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

Ladies and gentlemen, welcome to the Duni Q4 interim report. Today, I am pleased to present President and CEO, Robert Dackeskog; and CFO, Magnus Carlsson. [Operator Instructions]. I will now hand over to Robert Dackeskog. Please go ahead.

Thank you. Yes. Hi, everyone, and welcome to Duni Group year-end report for Q4. We'll start short here with the highlights, and we'll come back to all of these things, of course. So the highlights for the quarter was that we had a growth of 27% for the quarter. The operating income strengthened by 40% versus last year. And the Board of Directors proposed a dividend of SEK 3 per share to be split in 2 payments. The fourth -- this is actually the fourth consecutive year Duni Group improved the score in EcoVadis, and we made a big step there, 69 to 73, which is great. And in Q4, also, we divested 25% of the shares in BioPak Lty to the Australian-based private equity firm Five V Capital in order to facilitate the next phase of the growth of the company. Yes. In the agenda today is that we look a little bit on the outlook. We have a Q4 summary. We move into the business areas a little bit more deeper and talk a little bit about our sustainability targets, the financials and then, of course, the Q&A in the end. So if we look a little bit on the market outlook. There's a little bit lower purchase power out there now. The demand is actually holding up very well in the -- for industry. And we can see that on the left side here, we have Germany as an example, that bookings versus 2019 is around maybe 10%, 20% better actually still. It's a big demand out there still. And also all over, if you look at the right side, we can see the different companies also, it's a lot of green numbers there versus 2019. So yes, it shows a healthy recovery of the HoReCa market and really high interest in going out to dinner and meets and greet and so on. A little bit to the numbers in Q4. We had an increase of 27%. So the net sales ended up at SEK 1.9 billion for the quarter. Operating income ended up at SEK 153 million, which is 40% up versus last year. And we ended up at the operating margin at 7.8%, which is versus 7.1% last year. So strengthening there. A little bit more details then what happened in Q4. We got a broad and strong recovery in the business area Duni. So our napkins and table covers came back with -- of course, there were no restrictions in the market anymore. So people could go out and eat and meet. BioPak Australia continued strong demand there, while Europe for BioPak was a bit slightly behind versus last year. And it feels like the consumer demand is holding up well in Q4, although there has been high inflation in the world. And we initiated price increases in Q3, which will have effect from Q1 2023. And if we look at the operating income, there was an increase of 40%, and actually, the profit improvement in the quarter, thereby from improved sales. And of course, with the napkins and the table covers back, that generates good recovery. The gross margin strengthened, but it's still a bit under pressure from general high inflation and the energy and gas prices. But although historically high inflation, the weaker U.S. dollar and the container cost show signs of easing now when we're looking forward. And now when I look at the full year 2022, it was another volatile year, of course, where the pandemic still affected that market in the beginning of the year and also then the war started in Ukraine in February. So it's been a bit another crazy year in that sense. But if we look then at the full year with a net sales increase of 38% almost, it's been a stable and accelerating growth throughout the year. And of course, that's connected with the restrictions easing enough over the year. The price increases initiated already in 2021 and also that we continue in 2022 are compensating for the inflation. The sales in Australia and recently also business area Duni in Europe with strong momentum, as I said, for Q4 as well. And of course, operating income picking up as well, plus 60%. So profit back close to prepandemic levels, business area Duni with strong recovery. We have a continuous and accelerating cost increase, it puts a bit pressure on margins throughout the whole year. And then BioPak Europe has been challenged then through a lot of disturbances in the supply chain, causing now a bit high inventory levels. And yes, I hand over to Magnus here to go into the details.

Thank you, Robert, and good morning, everyone. So I will now go through our 2 business areas a bit more in detail. Starting off with the business area Duni that represents some products like napkins, table covers and candles. So the Q4 showed growth of almost SEK 300 million, ending close to SEK 1.2 billion for the quarter. The margin strengthened and now about 10%, 10.7% to be exact, and equal to SEK 127 million for the business area. And that is an improvement of around SEK 40 million for the quarter. So 2022 ended with a confirmation that the HoReCa industry, and that means the home sales and restaurants, they have recovered well from the pandemic. And there is a healthy demand thereabout from a strong need to socialize and enjoy good company over food and drinks. That said, compared to the same period last year, sales are up 25%, and the increase is quite broad and confirmed in almost all markets. If you look at the retail segment, showed slightly lower growth that also explain that the restrictions that had a negative impact last year, mainly influencing the professional segment constantly, it is now a strong rebound in this area. So although the price increases or compensations have started to be significant and explain around 14% to 15% of the growth, the margins are still challenged by the inflation in general, but particularly a high cost in energy and gas, raw materials and not least the logistics costs. The improvement on the profit of almost 40% in the quarter comes mainly from the improved volumes and higher cost efficiency in production and for better cost absorption in all our production units. So we do see a weakening of the dollar, which is the main currency that's hurting the raw material prices. That have led to an easing of the cost pressure. However, the effect for Duni, bearing in mind the contractual lead times we have and the inventory, that will first be visible next year. We also, in the quarter, accelerated the launch of several new solutions for fully compostable and fossil-free solutions for napkins, for the BioSoft. We think this is important for our ESG agenda but also for any customer like a restaurant or hotel that wants their target to become fossil-free in their businesses reportings. So if we look on the business area BioPak, certain products on the go like takeaway trays, cups and other fiber products on new service, we also here see a healthy growth of around 12%. And profit versus last year, while margins ended on 3.4%, slightly lower than the 4% we had in the same period last year. The fourth quarter for BioPak indicate similar pattern as we saw in the third quarter. The business outside Europe, mainly in Australia is solid with growth clearly above the average for the whole business area, thereby from some significant contracts that we secured early in 2022. But we also see an underlying and broad demand for our products. Europe. It's important to note that is more dependent on the takeaway solutions like boxes and bowls, which now when we see the end of the pandemic, is slightly back versus a very strong demand in the previous year. So the fourth quarter experienced lower container costs from Asia to Europe on the spot market. This has not yet been materializing stronger margins for BioPak, I think firmly for 2 reasons. One is the lead time in our contracts that will allow for immediate reduction. And second, our stock, which is filled up during the first part of 2022 to secure deliveries to our customers, but they also had higher average prices for freight. And this is naturally a challenge for BioPak, but we see it as a temporary one. And I think in addition to the plastic sheets that we have talked a lot about and driving other solutions like fiber, we see the legislation creates different conditions for different markets. Composting, for instance, can be a preferable solution in some market, while reusable solution might work better in other markets or locations. I think this dynamic is quite complex, but the group and BioPak is well positioned to take the lead and offer the best solution through innovation and collaboration. Finally, we are very happy to welcome the Australian-based firm, Five V Capital, that bought 25% of the shares for around AUD 65 million. They will be a very important strategic partner for us locally that will contribute to fuel further growth going forward.

All right. Yes. If we move to next slide here, we -- this -- we work well in 2021, we updated our strategy, and this is Our Decade of Action, we call it. And we have 3 sustainability initiatives with targets, and we are measuring different things here. And one thing that we have mentioned it in the past year now is the carbon intensity index scope on Scope 1 and 2. And that's upon CO2 per ton self-produced product. And I'm really happy to see that we are at an index of 37, which is outcome of 2022. And actually, we had a goal for 2025 of 40, and then we say, okay, that's already achieved, fantastic. But we've done a fantastic job and the whole organization has done a fantastic job here. And the main reason is that we changed to fossil-free electricity in all our European factories. And also, we're doing small things as well as installing solar panels on all our factories and so on. So every bit counts. We have 3 targets. It's becoming circular at scale, it's going net zero and living the change to become this trusted sustainability leader. And if we move then a little bit shortly, so we have goals for 2030, we have interim targets for 2025. And then, of course, we do activities in order to reach that. And we can take a couple of example on becoming circular at scale. We are reducing our use of virgin fossil plastic and going down to -- we have a target in 2025 of 50% compared to 29%, and we are at 75% now. So that's great, moving towards that. Also, we are working on new circular systems and so on in cooperation with our minority investments in reusable options in Germany with Relevo and Spanish Bûmerang to leverage on the legal requirements that are coming in now. On the going net zero, as I said, the index is at 37, so really good progress there. And leading the change, which is then we want to become a trusted sustainability leader. And here, we actually -- as I said in the beginning, we have an EcoVadis score that went from 69 to 73, so goal level again. And we're reaching to get to more than 75 points and then moving up to platinum the future. So that's really good progress on Our Decade of Action. Magnus?

Thank you. Moving to the financials. We're starting off with the income statement. The continuous improvement in demand that we see on our products together with the price increases, is the main contributor for the operating income that increased by 40% in Q4 and more than 60% for this full year. The price compensation measures that we have taken that were initiated in the third quarter has not yet compensated for the high increase inflation but will be so in the beginning of 2023. The difference between operating income and EBIT for the fourth quarter explained partly by cost to sell up to 25% on BioPak. Commenting a little bit on the business area. We see again that Duni is again biggest business area with good growth. The margin has also strengthened about 10%, while BioPak still on levels being explained by the challenging environment in Europe. At the start of pandemic, the group had benefited from having these 2 business areas that complement each other, working a little bit of hedging versus the other, and we see this as a strength also going forward. Cash flow is positive in the quarter and the difference is related to inventory, as you can see, where previously we have seen a [indiscernible], loss, while in Q4 this year, it's significantly less. The focus on optimizing inventory especially in BioPak continues, and as said in previous quarters, we are now seeing positive effects in this. As you can see, the net debt, it's very stable versus a year ago. We do see higher inventories being the main reason for mitigating the effect from profit improvement and explained also by the general high costs we have seen, but also the temporary higher cost, especially in BioPak Europe to secure delivery after several years of challenges in the supply chain. Positive contribution is, of course, the sale of 25% of BioPak shares to Five V Capital, as said earlier, at the very end of 2022. And finally, here, I think for total capital employed excluding goodwill continues to strengthen and now above -- on 17%. Finally, as you can see and as mentioned several times, we now have a very strong growth, as explained by prices, a strong rebound in BA Duni and also general solid market demand. Unfortunately, we are not yet able to reach our market target of 10%, although the trend is positive and linked to the price compensation measures taken with higher cost efficiency in production as well as for other processes and important contributors. And finally, our target is to pay out at least 40% of our net profit. And as Robert previously mentioned, the Duni Board of Directors recommended at the AGM SEK 3 per share as dividend. So that would fulfill the final target. So with that, I hand over to Robert. Thanks for listening.

Yes. Thank you, Magnus. Yes, the short summary then of 2022. We have had a positive trend in both net sales and operating income over the year. And also, we are continuing to deliver on our long-term strategic objective to become the trusted sustainability leader in our industry. And we are really happy to welcome the new strategic partner to accelerate the expansion of our business in Australia. And we also believe that 2023 will hold a volatile world actually, but stable recovery over time for the HoReCa industry. So with that, I think also we'll take the opportunity to thank all our employees for a fantastic performance for the year and also the great trust from our customers. So thank you. And yes, we'll move over to Q&A.

[Operator Instructions] Our first question comes from Karri Rinta from Handelsbanken.

This is Karri from Handelsbanken. I have a few. I'll take them one by one. Firstly, it looks like table covers had the best quarter in 3 years in terms of revenues. So anything out of the ordinary in this number, maybe one large delivery or something like that? Or is this sort of the new postpandemic normal that we should expect going forward in terms of quarterly sales? And can you confirm that this product group is still a higher-margin segment compared to a group average or compared to Duni divisions average? That's my first question.

Thank you so much for the question. Yes, that's correct. I think as part of the -- in general, strong rebound that we do see with business areas [indiscernible] has also benefited from conferences and moving back to people actually to meet through catering and meeting up on those types of occasion. And that has contributed to this product area. As we have said earlier, if we look on the long-term trend, it has been quite challenging for this. This is our work to do. And spent quite a lot on innovation to improve these products, and also make them more sustainable, and we hope that will pay off also in the future.

And the margin profile for this segment?

The margin is as also, we have said, is good. And that is, of course, the ambition also, to continue to have a strong margin on these products.

All right. Good. Then BioPak and the inventories. Just a clarification, is this a -- do you have high inventories or is that your customers have high inventories? And then the container rates that you referred to, do you expect them to start effectively coming down for you already in the first quarter if we compare to the fourth quarter? Or should we expect a more delayed decline in container rates for you?

Yes. It starting to see the spot market that the containers go down. That is, of course, or will be positive for us. It will be a gradual impact moving into 2023, depending on the contractual agreements we have with different forwarders on this. The stock in itself is too high. That is related to the difficulties we have seen in the supply chain over several years actually, and we are working hard to optimize that. And that will also have a little bit of impact on how quickly we can benefit from the lower container cost that we are now starting to see in the spot market.

Okay. So just to clarify, so you -- Duni still has to high inventories in BioPak, and that's why it will continue to lower that inventory as we go along.

Yes.