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 you over to Robert Dackeskog. Sir, please go ahead.

Thank you. Yes, hi, and welcome, everyone, to the Duni Group Interim Report Q3 2022. Yes, we start a little bit with some highlights and short term. We had an all-time high operating income for the third quarter. The market consumption normalized, and we had a good comeback here with business area Duni with napkins and table covers and so on. Inflation and the high electricity prices continues to be a challenge, of course. And in the quarter, we committed to setting Science Based Targets, which I will come back to as well. Yes. The agenda today is we look a little bit on the market outlook, the Q3 summary, the business areas, looking at our sustainability targets and the financials and then in the end, the Q&A. Yes, if we look at the market outlook. We here have some numbers here from Germany and looking at the table, [ see for it ], the reservations. And Q3 are back at pre-pandemic levels. And actually, October indicates levels over 2019. So that seems positive still. If we look at the right one, we see the development in the main segments in Germany versus 2019, and we can see that the quick service restaurants are above 2019 and the other ones are a little bit below, but recovering more and more, of course. And I think we believe here and we've seen from 2008, 2009 during the financial crisis that the restaurant sector -- actually a lot of people wanted to socialize and went to restaurants and so on. So we see that there is a strong need for this as well and indications are coming back. Short key financials for the Q3. We had a growth of 26% versus last year in Q3. Operating income ended up at SEK 154 million and the operating margin ended at 8.4% versus 10.4% last year. And a little bit more in detail then. The net sales was up 26%, and that, of course, came from really continued strong recovery in the HoReCa market as we had the first actually full quarter without restrictions since the pandemic started. And the consumption behavior, we see is in line with the pre-pandemic patterns. We also had a growth in all regions, especially then in the Rest of the World with Australia. Of course, the price increase is a strong growth driver for both business area, Duni and BioPak. And we have further announced new price increases as the inflation is putting more pressure in the world. Looking at the operating income in the quarter, it was up 1.5%, and actually, the historically best operating reported for the third quarter, SEK 154 million. We see normalized volumes now in the business area Duni with the napkins and table covers and so on, and that improves our fixed cost coverage in the factories. There is a very high inflation pressure, as we know, while our price increases compensate. The indirect cost in the company are increased, of course, since activities are coming back to a bit more normal after the pandemic. We also have some high warehousing costs due to consequences of this volatile demand, especially on the packaging area. If we take a little bit summary of the year-to-date here. We are reaching SEK 5 billion, which is 42% growth versus last year for the first 3 quarters. And of course, the beginning of the year was -- there was still a lot of restrictions linked to the pandemic, but a lot less than in 2021 but some countries, especially Germany, that was a bit late there than the other ones so kept some restrictions into May. We see a really good recovery in the hotel, restaurants, event segments but with a little bit demand for take-away decreases since the restrictions that eased in the world. Throughout the year then the retail channel and the Australian market has been the strongest during the year in sales. And during the year, price increases has been very vital to protect our margins during the year here. Operating income then ended up at SEK 296 million versus SEK 169 million last year, so that was 75% up versus last year. And of course, the Duni which is coming back with the napkins and table covers is the strongest contributor to this as sales gradually now normalized during the year. There is a strong inflation, as we know, for raw material, energy and logistics services that put pressure on the margin while trailing price increases to compensate this. Last year, we had a government support of SEK 39 million. We had this year SEK 39 million compared to SEK 104 million in 2021 for the year-to-date. So we see a positive trend in both sales and income growth after the pandemic, which actually affected the start of the year. I now hand over to Magnus to go through the business areas.

Thank you, Robert, and good morning, everyone. So I will now go through our 2 business areas, and I will start with business area Duni that represents our products like napkins, table covers and candles. And Q3 showed a growth of more than SEK 200 million, which now brings the business area over SEK 1 billion for the quarter. So although profit improved in the quarter, as you can see, in absolute terms, the margin is unchanged versus last year, which also, you can say, is a seasonal average historical level. As you can see from the graph to the left, Q3 follows a trend of improving net sales as well as profit levels from the absolute bottom during the peak of the pandemic, which I think were in first quarter of 2021. And I would say that both the second as well as the third quarter are well in line with pre-pandemic levels. And since we are a vertical integrated in the business area Duni, the utilization in our converting factories. But not least, our paper mill in Sweden are very important contributor to the profit improvement that we are seeing through a better fixed cost absorption. I think that we, in the last 5 to 6 quarters, we have been talking about inflation and the increase in raw material costs that we are seeing. And we have, in the third quarter, seen a positive effect from these price increases to mitigate these costs. However, the recent energy crisis with a dramatic increase in both gas and energy prices, have forced us to diligently initiate new price increases during the quarter, and we should see positive effects from this by the end of the fourth quarter but the main impact will be in the beginning of 2023. Another challenge is the lack of personnel to meet the high demand that we are seeing. It is quite remarkable how quickly it can change just within a year actually. And this of course some delivery issues in this quarter, which we feel is a general challenge in the whole core industry at the moment. And the final comment for business area Duni is that we threw hard work in reducing our emissions. We have been able to sell off mission rights for SEK 5 million. And this is something that we now will invest further activities to accelerate our goal to reach net 0 by the end of 2030. So if we now move over to the BioPak segment, which is offering sustainable food packaging. We continue to see good growth, more than 30%, and that is equal to SEK 200 million also for this business area. We are meeting a strong quarter last year, and I think especially the European part, which represents almost half of the business area has seen challenges causing the margin to drop versus last year, and profit in SEK is, therefore, slightly down. As mentioned previously, the region outside Europe and especially Australia has had another strong quarter, profit as well as sales price. We have seen several large contracts that have been secured in the quarter and are already contributed to the strong sales that we have in this region. Europe has been relatively more hit by transportation costs, also raw materials and recently, the high energy costs. And consequently, this region explains the drop in margin. Europe is also more dependent on pure take-away concepts like boxes and bowls which we now see when we're reaching the end of the pandemic slightly back versus a very strong demand in both 2021. However, important to say is that we do see fundamental good and strong demand in the area of sustainable food packaging where fiber solutions will play a vital part to exchange all the plastic solutions. Also delivery performance has been an area challenge during the pandemic, but we have now, in the last year, invested in higher stocks to mitigate the effect from the very fragile supply chain from Asia. Of course, the higher stocks bring also higher costs. But of course, better possibility to deliver and meet the demand that we are seeing. As for Business Area Duni, price increases are now under implementation and also new ones are initiated to secure margins going forward.

Yes. And if we go over to our sustainability initiatives, we have 3 targets here becoming Circular at Scale, going Net Zero, and Living the Change. And on our carbon intensity, we put an index there from 2019, which is based on the Index 100, and today, we're at 39, which is then the tons of CO2 per ton self-produced product. And just some numbers there. In 2019, we had 45,000 tons of CO2. And now, so far, this year, we're around 30,000 tons. So for the full year, around 20,000. So that's good trend we're seeing there in our goal to reach Net Zero on Scope 1 and 2. And if we look further into our decade of action here, what we're doing, we have goals for these 3 areas in 2030. We also put some interim targets in 2025 and just want to mention some activities then in the quarter that we are committed in the partnerships in the multi-use solutions with governments and other players in the market and stakeholders. With the next target, whereas we're zero vision for the greenhouse gases, going at 0. We have committed to Science Based Targets, which is fantastic. And that means that we should be in line with the Paris Agreement of 1.5 degree targets. And this, we see, hopefully then depending on how long this takes, but within 2 years with our target of maybe during even -- during 2023 to set these targets. And more important also on the Living the Change, we have worked really hard and updated our policies for better governance in the company. So the G in the ESG. So a lot of new good things there where we have put the right policy in place and code of conduct that we are working now with. Okay. Then I hand over to Magnus again.