Duni AB (publ) (DUNI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Duni Q3 report. Today, I'm pleased to present Mats Lindroth, the CFO and acting CEO; and Magnus Carlsson, Executive Vice President Corporate Development. [Operator Instructions] I will now hand you over to Mats Lindroth. Sir, please go ahead.

Thank you. Welcome to the Duni Q3 presentation. I will start with providing some highlights, and thereafter, I will hand over to Magnus Carlsson, who will talk about the development in the Duni and BioPak segments and the situation for Duni regarding the COVID-19 and restrictions and the response program. Thereafter, I will take you through the financials before the Q&A session. Starting to look into the Q3 highlights. We have a net sales development of minus 7%. Though, of course, this is a much stronger sales than we had in Q2. And we have had a positive development in the Duni segments during the summer months after restrictions that we had in the early part of the spring had eased. And we see a recovery across, in practical, all of the markets. The BioPak segment has also had a strong growth, both as regards to sales and the profits in the quarter. And of course, this is a remarkable strengthening of the operating income versus the situation in Q2. It's more than SEK 200 million better. And the reason behind that is, of course, that we have increased the sales in the Duni segment. That also gives us a much better absorption of the costs in the production. We had a strong development in BioPak also contributing. So that's more than SEK 200 million improvement versus Q2. If we look here to the year-to-date, it is, of course, important to remember that we had quite normal first and third quarters, but a very, very weak quarter 2 with the heavy restrictions that we had at the time. So if we look into the net sales development year-to-date, it's minus 16%. And as I said, we had a stable start of the year, but significant loss in volumes from mid-March and onwards during Q2. We had a volume recovery coming in at the end of May and in June with a positive development for the summer months. The BioPak segment has been much more stable in the year than the Duni segment, and we've had a good demand for takeaway boxes. Operating income is down with SEK 236 million versus last year, looking year-to-date September. However, more than SEK 200 million of this reduction of the profit has to come from -- in quarter 2. And we have been working constantly with capacity adjustments, the cost-saving program and, of course, the strong development in BioPak segment, along with low input material costs, have had a positive impact on the results. And with that, I will hand over to Magnus to talk to you about the segments.

Thank you very much, Mats, and good morning, everyone. So I will now go through our 2 segments in more detail and start with the Duni segment that represents our product to set the table, like napkins, table covers and candles. So although sales are down with 17% versus last year, we do see a recovery from previous quarter, and that started already end of the second quarter. This is highly correlated to the ease of restrictions we experienced across Europe over summer, and the positive impact was relatively broad and included all areas and markets. Although products related to the hygiene solutions that is aimed to protect napkins and cutlery, for instance, have seen a very strong growth. We have also, similar to the previous quarter, secured additional businesses being able to sell semi-finished goods from our paper mill here in Sweden. So despite this rebound of the business, we are not back to normal demand. And restaurants and hotels, being our most important customers in this segment, is still suffering from the restrictions and limitations in the number of guests. Since the majority of the products in Duni segment, thereby, from own production, the lower volume has burdened the result with lower capacity utilization and cost coverage. This has partly been mitigated with cost reductions, governmental support programs and, in general, lower raw material costs. Still, the result is down from SEK 99 million to SEK 68 million, again, because of overall lower volumes. So if we now move over to the BioPak segment, which is offering sustainable food packaging, we continue to see a strong demand. And this is driven mainly by 2 factors: the shift from plastic solutions to eco-conscious products based on various fiber solutions; and second, that the industry are now more actively looking for takeaway and sealable solutions for their food packaging in order to offset the negative effects from lower demand on sit-down meals. Australia had a clear comeback in the third quarter with strong growth, although still suffering on the regional lockdowns in the period. There is a healthy and good operational leverage on the volume increase. And as a consequence, the result has strengthened in the quarter by 35%, which also means that the margin improved from 7.2% to 8.7%. And we should also be aware that there is still a positive effect from the acquisition of Horizons in Australia, but that will be gone next quarter. As mentioned previously, the COVID-19 situation has had a tremendous impact on this year as for many other companies in the industry. And top priority from the start has always been to safeguard our employees and their health. And this is not only important from a strict human perspective, but also to enable that we can continue our production and deliveries without unplanned closure. So although, we have seen an ease in the restrictions in the third quarter, the last month has proven that the uncertainty we are seeing in the market with the lockdowns or restrictions, which is happening now as we speak, this is -- of course, will result that we need to continue working with the cost reduction program and adapt our business. We have shown since the start of the pandemic that parts of our offer is essentially boosting from these changes, and we need to continue to work close to our customers with a relevant offer that can support them in these difficult times. So the interaction with end customers and trying to be proactive is key in order to mitigate the negative consequences of further restrictions. So additional to the ambition of staying close to our customers and being innovative in our solutions, we are following our program of cost reduction activities. Capacities at our factories are continuously adapted to the current demand, which has been quite volatile over the period. Short-term work production programs in our countries where we are present has been an important part of this program. But we, all in all, will have more than 80 different cost reduction activities, that for the third quarter contributor with almost SEK 60 million and year-to-date that is SEK 200 million. With a significant improvement in the third quarter, the cash flow is positive, and there's no need for additional liquidity. Looking ahead, we have, during the last 2 quarters, proven that we have parts in our product portfolio that clearly meets the need for more hygienic solutions. This could be to cover and seal napkins and cutlery, but also to protect different surfaces at the restaurant table. So it's also clear that we have played and we will play an active part in supporting the HoReCa segment, hotels and restaurants and catering, to shift part of the business to takeaway and consequently, build a second revenue stream. So we are confident that the two macro trends of sustainability and hygiene solutions are here to stay, and that will be an important part of our daily business. And we are well positioned since many years and will continue to invest in this area to stay in the forefront of this development. So I will now hand over to Mats, again, to comment on the financials.

Thank you. Looking shortly then on the income statement. Here, we can see that we are not back to normal sales level yet. We are significantly below sales in Q3 2019. However, we are back to a profitable situation, where the operating margin is 8.8%, not fully up to last year's 9.5% in the quarter. And the profit is SEK 20 million lower than last year operating income. However, of course, much better than in quarter 2. If we then look into the segments, we see that we have a good recovery and, in fact, the turnaround of profits in the Duni segment in the quarter versus the previous quarter. But here, of course, although restrictions have eased, there is still an impact of COVID-19, which has impacted us in a negative way in the quarter, leading to a profit -- operating income SEK 30 million below that of last year. However, we see also that the BioPak segment continued to develop in a very strong way, both as regards the sales and the profit and also the profit margin, the operating margin increasing versus the operating margin last year. Cash flow is, of course, very important for us at this stage. We have a good operating cash flow in spite of the COVID-19 effects and the impact on the results. We -- that is partly due to lower investments, but we have also had -- concentrated and worked a lot on our working capital as a whole. We see between quarter 2 and quarter 3 a significant swing in the accounts receivable. As you can see, we have a negative cash flow from accounts receivable in the quarter of SEK 225 million. However, we had the corresponding positive effects of accounts receivable diminishing in Q2, so I think we can say that we are now back to a normal level of the accounts receivable, at least an almost normal level. So we are generating positive cash flow. Of course, impacting the financial position, and it's -- I'm happy to see that we now have a stronger position than we had a year ago in quarter 3 last year. We have reduced the debt of more than -- with more than SEK 200 million. And due to, of course, that we have worked a lot on the cash flow, and also because we have not had a dividend payout in May of this year. Looking forward, for the quarter 4, we will not have a dividend payment in November like we had last year. And that should, of course, impact the net debt at the year-end in a positive way, strengthening Duni's financial position. Coming in to have a final look then on the financial targets. Of course, we can see here that we have a very, very tough year for us in 2020 due to the situation with COVID-19. And it's, of course, again, the very weak development of results in quarter 2, that is really impacting us also here. So with that, we are ready with the presentation and we can go over to the Q&A session.

[Operator Instructions] And as of currently, we have no questions registered. I hand back to our speakers.

Okay. I think let's conclude the -- this presentation. And thank you for your participation. Thank you very much. Bye.

This now concludes our presentation. Thank you all for attending. You may now disconnect your lines.