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Edited Transcript of AAK.ST earnings conference call or presentation 30-Jan-20 9:00am GMT

Q4 2019 AAK AB (publ) Earnings Call

19 Malmö Feb 4, 2020 (Thomson StreetEvents) -- Edited Transcript of AAK AB (publ) earnings conference call or presentation Thursday, January 30, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fredrik Nilsson

AAK AB (publ.) - CFO, Head of Corporate Communications, Mergers, Acquisitions & IT and VP

* Johan Westman

AAK AB (publ.) - President & CEO

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Conference Call Participants

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* Heidi Maria Vesterinen

Exane BNP Paribas, Research Division - Financial Analyst

* Karri Rinta

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Welcome to the AAK Q4 report 2019. Today, I'm pleased to present Johan Westman, President and CEO. (Operator Instructions)

I'll now hand the call to Johan. Please begin.

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Johan Westman, AAK AB (publ.) - President & CEO [2]

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Thank you. Good morning and welcome to the Q4 2019 earnings call for AAK. I have today with me also Fredrik Nilsson, our CFO, and he will take part of this presentation today and also part of the Q&A session.

We have on Page 2 the agenda for today's call. We will start with the fourth quarter and year-end report. Then we will do a business update by business area and some more financial details. We'll also make a short update on our strategic direction going forward, and we will end with a Q&A session.

With that, Page 3, a few highlights on quarter 4. We closed quarter 4 and 2019 in a good way. It is another strong year for AAK. In the last quarter, we did increase our operating profit by 9% year-over-year, and we reached an operating profit of SEK 562 million. And with that, we have strengthened our margin. We continue to improve our operating profit per kilo, which was up 8% compared to last year. And the main drivers with regards to the industry for this is our Food Ingredients sector as well as the Chocolate & Confectionery Fats sector.

All right. With that, heading into Page 4, just a quick look at the trend. In short, we continue to see the positive trend. The fourth quarter was nicely in trend with what we have seen over the last years, and it was a record high quarter 4 with regards to operating profit.

Page 5, a few comments to 2019 as a summary. When we look back, we want to highlight that we launched our AkoPlanet portfolio. It is a portfolio for plant-based food solutions. We have seen a strong growth with regards to the plant-based industry, and we also see a strong growth with regards to our opportunity pipeline. We doubled the pipeline between quarter 2 and quarter 3 and between quarter 3 and quarter 4, we doubled again. So it is, for sure, a strong pipeline development, and we do see fast movements within the industry of plant-based foods.

We also launched our COBAO Pure, which is an application within chocolate and confectionery industry, a high-end solution that improves the application or rather improves the functionality of chocolate and confectionery products.

We also ramped up our M&A activity in 2019. We closed 3 M&As during the year, 1 in Foodservice where we expanded our portfolio of offerings. We also added new ingredients to our ingredients portfolio with the acquisition of Soya International, gave us lecithin in our portfolio. And we also increased our capacity -- strategic capacity in Europe with the acquisition in Rotterdam, the Netherlands.

All right, with that into Page 19 -- sorry, Page 6, 2019 in a summary. It was a good year. We did deliver in line with our management ambition with regards to operating profit. We increased it by 10% year-over-year, and our full year operating profit landed on SEK 2,157 million adjusted for acquisition costs reported. It was slightly lower, SEK 15 million lower, but all in all, a good year.

We continue to see operating profit per kilo increase up 8% year-over-year, and we landed a return on capital employed of 14.9%. Also, positive is that we continue to strengthen our financial structure, so we have now a reported tax cost of 25% versus 27% last year.

Heading on to Page 7, a few comments on earnings per share. We see -- on the back of obviously increasing profits and good tax cost, we see an increase of earnings per share. We will also, based on that, propose an increased dividend now at SEK 2.10, which is an increase by 14% compared to last year.

With those comments on quarter 4 and 2019, in summary, we head on to Page 8 and do some more details by our industries or business areas. Food Ingredients continued a strong trend. We delivered a 9% year-over-year growth or profit, and we increased our operating profit per kilo by 7%. So again, a volume increase and organic volume increase, but also, and more importantly, we continue to sell more high value-added solution on the back of our co-development approach together with customers.

We saw a really good growth of earnings in our Dairy and Bakery industries. And we also saw a mixed bag EBIT within Special Nutrition. We see continued growth and strong growth with our local Chinese infant formula customers, while our global players in this market had reduced volumes for us.

Our pipeline, as I mentioned before for plant-based foods, which is part of this sector, Food Ingredients, it continued to grow, and we doubled between Q4 and Q3 the opportunity pipeline that we have, and it was also a good profit growth from an EBIT perspective.

Page 9, Chocolate & Confectionery Fats. It was a strong quarter, a really strong quarter for Chocolate & Confectionery Fats. Our operating profit and our operating profit per kilo turned around. So we have seen a slight decline over the last few years. As you have heard us commenting before, we have had a period of higher costs and lower yields, while still being able to really push the market for high-end solutions. In this quarter, we did see a turnaround on EBIT per kilo, which was up by 13%, and our operating profit was also up by 13% year-over-year. It was on the back of a good mix of high value-added solutions and also some spot business with really good mix, so that all in all drive the profitability.

We continue to see a strong growth there by -- for value-added solutions. We have had higher costs during the year. We had higher costs also in Q4, but we have now completed our capacity, increased installments. We have also had a good season with regards to sourcing shea kernels, which are important for our high value-added solutions. So with that in place, we do expect to get to a normal cost base within the mid-Q1 2020. We are -- at the moment, we have an ongoing planned maintenance stop that will be finished during the quarter, and from then on, we should be back to normal with regards to operations.

Page 10, a few comments on our Technical Products & Feed business. Continued to see good performance in a more historical perspective within Technical Products & Feed. Compared to last year, it was a drop of operating profit by 8%, and our operating profit per kilo was down as well. But in the more long-term perspective, this is still a good quarter, a high quarter 4, and you can see that if you look at the graphs to the right on Page 10.

With that, I will turn it over to Fredrik, who will guide us with some more financial details.

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Fredrik Nilsson, AAK AB (publ.) - CFO, Head of Corporate Communications, Mergers, Acquisitions & IT and VP [3]

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Thank you, Johan. Looking at the cash flow on Page 11, we have good EBITDA increase of 13% or SEK 87 million in the quarter. Cash flow from working capital was negative in the quarter and amounted to SEK 176 million. That was a strong positive cash flow from accounts receivables and accounts payables in the quarter. This was offset by strategic purchase of key raw materials to Chocolate & Confectionery Fats, which had a significant impact on cash flow from inventory, but there are also some impacts in inventory from ships with oils arriving slightly earlier than scheduled.

As Johan said, paid tax is also down in the quarter, it's down to 24% compared to 26% last year. This has been helped by a lower corporate tax rate in Sweden and India combined with further optimization of the capital structure in the group.

Cash flow from investment activities amounted to SEK 326 million, where SEK 47 million was related to acquisition and that's due to the minority purchase in India of additional 5%.

Capital expenditure was mainly related to regular maintenance, investment and capacity increases. Full year cash flow from investments slightly lower than earlier communicated. It's earlier timing issue. We are more (inaudible) over going into 2020.

Let's move to Page 12. Looking at the raw material price development. We have, during the fourth quarter and the beginning of the first quarter of 2020, seen a sharp increase in raw material prices and this is particular for palm. This will have an impact on our cash flow, working capital and ROCE during 2020. And then I would like to remind all of you that the 10% change in all our raw material prices will impact working capital with plus/minus SEK 350 million. And also, if you look into the graph, you will see that the palm oil price over the last months is up 15%.

Let's move to Page 13, return on capital employed. As Johan said, we have a return on capital employed at 14.9%. But I think it's important to have in mind that the return on capital employed has been impacted by about 0.5% from the new accounting standard for leases. And also, if we adjust for the strategic purchase of key raw materials, the return on capital employed is flat year-over-year.

Loan and duration profile. We have been able during 2019 to increase the average duration in our loan portfolio. We have also in the fourth quarter issued unsecured bond for a total of SEK 500 million, which is part of our MTN program with a framework amount of SEK 4 billion. At end of December 2019, we have committed credit facilities of SEK 7 billion.

Let's move to Page 15 and FX exposure. We have a small positive translation impact in the fourth quarter of SEK 12 million, SEK 40 million in Food Ingredients, SEK 2 million negative in Chocolate & Confectionery Fats. I would also like to highlight that based on the spot rates end of December, we will start to see a small negative translation impact going into 2020.

By that, I would like to hand back the microphone to Johan.

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Johan Westman, AAK AB (publ.) - President & CEO [4]

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Thank you, Fredrik. We now head into Page 16 and a few comments on our strategic direction going forward. We did during Q4 launched our new strategic direction or updated strategic direction. And to start off, we have concluded that with a strong track record, the strong track record that we have in AAK, we also concluded on a few things that we really need to preserve a few things that have really been the backbone of our growth up until now: we have a really strong passion and drive and entrepreneurship in our company, essential that, that is kept; we have an organization that's characterized by regional ownership and accountability; we build real business with our co-development approach, a customer-centric approach, where customers stand in the center and we help them apply new applications and enhance their products; sustainability and responsibility to all stakeholders has been key for us, will be key going forward; and flexibility and agility in our sourcing, in our operations also very key in order to help our customers improve their products and come with solutions also fast. These are elements that really needs to be preserved. We call them the DNA of AAK.

In our strategic direction going forward, we have launched a portfolio-based strategy in order to capture the specific opportunities and also the specific needs of certain industries. The industry that we serve with plant-based oils and fats are very different. What it takes to win, what it takes to be significant and relevant in these industries are very different. So therefore, we also need to make sure that we manage our strategy going forward in that way that we invest, we prioritize and we find the solutions, innovations that are really the right ones for certain industries.

We have a portfolio based on 4 main categories. It is to invest for continued growth where we have Chocolate & Confectionery Fats and Special Nutrition. We will also make investments and priorities with regards to plant-based foods. It is a growing industry. We are very relevant to that industry already today. We will make sure that we invest for also capturing these opportunities. We also aim at building a strong Health & Nutrition platform to really help drive Health & Nutrition through the industries that we serve. We will also focus on optimizing our performance within industries like Bakery, Dairy and Foodservice. And we have certain industries that we serve where we say we have a strategy -- current strategy that works well and we will maintain that focus.

In order for us to be successful, we also need to improve how we go to market, how we operate. And we have singled out 7 critical enablers that we will focus on in the strategic program going forward, in our road map going forward. The foundation, our people that is so important. We will develop a purpose to become a purpose-driven company. And with that, we will also build and adjust our culture.

The backbone of our company is very much around product management and end-to-end supply chain planning. And we will differentiate versus competition with co-development, taking our customer co-development approach to the next level, and sustainability is and will be key, is key also with regards to the consumer trends that we see and will be key for us to differentiate versus competition and also driving the right behavior in our industry.

Page 19, M&A. We have done a few M&As over last year. We have done several M&As in the past 8, 10 years. And M&A will be key for us going forward. In the strategy that we launched and that I just articulated, M&A play a role and can accelerate the way we build capacity, geographical expansion, but also how we add technology and capability to our company. And as you've seen in '19, adjacent product portfolios when relevant will be part of the acquisition pipeline, when relevant. We have concluded that we are in a market where we want to be. Plant-based oils and fats is a growing market, favorable trends, but there are some adjacencies like lecithin that works well with oils and fats and enhances our product portfolio. That is how we look at adjacencies, not necessarily to just build a broader ingredient profile and portfolio.

All right. With that, heading into Page 20 and some concluding remarks. We strongly believe that we are well positioned with our offering of plant-based, healthy and high-value adding solution, our oils and fats solutions. We use our customer co-development approach, and we continue to see favorable underlying trends. Not all of them are favorable, but when you net-net look at the total consumer trends of the world, we do believe that they speak in favor of plant-based oils and fats, plant-based ingredients. And with that, we do remain prudently optimistic about the future.

With those remarks, we close the presentation, and we are happy to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Now our first question coming for you now. It's from the line of Kenneth Toll Johansson of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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Just a small detailed question maybe on Chocolate & Confectionery Fats. You're right that you use the spot market to sell some volume there in the quarter, but you still had a very good sort of EBIT per kilo. So I thought that when you use the spot market, maybe you sold commodities at lower prices. So how do you explain that?

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Johan Westman, AAK AB (publ.) - President & CEO [3]

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Thank you. Yes, good question, but it is really high value-added solutions. So there is also an opportunity to sell spot volume in high value-added solutions and that is what we have done. So it is actually the opposite in this case. And we do see an opportunity going forward. We have -- after a few years, as you know, we're struggling a bit with the capacity and the yield. We are now in a good position where we have managed to build up safety stocks. We have our operations into place, and we can start moving volume even if there is specialty volume and took advantage of that opportunity.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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Okay. So we should expect some of that continuing at least from Q2 2020 and onwards?

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Johan Westman, AAK AB (publ.) - President & CEO [5]

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Well, I think, spot business is spot business. It depends on the supply and demand. But what is the fact is that we have our operations now completed, our capacity increase. We have a good stock of shea kernels. So with that, we are in a strong position. We have been able to build up also safety stock of finished goods and work-in-progress material. So we are in a situation where we now can supply. We have a stock at hand. And with that, we can follow the market and be active, but it's not the same thing as there will be spot business every quarter.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

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And then you will have this maintenance stop in the Aarhus facility during the first half of the first quarter. How much do you think that will affect your sales volumes in the quarter and also on EBIT?

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Johan Westman, AAK AB (publ.) - President & CEO [7]

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Well, we do have stock at hand, and we have planned for this. So this is a planned maintenance stop. So in terms of sales, it doesn't impact. But with regards to our cost level, it does impact because we're not processing anything during that maintenance stop. So there is a slight EBIT impact, but not necessarily on the sales side -- cost side, I would say, but not sales.

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Operator [8]

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(Operator Instructions) We've just had 2 further questions come through. The first is from Heidi at Exane.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [9]

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So the first question is on CCF. You talked once again about pressures from customers, delaying contracts and so on. Can you talk more about what's happening there? Why are they doing this? And because there is lower demand, is there any impact on pricing? Is there price pressure from customers as well? That's the first question.

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Johan Westman, AAK AB (publ.) - President & CEO [10]

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Thank you, Heidi. Yes. So while this is a strong quarter, I think there's always -- we always sit with a combined full picture, right? So we have been able during the year to contract good business, focus on high value-added solutions and with pressure on supply, also price profiles also followed. So with that, you can say there's been an opportunity to use the value of what we sell. At the same time, there has been a pressure on volume a little bit because we could have sold more if everything was rolling according to contracted. So we have seen some customers due to probably lower volume expectations on their end and/or trying to optimize their purchase by buying a bit cheaper when volumes are there. So that is what we mean with rolling contracts that some customer choose to take a bit less compared to what the order was, but still we have a good business with good margins. And with that, we were able to improve our operating profit year-over-year, but as you saw limited volume growth. So obviously, if the contracts would have been pulled like they were ordered, then we would have seen an even higher sales in this segment.

With regards to going forward, we see normal market behavior. As of now, there is a competitive market out there, but at the same time, we do have a strong portfolio and competitors. So there is a slight price pressure. But at the same time, we do expect our costs to go back to normal. So there's both a bit of a price pressure risk, but also the opportunity of our costs being improved. And with that, we can also be competitive in the market.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [11]

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And in terms of competitors, do you see new competitors in the market? Or is it just same people out there? And because there are a few of you, there's some level of price pressure?

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Johan Westman, AAK AB (publ.) - President & CEO [12]

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It's not a big change in the market, I would say. So it is business as usual.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [13]

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Okay. And then, we were talking about cost in CCF. Is it possible for you to quantify the headwind you had from the lower-yielding kernels in full year '19?

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Johan Westman, AAK AB (publ.) - President & CEO [14]

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We do not comment that level of detail. I think it's always important to see that this is -- we will always also going forward have fluctuations in yields and so forth. We did have an exceptional period and you'll see that in the cost space. But at the same time, we have been able to manage our total portfolio, and we will continue to do that. So that is what it is. We do expect a cost improvement year-over-year, but there will also be margin pressure from the sales price. So -- but all in all, we are positive about the development that we see in our CCF business.

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Heidi Maria Vesterinen, Exane BNP Paribas, Research Division - Financial Analyst [15]

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And then the last 1 on Infant Nutrition, please. You talked about destocking by multinationals. How long do you expect this to continue? And with the backdrop, are you continuing with the infant expansion?

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Johan Westman, AAK AB (publ.) - President & CEO [16]

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If I start in the later part of your question, yes, we do continue with that. We see a strong demand. This market is a market that is growing. The spend by family, the need for high-end solutions for infant formulas, it's there. The trends are clear. So in a bigger picture, this is a market where we are -- as you saw in our strategy update as well, we will continue to invest to be strong in Special Nutrition as a whole. And Infant Nutrition is certainly a very important segment of that industry.

With regards to the destocking that is related to birth rates, obviously, that is something that we'll develop over time depending on how China and other countries develop with regards to the number of babies born. And it is difficult at the moment to get full visibility into our customers' portfolio and their view on the market and when that flattens out. But we clearly see a link to birth rates with regards to the multinational. But at the same time, it's a growing market with regards to spend by family. And with that, we're focusing on really winning it in China with local customers as well as with very strong value proposition to the multinationals and trying to drive this market forward. But it is difficult to forecast how much is destocking and how much is our customers winning or losing to competition on their end.

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Operator [17]

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And our next question comes from the line of Karri Rinta of Handelsbanken.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [18]

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Maybe starting with a follow-up to the last question on the Infant Nutrition in China. Firstly, what is sort of driving the culture change, so that the locals are now acceptable suppliers of Infant Nutrition because, historically, it was pretty much only multinationals, only imported products? So what is driving the -- sort of the success of the local producers? And are you pretty much agnostic whether you sell to locals or multinationals in terms of what you sell and what kind of margins you make? That's my first question.

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Johan Westman, AAK AB (publ.) - President & CEO [19]

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Thank you. Yes, good question. And we do see that the industry or the consumer -- the consumers in China see that the producers have good quality. So with quality being there, it is safe to buy. We also see from the political incentives and so forth, that if anything, China becomes more pro-Chinese players and suppliers and being in China. And that is also one of the reason why we invest for this industry in China as you have seen in our earlier communication. So with that, the short answer to your question, if we're agnostic is, no. It doesn't matter if we sell to multinational or a Chinese customer and it is the same products and the same market again that will receive this. But of course, there is a slight difference in dynamics and a bit how they act. But all in all, we are well positioned and this is how the market develops. And we are in China, we have locals as well as multinationals as customers. And with our operations now being also added into having capabilities of producing and supplying in China or supplying from Europe, I think we should be in a good position. But it's a competitive market out there as well. So nothing is given, but we are doing the right things as far as we see.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [20]

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All right. Then the comments that you made on the plant-based opportunity and the opportunity portfolio that you said doubled again after doubling the quarter before as well. So how should we -- for the first, what is opportunity pipeline? Is that a sort of a live project that is -- can be sort of also driving volumes? Or is at an earlier stage, so there's no volume -- there's no deliveries yet? How should we -- what is an opportunity pipeline? How do you define it?

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Johan Westman, AAK AB (publ.) - President & CEO [21]

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Our opportunity pipeline is a -- when we get an opportunity to work with the customer co-developing, it is a real project, the real opportunity for sales, meaning that there is a sales opportunity linked to this. But as -- it's co-development could be a short one, a month or so, but it could also be a longer project over half year or a year. This is our business. Look, this is what it looks like in Dairy, in Bakery, in Infant Nutrition, in Chocolate & Confectionery, so very similar. So opportunity pipeline is not an R&D project, it is a customer opportunity. So in other words, we do get more and more requests for, can you produce this? Are you able to supply us with this solution? So in that sense, it is an indicator of the growth of the industry and indicator of the interest in plant-based oils and fats in this industry. And then -- but we then have to convert it into a one business where we start supplying. So it's an indicator of how the industry is growing and our opportunity and how that is growing. And that has then a percentage that materialize into one business. So in other words, that's the best indicator we have about the growth going forward.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [22]

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All right, fair enough. And then maybe a more broad question. You mentioned in your closing remarks that not all trends are favorable that you're seeing at the moment. So is there a flip side of the plant-based trend from your perspective, i.e., maybe in the traditional dairy or in some other category where you have been strong in the past? I know that overall, it's a positive trend for you, but is there a flip side in any of your main categories from or some other trend?

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Johan Westman, AAK AB (publ.) - President & CEO [23]

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You could say an easy one to take, it's obviously dairy and dairy alternatives because there you could argue as a consumer are you -- if you want milk in your coffee or you want the milk alternative in your coffee, you're not buying double the volume, right? So there is -- that's the flip side. But at the same -- but we -- as a total and especially with regards to the plant-based meat solutions where typically we haven't sold plant-based fats in the past into the meat industry, we would say, for us, the addressable market is growing. So for the time being, we do see a net interest.

Then with regards to other trends to piggyback on your question, what I mean when I say that is, you could see the number of ingredients, sustainability. And what is sustainability in organics? Not always with regards to resources used and the efficiency a bit competing. The same thing with plant-based food, really a sustainable play. But then you start look at the ingredients list, and there is a huge opportunity to improve the ingredients list of a plant-based solution. So you could say that how much is that processed and the number -- e-numbers and so forth. So there are a few things that you could say are competing, but I do think that net-net, as we say, it's positive and it also drives new product development, the new solutions, which -- where we think that our co-development approach is really good.

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Operator [24]

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And we have a follow-up question from Kenneth Toll Johansson from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [25]

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So you have this management ambition to grow EBIT by 10% every year. And now this quarter, you reached around 9%. But you also had a tailwind from FX effects. And when we look forward, as you pointed out, those FX effects might not support earnings, but well, less in the first quarter and then maybe even be a slight negative in -- from the second quarter and onwards. So are you still sort of standing by your 10% EBIT growth targets that you have?

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Johan Westman, AAK AB (publ.) - President & CEO [26]

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Yes, we are, definitely. We do not set them with -- we're not speculating currencies where it is. We have had some tailwind this year, but we also had, as you know, some headwind in our cost of CCF and so forth. This target stands, and this is what we want to achieve. And we plan like that, and we have taken that into account. Currency will fluctuate over quarters and over years, but our target stands.

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Operator [27]

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(Operator Instructions) Okay. There seems to be no further questions at this time. So I'll hand back to our speakers for the closing comments.

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Johan Westman, AAK AB (publ.) - President & CEO [28]

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All right. With no further questions, then we thank you so much for listening into the earnings call for quarter 4, 2019, and looking forward to talking to you again. Thank you very much. Have a good day.