AAK CMD 2020 – Johan Westman, President and CEO – Business and strategy update

Good day and welcome to AAK's Capital Market Day 2020. This will be a virtual meeting. My name is Johan Westman, I am the President and CEO of AAK. In this unprecedented situation that we are all in, we have chosen to pre-record presentations. These are available at aak.com. I recommend each and every one of you to take the time to look through them. We will also have a live Q&A session. So after having reviewed this presentation, there is this live Q&A session and this one will be recorded as well. So for those of you not present in that one, you could look at that at aak.com afterwards.

Now with no further ado, let me take this opportunity to present some business updates as well as our strategy going forward. AAK today, we are a truly global company with presence around the world, serving customers around the world. Based on our customer innovation centers where we do our co-development for new solutions to our customers, with our production sites, we are operating with a decentralized structure: a global company acting with local presence, with local global reach.

Before we get more into the business update, let's just stop and reflect a little bit. COVID-19 is present as we speak. We, like people, businesses, societies around the world, have been impacted by COVID-19. First and foremost, our first priority has been the health and safety of our employees. It was before COVID, it is now, and it will be going forward. We're also a very important supplier, a key supplier in the important food supply chain of the world. With this in mind, we have put a lot of effort and focus on our contingency plan, securing business continuity, securing that our supply chains work, and that has been done successfully together with our suppliers, our full team in AAK, as well as with our customers. With this, our business has been working quite well. We are active in the food ingredient supply chain as I mentioned. We are, to a large extent, resilient but not unimpacted. The uncertainty is still very high.

Now let's talk a little bit about our current trending. After a COVID impact in Q2 where volumes fell lower versus last year, and we started to act and react, we have managed to come back to profit growth in quarter three. Our profit in quarter three was up six percent year over year. And why is that? Well, since Q2, volume has started to come back sequentially, not to last year's level yet but still improved. We've also managed our cost base and adapted to this situation, right-sizing the business where we were most severely hit, for example in food service. But we have also continued to focus on high value-added solutions, the product mix with a higher profitability. For example, high value-added solutions to infant formulas within our special nutrition segment. All in all, that has given us a strong foundation to go back to profit growth and really deliver on our strategy going forward.

When looking into our business areas, within Food Ingredients, we develop solutions to segments like dairy, bakery, special nutrition, and plant-based food. With regards to performance in this business area, it's a bit of a mixed bag. We were severely hit in food service as I mentioned. This is where we deliver to customers that in turn deliver through restaurant chains, airline catering, and so forth, dramatically hit by COVID-19. On the other hand, we are performing well in solutions to special nutrition, to plant-based food, and so forth. So a bit of a mixed bag, but all in all, a good rebound in Q3 after the low mark in April/May in quarter two. We also see in this segment that we are supported by long-term trends: health, nutrition, and sustainability. Those trends are here now and they will remain going forward.

In our business area for Chocolate and Confectionery Fats, we are the market leader. We develop solutions for chocolate compound pans for molding, as well as confectionery filling fats. In this industry, COVID-19 really came and hit hard right in the Easter season of this year. That had a negative impact on volumes, but again, we have seen volume sequentially picking up in Q3 here also. We have under the last two years focused on improving our supply chain, getting better she kernels in, as well as increasing and improving the efficiency in our facility in Orgrimmar in Denmark. So with this in place, we are now operating at a more efficient level and a better cost base. So in spite of COVID impacting the chocolate and confectionery business, we have seen our margin, our operating profit per kilo, being improved thanks to a better cost structure, a more efficient production with more capacity, and sequentially returning volumes.

For Technical Products and Feed, our third business area, there we are focusing on how to use our byproducts from the other processes to do that in a sustainable and profitable manner. We are developing solutions for animal feed, for technical products like candles and detergents, and many other applications. And the focus here is really to continue to innovate new and better solutions.

Let's talk a bit about highlights from 2020. A year ago at our Capital Markets Day, we presented the new strategy for AAK. That is now rolled out in our organization and we have started to execute. We also continue to invest in an important sector, which is the plant-based food industry. Nille, my colleague, will present a bit more in a specific presentation on plant-based food. In a situation with COVID-19, staying together while being physically apart is so important. We have a creative culture in AAK, and one of the initiatives is an initiative that we call 'AKT Together,' where we are filming and connecting people across the globe, really helping the global team to stay connected in spite of the very challenging time that we're in. Acquisitions is in focus. Fredrik will comment a bit more on that in his presentation. During this year, we have acquired the last piece of AAK Kamani, our joint venture in India, as well as acquiring 75 percent of Margaron in Russia to help us grow in a very important market. M&A will continue to be key in our strategic agenda going forward. Sustainability as important as ever. AAK is focused, has been focused, and will remain focused on improving sustainability. Within our women's program in West Africa, we have now included more than 300,000 women in that program, that is an increase by 33 compared to last year. We're also engaging in Ghana, for example, to help improve the water, to have safe drinking water, clean drinking water. And palm oil sustainability, a very complex supply chain that really needs continued efforts. And let me mention a few things on that. Palm oil is an essential food ingredient, very important to the world. It is also the highest yielding edible oil crop that is out there. So it is crucial that that is a sustainable supply chain. During the year we have, for example, doubled our traceability to plantation. Traceability is one way of monitoring and securing a sustainable supply chain. Our priority is to continue to drive impact. We have been doing that, we will continue to do that, and we are stepping up our efforts in palm oil sustainability. We are committing to no deforestation and we are committing to 100 traceability to plantation to prove that. And we are across AAK also signing up to science-based targets to really drive better performance in sustainability as a whole.

When presenting the strategy last year at the Capital Markets Day, we talked a bit about that foundation that we build this on. So just as a recap, our strategy going forward is built on the strength within AAK: our passion and drive, our regional decentralized organization with accountability, our customer-centric approach around customer co-development, which is so much in the core of what we do. We are flexible and agile, and we're using that in a customer-centric manner. That's the foundation on which we build our future strategy. And our strategy is a portfolio-based strategy, really targeting the opportunities in industries where oils and fats, plant-based oils and fats, are important. We are investing for growth within chocolate and confectionery as well as special nutrition. Huge opportunities going forward. We're also stepping up and making, call it, bets for the future on plant-based food, an industry that is growing dramatically, also to build a platform for health and nutrition. It's going to be important to almost all industries that we serve. Equally important is that we optimize segments, more traditional segments where we have been acting for a long time, like bakery, dairy, and food service. Part of that optimization is getting the right cost to serve, but it's also about finding the opportunities where high value-added oils and fats, speciality solutions makes a difference. So really selecting the pockets of great opportunity where AAK is best fit to serve. So that is how we build up our portfolio-based strategy.

Some of the achievements made during the year: one, investing for growth, like the acquisition of 75 of Margaron, getting us into Russia. Russia is one of the most important chocolate and confectionary markets, so that is one example. We're also investing in new capacity for infant formula production in China, the single largest market for infant formula, high value-added infant formulas. We've also continued to really focus on plant-based food. We are investing in a center of excellence for plant-based food in the Netherlands. Those are some examples of what we are doing to execute our strategy. There are many more, but really, we are now in the game. We have rolled it out, we are committed, and we are making impact. With that, let's conclude this presentation. We in AAK, we develop, we offer plant-based, healthy value-adding oils and fats based on our co-development approach. In spite of the short to mid-term uncertainty around COVID-19, those long-term underlying trends are strong and we see no reason to adjust our view on the more long-term future. So with that, we do remain prudently optimistic. Thank you for listening.