President and CEO, AAK AB (publ)
AAK CMD 2022 – Johan Westman, President and CEO – Strategy update
AAK's Capital Market Day is a recurring event where analysts, investors, and media representatives are presented with information on AAK's business strategies as well as financial updates.
On this link, watch Johan Westman, President and CEO, give a strategy update at the 2022 Capital Market Day.
About Johan Westman
Johan Westman, President and CEO of AAK, has presented strategic and financial updates at the company’s Capital Markets Days. At the 2024 event, Westman described a “positive trend” in plant-based food, technical products, and personal care, noting that AAK views replacing fossil-based ingredients in products such as candles and cosmetics as a “huge opportunity.” He stated that the company has a “strong track record” of earnings growth and has updated its EBIT per kilo target to “above 3 SEK per kilo,” having reached a prior target faster than anticipated. Westman attributed the company’s recent performance to a decentralized and agile organization that has navigated “high uncertainty, volatility, inflation, and war,” as he noted in 2022. He also highlighted investments in sustainability, including bio boilers in Aarhus, Denmark, a partnership with Mars to support women in West Africa, and commitments to no deforestation and science-based targets. Westman reaffirmed a goal of 10% annual operating profit growth, calling it a “bold target” that the company has historically achieved.
Transcript (29 segments)
J
Johan Westman0:21
Thank you. This strategy update was in my last presentation. Now, I will comment on our current strategy, reflect on what has worked well since launching the portfolio-based strategy, identify areas for improvement, and discuss the elements we are adding or changing to execute our strategy going forward. Afterwards, I am happy to take questions.
To recap, we are a multi-oil ingredient house based on plant-based oils and fats, on a journey towards higher value and impact. We will cover trends, market outlook, our strengths, opportunities, risks, and the updated strategy. Looking at consumer trends from a helicopter view, health and well-being, sustainability, and premiumization remain key long-term trends. Short-term fluctuations like down-trading do not erase these. While economic pressures like inflation may slow consumer-driven behavior, sustainability focus persists. Premiumization and convenience also play into food and personal care consumption.
From an AAK perspective, sustainability, natural ingredients, and health cut across almost all customer segments, from chocolate and confectionery to personal care and candles, where we replace fossil-based ingredients with sustainable alternatives. Premiumization is more selective, seen in bakery, special nutrition, and markets like China, where parents spend more on infant formula despite lower birth rates. These insights guide our innovation and co-development with customers.
Our strengths include strong performance with solid profit growth driven by volume and operating profit per kilo. As a multi-oil ingredient house with fat chemistry expertise, we access diverse raw materials to create solutions for functionality, sensory experiences, or sustainability. Fat is not a single ingredient; there are thousands of ways to blend oils for specific needs. This versatility allows us to serve multiple industries with a large customer portfolio.
Our volume distribution across segments like chocolate and confectionery, bakery, industrial, food service, dairy, and special nutrition shows we have many legs to stand on. Chocolate and confectionery grew 4% year-on-year, or 12% on a comparable basis excluding Russia. Food service and industrial saw post-COVID rebound effects. Special nutrition faced headwinds from declining birth rates in China but improved in profitability. Candles, after a 75% boost last year from fossil-fuel replacement and COVID effects, saw a slight setback but the sustainability trend continues.
Three years ago, we launched a portfolio-based strategy to be specific and selective by industry. We have delivered increased earnings across all quadrants. Chocolate and confectionery benefited from strong market growth. Special nutrition, though relevant and strong, faced price pressure in China. We optimized bakery by closing one plant and targeting high-value segments. In plant-based food, we are opening a center of excellence in the Netherlands and remain active despite market slowdown, expecting long-term growth.
Our updated strategy includes a 2030 aspiration: doubling value creation per kilo to achieve higher margins while continuing volume growth. We aim for increasingly positive impact recognized by stakeholders, including shareholders, customers, planet, society, and employees. This recognition journey involves telling our story authentically. We are on a journey towards higher margins, not satisfied with current EBIT margins, and have set clear targets to improve.
We are updating our portfolio strategy to target higher margins and volume growth. We are investing further in health across segments, targeting new food solutions like plant-based alternatives, precision fermentation, cultivation, and power-to-food technologies. We are betting on replacing fossil-based ingredients in personal care, candles, and other applications. Through investments like Big Idea Ventures and direct investments in companies like GreenOn, we stay close to new technologies to decide on in-house investment, partnerships, or sourcing.
Across all quadrants, we are investing in higher value opportunities to differentiate AAK, putting innovations to market, optimizing our core for efficiency and lower cost, and driving impact. M&A is on the agenda to accelerate growth, acquire technology, and expand product portfolios. Strong underlying growth drivers, a strong balance sheet, and targeting above-market growth in earnings and volume support our 10% year-on-year earnings growth target. Our purpose, 'making better happen,' drives us to always improve in business, sustainability, and stakeholder value.
Investors should consider AAK for its strong growth drivers, balance sheet, and focus on higher margins and value creation. With M&A, technology adjacencies, and our purpose, we aim to deliver better returns. Thank you.
H
Host26:28
Thank you, Johan. A lot of things going on here. Let me see if I get it right. First, a question to you directly: what are the components that will make you reach the aspiration of doubling the EBIT per kilo? Is there a plan in place?
J
Johan Westman26:47
Yes, there is, and to be honest, it's a plan in making. Everything is not one and done. We have put a clear aspiration, and we need to make investments today for future success. The ingredients include a focus on margins, contract management, product portfolio management, selective segments, and topping it up with M&A.
O
Oscar Lindstrom28:19
Thank you, Oscar Lindstrom from Danske Bank. Thank you, Johan, for the presentation on the updated growth strategy. There were many interesting growth legs. To what extent do you see efficiency and cost reductions as an important factor in achieving the doubling of EBIT per kilo? We saw a big impact in the third quarter. Will this be an element going forward?
J
Johan Westman28:59
Yes, and going back to optimize for a smarter and better core, that is exactly what it's about. We have a clear focus on productivity across factories and SG&A, in how we go to market and co-develop with customers. We must be competitive even in higher-value segments. Thank you for the question; productivity and optimizing the core are key elements going forward across all segments.
O
Oscar Lindstrom30:31
Thank you. If I may, a follow-up question: given your aim to double EBIT per kilo and grow overall EBIT, should we expect return on capital employed to increase by 2030, or are there reasons why EBIT per kilo should remain in the 14-15% range?
J
Johan Westman31:13
A very relevant question. It depends on how we choose to play going forward. If we increase volume and margins while keeping the asset base slightly fixed, return on capital employed will go up. However, our main target is not that; we need to continue growth with acquisitions and capacity investments, which initially drag on returns. We should focus on a journey of continuous growth, driving margin and volume, and being careful with cash flow. The ambition is to increase returns, but the main target is earnings growth and margin.
H
Host32:20
Okay. Submitted question here: this one is for both you and Thomas. How should we think about volumes going forward? It's been declining for the past few years.
J
Johan Westman32:34
Declining for the past few years? I'm not so sure. It has been declining this year partly due to our exit from Russia. Excluding that, it's flat to slightly reduced. We are closing one bakery plant in Europe and consolidating to two. We are optimizing bakery, which is a high-volume segment, and are prepared to leave certain product segments or customers if profitability isn't right. Not overly concerned, but we cannot execute this strategy without volume growth; we have big assets and need volume. We must see it as a journey of optimizing margins over time.
H
Host33:35
Yes. Markets here. So, I'm thinking about your plan to reach a doubling in EBIT per kilo by 2030 and growing faster than the market. Premium side is growing 4-6%. If I do a quick calculation, EBIT growth seems to be above 10%. Is that really what you target up to 2030?
J
Johan Westman34:06
We haven't put it like that as a new financial target, but it's an indication of where we're heading. We see an opportunity to strengthen earnings per kilo and have a need to facilitate investments and growth with strong margins. If we can execute higher growth in earnings per kilo, we would do that every day of the week. Increasing margins is extremely important, but delivery on the absolute target also requires some volume.
H
Host35:22
Great. Then one question going into details on how you see that doubling in EBIT per kilo between the different divisions. Looking at year-to-date, technical products have grown EBIT per kilo the fastest. Where do you see the biggest moves when you reach that target? Will it continue to be in technical products or also in other divisions?
J
Johan Westman35:33
Absolutely a great question. Some drivers in technical products and feed, like replacing fossil-based ingredients, will continue, but recent supportive factors like crushing margins in Sweden may not be repeatable. Special nutrition has faced weaker markets but is improving. Ambitions are to grow margins in chocolate and confectionery, special nutrition, bakery, dairy, and food service. I expect earnings per kilo to grow in all quadrants, but dynamics will play out over time. We stand on many legs, and with internal focus, we will capture opportunities best.
H
Host37:21
Perfect. Thank you. We have a submitted question here from Paolo Jørgensen at Asset Management. Two questions: doubling the margin and volume at 4% plus 4% means above 10% EBIT growth per year, so you are raising the bar. Do you need more volume or are resources enough? Is the base 2022?
J
Johan Westman37:55
Great question from Paolo. Is there enough volume? Yes, I think so. There are capabilities to source more volume by working on yield per hectare in supply chains. The doubling of EBIT per kilo is a journey over years, not including a weak Swedish krona, so see it more as starting from 2022 or 2021. We were not explicit about a specific number because we don't want it to be a new financial target, but we are clear about our direction. We see an opportunity to grow faster than 10%, but the realistic financial target is 10% earnings growth per year.
H
Host39:10
Yes. Another question here: is an M&A transaction needed to reach 10%?
J
Johan Westman39:28
Not necessarily, but if we look at the next seven years, I would be surprised if we did not do an M&A. It would be difficult to reach the target only through organic growth, innovation, and price management. We need that kind of ingredient list to make it happen.
H
Host40:03
Anyone else? Okay, last question before the break. We mix the questions received before we started. This one is: what does the competitive landscape look like? Also, what do you see as your peers?
Who was he as peers? The competitive landscape hasn't changed dramatically over time. It's the usual suspects. I don't like to speak about competitors by name, but if you follow us, you know who they are. AAK is a unique player focused on high-value-added oils and fats downstream. Some competitors are more vertically integrated, with upstream refining or plantations. We look different, which is a strength. We will continue to compete and live our purpose to make better happen, otherwise, they will catch up. Thank you for that, Johan.
Thank you also for your questions and online. Coffee break coming up. So far, so good. We have more to come with D-Rich on stage addressing India and a fireside chat on a sustainable future. Remember, you can submit questions even when we're not on stage. Before we leave the hall, visit the three booths in the foyer for goodies, including chocolates from the AAK customer Innovation Center in Denmark. We have team members here, including D-Rich from India, Nile, Susana, Tim, Thomas, Carl, and other AAK representatives. Don't hesitate to chat with us on financial performance or sustainability. We will be back at 2:50 PM. Thank you for now.