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. Please go ahead.

Hello. And yes, welcome to the interim report for Q3 '23, where we're building a platform for sustainable growth. And yes, starting out a little bit with the highlights of the quarter. So sales continued to increase with strong market resilience, but we saw some weak demand at the end of the quarter and we'll come back a bit to that, but we met quite strong numbers on Q3 last year after the pandemic and all the restrictions opening up last year in the summer. The margin came in with a trend shift and are back on levels before the pandemic. And the operating income had a significant improvement compared to the same period versus last year. And also, a very strong quarter historically, of course. We had good cost control and reduced inflation rates are the main drivers behind the results. We'll come back to that as well. So the agenda today, market outlook, Q3 summary, looking into the business areas, talking a little bit about innovations and where we always sustainability targets and then financials and at the end, Q&A. So if we look into the market outlook. The HoReCa market will continue to have a volatile recovery short term and a stable recovery long term. That's what we see. And if we look at the below left graph, it shows the volume in the HoReCa industry in Germany compared to 2019. And to the right there, it's around 10% below in Germany. Also, these seats are 10% lower versus 2019. If we look at the graph on the top right there, visits and but it's actually increasing and has increased, of course, from the bottom in 2020. And the outlook '24 is that the visits will come back in '24 a bit more versus than '19. So that's quite stable, stable market in '23,'24. Below right shows reservations versus last year and shows stability towards 2022. So that one is also Germany bookings seat reservations. And it's pretty stable at the end there, you can see as well. In Sweden, it's a bit different where we are back at the 2019 numbers in reservations, and visits in the market. So for us, we feel also that we have a resilience in having 2 business areas: one focus on the restaurants and dining occasion. And the other one takeaway on the go products is a very good balance if consumer behavior is changing. Also, our Duni Group's good financial position will enable us addressing profitable long-term growth opportunity in the future. Short key financials. The net sales increased by 5.5% to SEK 1.9 billion and operating income was SEK 225 million versus SEK 154 million last year in quarter 3. And operating margin is 11.6%, which is above the 10% target we have, and is back to the pre-pandemic level, so to say. More in details. Overall, the net sales up then and a record high in absolute terms. That's important to know. And the turnover, of course, increases from currency and price adjustments, while we saw a slight volume decrease in the quarter. There are negative growth in fixed currencies, mainly due to the high comparison numbers versus last year where we had the Q3 coming back from restrictions, mainly in Europe until June, and then the autumn was very good last year as well, coming back a bit more into the both business areas around that. And operating margin, plus 46%, all time high there, and it's back to the historical levels for the margin percentage, of course. And think the balance between cost increases and cost compensations are the main drivers for our improved results during the quarter. So I hand over to Magnus to go into the both business areas.

Thank you, Robert, and good morning, everyone. So I will now go through our [two] businesses more in detail. And as usual, I start with business area Duni represents our products for the dining solutions likely in napkins, table covers and candles. So Q2 showed a growth of SEK 146 million, that is equal to 14%, ending close to SEK 1.2 billion for the third quarter. And as you can see, operating income grew by almost 50% to SEK 170 million, and that's a margin improvement by 3.3 percentage points, ending at 14.3%. So a little bit deeper look at the business area Duni. We can see a continuous strong sales increase. However, this is impacted by favorable currency rates. And if we also take the price compensation measures that has been taken in the last 1.5 year, we see that we're actually down a little bit in the volumes for the third quarter versus last year. So the recovery in the HoReCa market has been volatile, but I think it indicates strong resilience. The decrease in -- as we see in disposable income for the restaurant visitor is clearly mitigated by a strong wish and need to continue to meet, as mentioned several times. Reviewing the Duni sales, we see that the restaurant segment indicates slight growth, while the retail segment decreases in volume for the quarter. So this is actually a positive mix effect. While we see contrary slightly negative mix effect that we're growing a little bit faster in commodity napkins versus premium napkins for this particular quarter. The margin improvement, as you see, is mainly coming from cost reduction program that we already initiated during the pandemic now being leveraged when we reach better volumes since that time period. Second, we do see that the inflation is coming down from the very, very high levels we saw by the end of 2022. Still, I think it's important to notice that we continue to see high-cost levels, mainly more than 20% above pre-pandemic level '19. Some raw materials that have been decreasing over the year, last year now from extreme levels is actually with a slight trend break and now on the way up again. So that's something we watch carefully. To stay competitive, we have adapted the price levels on certain tenders and commodity business. That means price reductions versus previous quarters. When it comes to the Duni branded business, we are confident that our efforts and investments we have done to have the best superior sustainable solutions with low emissions is in materials -- will be interesting for both the existing but also for new customers. So the fully compostable and fossil-free Bio Dunisoft napkin that we launched earlier this year in the third quarter had continued to develop well, but we also launched several new series of Bio Dunicel and that's the table cover a new material with a significantly lower emission impact. If we look on the business area, BioPak, which focuses on products within sustainable food packaging, like takeaway cups and other fiber products from in-service, we see a sales decrease of 5%, but the operating income is actually developing well with increases to 7.4%. So if we take the next page, then the slight decrease is partly linked to strong numbers last year that Robert mentioned, especially outside of Europe. We, at that time, secured some significant large contracts with a lot of pipeline failing in the third quarter. We had a result that was at that time, 20% increase versus 2021, a 60% increase versus '19. So again, exceptional numbers in comparison. But nevertheless, decrease is confirmed in the quarter, and I think it's attributable to lower growth level outside of Europe that previously up until now explain fully the growth seen in the last year or 2. Despite the lower sales levels in the quarter, we see better mix and clearly lower cost connected to our inventory. This is contributing positively to the margin improvement that we see. We not only have a lower stock but clearly with higher quality, meaning less risk for further write-down costs or obsolescence. We are operating, I think, in an industry with a fundamental change from plastic to fiber that has been going on for quite some time, as well as other business models in reusable and recyclable alternatives with mono-materials. I think this gives some short-term challenges for some product groups but even more possibilities in the market that is [ steamed ] to grow up to double-digit long term, meaning 2030 and beyond. So finally, the business area began its launch of reusable range of mugs, plates and cutlery that will comply with the legislation coming to Sweden, for instance, 1st of January 2024 as well as some other countries in Europe. So I will now hand over to Robert again, to inform you about our ways of working and securing being the trusted sustainability leader in our industry.

Yes. Thanks, Magnus. Yes. We are engaging in a lot of different things around sustainable innovations. And of course, we try to structure this as we have our own lab where we're looking into changing binders in our materials, which Magnus touched upon with napkins, Bio Dunisoft and also for the table covers Bio Dunicel with a Bio binder -- so there, we've done a lot of work and now launching all these products in Duni. And then we work a lot with corporations, OrganoClick, which has been involved in the binder of the Dunisoft. And also with &Repeat, Bower and BicyCompost in France to look into different type of circularity to aspects of the market and potential solutions. And then we also invested in 2 minority investments in the reusable area where Bûmerang and Relevo is 2 companies that have start-ups that started to look into reusable for yes, cups and mugs and bowls and plates and so on in Europe. Bûmerang is in Spain and Relevo in Germany, and then we also have to start-up projects within Duni Group, and it's Idun also focusing on solving the circularity around cups and plates and those kind of things, both single-use and for reuse and Unmo, which is a platform, we'll come back to that. So we'll take the next slide a little bit more in depth there. But our 2 start-up projects, they progressed positively during the quarter. The Idun system that's tapping now into the circular economy, and we launched a couple of pilots in Sweden and Denmark during the quarter and got some new customers into this system, which is very interesting. It's of course, an early stage for the whole reusable market in Europe, and everyone is testing and trying here. And I think we've been good here. We've been quite early in this and learning and understanding a lot around this. So here, we're looking forward to see how things evolve. But it's a little bit a blue ocean for us, these things since we're not that big in certain of these areas where these kind of systems will be part of the solution for the restaurants and also for consumers. The Unmo project, it's a digital community of restaurants, owners and potential employees hooking up and driving the socially sustainable HoReCa market. This is -- we tested it in Malmo here and started to get some pilot tests and traction in that. So a very interesting projects that are driving us to become the trusted sustainability leader in the industry. If we look at, yes, our action, our decade of action here, our sustainability initiatives. We have 3 becoming circular scale, going at 0 and living the change, and I'll move to the next slide directly. So becoming circular at scale. Here, we are doing the pilot test of Idun, which is an important part in this. Growing net 0, we are doing initial upgrade of the dry unit enables in Skåpafors, our paper mill where we then enable energy efficiencies and improvements and also helping us reaching our target for net 0. So we are working towards all this. Delivering the change is a target we measure mainly yearly. But if we look at the net 0, we are at 37 in index. So that's good. That's the target for this year, and we are working hard to decrease that even more for the next year. So yes, I hand over to Magnus with the financials.

Thank you, Robert. So if we start with the income statement, we see that the sales increased by SEK 100 million versus the same period last year. And as previously stated, this is the best third quarter from a sales perspective and in terms of operating income perspective, the SEK 225 million is actually the best quarter ever, including fourth quarter which historically is the seasonal strongest one. The gross margin as well as the operating margin has improved significantly and is now on par with levels before the pandemic. And the operating margin is now above our 10% target, namely 11.6%. We also have in the last year, initiated several significant projects that Robert just informed you about to secure our relevance in terms of offering services and material solutions fulfilling our high ESG standards. And that you can see in the R&D for higher costs, but also in the digitalization seen in admin expenses. And the savings program we have mentioned in -- especially on the BA Duni is contributing to COGS, mainly in the gross margin, and that enables investments in this sector of R&D and other areas to future-proof our offer. And finally, earnings per share is now close to SEK 8, as you can see for the last 12 months. Commenting a little bit on the business areas. We see that both business areas improved not only in absolute terms, but also from a margin perspective. BA Duni share of sales is now 60% for the quarter. That's also equal to the proportion for the last 12 months. We take the next one and look a little bit on our cash flow continues to stay strong, especially so I would say in the third quarter, SEK 350 million for the operational cash flow. The amount for the last 12 months is SEK 1 billion, a very strong cash conversion, leveraging on the improved results, of course, but also that we have significantly lowered our stock, and that's mainly in BioPak. And that goes for both the stock inside of Europe and also outside mini-Australia. And of course, this gives us a very good position in terms of headroom for future investments. As you can see on the next page, showing our financial position. The strong cash conversion has led to that the net debt has decreased with SEK 800 million versus a year ago. And I would say, an overall stronger financial position with increased headroom going forward. And finally, the return on capital employed is now 27%, excluding goodwill. Lastly, as you can see, we continue to stay well above our growth target of 5% organic growth 11%. We are closing in on the margin target, 8.8% rolling 12 months. And finally, as you are aware of, the dividend target decided in May of SEK 3 per dividend -- per share would fulfill our third target, and that equals 7% of the net income. So with that, I thank you all for listening in and hand over to Robert.

Yes. And a short summary then of Q3. We had a strong quarter in a volatile environment. Our operating margins are back to pre-pandemic levels. And the uncertainty in consumer confidence is balanced by basic need to socialize. And I think there for us, it's -- people go to restaurants, not just to satisfy their hunger. It's also a way to socialize. And I think that need is very strong. And we -- I think we can see that in the German reservation numbers that it's actually stable versus 2022 still. So I think that feels that the balance is good there for the social need. So with that, I open up for questions.

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

I have a few starting with the energy prices that you mentioned that was a positive factor in Q3. Could you quantify that to some extent? Are we talking about low single-digit million impact? Or was it higher compared to Q3 last year because in Q3 last year, you commented in the opposite fashion. So that's my first question.

Thank you very much, Karri. Yes, it is clearly lower the energy cost. That is the case, and it's mainly attributable to our paper mill in Sweden. And for the quarter, I would say it is double digit, but it's on the lower side.

All right. That's very helpful. Then you make some comments around the volume outlook and you -- not volume outlook but volume trends that you have seen, so that the -- and maybe the -- it's been flat and then softening towards the end of the quarter. Are there any signs of customers pushing back on your sort of price compensation measures? And do you still have some price increase in the pipeline? Or do you feel that -- you have now implemented the necessary price adjustments. And now going forward, you're trying to stick to the price levels of today.

Yes, 2 questions there. I think we start with the demand in the marketing way. I think for us, we had a very strong quarter last year in Q3. A lot of business was made and also with the restrictions moving away in the summer. So it's a little bit hard maybe to see. But I think what we lean towards is that the numbers we're seeing in Germany and Sweden is that still people are out eating and so on. So it feels -- yes, it's this need of socializing is balancing up maybe the consumer confidence. And I think, yes, we have a lower share of our sales in Sweden. So if we look at the rest of Europe and the world, it's a little bit different situation maybe with the consumer confidence actually. And so I think we see a balance, and we will see here in Q4 what happens either way but we still are -- I think we are quite positive that the need of socializing is there very much and that driving us. And I think with our napkins we fulfill maybe the mid segment quite a lot. So if you were maybe eating at more expensive maybe place before, you're moving down a little bit maybe and that's our anyway core. So that's the positive thing. And when it comes to price adjustment, this is something, especially on the big maybe contracts where we see, of course, then we need to adjust the competition all the time. So that's maybe where we need to adjust, of course, according to -- and of course, pulp prices are driving quite a lot, but that's also we see it stabilizing and actually moving up a bit in the end here now. So yes, we'll try to adjust, of course, and be competitive on the big, big contracts.

And maybe just to add on to that, that I think you should separate the 2 things. One is the commodity business, the bigger tender contracts, as Robert is mentioning, where we try to be and we need to be competitive. But then we have more of the branded business where we invest in having superior quality materials with low emissions and so on, there, we need to get paid. And we see that there is a wish to pay for it as well, and it's increasing. So there's another agenda, and we need to stay relevant here to offer the best solution to the customers, then we will get paid.

And of course, as you asked also with the price increases, of course, we monitor the prices, of course, over the raw materials and everything and the rest and adjust to that. I think that we are -- yes, we're usually quite good at adopting. Sometimes it takes a bit longer because we are in the distributions and the wholesalers are in between in way, but we are, of course, monitoring and adopting.

And our next question comes from the line of Johan Fred from SEB.

I think you briefly touched upon this, but could you provide some additional color on the inventory situation in BioPak. I think you mentioned in the Q2 report that you're past the peak. But in terms of timing, when do you expect to fully have cycled through the inventory acquired at higher prices? That's my first question.

Yes, as mentioned in the third quarter, I think we're starting to reach a level where we see that. It's not -- maybe it's not an optimal level still, but it's definitely in a much better situation we've seen in the first half year. That goes for the size as well. We have taken down the stock, but it also goes for the quality, meaning that we have lower risk in write-downs, but we also have more adapted to the price level seen in the market. So we shifted out a lot of these items. So we're maybe not that fully, but very -- we're in a good way, I would say.