our P&L and balance sheet, right? So you have to move the price points in the market to us by six to nine months as well, right? And then there's more of a no, we don't see any any large concerns regarding that.

And then if that's okay by you, then over to your third question, which was about the EU deforestation. Will we be ready? Is there a chance risk depending on how you see it, that EU will delay it? I think that's a good question. To the last part of it, there's no reason, there's no information that we have that it would be delayed. There are, of course, discussions around how to implement, how to verify, etc., where we, others and government bodies need to align on how to do that. We are actively working on this one. We have a plan and we see a clear way forward. And we will continue to work on the, in our plan on three areas where one is supplier development, where we solve the needed verification, documentation, etc., together with our suppliers. And two, looking at in some cases, three formulations together with customers to find a solution, an ingredient that is easier or have that prerequisite already there. And the third leg is to look at investments where we could potentially insource some of the operations, de-complexify the upstream supply chain to make it easier to comply. And we are well underway in these plans and we will come back to that later in the year to give even more clarity. But with regards to the implementation, there's no news, no reason to believe it will be delayed at this stage. Would that be the case, then maybe there will be a relief on maybe having a longer time for implementing the verification and the documentation. But again, that would be speculation.

We

are working full speed ahead to be able to deal with this in the best possible way. Thanks very much. And I think maybe just to add to that, let's not forget the

The next question comes from Kari Rinther from Handelsbanken. Please go ahead.

Yes, thanks Kari from Handelsbanken. Two quick follow-ups and clarifications. Firstly, about food ingredients. I think you mentioned that the between different categories, most categories had higher EBIT per kilo on a -on-year basis except for special nutrition. So, reason for special nutrition not enjoying the same positive development, is it because those optimization efforts were mostly aimed at other categories or is it because special nutrition had such a negative volume development that it meant that EBIT per kilo came down? That's my first question.

Yeah, thank you. Great summary there. It's a combination of the two for special nutrition. Lower volume per se has a negative impact and yes, the broad-based improvement programs were maybe not targeted only on things excluding special nutrition but have a higher impact on some of the other categories in general. I think that's a fair summary.

So, I have to remember special nutrition being a well above the average margin product for us and still remains that.

And have also some special purpose parts of the operation meaning that it has dedicated production lines for certain parts of that production as well.

Sure, all right, that makes sense. Then the second question is about freight cost developments in 2023. So, can you briefly summarize how did your freight costs develop during the year? What's the outlook for 2024 and if you have any meaningful exposure to these recent disruptions?

Yeah, very good question. We try to match our cost with freight agreements based on our sales volume which is not the easiest thing in the world but we try to do that. So, to be able to price in any increases that we see on our cost side in the prices to our customers. We have done successfully since 2020 when things started moving on inflationary role maps and so forth. We are following the situation very carefully and some of the vessels that we are using have also rerouted to some extent. It's not impacting our production but some of the deliveries take a week, 10 to 12 days longer than expected and costs are accordingly going up a little bit because of that delay. But going back to show how we managed this in the past, I think we've proven that we can deal with these volatilities if you will particularly on the cost side in pricing our product as well. So, following the situation very carefully but confident that we can manage the volatility in prices.

If anything at the moment as Tomas said it's the longer lead time, it's a longer lead time to get material and without a bit more call it material and capital on a ship but that's it. It's manageable but I do hope it goes back. It's just sad that we have these kinds of disruptions in the global supply chains at the moment.

Right now we don't see any significant impact either to production or to work in capital due to this, not at the moment.

Thank you, that's very clear. Thank you,

Karin.

There are no more questions at this time so I hand the conference back to the speakers for any closing comments.

Thank you and just maybe in addition to the EUDR we talk about implementation, potential challenges back and forth. I just want to remind us all about the intent which is a positive intent to reduce deforestation. We are fully committed in AK. We have targets on no deforestation on important supply chains. So, we're very aligned about reducing zero deforestation while continuing to grow a sustainable business and we're very active on that. So, that's the number one. We're going to continue on that path and EU is making its effort. Now it's become a bit challenging in how to verify and make sure you can prove that everything is verified deforestation free and that's where we will now have a bit of a challenge and make sure we get there. But again the intent is really good. We are in full support of that and our plans are targeting no deforestation. I think that's just an addition to that.

Thomas? Yeah and just on 2024. I know we receive a lot of questions on that and we don't provide guidance but I would encourage you again to go back to the slide we showed on our optimization internal focus improvements, portfolio management and also what we have been stating all through 2023 more or less to find the balance between volume and margins and that we have a utilized capacity in our factories due to the deep dives we've done. So, we're in a very good position for the year I

would say. Yeah and also that the volume reduction to last year has been reduced sequentially and sequentially we've seen improvement from Q2 to Q3 and Q3 to Q4 in many areas with regards to volume. So, that's where we are. All right with that I thank you all for listening. Great questions and with that thank you so much for the Q4 2023 earnings course.