AAK CMD 2022 – Tomas Bergendahl, CFO – Financial Development

Good afternoon everyone, welcome to AAK's Capital Market Day. I'll continue the description of AAK through a financial lens, followed by Q&A. As we announced in October, we've generated very strong performance in Q3 and for full year 2022. Despite great volatility, macroeconomic challenges, and a positive currency effect, even cleaning for those factors it's still a very good performance. In Q3, volumes were down 4%, but excluding our exit from Russia, just minus 1%, driven by optimization in Bakery and some reduction in technical products and feed. Adjusted operating profit per kilo was up 10% at fixed rates, generating 822 million SEK in EBIT, up 5%. Year-to-date volumes are up 1% excluding Russia. Operating profit per kilo up 7% to 125 SEK, generating 2.1 billion in operating profit including about 60-70 million of reduced EBIT from our Russia exit. Return on capital employed is 14.8%. Looking beneath the surface, chocolate and confectionary volumes are up 11%. By region, growth is driven by Latin America and Asia, with a small contribution from North America. Europe is impacted by the Russia exit and Bakery/dairy optimization. The big positive driver is price and mix — our optimization efforts are paying off as we make choices to move up the value chain. Special nutrition is improving after difficult years. This demonstrates our ability to offset inflation. Raw material inflation has been significant for two years, and we've been able to offset these as well as non-oil input increases in utilities and logistics, still increasing EBIT per kilo. FX has been significantly positive this year versus negative last year. SG&A is increasing from pandemic levels as we invest in customer interaction and product development. EBIT per kilo surpassed 1 SEK in Q3 2020 and has continued growing. From 2019 to 2022, EBIT per kilo grew 11% while volume grew just 1% — a significant shift toward margin-driven growth. On raw material inflation: palm oil tripled from $600-800 to $1,800 per metric ton, then declined to $1,000 by late 2022. With 80% of our cost base in raw materials, it's critical we don't absorb these increases — our results show we've managed this very well. Working capital has doubled from 5-6 billion to 12 billion due to higher input prices. We've improved DSO and DPO and are back to pre-pandemic working capital days in the low 70s. We expect working capital relief in early 2023 as raw material price declines flow through with a 6-9 month lag, though Q4 will still be impacted. Capex averaged 800 million SEK; this year just over 1 billion, focused on safety, sustainability, capacity, and efficiency — less than half to maintenance. ROCE is at 14.8%. Net debt to EBITDA is slightly below 2, still healthy. Total loans are 12 billion, 83% long-term with 5 billion unutilized. Capital allocation focuses on core business investments, bolt-on acquisitions for geographic and capacity expansion, technology, and adjacencies. We also monitor transformative M&A opportunities. Dividend policy remains 30-50% of net profit with about 10% annual growth. In summary, AAK is delivering on its long-term promise. Operating profit has grown more than 10% over the last couple of years, or even over a 10-year stretch. Most of that comes from operating profit per kilo improvement of about 7%. Earnings per share and dividend per share are both up 12% year over year. Thank you.

The impact is mainly on the working capital side, but the risk also lies in the P&L. What we've tried to do, even before the price increases, is hedge our raw material purchases back-to-back with customer sales as much as possible. When we have a customer sale, we commit the raw material needed for that product on the same day, avoiding effects of price movements during the delivery period. It's not a perfect system and has its challenges, particularly with the volatility we've seen, but that's what we do to avoid speculating in the market and to show our true performance through operations. When prices go down, contract management becomes vital — making sure customers stick to their contracts and managing deliveries on a first-in-first-out basis so we don't get stuck with high-value inventory. I think in Q2 and Q3 we've performed very well in that area. Volatility is there, but we've done a good job so far.

Maybe to put it into a longer time period, China is a big market for infant formula. There's significant usage from a cultural perspective, and parents pay a lot, meaning there's a premiumization trend. There's a high focus on quality in China, and this regulation is an example of that — there have been ongoing discussions about how to make products better. I see this as a step on that journey. I don't see it as a risk for AAK — it's an opportunity, because the trend is towards better products. The overarching positive here is the focus on high-quality product, and that's where we typically deliver well in that market today.

When you look at M&A, I think there are opportunities in all regions we're in, even in Europe where we're fairly well established. We're very active with a solid pipeline that we continue to follow. The majority of acquisitions we've done in the past, and going forward unless we look at game changers, will be bolt-on acquisitions focused on geographical coverage or capacity. We see great opportunities in all regions and follow a pipeline in each, but it's a stochastic process — the market isn't that fragmented, so there isn't a refinery on every corner waiting to be acquired. We work systematically, region by region, country by country. The opportunities are there, but we need to be patient and make sure we do the right acquisitions that fit AAK the way the company looks today.

What we're referring to with game changers is whether we can convert something bigger than a bolt-on — not just one plant in a country. When we come to that, there aren't that many opportunities in the industry, and I won't comment further. But we're interested in continuing consolidation to make AAK stronger and deliver stronger value. The other piece that could be game-changing is if we decide to go more aggressively into an adjacency. Today our strategy is about the core — oils and fats expertise expanded to adjacent portfolios, which makes a lot of sense. There are opportunities to go bolder there, but we're not going to take too much risk in such an adventure. That could be game-changing at some point in time.

To clarify, I'm not sure I mentioned downtrading as a risk, but rather as a behavior and consequence of the current climate. Conceptually, downtrading as a consumer means choosing a lower-cost brand or retail store — you still go home with a product. As a producer, it could mean accepting a slightly lower quality or spec ingredient at a cheaper price. From AAK's perspective, we're a high-value-added solution provider, so is there risk? Yes. But in some industries we serve, our product actually helps customers reduce their cost of goods — cocoa butter equivalents are cheaper than cocoa butter, so if customers view that as downtrading, it's an opportunity for AAK. That's the beauty of our business model — many legs to stand on. There are shifts in patterns, but with our wide portfolio we can serve downtraded options too, so we're not necessarily concerned. I was more articulating what's happening, as many investors have been asking about downtrading.

But we have seen in certain segments — like candles, for example. After the pandemic, we saw a bit of de-stocking, but it's been temporary. We also saw in early 2021, when prices were rising, that some customers pulled back on contract lengths, thinking prices might come down. When they saw prices continue rising, they came back quickly because they needed to cover volume. It's more those types of behaviors we've seen rather than a big trend toward de-stocking or major changes in inventory levels. The dialogues with customers have been much more dynamic, for sure, but the underlying demand and consumer pull are still there.

I think another thing to add is — looking forward, anything can happen, but over the last few years, one important ingredient in the chocolate market has been cocoa and cocoa butter, which has been quite stable or even declining. So the cost of producing chocolate hasn't increased as much as some other ingredients, meaning our customers have been able to produce at a fairly okay price. The retail price increases needed haven't been as dramatic, which helps. Chocolate is somewhat less impacted compared to other things you could eat. There are competing trends — you might want to downtrade, but it's also comfort food and indulgence. If things get really tough, you can skip chocolate, but we've seen very strong trends even through COVID and this dynamic year. You've seen volumes go up in the last couple of quarters, and as Johan mentioned, over the past two years cocoa butter prices have almost declined while prices of inputs into our product have steeply inclined, yet volumes still come right back — driven by our solutions and functionality, not just competitive pricing but also functionality in chocolate.

Looking back over the previous year, you've seen tremendous increases, and we've been able to manage that — utility-wise, non-oil inputs, secondary production inputs, and logistics. As we outlined before, 80% relates to raw materials, 2% to utilities, 5% to logistics, and about 7% to other inputs. Raw materials are the biggest component, and so far we've dealt with it. We're very cognizant about continuous increases and always look for efficiency improvements. Some capex related to energy efficiency has much better business cases today than in the past. There are risks going forward, no question. But the good thing about our business is that raw materials have always been the basis for discussion with customers — they understand that if raw material prices go up three times, our product cost goes up too. That structure makes it easier to discuss other increases with customers. That's what we've been successful with, but the risk is there and we keep a close eye on it.