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

Hello, and welcome to the Duni Group Interim Q1 Report 2025 Conference Call. [Operator Instructions] Please note, this call is being recorded. Today, I am pleased to present Robert Dackeskog, President and CEO. Please begin your meeting.

Yes. Hello. Hi, everyone, and welcome to the Duni Group Interim Report for Q1 2025. Headline here, growth despite subdued demand and negative currency effects impacted the quarter. And looking into the agenda, we have some highlights and then look into a little bit market status and outlook. We have some new market data that came in last week. And then Q1 summary, business areas in both areas will Magnus go through, looking into our sustainability initiatives and a little bit looking on our strategy ahead and at the end, financials and the summary and then a Q&A at the end. All right. So if we move into the highlights for the quarter, the group achieved growth in the first quarter despite continued weak demand in the European market. The number of visits to restaurants are still lower versus 2019. We'll come back to that a bit later in the presentation. Both acquisitions and organic growth contributed to this positive development. And the operating income was impacted by negative revaluation effects due to strengthening of the Swedish krona against the Euro. We have currency effects amounted to minus SEK 15 million compared to plus SEK 10 million in the first quarter 2024. So there's a difference of SEK 25 million, and that explains the main part of the SEK 30 million difference versus last year in Q1. Even after the acquisition of Poppies in the first quarter, we maintained a strong financial position. And also what we've done in the Q1, we have initiated transformation of the sales and marketing organization, where we established now a dedicated and specialized sales teams within each business area, aiming to improve our efficiency and strengthen customer focus. Yes. Looking at the market status for 2024, we have received a market research covering the big 5 countries regarding the state of the European Food Service market in 2024. And all markets still down strongly against pre-COVID visit levels, Great Britain and Germany with biggest gap versus 2019. For Germany, the government now proposed a VAT cut from 19% to 7%, and it's planned then from 1st of January 2026 in order to boost the food service market. If we look at visits, it decreased compared to 2023 by 1%, but stabilizing then in most countries, if you compare to the past years. Of course, life changers through the COVID and the economic situation keep visits down in the markets, remaining 10% on average below 2019 visits. And most countries are suffering from visit declines and the spend increases and -- are solely a function of growing eater checks, of course, driven by the inflation in the past years. The main driver of lost visits in Europe is works and education situations, but also meals out in restaurants and leisure has lost a lot of visits. Meals out, for example, has lost 877 million visits since 2019 in these 5 countries. And not surprisingly, home meals is the consumer situation that are growing. Ready prepared meals are bought via delivery service, takeout and retail. If we then look a little bit more specific on the German hospitality data that shows also still slow recovery from '24 versus '23. And there is still a big gap as we talked around before versus 2019 for the German hospitality and restaurant industry. If we look at the -- left on the slide here on the open table numbers, it's still a bit hard to interpret these and also reflects maybe a trend that people book more and more online, which -- because it shows a little bit more positive than the general data. It might be a city also reflect that people book more in cities and so on. But all in all, business sentiment continues to be affected by the overall macroeconomic uncertainty in the world. Key financials, as I said, growth in the quarter, driven by acquisitions and also organic growth. Operating income main effect is coming from the SEK 25 million of currency effect. Margin, therefore, lower and ended up at 5.9% versus 8.1% last year. And if we're moving a little bit more into the details here on the next slide here. So the first quarter was characterized primarily by growth despite continued subdued demand in the European market. And this is driven primarily by acquisitions, but also organically from BioPak in Australia, while volumes are slightly lower in Europe. Net sales increased by SEK 128 million to SEK 1.863 billion, which corresponds to a growth of 7.7% at fixed exchange rates. And if we look a little bit on the operating income side, it's good given that the comparative quarter in 2024 was the strongest ever Q1 in the history of Duni Group. Operating income amounted to SEK 110 million versus SEK 140 million last year, corresponding to 5.9%. And the 2 main drivers of that in the quarter was affected from first by revaluation effects from the stronger Swedish krona with a currency effect of minus SEK 15 million, as I said in the beginning, compared with plus SEK 10 million last year than in the first quarter of '24 with a difference then of SEK 25 million. The second, we're also seeing an increase in cost in Food Packaging Solutions linked to the high inventory levels in Australia, which burdens the income figure by approximately SEK 20 million compared with previous year. Now we're moving in a little bit more in details to the 2 areas. I'll hand over to Magnus.

Thank you for that, Robert, and good morning, everyone. So I will now provide, as Robert said, a little bit more detailed overview of the 2 business areas. I'll start with Dining Solutions, which covers our table setting products. So we look at the numbers, sales increased versus previous year and closing at SEK 1.1 billion, mainly driven by acquisition, as said. Operating income almost on par with previous year from SEK 109 million to SEK 102 million, and that results in a margin of 9.1%. Diving into the numbers a little bit more. We saw a slight decline in volumes compared to last year, continuing the trend we observed over the past few quarters. And as Robert mentioned earlier, the broader market continues to be affected by high geopolitical uncertainty, which is clearly impacting consumer confidence. People are more hesitant to spend money on food and drinks, and we're seeing that reflected in our segment as well. That said, despite these headwinds, there are still several bright spots. We're seeing a strong momentum outside of Europe and continued growth in areas like premium napkins, LED lighting and in specific markets such as Italy and Switzerland. So we're also seeing particular -- we're particularly pleased with the positive response to our more sustainable product offerings like the Bio Dunisoft. It's clear that there's a genuine demand for the environmental-friendly alternatives, which aligns well with our strategic focus. So however, the overall market situation remains tough. It is highly competitive with players fighting over smaller volumes. There's also a notable trend of consumers trading down in some parts of the assortment. But we have gradually implemented our price increases. It hasn't been without challenges in some areas, particularly retail and private label commodities, price sensitivity has led to delays or exceptions. However, we remain disciplined in pushing these changes through even if it temporarily affects volumes since protecting our margins is critical. So it's a careful balance that we continuously evaluate on a market-to-market basis. So we're working hard on 2 fronts, implementing price compensation measures and driving internal efficiency improvements. As mentioned earlier, currency effects have had also impacted our performance. The stronger SEK at the end of the quarter had a negative effect, particularly from the revaluation of working capital that is denominated in Euro, we'll do in the [indiscernible]. This alone explains roughly 1.5 percentage points of the margin decline this quarter. I'll come back to this in a little bit more detail shortly. And finally, we're already seeing positive effects from the Poppies acquisitions, which was closed and integrated in February. We're now preparing and adapting the U.K. production facility to in-source volumes from other sites across Europe. At the same time, we're working to leverage the high-quality tissue and airlaid materials from our paper mill in Sweden which will help us optimize cost and quality across the board. So thanks to this setup, we expect to start realizing synergies already from the second quarter with a more comprehensive plan in place to drive additional efficiencies over the long term. So if we move over to Packaging -- Food Packaging Solutions, which focuses on sustainable food packaging, we record a 6% sales increase this quarter, reaching SEK 745 million. However, we have seen a challenging quarter where profit dropped to SEK 7 million from the SEK 30 million, that is equal to 1% margin. We look closer on the quarter, and as mentioned, it has been a challenging start to the year from a profit perspective. There are 2 main drivers behind this. First, inventory levels outside of Europe have been too high in relation to sales, and this has led to an elevated OpEx. Second, we continue to see a decline in volumes within the takeaway segment in Europe, and this is driven partly by intense competition, partly due to the dynamic and uncertain regulatory landscape related to packaging, sustainability and waste management. But in parallel with our Dining Solutions business, we began implementing price compensation measures toward the end of the quarter. So while the U.S. dollar have weakened during the quarter, the Australian dollar has depreciated even further over the last 6 months, and this has placed additional pressure on gross margins in Australia. Another contributing factor is substantial investments over recent years to deliver superior and substantial solutions. This not only meet the highest current standards across our markets, but also designed to stay ahead of upcoming legislation such as bans on PF-based barrier products. So while these investments strengthens our long-term position, it has put some short-term pressure on our operating margins. We also invested heavily to ensure we can deliver full product range with a short lead time to all customers. While this is a strong value position, it has also contributed to higher cost. But if we're looking ahead, we're focusing on improving demand planning. We will do that by supporting from better systems and closer collaboration with our customers. And since a large share of our elevated cost is tied to high inventory levels, we expect cost to come down as inventory is reduced. So in fact, we already starting to see this positive trend in the second half of the quarter, and we anticipate further acceleration going forward. So we remain optimistic about the plastic to fiber shift, which continues to support our solution and is aligned with our evolving customer behavior. So while we currently face temporary profitable challenges, we strongly believe in the long-term growth potential of these driving forces, which we expect to outpace general economic growth. So we are a niche player with a relatively small market share in the packaging industry. However, we have also seen competition increased as other recognized the same opportunities that we have been focusing on in the last years. So during the quarter, we accelerated efforts to address the issue of food waste. One highlight is our Duniform system. It's Duni Group's premium food packaging solution for takeaway and ready-to-eat meals. And this area now represents about 30% of our sales in Europe, and we see strong growth here. So we're committed to further accelerate our efforts in this segment in what we still -- is a highly fragmented niche, and we believe we offer a unique solution here. So Duniform will play a critical role in driving the future growth of the entire business area. One very recent example is the cooperation we have with [indiscernible], where the focus is to reduce food waste and enable sustainable growth. So this is a segment we expect to become more regulated over time, where we are well positioned to take a leading role. So I will now hand over back to Robert.

Thank you, Magnus. Yes. And if we look at our decade of action, where we have our sustainability initiatives, we have 3 initiatives. We are becoming circular at scale, going net zero and living the change. And I can mention here that we have started a review of these current KPIs after now 5 years -- 4, 5 years, yes. And we'll come back maybe to next year again to look into the more details of these. But if we look into the 3, what has happened in the quarter is that becoming circular at scale, we're working on napkins and launched napkins made from unbleached paper fiber were launched during the quarter. If we look at going net zero, Scope 3 has been done calculation for the 2024 completed, which also is important now. We have the target on Scope 1 and 2 today. So this is something we're looking into as well. And then at Living the Change, we got the EcoVadis result for 2024 and increase to a score of 79, which then keeps our gold level where we have a target of getting platinum up for next year. Looking ahead, we have a strategy for growth, which for us means a strategy of profitable growth and value creation. So based on our market position, our strategy is to become the trusted sustainability leader in our industry. And in order to achieve that, we have 3 priorities, strategic priorities. And then the first one, increased innovative offering to customers and consumers. Here, we, of course, need to revitalize our core business with innovative materials, design solutions and by expanding our business into related high-growth categories. And examples here is that we can potentially expand our LED lighting portfolio. And also, as Magnus mentioned, Uniform is one initiative that looking -- that we're looking into for the future and it's a growth enabled. If we look into our second one, growth position in Europe and Asia Pacific. And this is by consolidating our core in our strategic home market in Europe and also by expanding further in Asia. for dining solution and also in the South Pacific for food packaging solutions. So examples here is that we are building a manufacturing hub in Bangkok, Thailand to support our expansion in Asia. Also, the acquisition in the U.K. and Slovenia will help us grow in our core European market. And number three, then enhance operational efficiency and at the same time, enable regional differentiation. Here, example, we are investing in a more efficient logistics solution in Germany, Meppen, and that's a good example on that. And with our strategic priorities here and sustainability initiatives combined, we can also act as this trusted speaking partner to the restaurants, especially as Magnus mentioned here with all changing in legislation and other things. All right. We move into the financials, Magnus.

Thank you, Robert. So maybe before we dive into the financials, I'd like to take a few minutes to explain our exposure to currency movements during the first quarter. We have mentioned it before and maybe how these might affect us moving forward. And I think there are 2 main reasons for this. First, currency effects accounted for a significant part of the drop in earnings this quarter, SEK 25 million out of the total SEK 30 million decline. Last year, we saw a positive currency impact. This year, they turned negative. And second, the ongoing geopolitical uncertainty is likely to continue, causing high volatility in foreign exchange markets. And depending how currencies move, the impact on Duni Group will vary. So if we start with the translation effects. So this, of course, refers to the impact of converting the financial statements of our foreign operations into SEK. And since more than 90% of our profit is generated outside of Sweden, a stronger SEK will negatively affect our reported results. In Q1, the average exchange rate didn't differ that much from last year actually. So the translation impact was minor. However, if we look ahead, and as you can see yourself, the Swedish krona is now noticeably stronger than most other currencies, which could lead to more pronounced effects. The second and maybe a little bit more complex area is the transaction effects. And this relates to how we manage our revenues and costs in different currencies. So if we take one example, we buy pulp in SEK for our paper mill. But since pulp is priced in U.S. dollars, a weaker dollar will benefit us. However, when we then sell the finished raw material primarily to Euro-based markets, we are exposed to a negative SEK Euro impact. So for Duni Group, the U.S. dollar versus the Euro exchange rate is often more relevant than the U.S. dollar versus the SEK. So when we analyze our broader currency exposure, the U.S. dollar versus the Australian dollars relationship is actually the most critical, it's a bit special maybe for a Swedish-based company, but that is related to BioPak. So most of BioPak's costs are in U.S. dollars, while nearly all the revenue is in Australian dollars. Another important currency pairs for us is the Euro versus the British pound and the SEK versus the dollar, but also have an impact on the [ franc ], yen and the NOK and so on. So generally speaking, a weak U.S. dollar compared to other currencies will benefit Duni Group, but not just in relation to SEK. So unfortunately, the Australian dollar has recently weakened more than the U.S. dollar, which has offset some of these benefits. So in Q1, this transaction effect was relatively minor, slightly negative. However, there is a second transaction effect we've seen come from the revaluation of euro-denominated assets in our Swedish entities working capital. So one example, at the year-end, the euro-SEK rate was SEK 11.50, by the end of March, it dropped sharply to around SEK 10.85. And this change alone explains the SEK 50 million impact in the quarter. And it's a one-off effect tied solely to the end of month exchange rate. So I apologize for the technical aspect here. Hopefully, it will give some clarity. Otherwise, feel free to ask more questions later on. But if we move on to the income statement and summarize the key drivers behind the development this quarter. So although we saw top line growth, operating income decreased from SEK 140 million to SEK 110 million. I think there are 3 main reasons if we summarize it. First, the revaluation of the euro-denominated assets had a significant negative impact this year in this quarter compared to a positive effect last year. Second, our Food Packaging Solutions segment saw a noticeable drop, SEK 23 million. This was mainly driven by higher operating expenses linked to increased inventory levels and lower volumes in the European Takeaway segment. And third, I think a relevant across the board in both business areas, the HoReCa segment market remains challenged. So with a lower consumer spending, fewer visits. And also, as you can see, net income declined from SEK 83 million to SEK 63 million, which is reflected in earnings per share. So while this is by no means an excuse, I think it is worth noting that Q1 last year was our all-time high for Q1, making this quarter particularly a tough comparison. We take the next slide, looking at the breakdown of the business areas, I believe most points have been covered. I'd just like to highlight the weak start for Food Packaging. In contrast, I think Dining Solutions performed more in line with expectations, maintaining a margin close to 10%, which is a normal level for this season. If we take the next slide, operating cash flow in the first quarter is seasonally negative, and that is largely due to stock buildup from low levels at year-end. This year is no exception. However, as I said before, the increase early in the quarter was clearly higher than what the volumes would justify. So this was partly due to the changes in our portfolio and onboarding of new customers, but also a result, I think, of suboptimal processes in a rather complex supply chain. So this has a direct link to the weak profitability in Food Packaging. We're now fully focused on bringing the inventory levels down quickly. And currently, we see improvements already by the end of the quarter, as I said before. And while the market remains soft, we still see significant potential to reduce the stock days further. That will impact our P&L and cash flow moving forward. If we take the financial position, it remains robust, although we experienced an increase of the net debt that comes from the acquisition of Poppies. Inventory, as I said, has increased versus a year ago. I think there's potential to reduce this, as said, and optimize stocks. Lastly, return on capital employed, excluding goodwill, has unfortunately been reduced from levels close to 30%, very strong, now on 21%. This is something we focus on, of course, to come back to numbers we've seen before. And finally, maybe just some short comments on the financial targets. Organic growth landed on minus 1% for the last 12 months, primarily driven by weak consumption across all markets, most notably so in the last 12 months in DACH region. As Robert mentioned earlier, the official macro numbers for the HoReCa sector in Europe have worsened. That said, we've been able to partially offset this decline through growth in selected areas in Europe, even more so outside of Europe, particularly so in Australia and Asia. So looking ahead, key drivers for improved customer confidence remain very focused on low interest rates, increased disposable income and more stable geopolitical environment. However, these factors now seen maybe a little bit further out of reach than just a few months ago, though there are some positive signs. One example, as Robert mentioned, is the government support measures taken to reduce the VAT in Germany. Our rolling 12 months operating margin currently stands at 7.4%. That is below our target of 10%. Closing this gap will require continued focus on improving gross margin and reduce the share of indirect costs. And lastly, the Board has proposed a dividend of SEK 5 per share to be decided at the AGM in May. This corresponds to 66% of net income adjusted for restructuring costs, and that exceeds our target. Thank you all for listening. I now hand over to Robert for concluding remarks.

Yes. I'll do a quick summary here. So for Q1 2025, we achieved growth with almost 8% in the first quarter despite the continued weak demand in the European market. It was both acquisitions and organic growth contributed to this positive development in Q1. If we look at the result then was impacted by significant negative currency effects, as we talked a lot, Magnus also went into some details on. And that, of course, is due to the strengthening of the Swedish krona against the Euro mainly. And I think in this uncertainty and challenging times and conditions, we have the advantage of our broad geographic presence, where actually we have 2 business areas that are complementing each other and help us become less vulnerable. And this gives us a solid foundation on which we can build. Thank you. And now moving on to Q&A.

[Operator Instructions] I'm currently not showing any questions at this time. I would like to turn it back to Robert Dackeskog for further remarks.

Thank you. Yes, we must be crystal clear today, a lot of information. But yes, thank you for listening in. And yes, see you in the next quarter. Thank you.

Thank you, presenters. And ladies and gentlemen, this now concludes today's presentation. Thank you all for attending. You may now disconnect.