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 now hand over to Robert Dackeskog. Please go ahead.

Thank you. Yes. Hi, and welcome to the Duni Group Q2 report. Yes, we're building a platform for sustainable growth, Duni Group. First, start with some highlights of the quarter. So sales continue to increase and the market show resilience with healthy demand. People are out eating, traveling and so on, in the same pace. Price compensations measures were taken in 2022 and in the beginning of 2023 here. And together with high efficiency in our production, the gross margin has strengthened. I'll come back to that more as well. So historically, strong Q2. The operating income ended up at SEK 170 million, which is an increase of 87% versus Q2 2022. And operating cash flow of SEK 354 million derived from inventory reduction and a good result. If we look at the agenda for today, we will run through a little bit around the market. Q2 summary, businesses areas, innovation parts for Duni Group. Sustainability targets and the financials and Q&A in the end. So if we look a little bit on the market data, we don't yet have any new data for Q2 2023, so that's a bit lagging. Of course, there's a lot of uncertainty in the future still. But we see a lot of resilience with the consumer during Q1 and what we've seen in Q2 as well without getting the data, of course. And in the first quarter of 2023, the market was still in recovery in terms of volumes compared to 2019. And if you look at the graph on the top right there, hotel reservation is still slightly below 2019 for most European countries. There are some U.K., Italy are up, and then most are a little bit below. And as you know, the last 12 months has been normalized with no restrictions in the market. So from Q2 last year, we went into a normal world without restrictions in the restaurant area. So we're meeting Q2 where there were no restrictions last year. And we can see that there is a growth in the seating in the past months here, which is positive. So if we look at the short factor about the key financials in Q2. We were up net sales of 12.3%. And then the operating income ended up SEK 170 million versus SEK 91 million last year. And operating margin ended up at 8.8%, which was -- versus 5.3% last year. So a little bit more details then in Q2 comments around the net sales. We had a significant growth in absolute terms. Currency and price adjustments were the main drivers of this growth. There is a solid underlying business with normalized sales now to the restaurant segment. We are in a normalized world, as I said, meeting same normalized behavior as last year. There is a little bit dampened demand for takeaway in Europe after the pandemic, while growth outside of the Europeans continues mainly in Australia. And the operating income then in the quarter went up plus 87% and this is a historically high operating income in absolute terms for Q2, which is good. There are normalized margins for the second quarter, almost 9%, as I said. And there is a balance between cost increases and cost compensation is the main driver for our improved results. And we will move into the business areas, and I hand over to Magnus.

Thank you very much, Robert, and good afternoon, everyone. So as Robert said, I will now go through our 2 business areas, a little bit more detail. I'll start with the Business area Duni, as it represents our products for the dining solutions like napkins and table covers and candles. So Q2 showed a growth of SEK 175 million, and that is equal to 18%, ending on SEK 1.15 billion for the second quarter. Operating income almost doubled ending at SEK 134 million, and that's a margin improvement of more than 4 percentage points and ending at 11.6%. So some more in-depth comments for Business area Duni. Second quarter last year was a quarter with no or very few restrictions at least from a COVID perspective. And consequently, a comparison is possible without any of these effects, as Robert stated. It is clear that the HoReCa segment continues to show resilience, although we have some headwinds from macro perspective with high inflation and higher interest rates, and that affects, of course, the disposable income for the consumer. Sales has also contributed with both favorable FX rates and price compensation measures. Corrected for this, we can see that the volumes are almost aligned with last year, slightly down for retail and slightly up for the professional part, especially premium napkins continue to be strong. That is partly contributor with a well-received launch of our newly introduced BioDunisoft napkins. We mentioned it last quarter, and that increased the whole relevance for the segment. As we have informed and a very relevant topic in the last 1.5 to 2 years, the price compensation measures taken last year, but also in the beginning of this year has clearly contributed to the margin recovery. I think this, together with higher efficiency and lower cost per ton produced, has resulted in the operating margin of 11.6%. And as you can see, a continuous positive rolling 12 months on the curve to the bottom right. We can also confirm in the quarter that the inflation has slowed down and some of the raw materials are decreasing and in line with last year actually. However, I think it's important to state that the production costs as well as the inflation, in general, not least the salary inflation, is significantly higher than we saw pre-pandemic. So to sum up, a solid second quarter with clear margin recovery and increasing sales. So if we look on the business area BioPak, focusing on products with food packaging, like takeaway trays, cups and other fiber products for mill service. We see a sales increase of 5% and an improvement of the operating income as well as an improvement in the margin, ending at 4.6% from the last year of 2.7%. So if we take the next page, then we can state that the growth pace is lower than seen in the last quarters and especially versus the very strong quarters during the pandemic. Main explanation is slightly lower volumes on takeaway in Europe versus last year, which was very strong and boosted by contracts that we -- that was taken during the pandemic when we were able to deliver in contrast to many other players. Unfortunately, we have not been able to keep all of these volumes. However, if you look on sales outside Europe and especially Australia, continue to be -- to show positive development with good momentum. Albeit stock write-down in the quarter of just above SEK 20 million, we see that the margin strengthened, and the result in absolute terms is also clearly better. Container costs, which we have talked about a lot as well in the last years has imploded and significantly down. This is something we will gradually benefit from, but also means that we need to adapt our prices to the lower cost level. So overall, we see a strong need for sustainable products in this segment of food packaging. One example is the newly launched cups with water-based barriers that gives a fantastic opportunity to shift out the plastic alternatives. I will now hand over to Robert, again, to inform you a little bit our ambition to strengthen our position of being the trusted sustainability leader.

Thank you, Magnus. Yes, our aim is to become the trusted sustainability leader in our industry, and we are engaging in a lot of different things around this and driving sustainable innovation projects. And one part is what we call our lab part, where we have worked with the BioBinder, our product with the napkins, the Dunisoft and also the table cover, Dunicel products to change that. We have done that with the cooperation with OrganoClick, a Swedish company. It's been a great development. And also, we are working with composting corporations for our napkins with BicyCompost in France, also interesting cooperation. We talked previously about our partnerships with Bumerang and Relevo where we invested in these reusable companies who wants to create systems for circularity. And also, we have started to work on our own start-ups Idun and Unmo. And Idun is a circularity system where we're looking into both for single use and reuse products. And Unmo is a platform and community for getting restaurants and the potential employees to the restaurants to get together. And if we look at that a little bit more, the Idun, which we presented in Almedalen, a pilot was launched with very great interest from the industry. And of course, there are legal aspects coming in from 1st of January, there will be a demand of restaurants to have reuse as -- in the restaurant for fastfood chains, for example. So an interesting area to look into, of course. And the Unmo project, where we have started now to launch this digital community in Malmo, which is the first out there, and we're starting the pilot there. And then we would like to, of course, expand that more as well in the future. So that's a little bit more about the innovation progress we are driving in order to become the sustainability leader in our industry. And as previously, we have 3 big sustainability initiatives and targets. It's becoming circular at scale, which some of the innovation products I talked to here is solving them, and going net zero and living the change. And if we look at these 3, we -- in order to become circular at scale, we did a pilot test now in Visby, Almedalen here as a first step. And also here, in terms of KPIs, we are measuring the use of the fossil index. And it's at 65%. We have an aim at 50% for 2025. So we have 15% to go there until 2025. We're going net zero. We're doing a lot of activities, sometimes big ones, sometimes small one. And in this quarter, it's a little bit a lot of things, but smaller things, like installation of charging post in the factory in Germany and so on. But here, we have a KPI target of reaching index 37 compared to 2019 then, and we are at 38 for the Q2 2023. So a good way there as well. And within living the change, also here, Idun is part of that, of course, to help that change. And here, we're measuring EcoVadis, which we got a score of 73, which was an increase from 2022, but aiming for Platinum in 2025. So good progress in all these 3 areas for us. Now, I'm handing over to Magnus for the financial.

Thank you so much. If we start with the income statement, we can see that the -- we increased sales close to SEK 2 billion in the quarter, and the gross margin strengthened from 16.4% to 22.7%. And main reasons, I think, has been mentioned during this presentation, but again, very much related to the price compensation measures taken and also the efficiency programs that we have been running. It is also noticeable that we are investing clearly more in 2023, as Robert just mentioned, to be in the forefront of relevant solutions to strengthen our existing portfolio around circularity. But also looking into new business models and technical platforms to offer solutions on broad scale to the HoReCa segment. We see this as the true meaning of being the most trusted sustainability leader in the industry. The margins at 8.8%, which is in line with levels we have seen in the second quarter, also in the years before the pandemic. If you look on the rolling 12 months, it's now 8% on operating income and net income equals now to SEK 7 per share. Commenting on a little bit on the business areas, again, we see that the BA Duni has improved significantly from previous year, now above 10% for the quarter, but also year-to-date, as you can see. BioPak also recovers from the tough period of massive cost increases in a very difficult environment to navigate in the terms of supply chain and securing deliveries for quite some time. And now we have a positive trend in the operating income as well as the margin. So if you look on the quarter 2 from a cash flow perspective, it's very similar to the first quarter with clear contributions from both the improved EBITDA, but also significant lower inventory. Most of the inventory reduction there from BioPak has been a clear ambition for us. So looking at the rolling 12 months, operational cash flow is more than SEK 700 million, which indicates a strong cash conversion close to 100% versus EBITDA. So as you can see on the next page, showing our financial position. This strong cash conversion has led to net debt decreased with SEK 500 million versus a year ago. And of course, an overall stronger financial position with increased headroom going forward. And finally, the return on capital employed is now above 20%, excluding goodwill. And the last page here, as you can see in our financial targets and mentioned several times, we continue to see strong sales growth development, and we are clearly above the 5% target, rolling out 16.6%, thereby by price compensation measures, foreign exchange but also a solid market in general. Unfortunately, we are not yet able to reach our margin of 10%, although the trend is positive. We are now on 8%, and that's an increase from the previous quarters. And finally, our target is to pay out at least 40% of our net profit as previously communicated. We paid out SEK 3 per the dividend, and that fulfilled the target of at least 40% -- actually 70%. So with this, I thank you all for listening, and I hand over to you, Robert, for final comments.

Yes. Thank you. And I think, yes, also, a good summary here. I think, yes, very short then. Yes. Q2 then continued good demand. Historically, a strong result in Q2 in absolute numbers. And also, I think a lot with a focus on the sustainability and circular solutions. We really want to help the restaurants and the fastfood restaurants to be part of the circular economy going forward here. So a lot of focus on that. So I think that summarized the Q2 pretty good. Thank you. Now some Q&A.

[Operator Instructions] The first question is coming from Karri Rinta at Handelsbanken.

Yes. Karri from Handelsbanken. A few questions from me. Firstly, about the cash flow and the working capital. So how much more do you think that you can release? How much more cash do you think you can release from inventories? Or do you now consider inventories to be at a more normal level? And then related to that, the inventory write-down in BioPak, so was that an adjustment of inventory values? Or did you actually scrap some materials?

Yes. Thank you very much, Karri. If I start with the first question, I still think that there are some potential in BioPak, if you're looking on the days. It should be -- we have an ambition to further reduce it, to optimize it. The inventory for BA Duni, I think, is well managed and on a good level, but still some potential for BioPak. That's our ambition. When it comes to the scrap or write-downs, yes, it's correct. And as mentioned, we did take some. Not that -- it's more related to slow mover provisions. So hopefully, we are able to manage that in a good way. But there are some, as always, adjustments that we need to take. A little bit higher in the second quarter, but also to give potential to move out the stocks quite quickly. So yes, a little bit higher provisions taken in the second quarter for this type of adjustments.

All right. All right. Then tax rate. Tax rate has been low now for the first and second quarter. So should we expect a higher tax rate for the remainder of the year? Or is there something that sort of keeps the tax rate lower for the coming quarters as well?

No. You should expect basically the same tax rate. There are some quarterly adjustments from time to time, but over a long run, it's basically the same level, around 23%.

All right. That's helpful. And then the demand picture. So you're saying that, that takeaway food was a bit weaker in Europe in the second quarter, but that was pretty much sort of the only clear area of weakness, but then for the second half, I guess, it's reasonable to be a bit more cautious also when it comes to the Duni division. So are there any geographies that you could single out either as positive or maybe getting a bit weaker? Or how should we think about that going forward?