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

Ladies and gentlemen, welcome to the Duni Q2 Interim report. Today, I'm pleased to present President and CEO, Robert Dackeskog; and CFO, Magnus Carlsson. [Operator Instructions] I'll now hand it over to our speakers. Please go ahead.

Thank you. Yes. Hi and welcome to the Duni Group report for Q2 2021. Me and Magnus will go through what has happened during the year and, of course, especially in Q2 here. And I hope everyone enjoyed the summer. It has been a very tough year in many aspects, and I want to take the opportunity to thank everyone in our company for a fantastic job during the past year. We have faced a lot of challenges during the past year, which we have handled in a very good way. And I believe that many of these challenges will actually become really good opportunities for the future for us. Yes. So we'll go through the period first here in short. The COVID-19 restrictions eased during the second part of Q2 with a strong result improvement as a consequence. I think a lot of countries have gradually opened up and especially in June, we see much better momentum in the restaurant business. Strategic partnerships accelerate the sustainability agenda through new materials and new business models. And here, we believe that cooperation and partnership will be really important for the future for us. BioPak continues to grow rapidly with strong operational leverage. And the fourth one here, German support program contributes to the quarter. That was a little bit period in short, if we go a little bit more into details. Our net sales increased by 37% to 1 -- a little bit more than SEK 1.1 billion. It was the eased restrictions as vaccination rates accelerate and the number of confirmed COVID-19 case dropped, which is good. Sales increased in the business area Duni as private events increase and restaurant visitors return earlier and at a quicker pace than previous Q2. So especially in June this year, it's been a good momentum. The business area BioPak continues to grow as takeaway benefits still from the COVID-19 restrictions and high demand for sustainable packaging continues. The business area Duni was well prepared to meet the demand. While the business area BioPak delivery performance has been a bit challenged here. We'll come back to that, the lack of containers and so on. Our operating income, up with SEK 150 million versus last year to SEK 58 million in the quarter. The main explanations for the improved results are the recovery of sales due to the market opening up earlier and faster compared to last year, coupled with growing BioPak sales. Second point is that the German government support and continued control strengthens the results further, while significant raw material and freight cost increases have a negative impact. Year-to-date highlights. Net sales, minus 1% to SEK 2.56 billion. Still very low sales to the hotel and restaurant industry until end of May due to the heavy restrictions. And then, of course, from June much more positive development. The restriction was in place last year as well, but then only from end of March. And we see continuously strong growth in BioPak, which is the reason Duni Group's turnover ends in line with last year. If we look at the operating income, it was up SEK 30 million versus last year to SEK 18 million. Still volume decreases and high share fixed cost in the business area Duni has a significant impact on our results. The strong operational leverage for BioPak generates high operating income growth in BioPak, and the government supporting cost saving activity supports the results year-to-date as well further with -- while the raw material then and the freight cost increases have a bit of a negative impact. So I hand over to Magnus here to go into the business areas.

Thank you very much, Robert, and good morning, everyone. So I will now go through our 2 business areas in more detail, and I'll start with business area Duni, representing our products to set the table like napkins, table covers and candles. So leaving quarter 1, which were heavily influenced by the pandemic and the lockdown situation, the second quarter and especially end of May, as Robert mentioned, indicated a significant improvement in volumes, directly linked to the easing of restrictions towards restaurants and I would say, society in general. We are not yet in a normalized situation. We are not out of the pandemic, but clearly we're giant leaps in the right direction. The improved situation is noticeable in all markets, but, of course, very much linked to the vaccination development, where U.K. was one of the countries earliest to open up, and we saw that clearly in our orders coming in or almost no delay also in the sales numbers for these markets. But as you can see, all regions increased significantly from last year, although central region with Germany as the biggest market still has some restrictions that just very recently been eased. Retail channel indicates levels that we have seen pre-pandemic, while the professional channel like the restaurants, hotels and catering is still not back to normal levels, but again, with significant improvements from last year. So the result improvement is directly linked to the better market condition I just mentioned, and volumes from the negative results we had last year of SEK 118 million. We're now close to 0. Additional to the increased volumes, the indicated German support program contributed with almost SEK 45 million in the quarter, which, of course, is a very important factor. However, we already benefited from various support programs last year. So the result improvement is linked to an underlying better situation, with better utilization in our factories and, in general, a much better cost coverage. The inflationary pressure, as we have seen already in Q1 has remained, and we are on historical high levels of pulp and other key raw materials. And we have, during the quarter, taken actions to initiate price compensation measures with a planned effect later this year. So I will now move over to business area BioPak. So if we move over to the BioPak business area, which is offering sustainable food packaging, we continue to see a strong demand. Essentially, the growth is even stronger than we have seen in the first quarter. And it is clear that BioPak has benefited from the shift towards takeaway Solutions coming from the lockdowns. But the comparable figures towards 2020, we already had a lockdown situation last year. So that indicates that the growth is not only linked to the pandemic situation, but the general increased demand for sustainable solutions for food packaging. It is also noticeable that the growth in our 2 biggest markets, Australia and Germany, show strong and are very firm. Although we have totally different situations with a knockdown in Germany and relatively unaffected in Australia, at least for the second quarter. Since the end of last year, we have seen an acceleration cost development in container shipments, Robert touched upon that, from Asia. The increase is almost 600% versus a year ago. And especially dramatic only in the last month. This is not only impacting Duni, of course, but basically, the whole trade between Europe and Asia. We are doing everything we can to protect the satisfying development in our delivery performance towards our customers. But we have been forced to initiate price increases starting gradually from third quarter. To summarize, Q2 was very strong for BioPak with a clear leverage on the volumes as seen in the strengthening of the margin. But again, with cost challenges seen in the last 4 to 6 weeks on logistics. I hand back to Robert.

Thank you, Magnus. All right. If we look a little bit at the COVID-19 situation. I mean, although we are approaching a more normalized situation with less restrictions, there is a bit of uncertainty, and then we have this Delta variant that may cause some changes in the restrictions. So still some uncertainty, but it looks more positive, as Magnus mentioned here, as last year anyway. And of course, we follow this carefully with aim of being well positioned in the world where the need to meet, eat and travel is expected to thrive. Another focus for us is, of course, accelerating within the sustainability agenda and the digital transformation, which we are working on constantly to fine-tuning and continue to set more ambitious targets every day. The last point here is what we've been working on, not just in the quarter, but for the time here. It's building up strategic partnerships, which will enable us to remain more -- and well positioned in the post-pandemic world. And there are 3 important partnerships that we want to highlight in this quarter then is that we have partnered up with OrganoClick, which is award-winning Swedish company, which were honored for their innovation in designing renewable, functional cellulose-based materials. There, Duni has developed a new Bio Dunisoft napkin, where we're using a bio binder. So the binder is like the glue with fibers. And this one is made from corn, lemon peals and other food waste, which is fantastic. And in addition to that, we have our new Bio Dunicel premium table coverings, which will use a renewable binder, which is made from potato starch. And this one is developed by Duni’s factory team in Germany, which is a great innovation. And both napkins and table coverings are recyclable paper. The second partnership here is that we're partnering up with &Repeat, which we will join forces to achieve circularity of single-use products and take one step further towards the goal of becoming fully circular. &Repeat offers a smart deposit return system to restaurants and offices that make it easy to recycle takeaway packaging and the purpose is to create less waste. The third partnership starts in a way that we are dedicated to offer the most sustainable solution for any customer occasion. And we believe in a combination of single-use, reuse or other upcoming innovation -- innovative solutions that will transform to a more circular society. That's pretty important. So partnering up with Relevo GmbH strengthens our existing offer within the takeaway packaging, mainly today's supply BioPak brand in Europe. So we are really happy with these innovations and partnerships and looking forward to many more in the future to take us to our goal of becoming fully circular and also climate neutral. All right. And Magnus, I hand it over to you.

Thank you. Some comments on the financials. So if we start with looking on the income statement. And as Robert mentioned, volumes increased almost with 40% in the quarter from previous year. It should be noted that second quarter last year was very weak for business area Duni. Nevertheless, the growth seen in both business areas is the most important factor for the result improvement of almost SEK 150 million in the quarter versus last year. The other important factor for the quarter is the German government support program, as we have mentioned before. But we did receive support already last year, so the net effect is still positive of around maybe -- around SEK 25 million. If we look more specifically on the business areas, they both grow fast, close to 40% versus last year for the quarterly period. Again, looking on business area Duni for the first half year, it is still burdened by the first quarter, which basically was not affected in 2020 by the pandemic. As previous quarter, BioPak remains the biggest business area since the growth has been significant, also before the pandemic, but accelerated even further in the last year. The operational margin is 10% for the quarter, indeed, strong development, leveraging from the volumes. The sharp increase in logistics costs, which have had a negative impact on BioPak has mainly impacted the second half of the quarter. So looking on -- back on the rolling 12-month curve -- on the profit curve, it is clear that we now have a positive development since mid-first quarter and accelerates upwards. Looking on the cash flow. It is unfortunately so that although we have a clear profit improvement in the quarter of SEK 150 million, the operating cash flow decreases. And this is strictly related to the effect on accounts receivables, which decreased quite significantly last year, moving into the pandemic. And now focusing this year moving out from the pandemic with increased volumes. All other aspects of the cash flow, including the inventory and CapEx have improved from last year. And finally, looking on the financial position and our balance sheet and some other key financial figures. It is clear that net debt is stable versus year end, slightly higher than a year ago, mainly for the reason I just mentioned about higher accounts receivables. Return on capital employed developed positively aligned with strengthening of the results and firm control on our balance sheet. And also, finally, if you look on the financial targets, unfortunately, we are not able to deliver on those in this tough year, as Robert mentioned initially. But they are progressively progressing in the right direction in comparison to previous quarters. So we had a tough start to the year, clearly influenced by the lockdowns in almost all markets, that lasted basically up until end of May. But now we have finally seen clear steps towards a more normalized situation where we can meet and eat and socialize together. So this is something I think we all have been longing for, for Duni Group. And Duni Group will be there to make these occasions memorable. So I thank you all, and I hand back to Robert.

Yes. Thank you for listening, and we stop there and for Q&A.

[Operator Instructions] It seems like we have no questions from the audio, I'll hand it back. Okay. So we have one question coming from Karri Rinta from Handelsbanken.

Karri, Handelsbanken. A few questions. I guess I'll start with two clarifications. Second quarter, when I look at the sales per product category, it was table covers that was weak again, and I'm guessing that's about indoor seating and Germany, but I just wanted to confirm that is the main reason behind the weakness in table covers.

Yes, that's right. Yes. And I think, I mean, as you say, there has not been any indoor seating, especially Germany has been the one who has been the latest in a way to lift the restriction. So you're spot on.

All right. And then a similar observation in BioPak, and you had a really strong sales in West. So is that also all about the U.K.? And is there anything other than just relaxing restrictions behind that?

You're right, U.K. had a strong development. But basically, I would say it's been relatively strong in all regions and in some markets, depending on the size and so on, it's been even stronger than others. But as we have seen it also -- it is partly related to the lockdowns, but we're also see since we had a strong development in Australia, which has not had a lockdown, where we also had a strong development. So it's slightly difficult to say. We can only confirm that the increase has been quite broad everywhere, but particularly West, as you say.

And I think you may had some comments in the presentation where you were -- I don't remember if it was for Duni or BioPak, but you mentioned that sales in June were sort of almost back to June 2019 levels. But if we would look at the Duni division overall, is there any way to compare sales in June to what the sales were in June 2019 to get a sense of where are we in terms of recovery?

Yes. As we have clearly said throughout this year, we -- the sales in business area Duni strictly very linked to the restrictions. And once we have seen the restriction, we also saw that last year, we were approaching normal levels. So that is comfortable to see that we are coming back quickly. And as we said in June, the restrictions were east almost everywhere in Europe, and we were approaching '19 levels. Still, there are restrictions, which is also seen in the numbers. So we're quite not there yet, but we saw a good acceleration gradually in the second quarter.

All right. And then a follow-up to that would be then typically, if we look at the historical seasonality that Duni has. The company as a whole, typically has Q3 sales that are similar to the second quarter. But I guess, assuming that there are no new restrictions that would be put in place during Q3, it would be safe to assume that we should see higher Q3 sales compared to Q2? Or...

Yes, with the logic of having less restrictions throughout the period, the third quarter, that makes sense, absolutely.

All right. And then on the cost side, you mentioned both pulp prices and especially container prices. And you mentioned with container prices that you had seen this cost inflation towards the end of the quarter. So how should we think about gross margins in the third quarter? Because there is still the incremental pressure from higher pulp prices compared to the second quarter since pulp prices continue to increase through the quarter. So if you didn't manage any price increases for your own products, then gross margins should come down, assuming unchanged volumes. But how should we think about how much of these cost pressures should we expect you to be able to offset already in the third quarter, if any?

Yes. As I think we have mentioned earlier, there is always a bit of a delay once you initiate the price increases, you are in a dialogue with the customers trying to come up with the best solutions. So there is always a delay, and that varies with customers and regions. And I think it's fair to say that we will not be able to come through early in third quarter rather later in the third quarter. But this is something that is dynamic, and we are in the middle of it. So it's difficult to say.

All right. And then final question, maybe more on the long-term than sort of -- so what is your best sense when it comes to your customers and your customers' customers that what is -- what's the rate of bankruptcies or similar that you have seen? And is there any category? Because I would assume that maybe the catering sector has been the hardest and probably to the structure of sector being a lot of smaller players that there's to be quite a few that haven't survived the pandemic. But what's your sort of best assessment post-pandemic? What percentage of your customers and their customers' customers have survived? Any rough ballpark number would be very helpful.

Yes. I think it's hard to say a number in a way. I think we believe actually that -- I mean, the world will normalize and people will start to -- yes, start to do catering, start to do air travel, start to do events and so on. So I think we believe strongly in that. And I think there will be, of course, in some areas, harder hits, maybe restaurants will close down and so on. But I think that consumer want to eat again, they want to. So maybe there are less restaurants, but -- even bigger takeaways. And of course, then it should be the right restaurants and takeaway places for us then. And it's really hard to say, actually, I have to say. But I think we believe in that it will normalize for the future.

To just complement on that, that I think there's two observations. One is for us is that we have had very low bad debt losses. I mean, there has been a good resistance in the industry, supported by government programs to basically survive over this tough period. The second reflection is that the obstacle of coming back and starting up the new restaurants is normally very low. And the more important to observe is the fundamental need to go out and eat in socialize. And that, I think we have seen is there. So the prerequisite for not being -- for being hurt in that sense and for a quick comeback is good. And I -- unfortunately not answering in a percentage number, but it's low. It's low, that I can say.

All right. I mean even the catering sector, you feel comfortable and confident that even that sector will come back.

The catering sector is also linked to hotels and to bigger companies and so on. It's not only small players. And due to the programs, they have been able to survive through these tough periods to a big extent. And time will tell when we see the first big conferences and so on, it is during the autumn or later in the winter and so on. But there will be a market that will quickly pick up the demand from this, I'm sure.

We have no more questions from the line. I will hand it back to our speakers.

Okay. Great. Thank you for listening. And yes, we just want to wish you a great summer, and looking forward to next quarter. So see you soon.

Thank you. Bye-bye.