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 will now hand you over to Robert. Please go ahead.

Thank you. Yes. Hi, and welcome to the Q2 report from Duni Group. Today's highlights of the quarter is that we have a fully open market. There are some staffing challenges in the industry. We have a continuously increasing cost that's followed by further price increases from us. And then also we further do investments around sustainability area. The agenda for today is the market outlook due to summary. The business areas will go into around sustainability targets, what we do there, the financials and then in the Q&A. Yes, a little bit look on the market outlook here. We have a recovery from February. The graph on the left side here is Germany as an example, where you have seated diners, walk-ins and reservations. And we can see that we had a good growth here on the line -- the green line in Germany, and that's also a good example for the rest of Europe. But we see that we meet some strong numbers from last year in the summer here in July and August, of course, but it looks like a really good recovery when the restriction has gone. But we also see that actually COVID is picking up in the middle here -- in the graph in the middle in the last 3 weeks, but there are no restrictions today in Europe with some exceptions where you need to wear mask in some areas. But we can see that in a lot of countries it's starting to rise a bit again, which -- but not to the level as before. We also see -- we have an example from London here where the staffing is the main challenge. And here, you can see where the restaurant says, you may be wondering why you have to queue when you can see the empty seats in the restaurant, but it's due to staffing shortage and hard to get people. So that is an issue for the whole sector in most countries actually in Europe. If we take a look at the key financials here, we had a net sales growth of 53% in Q2, SEK 1.7 billion versus SEK 1.1 billion last year. The operating income ended up at SEK 91 million versus SEK 58 million last year, and the operating margin ended up at 5.3% versus 5.2% last year. And if we go in a little bit to the details around the Q2, the significant recovery here was, of course, coming a lot from napkins and table covers as restaurants open up and the restrictions were removed. We also see still strong, but increasing demand for the takeaway area. The supply chain and delivery performance challenges is still there in this really volatile market, of course, with the shipments and so on and cost of transport and so on. The prices has been a strong growth driver for both business areas. We'll come back to that a bit. If we look at operating income, we had a really strong recovery in volumes in the business area Duni in napkins and table covers that, that improved the fixed cost coverage in the business area Duni. High inflation is still pressuring margin while price increases are compensating, I'll come back a little bit to that later on as well. The indirect cost increases as market activities normalize. So the whole organization is starting to gear up again due to customers popping up. In the quarter, we also had a government support of SEK 34 million and that's compared to government support of SEK 64 million in 2021 in the second quarter. If we look a little bit on the year-to-date, as you all know, the start of the year was still impacted by restrictions, but it's gone down a bit, as you know. But -- and also, it was a bit less than compared to 2021. It eased up in Q1 and fully removed in Q2. There were some countries may be delaying a little bit on certain areas in some countries. We had a really strong sales through the retail channel in both Q1 and Q2. The price increases support both growth and our margin. And then on the operating side -- operating income side, of course, the recovery volumes are really important for the business area Duni, and that has been a really big driver for the improved results in business area Duni. The increase in cost for raw materials is continuing as well as for energy as everyone know and logistic services puts pressure on our margin. And the price increases trails a bit the cost increase. We are chasing a little bit rolling wagon here. And as you can see, government support in the year-to-date and the half year was SEK 34 million as compared to SEK 97 million in 2021. And I hand over to Magnus to go into the business areas.

Thank you, Robert, and good afternoon, everyone. So I will now go through our 2 business areas a little bit more in detail, and I will start with business area Duni that represents the products like napkins, table covers and candles. So as we indicated already in Q1 report in April, the second quarter was basically unharmed from any restrictions in HoReCa, frankly, with strong growth of almost 85% in the quarter, ending close to SEK 1 billion. And margin for business area Duni improved significantly and ended on 7.3% or SEK 71 million. So I can move into a little bit more detail in next page. We can again confirm the strong correlation we have between the restrictions and the net sales, which we have said earlier. Basically all markets are now open up with few or non restrictions in the second quarter. Although, we did notice some delay in the German market until end of May before the volumes picked up. But all in all, we are approaching record high sales levels in the second quarter, and I think it's been obvious to each and every one of us that has tried to book a table with short notice, it's been very booked and very difficult to get. So there's a high demand. Price increases have influenced sales since we initiated price increases already mid last year actually. However, since inflationary pressure remains very high and cost continues to increase, especially notable in the last month, it's a record high energy prices. So we have, in the second quarter, initiated new price increases, which will be implemented during the second half year, although main part before we move into the fourth quarter. It is also worth mentioning as Robert did that last year, the second quarter was contributed with almost SEK 70 million, SEK 64 million in governmental support, mainly coming from Germany. In the second quarter this year, we did receive the final payment for our application that was made for the first half year 2021. So reviewing the underlying result improvement, the result improvement is close to SEK 200 million year-to-date in operating income. So if we now move over to BioPak segment, which is offering sustainable food packaging. We continue to see good growth, almost 20%. However, we also see an enormous cost pressure, especially influencing the business in Europe and their margins, and they are now down to 3% for the quarter, equal to SEK 20 million. We'll move over to the next one. The restrictions during the pandemic were directly primarily towards table service, which resulted in an increase for takeaway. The change in consumption pattern was stronger in the comparative period than in the first half of this year, which limited growth a little bit. The underlying trend of strong demand for environmental adapted products has remained clear, and that is a strong growth factor for the business area. In the second quarter, the product portfolio saw a shift from the takeaway to serving products, which previously negatively affected when we had the restrictions, but limited social events. So we do have a natural hedge within BioPak and not only within the 2 business areas. So price increases have been implemented, but clearly, the cost has increased further, pushing the margins down, and that is especially valid for Europe being really hurt, while Australia has managed to keep up the margins to good levels and also bigger growth. And what's especially has been a challenge in the second quarter has been the storage cost for our European business. To secure delivery performance in this very challenging environment, we have increased the stocks for certain products. And at the same time, we have seen a dramatic increase in logistics service costs, as Robert mentioned earlier. Some we do see as more temporary, but others will continue to push margins. So new price increases are initiated in the quarter for business area Duni. They will have a gradual effect from the third quarter. It's also worth mentioning that Duni Board of Directors have during the quarter, taken further steps of evaluating various strategic alternatives to maximize the long-term value of BioPak Group, which is the Australian part of the business. Move over to Robert.

Thank you. As I mentioned, I think before as well, we have a decade of action, and we want in our journey to become a really a purpose-led company. We want to inspire the world to give more than we take in order to -- yes, let people enjoy a lot of good food, well-being and so on as we together that has to be for today and for generations to come that is our purpose, driving the company. And we have a vision of achieving full circularity in 2030 and be the trusted sustainability [indiscernible]. We are working on this. We have 3 targets becoming circular at scale, going at 0 and leaving the change. We also measure the carbon intensity index on Scope 1 and 2, which is tons CO2 per ton self-produced product, where we had a baseline of 100 index in '19, and we are at 41 actually for the first half year. It's a little bit -- we have just mentioned 6 months, but when we mention 12 months, that would be a little bit higher because during Q2, [indiscernible] was very low due to no use of heating in the factor of natural gas and so on. So we are targeting 40 index in 2025. If we look a little bit on the goals we're having, becoming Circular at scale, Going Net Zero and Living the change, what have we done kind of activities here to achieve that long term. We partnered up with, an example is, Sweden Rock Festival where we use fiber products instead of plastic to reduce plastic. We partnered up also with UNICEF in the Netherlands for Ivory Coast project where also focusing on removal of plastic. And we are engaging a lot in workshops and different places like [indiscernible] and so on in order to look into circularity questions and so on. If we look at the Going Net Zero, we are improving our efficiency and reducing the carbon footprint through pallet optimization project. We are installing solar panels in Bramsche now. We also took a decision to install solar panels in Bangkok, and we're launching the Scope 3 projects where we were looking to the whole Scope 3 as well, and that will -- that is also a long-term project. And also, we have taken a decision to link to Duni Group to the SBT targets. We're also -- Living the change then. We're working a lot around these things and pushing the whole organization here as we -- the following activities. We have ambassadors appointed in company and trained. They will use the train method here, trying to train method in the company. We'll also become member of the Charter of Diversity, and we completed as Early Adopter in the UNGC program. And yes, we can move over to the financials.

Thank you, Robert. So if we start with looking into the income statement, it is clear that I think the improved demand and increased sales is the main contributor to the increased operating income for the quarter. But as you can also see, the gross margin is severely challenged and slightly down, although price increase has been implemented. And I think we have previously referred to the German producer prices, annual producer inflation in Germany, the official numbers has now surged to 34% in May of 2022, 34%. So that is a new record peak for the sixth straight month. The figures reflect the effects from the Ukraine war with energy prices, I think, remaining the biggest upward contributor. As mentioned in these special times, we need to work intensively with price compensation measures, and we do that in close dialogue with our customers, but also continue to working with cost reduction measures. To summarize the business areas, we do see a strong growth in both areas. The cost pressure is also, I would say, extreme for both areas, but in particular, BioPak European business. With the growth in Duni, you can see that business area Duni is back to being the biggest business area again, although BioPak has established itself as significant part of the group and clearly above 4% share for the whole group. Cash flow is positive in the quarter and actually contributed from slightly lower levels in inventory. However, as we previously have stated, we are on high levels in certain areas, especially in BioPak, and we will work to take down stock days in the coming quarters. Accounts receivable is the main explanation for pressure on cash flow, but that is related to strong growth and not an increase in overdues, which is stable. So for the financial position, as you can see, net debt is slightly up from a year ago, but with improved outcome on rolling -- versus rolling 12 months EBITDA. It is basically 2 factors that's driving a slightly higher level in debt, is the inventory level, as we have stated before, and also the strong growth having impact on accounts receivables. And also, as you can see, return on capital employed, excluding goodwill, continued to increase and now up to 17%. Finally, our financial targets, and as you can see, we now have a very strong growth from low levels coming through the pandemic, but clearly above the levels of 5% being our target. BioPak has been the growth driver in the last years during the pandemic and continue to contribute to fulfillment of this target. But now also business area Duni drives the growth, and that's really promising to see. As stated several times during this conference, our margins suffer from extreme cost levels that will be mitigated by further price increases. We will also see positive effect in better absorption in our production units for business area Duni. It is indeed exceptional times, but we are confident with the value in our offer and our plan for price increases to be implemented going forward as we speak. So with this, I thank you all for listening, and I hand over to Robert for final comments.

Yes. Thank you for listening. And yes, there's a summary I have to say, I think it's great that all the restrictions have been eased up here in quarter 2, and we have seen a very strong recovery in the HoReCa market, which is great. People are coming back to the restaurants and are together again and really eating a lot of good food and other things. And we are really looking forward to a good restaurant summer here, where people will visit the full HoReCa market. So Yes, thank you for listening. And now we hand over for questions.

[Operator Instructions] Now first question comes from the line of Karri Rinta from Handelsbanken.

Karri from Handelsbanken. First question about the price increases that you have -- you are implementing. The first question is that the -- I think you mentioned that for the BioPak, you do expect some improvement already from the third quarter, whereas for the Duni division, it's from late 2022 and more so maybe in 2023. So why is there a longer lead time for the Duni division? That's my first question.

Thanks for the question. And sorry, maybe being a bit unclear. The implementation is actually for both business areas, gradually from Q3. We do see some contracts in retail, mainly moving into end of 22, maybe early '23, but that is an exception. So for both business areas, there is a gradual increase from the third quarter.

Okay. And then a follow-up on the -- on Duni, you mentioned that the previous price increase was mid-2021. Why did you wait for this long to reengage your customers with pricing discussions given that power prices have been rising and energy costs have been rising for quite some time.

Correct. They have been rising for quite some time actually going back almost a year and we had a clear intention to protect our customers not to increase more than needed, so to say. And therefore, we had to take this several price increases when we have seen a continuous increase in cost, which has just accelerated. So of course, knowing what we know today a year ago then we might have acted differently, but it's also been in the interest for our customers not to be too await and not to be overly aggressive and [indiscernible] with the customers. That's been very important for us.

Okay. That sounds reasonable. Then the -- can you remind me of the product flows and the value chain in the BioPak business, is it so that the European part of BioPak relies on imported finished products that come from Australia? Or are you importing raw materials that then are converted in Europe? If you can just remind me of how does it actually work?

On the BioPak side, we are importing, yes, ready products from mainly Asia, yes, and then not [indiscernible] already to the Europe, but it's more from Asia side. So ready products, not raw material on that part. The Duni part we produce 100% yes, ourselves on napkins and table covers.

All right. And then finally, the mentioned process with BioPak Australia. I think you mentioned in the release that you had costs of close to SEK 10 million in the second quarter. So that's a quite sizable cost for this process. So can you be more specific about what have you done so far? And I don't know if you don't want to make any -- I understand if you don't want to make any guesses on what the final outcome will be. But -- so what exactly have you done so far?

No, I think we have been putting a lot of focus and emphasis on investigating different opportunities, and that includes finding a good understanding of the market and working closely with advisers and so on, on what could be good long-term options. And yes, so a lot of focus on evaluating different options. Yes. We get the good understanding of that.

Should we expect this to be a run rate -- sort of a quarterly run rate of this advisory cost until there is a solution or how should we [indiscernible] numbers?

It all depends, of course, on the market environment and how it plays out and also what is good for Duni Group. But it's not impossible that we pay out like this. Yes.

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

Okay. Great. Yes, thank you for listening in and good questions. And yes, I wish you a great summer, and we see each other soon again. Thank you.

Thank you.

This now concludes our conference. Thank you all for attending. You may now disconnect.