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

Ladies and gentlemen, welcome to the Duni Q3 interim report. Today, I'm pleased to present President and CEO, Robert Dackeskog; and CFO, Magnus Carlsson. [Operator Instructions] I will now hand over to Robert Dackeskog. Sir, please go ahead.

Thank you. Hello, everyone. Welcome to Duni's Q3 report. But it's great to see that the restaurant visits finally are back in Europe here and all over the world, actually. And of course, it's mainly due to that restrictions are taken away in the docks during the quarter and that the restaurants are truly open in a lot of markets. We have still some restrictions, of course, where you require the vaccine passports and so on. So very happy to see that the demand is back again. I think that's critical. If we take 4 bullet points here, the period in short, it's that, as I said, eased restrictions here has led to the recovery within business area at Duni. That's one major point. And of course, that has also led to rapidly increased volumes in the factories, and that has led to strong efficiency. That's really good. And also that business area BioPak continues to grow really rapidly here with good operational leverage in the quarter. Of course, then as everyone else sees is that raw material, energy prices and sea freight cost continues to increase at concerning levels, of course, and it's everywhere in a way, pellets, and energy costs, definitely. But still the demand is there. That's the good thing. If we go a little bit more into details. We had a net sales increase of 6.2% here. And as I said, the restriction has been removed, so that has led to really good business where we especially have two new products versus before. Good thing, growth in the APAC continues despite some disruptions then in the freight market on the sustainable packaging in the takeaway market. We had a strong demand for eating and drinking products, which is good for the quarter, where it's more serving products for event catering. So we see that that's kicking off a bit as well. So that's really good. And of course, then the volumes that are returning into the factories gives very high efficiency, so that's positive as well. And in both the Duni and the BioPak we have rising raw material, energy costs and containers, of course, that everyone knows about. But all in all, good demand in the quarter and positive in that sense. If we look a little bit on the full year, year-to-date here, as you know, it was really heavy restrictions and they've been lifted then, especially in Q3. So that's, if you look at the whole year, we're coming back now, so to say. And the major thing, demand for business here at Duni's portfolio was very low in the beginning, end of May, and then started to recover slowly in Q2 and now really kicked off here in Q3. And it's good to see also that demand for BioPak product is here as well. So that's also positive. And the high volumes, as I said, government support and strong costs for the full year, that has strengthened our results. So that's really good. But then, of course, we have raw materials that are increasing in costs for the full year as well. All right. We'll move to the business area of Duni and Magnus will take over here.

Thank you, Robert. So yes, I will now go through our 2 business areas, starting with business area Duni. So as mentioned, third quarter confirmed the positive development and actually momentum that we saw by the end of the second quarter. The restrictions were gradually lifted also in the third quarter in many countries. Sure we know Sweden and Denmark is basically back to normal situation involving our restaurants and hotels and social gatherings. So as you can see from the slide, the improvement was broad in all regions. So it's very positive. It should be noted that the third quarter already last year was positively impacted by the then temporary easening of restrictions that we had over summer until mid October. So the rebound we are seeing in the quarter is actually historically strong, even looking on the third quarters before the pandemic. It is also noticeable that our retail channel reached pre-pandemic levels when people all over Europe now finally should celebrate at home and that had a positive influence on our retail channel. We indicated earlier that we have a positive view on the operational leverage that comes from the improved volumes. Factories are running with high efficiency and productivity while we still have a low indirect spend. And this is one of the main explanations for business area Duni being back to margin levels above 10%. However, we have experienced high raw material and logistics costs that further accelerated by the end of this quarter, third quarter, with all-time high levels on energy and pulp. But basically, all raw materials components have reached all-time high levels. So the cost inflation is indeed severe, and that will impact us further. So this is something we are working hard to mitigate, and both price compensation measures and cost reductions have been taken. So if we now move over to BioPak segment, which is offering sustainable food packaging, we continue to see a strong demand with growth beyond 20% for almost all regions, as you can see, and that includes Australia being the biggest BioPak market. Even here, we see a strong operational leverage on these volumes, and we managed to maintain an operating margin level above 9%. The product segment, as we refer to as eating and drinking, as Robert mentioned, has suffered over the pandemic since it is strongly associated with events and caterings. But that has also improved. And while we still have a strong demand for our takeaway segment. But we have, for several quarters now, indicated a worrying trend with shortage of containers that is causing challenges in our supply chain and for us to ensuring flawless deliveries to our customers. And this totally exploded during the third quarter, and we are seeing now cost increases, 5 to 6x versus a year ago. And recently, we also experienced close down due to the shortage of electricity from our suppliers in Asia. And this is, of course, putting another challenge to the situation. So we are working around the clock to mitigate the effects towards our customers, but it will result in disturbances and necessary price increases since the situation is indeed exceptional. And this is not only a challenge for BioPak and Duni group, but for the whole industry and that is important to mention. So summarizing third quarter, strong demand, but with accelerating cost levels in our supply chain. So on this slide, as stated by Robert, and I mentioned also earlier, the demand has really lifted in the third quarter and that it's especially noticeable for BA Duni. And this is, of course, related to the easening of restrictions that we see throughout Europe. We're all very happy for that. But as you can see on the map to the left, and I think it was also mentioned in some of the news is on. There is an increasing trend of new cases, especially in Central and Eastern Europe. So we are, of course, carefully following this, but we are positive that we will not move into a new area of lockdowns or restrictions in our main markets. And that is explained by the graph you see to the right. And that is indicating the deaths related to COVID, which thankfully is still very low linked to the successful vaccination rollout. However, on the next slide, as we see a positive demand, it is a worry that every raw material, energy and cost component is actually increasing rapidly. And as you can see, that is exemplified by the graph below; the container prices from Asia is up almost 600% than versus 1 year ago. So of course, this is something that affects, as I said, basically all industries. But we feel that there is an understanding from our customers that we need to increase our prices. Of course, BioPak concerning, but also Duni, business area Duni.

All right. And of course, more than a little bit maybe short-term things that we are focusing on. Our goal is to be an innovative, sustainable, and delivering circular products and services solutions for the future. And I think we have a lot of good examples here. One is that we launched the world's first fossil-free airlaid, which we use in our premium napkins, which is a fantastic step for us. And during the quarter, we also announced that our paper mill in Skapafors has initiated a transition to fossil-free biogas, which is fantastic also. And that's really positive. And also, we are doing a lot of partnerships and collaboration in order to work towards a more sustainable future. And in the quarter, we also took a minority holding in the Spanish reuse company, Bûmerang Takeaway. So this complements our previously announced minority ownership in German company, Relevo. So both of these work with reusable systems for takeaway products using digital platforms and to reduce litter in our cities. This is a little bit what happened in the quarter towards our more sustainable future.

All right. Thank you, Robert. I will now go and comment a bit on the financials, starting with the income statement. So as Robert mentioned, volumes increased by more than 15% in the quarter from previous year. Main explanation for that is a strong rebound in business area Duni. You can also see that gross margin strengthened from previous year. Year-to-date still below levels that we saw pre-pandemic. But looking on the rolling 12 months numbers compared to the end of last year, we are now on a positive development on the profit curve, and we actually have been on the positive development since February this year when reached bottom and now we are gradually progressing in a good speed linked to the lifting of restrictions. On looking more specifically on the business area. BioPak continues to leverage on the growth. At the end of this quarter, we are, as mentioned a couple of times now, facing severe cost increases. BA Duni is even more capitalizing on the volumes with healthy improved margins. You can also note that year-to-year that both business areas is equal in size when it comes to the revenue. But in the third quarter, BA Duni is once again with higher share. On the cash flow, it's positive for the quarter and indicating a healthy cash conversion. However, we do see negative effects from the accounts receivable when the volumes are picking up. This is expected and we are carefully monitoring our overdues. Although many of our customers are operating in an industry that has been severely hit by the restrictions from the pandemic, we have so far not seen higher levels previously in our bad debts. Also, inventories are increasing in absolute numbers, but actually with lower days in stock for many of our product groups. Looking on the financial position and our balance sheet and some of the key financial numbers. It is clear that the net debt is stable versus year-end, slightly higher than the year ago. That is mainly for the reason I just mentioned about higher accounts receivable, but also that inventories picked up a little bit. Return on capital developed positively in line with our strengthening of the result and, I would say, further control on our balance sheet. And finally, our financial targets, we are still behind, although we are developing in a right way. So I think that's all from me. I'll leave it over to you now, Robert.

Yes. Before we go over to questions here, just summarize then in a way, I mean, I think we see very positive development, more normalized existence now in the world here and that we get a good demand. But however, as we mentioned here today, it's accelerating cost increases in almost all raw materials. But of course, we need to compensate and increase efficiency, that is really important for us to do. That's maybe a bit of a summary of today's report. Yes. Thank you.

[Operator Instructions] Our first question is from Gustav Hagéus of SEB.

I have a few, if I may. Firstly, on the BioPak, then quite exceptional growth given that it was a rather decent year last year as well for BioPak. So I think combined growth versus 2019, then 25% plus 16% stacked. If we can start by going through sort of the components to that organic growth, whether or not there's a big price mix element to it or if it's mainly volume related? And if you can also talk a little bit about the regional differences where you see bigger growth versus other regions? I know that you have in Oceania, but still a little more granularity in that would be helpful.

First question related to the price volume mix from '19. That's if I understood correctly. And it's very little, if known, price effect on that development. So it's very much driven from the organic growth as such. Second, the increase where it comes from. As mentioned, it's quite broad. And it's on relatively same levels everywhere in all regions, including Australia. So it's a similar development in Australia as in Europe. Going even further, of course, there are some markets with lower market share that might have slightly higher increase than others. But I would say, it's quite broad, the increase.

And where do you see internally sort of normalized growth for BioPak in a post-pandemic world 2022? What are the -- I assume takeaway has been a boost. Then again, conferences, first of all, so fourth has been a drag and so forth. Where is the normalized growth as you see '22, '23 for BioPak?

Yes, that's a very good and tricky question. I would answer it like this. Before the pandemic, we saw we had a stable development, especially linked to our sustainable food packaging segment. So that is confirming that there is an underlying good demand for our products. Of course, pandemic has boosted that, but we are positive that there is also in the future strong demand for our solutions and products. Of course, we are carefully looking into this and continuously need to develop solutions that our customers request. So I think that is a very important component. But we are positive on that, without giving you a certain percentage, but we can go back to the pre-pandemic levels and give you a hint of what is going on.

Yes. Could you, because the history is quite limited since the business unit is quite new. Could you remind us what the pro forma growth has been, say, '15 to '19 for BioPak, to get a sense of the normalized growth?

Yes. I mean, first of all, BioPak, going back a number of years, has been 2 parts. One is more related to the plastic shift where we actually had plastic products, and that we are now shifting out. So now we have a much more bigger share of what we refer to a sustainable product. And they have a higher growth than the others, of course. So going back, we are positive that we should at least have a higher number than historically from that looking on what we refer to as [indiscernible]. So we are positive and we have seen a very stable development in BioPak over the last, I would say, 7 to 10 years.

Yes. Also, I think on a higher level, in a way, the behavior, I think we also believe that people will take more takeaway in the future. And I think that trend has been going on for many years in a way, and maybe it's accelerating and people have got -- that type of behavior will actually stay. So I think it's hard to mention a percentage number, yes.

Okay. And I guess your confidence level in terms of M&A has gone up a little bit given that it seems to have been quite successful, the 2 recent acquisitions within BioPak in retrospect. Now that you start to see sort of the light at the end of the tunnel, and you, in contrast to many smaller peers within the BioPak segment, have access to capital markets to great extent, doesn't it make sense to sort of pick up that M&A agenda again here while we're not fully back to the top of the cycle? Or how do you think about that? And I guess it's a Board decision as well, but if you could give some color on that, that would be helpful.

No, you're right. We are starting now to be back on our feet, so to say. We're getting some headroom in our balance sheet. And M&A has always been important for us in the last 10 years, a very vital part of the strategy, also during the pandemic. However, we worked slightly different taking shares in some smaller companies. So I think that we will continue to work with. We will also, of course, come back to more of the traditional path of the M&A, also looking into bigger companies and how we can expand in Europe and elsewhere if there is any opportunities. That will be, of course, very important for us going forward.

Okay. And in Duni then, the Duni segment, quite a nice pickup in terms of profitability. If I calculated correctly this morning, sort of 31% incremental EBIT margin -- EBITA margin on the incremental top line growth year-over-year. Are there any temporary cost savings still in these numbers? Trying to sort of get a sense of where the normalized margin is for Duni if the market sort of continues to come back into 2022?

No. I think we had significant cost reductions during the pandemic. And it's fair to say that many of those were linked to the pandemic as such. We have a government support program and so on. Of course, we want to maintain firm cost control going forward, so we can get this operational leverage on the volumes. That's for sure. At the same time, we need to develop and so on. But it is important to keep the firm cost control and to keep as much as possible on the savings that we did during the last 1.5 years.

Okay. Sorry, a lot of questions, but final one for me. In terms of -- you know what, I'm going to save that question for later.

Our next question is from Karri Rinta of Handelsbanken.

A few questions from me. Firstly, just a clarification. There is no government support in Q3 numbers, right?

Correct. Correct.

Good. And then about the cost inflation, I think you might have mentioned at some point that pulp is roughly 10% of your costs. But since then, BioPak has increased quite significantly as a percentage of total sales. So ballpark numbers, how much is pulp of your costs? How much is energy of your costs? And those 2 refer to Duni. Where's then the freight cost that's more of a headache for BioPak.

Yes. That's a good observation. And that relates to that now BioPak is a big part of the Duni Group. And of course, pulp is still very important for us. It is the biggest component in our raw materials, and of course, vital for business area Duni. But bearing in mind the magnitude of the increase in the containers, of course, this will have an impact for the group, but also specifically, of course, for BioPak. So it is a bit of a new post-pandemic world, and now we need to look into other components as well that might have an influence here.

And since this is a new dynamic, so do you have anything that you can share with us in terms of what kind of contract structures and durations you have with your freight partners? Will they hit you directly sort of with a short delay, or how should we think about this?

Yes. It's more shorter delay, I would say.

Okay.

Yes. We're seeing the prices. So there's just a couple of months delay when we're actually facing the costs. So it will move into the fourth quarter. The relationship is very good with our forwarders and our suppliers in Asia. It's with long history. However, the situation in general is quite demanding and difficult. So we are in a good position to manage this, I would say, better than many else. But of course, it is a challenge.

Okay. And then a few more strategic questions. You mentioned that retail is back at pre-pandemic levels. Where is hospitality roughly at the moment compared to pre-pandemic levels.

Yes, then the restaurants and catering and so on, you mean?

Yes, exactly.

Yes. I think they are not really back on track yet. We get some data from some markets where saying that maybe 2021, then we'll be at maybe 70% in total, I think, in Holland, for example, and in the U.K. So not back on track yet 100%. And I think in Europe, in general, there is a problem for restaurants now with staff actually - so getting staff. And I know we have some customers in Holland that have opened maybe 2, 3 days a week only because they don't get chefs and staff. So it's not 100% back, of course, there. And then you have catering. Maybe events is still not back as well. But we see, it was positive, I think, in the quarter that we see that we have some serving products that are starting to grow again, and that's for the event catering business. That was really positive, maybe not the biggest, but we see the trend. So that looks good, but definitely not back on track. Yes. So that's what we see.

And then finally, when you look at your competitors that you had pre-pandemic in different markets? Do you see any changes in the competitive landscape, i.e., have some of the smaller players maybe been forced to shut down? Or is there any change in competitive landscape compared to pre-pandemic levels?

Yes. No. I think luckily, we have 2 legs, BioPak, which has developed really positively during the pandemic, and Duni that has suffered. And I would say that we have managed the pandemic very well in business area Duni. And meeting competitors in business area Duni, which is smaller and do not have the support of the second leg, so to say, BioPak, of course, we see that we are relatively strong and will come out of this in a good way, which we already saw now in the third quarter. So hopefully, we can utilize on this and take further market shares and leave the other ones behind, so to say.

All right. But no major bankruptcies or no -- the competitors that you had before the pandemic, the main competitors.

No. You continuously see certain movement. But of course, the balance sheet has been a bit diluted for everyone. But no general. No major loss.

We have a follow-up question from Gustav Hagéus of SEB.

Just a follow-up on the external price inflation. What do you think, in a scenario where you have a rapid decline in freight costs and raw materials from here, contrasting what you're seeing right now, to what extent will that also you think carry a lag between prices from your end of including rebates coming down to represent this new cost level? And how long will you be able to keep that positive lag you think?

No. I think there are 2 aspects of this. First one is historically that we have always been good in compensating. I think that is something that you should keep in mind. Second, we are now in extreme situation. We have a very close dialogue with our customers where we might -- there is a good understanding that we need to compensate for this. but it also means that we might need to work slightly differently with our customers to come through here and to support them and to support, of course, to do what's necessary for us. Your question, if there is the risk if the cost will go down? Of course, there will be perhaps a new dialogue with our customers. But normally, over time, we are good in compensating for this. So that's what we're focused on to do as fast as possible.

Yes. No, I appreciate it. My question was more like, in a scenario with a rapid decline, do you think there's a lag between your higher margins and then the normalizing? Or do you think that it's sort of 1 quarter lag when prices go up for you and the instant reaction downwards when prices come down for you?

Normally, there is that type of a lag or the delay 1 to 2 quarters, so it goes both ways.

In both scenarios. Okay.

[Operator Instructions] As there are no further questions, I will return the conference back to you.

Okay. Thank you, everyone, for today, and see you next time.

Thank you. Bye-bye.