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

Hello, and welcome to the Duni Group Q2 Interim Report 2024. [Operator Instructions] Please note, this call is being recorded. Today, I am pleased to present Mr. Robert Dackeskog. Please begin your meeting.

Thank you. Yes. First, I have to apologize that the report came out late. The Board meeting took longer than expected this morning and the practical reasons delayed it. So sorry for any inconvenience. And thanks for calling in. And now we kick-off. So the agenda for today is the highlights and market outlook. We do a Q2 summary of the group and the business areas, innovations and also sustainability targets. And then financials at the end and then finishing off with a Q&A. Top highlights for the quarter. So regarding the market, it's still a bit of a soft market, but with mixed development signals. Net sales and profit is the second-best Q2 in the company history, next to the particular high Q2 last year. And the third highlight is that we are in a strong financial position. If we look a little bit on the market outlook, we still see that the HoReCa market is volatile. There are some mixed signals. The left graph shows OpenTable Germany and report increases in bookings, but still volatile and a bit bumpy, as you can see. Bottom right is the HoReCa trend versus 2023 and Q1 2024 versus 2023. So where the start of the year has been tough with minus 12.9% and the [Foreign Language] has minus 14%, which is an important segment for us. And then top right, we see the consumer confidence. And that shows that after a very steep increase in 2023, it went down, end of 2023. But now starting to increase again. So there seems to be turn upwards and with interest rates and inflation on food coming down, we believe in a stable recovery. And we also have 2 business areas that provides resilience and a good financial position that enable us to address long-term growth opportunities. Yes. Looking at a high level on the key financials. Net sales ended up at SEK 1.875 billion, which is SEK 61 million less than last year. Our operating income ended up at SEK 135 million, which is SEK 35 million less than last year. And our margin at 7.2% versus 8.8% last year in the quarter. I'll come back to the details more later on as well. So Q2 commentary, net sales dropped 3%. So the main reason for sales drop is that there has been a general decrease in most markets and product categories as sales reached record levels in comparison periods last year. And the biggest drop is coming from Germany and also Benelux, more positive is Nordics and Poland. We have done some price decreases last year that actually decreased the sales this year and also a bit of a negative mix effect between retail and HoReCa in the quarter. So a bit softer market and volatile market with some negative signals, such as bankruptcy increases 10x versus last year in Germany. Looking at the operating income. It is the second-highest quarter in history but lower than last year, coming from a last year government support for electricity of SEK 20 million, also price decreases and a lower turnover within business area of Dining Solutions. After turning down, we are seeing increasing raw material and cost for sea freight, which puts further pressure on the results in the quarter. Newly acquired Decent Packaging and Huskee contributes with positive results to the operating income, while innovative start-up Relevo lowers Duni Group's results. So now I'm handing over to Magnus to look deeper into the business areas.

Thank you, Robert, and good afternoon, everyone. So as Robert said, I will now go through our 2 business areas a little bit more in detail. And as usual, I start with business area Dining Solutions, which represents our product for setting the table. So a quick look at the numbers. Sales is down with SEK 80 million versus previous year, and that equals 8% roughly. Operating income is also down from the previous year of SEK 134 million to SEK 93 million, and that is a margin of 8.7%. So if we look a little bit more in detail, we can confirm that we do see a similar development as in the first quarter. We see an effect from the weak market consumption in lower volumes in the HoReCa sector, expanding roughly half of the decrease in the quarter. And it is especially noticeable in DACH region where Germany, it's our most important market is struggling. But there are also positive exceptions, Napkins, our biggest product group continue to be strong, and we have seen that the smart lightning with lead lamps, some of you might have seen on the restaurant tables, has been very well received in the market and growing strong. So in addition to the slightly lower volumes, we have also made selective price decreases starting already last year when we saw the raw materials were bottoming out, exactly a year ago, summer 2023 from very high levels in the second half of '22. So the decrease is mainly directed to tenders and certain customer segments that is the scope for this, I would say, fierce price competition and for us to secure our relevance in some of these areas. However, we also focus very much on our gross margin, meaning that we deliberately step out from some volume contracts if the margin has been deemed too low. So this has resulted in a positive mix effect and contributed to the gross margin. So nevertheless, the last years, as you might hear, has been very volatile when it comes to cost increases. Pulp, energy costs, freight and not least, inflation, in general, although we heard some positive news this morning, at least from Sweden, it's going down. But consequently, I think the need to work with our operational excellence is crucial, and we also need to stay close to our customers and manage competition, which is, in some markets have increased sharply when the volume is going down. So this means that the customer contracts are continuously evaluated, as we said, in some areas. Sometimes we need to be more aggressive, sometimes we are stepping out. What is crystal clear is that we need both our premium offer with high margins, but also healthy levels of volumes to secure a good utilization in production, which has been suffering in the second quarter, when the volumes are down. If we move to Food Packaging Solutions, focusing on products with sustainable Food Packaging, we can see that the sales has increased with 2% in the quarter, the profit has improved from SEK 36 million to SEK 42 million. That's a 5.1% margin. So if we look a little bit more in the details and the development, so if we start focusing on the sales, we do see that both volumes in the APAC area as well also the acquisitions we have done in the previous quarters that contributes to the growth in the quarter. However, contrary, we can also confirm that volumes in Europe continues to be a challenge and falls behind last year. And similar to the situation in Dining Solutions, we have also made selective price decreases when the sea freight fell back from the extreme levels also at the end of 2022. But we have, in the quarter, seen a sharp increase again. They are up with 200% to 300% versus a year ago. It's still slightly below the extreme levels we saw at the end of 2022, but still quite dramatic. So again, I think this puts some emphasis that we are in an environment where we need to follow this closely, and we are trying to be very agile in this volatile environment. But the profit improvement in the quarter comes from lower stock levels that we have seen in Europe and a significant improvement in the inventory cost. And I would say, higher quality with less write-downs. However, a bit unfortunately, we have in the APAC region and Australia also seen a sharp increase since the year-end with higher storage costs. So I think we are rapidly trying to shift the portfolio to stay well ahead of competition when it comes to the best products, not least from a sustainability perspective. We have the non-PFAS added products that we have been launching in the last quarter is one example. Another example is Liplid. Robert will talk about it more, where we replace single-use plastics with fiber. So I think all these innovations and changes come with high demand in planning and managing rapidly shifting customer demands or changes in the legislation that is also a factor here. But we do see a competitive advantage in doing this better than our peers. So I hand it over to Robert here.

And on that topic, of course, we want to be the trusted sustainability leader in our industry. So we are engaging in different sustainable and circular innovations. Yes, we presented some of them before, but important is that in our own lab, we have launched a nonfossil free binder, the Bio Dunisoft and Bio Dunicel. And this we've done with the cooperation with OrganoClick. And this is very important for us, to do a lot of cooperations because I think this is the way forward to do business and come up with really great innovations. And one new thing then in the quarter as Magnus mentioned is the launch together with Liplid or the renewable coffee cup lid, which is really great to drink from. So a fantastic innovation, a Swedish company as well. When it comes to our start-up projects, in particular, the reusable part, as presented in last report, we have taken the majority share of Relevo, and we are now consolidating the brand Idun under the Relevo brand, which will be the lead brand for us in Europe. The reusable market is still very young but growing slowly. And if we look at our sustainability initiatives, we have becoming circular at scale, going net zero and living the change. And if we move into the -- how's that going and what kind of activities we've done in the quarter, we've done collaboration, as I said, with Liplid, changing the plastic, also collaboration with Notpla and launch of that product. Also to reduce plastic and PFAS-free products and the barriers. So when it comes to the KPI for becoming circular at scale, we have the use of virgin fossil plastic for a single-use item. So we have an aim for 50% by 2025. At the moment, we're at index 64. So we have a reduction with 36%. So things are moving, going net zero, there, we have a new and more efficient production equipment installed in the paper mill up in Skåpafors, and here, the aim is then to measure Scope 1 and 2 carbon intensity. So the KPI we have for end of '24 is 38 in index with a comparison to the base in 2019. And at the moment, we are at index 40 by the end of Q2 2024. So a reduction with 60% from the base. And also, we're looking on the -- leaving the change as a company. And here, we do a lot of good stuff. We are getting awards for -- and recognized for doing good new products launches and so on. And here we are at gold level, and we want to go to platinum for EcoVadis, that's our KPI. So now moving into the financials.

All right. Thank you, Robert. So if we start looking at the income statement, we can see that the gross margin has strengthened compared to last year. We have a positive development in the last 12 months. The focus on improving the gross margin has, I would say, have been very sharp. I think it's especially important in a volatile environment as we have experienced in the last years. It's also crucial for us that we are getting rewarded from our customers on all the investments we are doing in staying in the forefront as we -- Robert just mentioned, for having the best offer in terms of sustainability, but also with high ambitions in customer excellence and being the trusted sustainability leader. You can also see that we have some extraordinary positive effects in the previous year's quarter as previously mentioned, in terms of energy support being paid out. So if we look a little bit on the business areas, as you can see on the breakdown, the profit improvement comes from BioPak -- from Food Packaging Solutions, which continues to improve in margin. However, still behind the levels we saw before 2022, and the turbulence we have seen in the supply chain on deliveries from Asia. Dining Solutions on 8.7% margin, again, mainly impacted by lower volumes and utilization degree in our production facilities. The operating cash flow is SEK 76 million in the quarter. I would say this is seasonally normal for the first half of the year. The difference, as you can see, is that we had a significant stock reduction last year, a very strong one, and that contributed to historical strong cash conversion at that time. CapEx is also higher this year. But I would say on depreciation level and coming from very low levels that we started already in 2020 during the pandemic, and it's been very low since then. But again, it's now more on a normal level. Our financial position remains very strong, as Robert mentioned in the beginning. Net debt is down by SEK 220 million from Q2 last year. And during this time, we have made free acquisitions, and we are back on dividend with a yield around 5%. And as you can see, return on capital is above the 25%, although we are slightly down from the very strong level seen a year ago. And lastly, some comments on our financial targets. First, looking at our target for organic growth we are down, as you can see, on minus 5%. This can mainly be explained by 2 effects. The first and most important is that we have said, I think, during the whole presentation that we continue to see a weak consumption and demand, and that goes for basically all our markets, but particularly so for the DACH region. And also the long period of inflation has resulted in a hesitation for consumers to go out and eat, but also that the HoReCa industry is still struggling with getting qualified personnel to keep the restaurants open. On a positive note is that, as Robert mentioned, the consumer confidence has improved during the quarter however, maybe still on low levels if compared to history. But that is an important factor for increased consumption in the future. Second, since 3 quarters back, we have seen an effect from the selected price reductions to keep relevance in certain areas, when energy and pulp fell back last year, and that also had a negative effect on the sales. Our operating margin is still stable, I would say, on 9.2% rolling 12 months, slightly below the 10% target. And finally, the dividend of SEK 5 is above the 40% target to be paid out of net income. So with this, I thank you for listening. I hand over to Robert to sum up.

Yes. And yes, to end before the Q&A, the three highlights then still, yes. And we discussed this a lot soft market with mixed development signals. We have the second-best Q2 in the company history, next to the particular high Q2 last year. And then Duni Group's strong financial position is there. So yes, thank you. And yes, moving over to Q&A.

[Operator Instructions] Our first question comes from the line of Johan Fred from SEB.

My first question is on Germany. Obviously, performed quite poorly, worse than expected despite the European championship and a positive development in restaurant's bookings during the quarters. Is there any way for you to quantify the impact from the Euros in the quarter?

Yes, it's a bit hard maybe. But I think on a general level, I think with -- what we have heard and seen now is that the Euro impacts a lot the pubs, where they eat and drink mainly, so -- and maybe people, we saw that during the Eurovision in Malmö, actually, the restaurant had a bit actually tougher with the bookings. So I think it's a little bit the same with these events nowadays that people eat like -- in Benelux, they have beer and these bitterballen and all those kind of fast food products instead maybe. So there we see maybe a shift during these big, big events, then it's a bit hard to quantify maybe, I don't know.

Okay. Fair enough. My second question is on the gross margin development, which improved yet again year-over-year and has done so for the last couple of quarters, which I gather is largely from an improvement in mix. How should we think about this trend going forward? And when will this potentially translate into a higher operating margin?

Thank you for the question, Johan. Yes, you're right. As we said, there's been, and as mentioned, a very sharp focus on the gross margin and to have that stable, especially so in turbulent times and to improve it. We think that is very important. Going forward, I think this will continue to be important, but it's always a balance between the cost, the price and the volumes which we continuously try to evaluate. And as said we need to be in the premium segment, but we also need the volume contracts, even though they are lower volume, because of the utilization in our factories. So that's a delicate balance that we continuously need to work with. And if we do that right, the higher volumes will have good cost absorption and then you will also see an effect on the operating income as we have seen in the gross margin.

Okay. Very clear. And my third question is on Dining Solution. What's the underlying margin potential in like a normalized market climate with normalized volume, given your higher gross margin?

Yes. I mean if you only refer to where we're coming from and a little bit what we have said previously is that, this is where we are vertically integrated. And if you get good utilization, if we get a healthy product mix and we stay in the forefront of innovation in the premium segment, we should be clearly above our 10% target. That's where we need to be because we know the margins on the Food Packaging is normally slightly lower. So that's the logic in that. But it's also when we see tougher market climate that when you're vertically integrated, you also get a bit punished which Q2 is an example. So we -- historically, we have been higher, and, of course, that is something we're also working for.

Okay. Got it. And my next question is on the pricing dynamics. You talked about having lower prices due to lower raw mat cost and input and freight costs, et cetera, last year. Yet we've seen a quite significant reversal, as you mentioned during Q2 with higher input prices. Is it fair to assume that you start raising prices again during the quarter? And in that case, when will we see the effects of these increases?