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

Ladies and gentlemen, welcome to the Duni year-end 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. Please go ahead.

Thank you. Hi, and welcome to this year-end report for 2023, where we are on the journey to build a platform for sustainable growth for Duni Group. If we look at the highlights for the quarter, is we strengthened the margins and improved our operating income versus last year. We have a very strong operating cash flow and low net debt that provides increased room for maneuver going forward. The Board proposed a dividend of SEK 5 per share. And we've done a bit of a change here. We're changing our business area name. So business area Duni is changing to business area Dining Solutions, and business area BioPak will change name to Food Packaging Solutions, which is a little bit more descriptive and doesn't then collide a little bit with the brands as we have as well. So more descriptive going forward. The agenda for today, market outlook, Q4 summary, we go into the both business areas, a look around our innovations, the sustainability, and then financials in detail, and then at the end a Q&A. So if you look at the market -- we have shown this before, and if we see the right picture on the top corner here, where you see the number of average check, visits, total spend. And we can see that in 2023, it's not back at the levels of 2019, so it's 10% lower visits. But the trend here looks like it's going to increase, especially in Germany, where it's been lower. In Sweden, we had the same amount of visits, that's before the pandemic. So a little bit different picture in different countries in Europe. If you look at the top -- bottom graph, we can see that in last December there that it's a little bit lower turnout of bookings. So this is OpenTable data that we're looking to for the last quarter of 2023. But if we look at the group's financial position, this enables us to address a really profitable long-term growth opportunities in the market, and we, of course, are in a very interesting market overall. If we look at the Q4 key financials here, our net sales was slightly down and amounted to SEK 1,971 million, and our operating income was up with -- from SEK 153 million to SEK 191 million, and we ended up with a margin of 9.7% in the quarter and last year it was 7.8%. So positive development there. A little bit more detailed comments for the group. The net sales, as I said, slightly down, and the sales are in line with last year's record Q4. What's driving is currency and prices are increasing, of course, the top line. In Q4, the retail channel declined, Christmas sales was lower than previous years. The market seems quite stable, but are not yet back at pre-pandemic level, especially, as I said, the German numbers here with less visits. And if we look at the operating income, it's been a significant growth in operating income versus last year, 25% almost. And the balance between cost and price adjustments are the main drivers for the improved result in Q4. Also, efficiencies in our production and procurement have strengthened the result. We have some one-off costs of SEK 20 million that is affecting the operating income which are included in Q4. We'll come back to that a little bit more when we go into the business areas as well. If we summarize the year, we have a net sales growth of 11%, positive turnover developments during the year. And of course, the main growth coming from the first half of the year. Cost compensating adjustments has been implemented during '22 and Q1 '23, that has significantly strengthened the top line in -- during the year. So sales towards the hotel and restaurant industry increase in volume, while volumes for takeaway and through the retail channels has decreased during the year. We had a 60% operating income improvement versus last year and it's record high in absolute numbers. The balance between the cost increases and price adjustments towards the market is the main driver for the improvement. We have had a high stock level for business area Food Packaging, which has resulted in stock write-downs during the year. [Technical Difficulty] second half of the year, which is good. And we have continued efficiency gains in our manufacturing and production and sourcing during the year as well, which also supports our result. Yes, I will go hand over to Magnus here to go into our business areas.

Thank you, Robert, and good morning, everyone. So I will now go through our 2 business areas more in detail. And our sourcing business area Dining Solutions, previously known as BA Duni, and that represents our products for Dining Solutions like napkins, table covers and candles. So if we look on the numbers, Q4 showed a growth of SEK 27 million, and that is equal to 2.5%, ending just above SEK 1.2 billion. Operating income grew by almost 40% to SEK 175 million with a margin improvement of 3.7 percentage points, ending on 14.4%. A little bit deeper look at the business area of Dining Solutions, we can see that sales increase was driven mainly by favorable currency rates and partly price compensation measures. However, this effect is now significantly smaller. So it's fair to say that volumes are down in the quarter and majority of this is derived from the retail segment, which is down from a very strong 2022. And as Robert mentioned, we could see a lower demand already at the end of Q3. And as the market data indicates, Dining Solutions experienced now a slightly lower demand in Q4. And the margin goes up compared to previous year, as said, and now on 14.4%. I think the efficiency programs that have been dominating since the pandemic have now resulted in a good operational leverage, and that has strengthened the margin and the result. So in summer, we see that many raw materials are now increasing again. They peaked at the end of 2022, gradual went down. And pulp is now up, for instance, with roughly 15% in summer. So I think the last year's volatility in raw material and energy has now become almost a new normal. And this is something I think we have been able to manage in a good way in the last years and, of course, also something that we will act upon as it develops. So to sum up, Q4 for Dining Solution a record high in terms of both sales and profit, although we see somewhat weakening demand, I think, impacted by the general economic uncertainty. So if we move over to business area Food Packaging Solutions, previously BioPak, focusing on products with sustainable -- within sustainable Food Packaging, we see a sales decrease of 4% in the quarter and a slightly lower profit of SEK 17 million from last year's 27 million, and that's a margin of 2.2%. So if we look a little bit also here a little bit more in the details, the slightly lower sales follows a long period of superior high sales from the pandemic years, '21 and '22, that brought significant growth for the business area. Main part for the lower sales versus last year is price reductions following a decline during 2023. And that's a compensation and adaptation that the container rates has come down from the end of 2022. So volume-wise, we are on par or maybe even slightly up in some product segments versus the same quarter last year. As many of you are aware of, we do see sharp increases again in container costs resulting from the war in the Middle East region and the attack from Houthi rebels on trade ships. And this increase has not yet been as dramatic during the period now, Q4, and I would say have limited impact during the quarter. But we naturally follow this carefully and, of course, in close dialogue with both customers and suppliers to mitigate any negative effects that could come from this. So -- but without a doubt, I think the last year has been a challenge, mainly for the European part of the business within Food Packaging Solutions. The high stock that was built during the time of the high container costs has caused challenges and lower profitability when the market prices went down, and this has impacted mainly the first half of 2023, but I would say the whole year. However, the stocks have reduced significantly outside of Europe and normalized in Europe, and this is now a clearly less impact. So I would just like to say that Food Packaging is an industry of transformation towards better and more sustainable solutions with sharp focus on how to reach circularity and very much on having the optimum materials. I think we have been in the forefront for many years in offering the best solution for our customers. We continue to invest heavily in this, not only to stay ahead of legal demands, but to offer the best solution for every eating and drinking occasion and regardless if it's recyclable or if it's reusable solution. So therefore, we are very proud to be able to launch a new series of products that is both plastic-free and with non-PFAS additive. This is a unique offer in the market. But also, we have taken some significant costs in the quarter for this, some phaseout costs, but also campaign costs, which temporarily burdened the results. We are also, of course, connected to an acquisition that we are happy to inform you about today, and we just closed it 1st of February. So Duni expands further in the APAC region with an acquisition of Decent Packaging within BioPak Group, and this acquisition will contribute approximately SEK 150 million in sales from 1st of February this year, and that's a profitability aligned with Duni Group. So we are very excited about this new acquisition that will strengthen our presence in the APAC region, but it will also have a very good foothold in U.K., they show very strong growth. And this will continue to broaden and strengthen our offer in this market. So the acquisition, just a final comment on that, is financed with the BioPak own loan facility, their cash and also shares from BioPak. And that will be consolidated in the business area Food Packaging Solutions. I'll now hand over to Robert.

Yes. Thank you, Magnus. Yes. As Magnus said, we are investing to become this trusted sustainability leader in our industry and focusing a lot on circularity and focusing a lot on our own start-up projects, Idun, Unmo. Let's now share a little bit around that. They are progressing positively during the quarter. We have increased the number of companies and potential employees in Unmo. That's great. We're expanding from Malmo to Gothenburg and Stockholm and moving on there. And let's see if this will fly. But very interesting. And it's a socially sustainable -- to create the socially sustainable restaurant industry that we can help with, where we play. And the Idun system is tapping into the restaurants into the circular economy with reuse, for example. And we've done tests with Liseberg, who wanted to enable circular food and beverage in their food court, also progressing and testing further. And if we look into our Decade of Action, our sustainability initiatives, we have 2 targets here: becoming circular at scale, and going net zero, where we're measuring carbon emissions for Scope 1 and 2, and Living the Change to become a trusted sustainability leader. And in the quarter here, as I said, we tested the system for reasonable servings for Liseberg. We also, as Magnus mentioned, launched a takeaway range with no additive PFAS or fossil plastic, which I'm very proud that we are the first in this. So really great job here. The second one is going net zero. We've got science-based targets approved. And Living the Change, we are really pushing e-learning in the company for sustainability. So if we move over to the financials, Magnus.

Yes. Thank you. So if we look in the income statement, we see that sales is on par with last year in absolute numbers for Q4. Price compensation measures only have a small positive effect versus last year now in Q4 and bearing in mind, as said, some favorable exchange rates. Volume is slightly down in the quarter. And as you can see, we have over the year and also in the fourth quarter increased our efforts in R&D. It goes especially so in circular solutions and products and the systems around this. We believe that this is a key to increase our future relevance, and therefore, very important. So we need to be involved in many different solutions, especially within Food Packaging since legislation and innovation industry is as intense as ever, and we simply need to stay on top of what is happening. Furthermore, we need to play an active role in guiding our customers and making good and sustainable decisions. I think Robert mentioned it very clearly just before. A comment specifically on the Q4 numbers that sticks out, maybe it's the tax, but is proportionally high in the quarter. But if you see on -- but this should be seen as a minor correction. And if you look over the year, it's on -- just below 25%, as we have indicated before. And earnings per share increased further, now above SEK 8.3 per share. So if we look a little bit on the business area, we see that Dining Solutions improved quite significantly from previous year. However, Food Packaging slightly below last year, partly explained by temporary higher costs connected to the product launches, but also the DD cost and the innovation costs. Our operating cash flow continued to stay strong and in the same pattern as we have seen basically throughout 2023. Main part comes, of course, from the improved result. But as you can see quite clearly, it's also from inventory reduction, especially in Food Packaging. We'll also say that CapEx is now back to depreciation levels of the 3 years with very low levels consequently from the pandemic. So with almost SEK 1.2 billion from operational cash flow, our net debt is significantly down, now below SEK 600 million. And this naturally puts us in a very good position for various capital allocations, so that the Board recommends a higher dividend, as Robert just informed you about. But we also see that we can now benefit from growth opportunities as well as CapEx improvements. And return on net capital employed is now above 30%, excluding goodwill. So lastly, as you can see, we are above our growth target of 5%. The Board recommends a payout of SEK 5 per share, and that equals 60% of net income, so also above our target. However, the operating income still being 60% higher than 2022, but still slightly below our target of 10% in the margin. So with this, thank you all for listening. And I hand over to Robert again for final comments.

Yes. So let me short summarize then 2023 here. We have strengthened the margins, as we talked around, and improved our operating income versus last year. And of course, the strong operating cash flow is really positive and low net debt, and that, of course, provides room for maneuver. And again, really happy that we could do the acquisition of Decent packaging here. And also that we are looking into the whole Asia Pacific area, which is a very interesting area for the future. And at the end here, the Board proposed a dividend of SEK 5 per share. So thank you. Opening up now for Q&A.

Thank you. [Operator Instructions] And our first question comes from the line of Johan Fred from SEB.

Starting off with sort of the issue head-on in Food Packaging Solutions, could you elaborate specifically on what drove the lower sales and earnings in the quarter, please?

I think we are operating in a niche compared to some of our peers, and we're trying very hard to shift some of the assortment to be future-proof and increase the relevance. And it's quite dynamic and sometimes you go wrong, sometimes you go right, and it's very much of interaction with customers being able to understand this and also to pay for it. And I think we are very successful. But in this quarter, I think we were slightly below our efforts in increasing. So short term, it is a bit dynamic. All data indicate that long term, this is a fantastic area to work in with growth between 5% to 15%. So it is very dynamic and it's a bit of a disappointing on the volume. It also reflects, I think, very high numbers we had in the – during the pandemic, so we are quite up from the 2019 numbers, but we are meeting very strong numbers as well that should be said.

Yes, on the lower margin in the segment as well. Is this due to the sort of still cycling through inventory acquired at higher input levels or it’s quite a significant drop-off, I feel. Could you elaborate on the margin development as well, please?

We -- I think it's important that we can go into maybe both a little bit to Europe and Australia here. And I think that the margins has been under pressure, of course, with -- yes, during the last years here in -- especially in Europe with long sea freight and everything. And of course, the as Magnus said, in a way, the market in Europe has been under maybe more influence and there a lot of changes, legal and so on. So volume has been also a driver in that. And yes.

Yes. And as Robert said, maybe just to add on that, it's mainly thereby to Europe, which is slightly in a different position than rest of the world. And we are also here adapting quicker to the new demands, both from our customers, but also from legislation. And this is costly, however, we think we are in a better position going forward. But we have taken some costs in Q4 that put some pressure on the margin.

Yes. The European market is changing more than maybe outside Europe actually with especially reuse coming in and so on and putting a lot of questions in the market as well.

Okay. Perfect. But how should we think about the recovery for the segment, both returning to growth and margin recovery in 2024? Is it more sort of -- when can we expect to see an increase or a shift?

I think if you take a little bit longer perspective, I think that the shift from plastics and fiber will continue. That's a very important part that we are driving, and we're doing a lot of good stuff. And I think as Magnus said, that we are the first one moving out of PFAS and launching that is a big thing. And the shift from plastics to fiber will continue. And then, of course, you have short maybe, yes, flatten in the market depending on customer demand and so on. But the shift from plastics to fiber here is very important.

Yes. I think comparing to historical numbers, especially in Food Packaging, bearing in mind the last year's volatility in what is happening is difficult. So there is a – it’s a difficult base to work from, but as said many times, we have taken a bit of moving away from plastics to different fiber solutions and try to be absolute forefront with sustainable solutions. They are a little bit more costly, but it's in our destiny to work with the customers to understand this and to drive it. So we are positive. And as said, the market in itself is growing, especially so in fiber solutions.

So yes, just to clarify, you have to take a sort of longer-term approach rather than seeing, I guess, a sharp recovery in 2024. Is that correct?

Yes. I think if you go back -- if you go back 5 years, the market and our performance has been quite good over the years. I agree Q4 is a little disappointing, the volumes are down. But overall, we also expect them to grow with high numbers going forward. That goes for ‘24 as well as for the coming 5 years. But it is now dynamic, we are working in a niche and that could be -- that could be higher numbers, but it could also be short term, a little bit more uncertain. So that's maybe what we try to say here.

Okay. Perfect. I'll run to BA Duni or Dining Solutions now. Volumes continue to decline, albeit with low numbers. But I still gather from your report that there are some sort of subsectors or niche or say that are still below 2019 levels. How should we think about the recovery in those specific sectors or geographies and the sort of volume growth going into 2024 in BA Duni?

I think yes, I think it will seem to be done for quarter 4, and then we had a drop in retail mainly. I think the professional side has been quite flat in a way, a little bit down, as in organic growth. So that is in a way, positive that our core is growing. That's very good. It's the retail, maybe Christmas sales that has dropped significantly in the quarter versus maybe pre-pandemic numbers. And that is a change in behavior or is it just, yes, this year, lower last year than in December.

Okay. Fair point. And how much of BA Duni's sales are from the retail segment?

I would say clearly below 50%. I think is, say, around 20%. But of course, the volatility has been higher here, so it had some impact also for the quarter.

Okay. Fair enough. A final question on margins in BA Duni as well -- or sorry, Dining Solutions. We've seen some very impressive margin development. And in Q4, the margin was above 14% for the segment. What levers do you have left to pull in terms of the efficiency improvements in production? And what do you think this segment can generate in terms of long-term margin?

I think maybe I should put it like this, that we have a good potential for continuous good operational leverage. Our factory results on still fully, and if we grow in the right areas, we will see a nice operational leverage on the bottom line of this. If in periods where the volumes are more flat or even decreasing, it's a bigger challenge to take out cost. So with growth, that -- a good operational leverage will follow.

And I think as you've seen in the last call that we're doing yes, yes, small things everywhere. So I mean, we're consolidating now in Asia Pacific as well that we're trying to be more efficient, of course, as well in that. So that's -- yes, it's hard to work everywhere.

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

Okay. Great. Thanks for the questions. And yes, we hope for that people will enjoy good food and your restaurants here coming in the 2024 and looking forward to the next quarter. So yes, see you soon. Thank you.

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