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

Hello, and welcome to the Duni Group Q2 Interim Report 2025. [Operator Instructions] Please note this call is being recorded. Today, I am pleased to present Robert Dackeskog, CEO. Please begin your meeting.

Yes. Hello, everyone, and welcome to this interim report for Q2 2025. The headline for this quarter is subdued economic situation balanced by targeted measures and acquisitions. So if we move to the agenda, and we will go through this today. And at the end, we will finish off with a Q&A. So moving into the highlights for the quarter. We see weak market and economic conditions pressured the demand and volumes in many markets, but we saw the quarter ended stronger than it began. The recent acquisitions, Poppies and SETI had a positive impact and structural internal actions and measures were taken to adapt to the market condition. One action is that the sales and marketing organization has been restructured as planned, including integrated sales team in the 2 respective business areas with a 10% staff reduction. And the expected annual impact of this is approximately SEK 30 million, and this will start from Q4 2025. And last, an improved operational cash flow seen in the quarter, and this is by lower inventory levels versus quarter 1 this year. If we look a little bit on the market outlook and the market data, it's still a continued weak market, persistent inflation and a challenging consumer climate, as you know. And as you can see on the left graph below that in 2025, the consumer confidence went down versus '24. The forecast when we went in '25 was the assumption that it was actually going to be stronger, but we're not seeing that yet. And on the right side, you can see the German graphs here which is [ are a lot ], which actually -- where the visits went down by 4.8% in Q1. So it's still tough market, but the German government has proposed lower -- to lower the VAT for the restaurant from 19% to 7%, which then hopefully will give a positive impact to the restaurants. When the consumers in Germany will start to come back? It's hard to say, of course. But historically, they always return of downturns in the economy. If we look at a little bit the market and the restaurants, consumers are trading down to cheaper places. This graph shows the visits in the big 5 European countries, U.K., Germany, Spain, France and Italy. And we can see that there is a trade down from casual dining to quick service restaurants, but also from quick service to retail, also delivery loss to quick service restaurants. But as I mentioned before here, historically, the arrows has gone the other way when the economy is getting better and the restaurants and Duni has after the different crisis in 2008 and 2012 and also after the pandemic, always bounced back again. Looking into the key financials. The net sales is increased mainly driven by the acquisitions we've done. The operating profit declined by SEK 14 million, mainly driven by lower volumes and the margin ended up at 6.4% versus 7.2%. We'll come into this, of course, a little bit more here. So if we look at the net sales, it has increased by 5.2% in fixed currencies, and that was thanks to the contribution from our acquired companies, Poppies in the U.K. and SETI in Slovenia, which covers the Southeast of Europe. We had a negative organic growth of 3.8% in the quarter, coming from a negative mix effect as customers placing lower priority on premium products. Selling more tissue compared to, for example, our premium napkins like Dunilin and of course, then the volume in total. We have a gradual impact on our price increases in Europe to balance the effect of inflation. In the second quarter, BioPak Group continued to grow, which has its biggest share of sales in the Australian market. If we look at the drivers behind the operating margin, as mentioned here before, was -- the main driver was lower volumes in sales and the mix effect in the assortment. So in order to mitigate our efficiency, we have taken some measures, both in production and logistics, which has strengthened the income in the quarter. Also measures have been taken to reduce our sales and marketing costs, and that will have an impact from quarter 4. Positive is that the normalization of inventory levels throughout the quarter helped to improve the results within BioPak Group versus last quarter. And the recent acquisitions within Dining Solutions, Poppies and SETI contributed by SEK 21 million in the quarter. Now I'm handing over to Magnus to go through the 2 business areas in more detail.

Thank you for that, Robert. So as usual, I will now provide a more detailed overview of our 2 business areas, and I start off with Dining Solutions, which includes our table setting products. So despite currency headwinds, sales increased by SEK 70 million compared to the previous year, and that's -- we're reaching SEK 1.14 billion. This growth was primarily driven by acquisitions completed earlier this year and at the end last year. Profit improved slightly year-on-year with a stable operating margin of 8.7%. So as Robert mentioned earlier, the second quarter was marked by challenging market conditions reflecting weak consumer confidence and declining volumes in the HoReCa industry, I would say, across all over Europe. The price effect was close to 2%, implying a volume decline of 3% to 4% in the HoReCa segment. In retail, however, we experienced a double-digit volume drop primarily due to the loss of a few large contracts, so these were low margin in nature. So as we touched upon in the market outlook section, in tough market conditions, we've seen a shift in customer behavior, particularly in the premium segment. Some customers are opting for more cost-efficient alternatives over our higher-end offerings. And while we have competitive solutions also in these segments as well, the result has been a negative mix effect, lower margins and reduced cost absorption in our factories. But this behavior mirrors what we observed in previous downturns, as Robert said, still, we remain confident in the strength of our premium offering, thanks to enduring appeal in terms of quality and sustainability and its contribution to the overall dining experience. If we look on the acquisitions made in the past 9 months, contributed positively to the profit this quarter in line with our integration plan. So although full synergies are expected to be realized by 2026, contribution from the acquisitions were approximately SEK 20 million, and this was partly offset by volume decline in our core business. Nevertheless, we are well positioned to capitalize on increased volume once the market recovers. Finally, we continue to see growth opportunities outside Europe, particularly in the APAC region, which remains relatively immature in terms of the premium fiber-based Dining Solutions offers. However, as you have seen also this spring and summer, have huge geopolitical uncertainties driven by conflicts in Middle East and discussions, I guess, on global tariffs. That has created a more cautious market environment. So while we don't foresee any direct threats to our markets, the indirect effects of reduced consumer willingness to spend on travel and by extension also maybe on dining are being felt. If we turn to business area Food Packaging Solutions, which focuses on sustainable food packaging, sales declined by 7%, primarily due to a weak quarter in Europe and negative currency translation effects from a stronger Swedish krona. So although improvement from the first quarter, which was very weak, you see that profit decreased to SEK 22 million from SEK 40 million last year. That corresponds to an operating margin of 3%. There are essentially 2 main reasons behind the weak sales performance in this quarter. Firstly, organic growth was 0.6%. So it's nearly in line with the same period last year. So the primary driver of the overall sales decline was the weak Australian dollar, particularly against the Swedish krona, which has strengthened by more than 10% in the period. And this currency effect accounts for the majority of the top line decrease. Additionally, we observed continued softness in the European takeaway market with lower sales compared to last year. But on a more positive note, sales outside Europe, especially in Australia, continued to show organic growth when measured in fixed currencies. We also saw continued growth in our Duniform system, which we mentioned earlier. This system comprising seal machines, trays and films is designed to optimize food packaging processes. It's an area where we are currently accelerating efforts backed by strong customer recognition and the system offers a clear competitive advantage by prioritizing food safety, operational efficiency and user friendliness. During the quarter, we completed the restructuring of our commercial and marketing functions, as Robert mentioned. This is an important step towards increasing efficiency in a rapidly evolving market. And more important, this change allows us to strengthen our focus and expertise across our distinct business areas. So the restructuring will impact both business areas, delivering annual savings of approximately SEK 30 million. Majority will be realized within Dining Solution, but also in Food Packaging Solutions. So we remain convinced that the more specialized and capable sales force is essential for future success. So as the demand for restaurants and hotels operators grow, particularly around materials and regulatory compliance, we are well positioned to provide meaningful support and create real value. So Food Packaging is undergoing a fundamental transformation, driven by evolving legislation, shifting customer expectations and emerging business models centered around recycled, reuse and compostable solutions. And Duni has long been a leader in developing innovative materials in packaging solutions, and we are committed to stay in the forefront. So key focus going forward will be our ability to clearly communicate and demonstrate these future-ready solutions to both existing and new customers. So I hand back to Robert again.

Thank you. Yes. And looking at our sustainability initiatives, we have 3 becoming circular at scale, going net zero and living the change. In the quarter, there has not been any major activities, but a lot of small one, of course, and which we are working on. And if we look at circular at scale, we're on track on adaptation to the European Union deforestation also launching new products within improved recyclability. Our KPI on virgin fossil plastic here is to reach 50%. At the moment, we are at 63%. If we look at going net zero, index are at 38% in the quarter and we have had a reduction with 62% since 2019 the target this year is 37% in index. So a lot of small steps to be taken there. The third one, living the change, which we're measuring EcoVadis. We are measuring once a year, and our goal is to become platinum level there. And as mentioned last quarter, we are reviewing the goals now since Scope 3 is coming up as well as part of the going net zero. If we look at our strategy and our strategic priorities. The first point is that we want to increase our innovative offering to customers and consumers. Here, we have worked very hard to be the first one in the world with a BioBinder and airlaid for Biosoft (sic) [ BioDunisoft ] napkins. We are also able and can offer both recyclable, reusable products, including systems and in addition, compostable products. And going forward, we are focusing on both improve our current assortment to match the needs of our customers today but also focusing on innovate and grow in our existing concept like Duniform where we, as Magnus mentioned, we acquired LinePack in Finland in order to strengthen the service part in Duniform. The second priority is that we want to grow our positions in Europe and Asia Pacific. And with the acquisitions in U.K. with Poppies and SETI, which is in the Southeast and in Slovenia, we are covering and diversifying our presence in Europe and the dependency on Germany. The third priority is to enhance our operational efficiency and enable regional differentiation. We have increased our operational efficiency in production and logistics and also being -- we are working with more efficiency in our sales and marketing as Magnus was into here. And the important thing that we specialize sales now and sales and marketing for each BA. Also the move of our logistics center in 2026 will enhance our efficiency. Now we're going into the financials.

Thank you, Robert. So as usual, we start with the income statement and try to summarize the key drivers behind this quarter's performance, I think we touched upon many of those already. But as you can see, sales were nearly on par with previous year, and this is primarily driven by the acquisitions of SETI and Poppies. So if we adjust for these acquisitions and at fixed currency rates, organic growth declined by 3.8%. As mentioned earlier, the price effect was close to 2%. This is slightly below our expectations or targets. We are facing challenges from negative mix effects with a higher share of private label and tender business diluting the impact of these price increases. So inflationary pressures remains, I think, notably from salary increases as well as other cost areas. The main reason for the 1 percentage point, you can see a decline in the gross profit is primary lower absorption in our production facilities due to the decreased volumes and also these negative mix effects. So we continue to work diligently to mitigate these impacts through efficiency improvements across our production setup, infrastructure and indirect cost, as we touched upon. These efforts are aimed not only at offsetting the effects of weak demand, but more importantly, at enabling a strong operational leverage when the volumes recover. So overall, the operating margin decreased by 0.8 percentage points, ending at 6.4%. I think it's also worth mentioning the adjustments, you can see here amounting to SEK 194 million over the rolling 12-month period. Of this, as you might remember, SEK 125 million relates to restructuring costs recognized in Q3 2024 for our new main warehouse in Meppen, Germany. And these logistics investments will enable significant savings in handling costs and more importantly, future-proof our ability to deliver efficiently to our customers for the decades to come. Looking a little bit more on the business areas. It is clear that both are currently performing below the financial target of 10% operating margin. This is, of course, something we address decisively through a range of initiatives, although against a challenging market backdrop. So at present, we are trailing the target by 2.5 percentage points. Considering our historical performance and a return on capital employed above 25%, it is evident that this gap needs to be addressed across both business areas in a balanced and focused manner. So if we look on operating cash flow in the second quarter was positive, largely driven by a significant reduction in inventory levels, as mentioned in the previous quarter as some of you might remember, we took targeted actions to address elevated inventory, particularly outside Europe and within the BioPak Group. So we're now pleased to report that these efforts yielded result in Q2, contributing not only to improve cash flow, but also to reduce costs and a positive impact on BioPak Group's profitability. If we look on the CapEx, it remained in line with previous year and also aligned with the level of depreciation. So our financial position remains robust. Net debt has increased compared to previous year, and this is primarily due to recent acquisitions. And as highlighted in April, we have focused on reducing inventory levels, which has a positive effect on the second quarter and contributed to reducing the net debt. Return on capital employed has declined year-over-year. Why not on an external target as such? This is important for us in our internal metric that we actively monitor. We are committed to improving it through careful evaluation and optimizing our capital allocation decisions. So if we look on our financial targets. Organic growth for the last 12 months landed on minus 0.8%, and this is again, primarily driven by weak consumer demand across all markets, most notable still in the DACH region. And as Robert mentioned earlier, macro indicators for the HoReCa sector in Europe have deteriorated in some way significantly. Despite this, we have managed to partially offset the decline through growth in selected segments in Europe and even more so outside Europe, particularly in Australia. And as stated this spring, the key drivers for improved consumer confidence remain lower interest rates, increased disposable income and for sure, a more stable geopolitical environment. So while there are some encouraging signs for this, such as the proposed governance support we see in Germany for VAT reduction. The latest statistics still show that the European consumer remains cautious, I would say. So our rolling 12 months operating margin currently stands at 7.3%. This is below our 10% target. Closing this gap will require a continued focus on improving gross margin and reducing the proportion of indirect costs. We are confident we are in a good position for a strong operational leverage when we see increasing volumes. And finally, at the AGM in May, a dividend of SEK 5 per share was approved. This corresponds to 66% of net income, if you adjust for restructuring costs, and this exceeds our target of distributing at least 40% of the net income. So I hand back to Robert. Thanks for listening, and have a really nice summer.

Yes. Thank you. And yes, just a short summary of the quarter and of today's presentation. I think main things here are weak market and economic conditions, of course, as we mentioned. And the recent acquisitions have added positive impact and enabled growth for us. Sales and marketing organization is restructured as planned and expected impact is approximately SEK 30 million from Q4 2025. And we see an improved operational cash flow driven by the lower inventory levels, as Magnus talked about. So yes, thank you for listening. And now we hand over to Q&A. Thank you.

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

First one on the sales trend during the quarter. You stated that the quarter ended stronger than it started. Are you referring to the volume trend here? And essentially, my question is, could you elaborate on the sales development seen during the quarter? That would be helpful.

Thank you for your question. Yes, I think we saw a really tough start in the quarter in April, May, mainly and with the volumes in the market. And yes, at the end of the quarter in June, the volumes actually gone up. So the customer, hopefully then, yes, that will be continuous. We don't know. No one knows the future, of course. But yes, definitely the volumes, yes, was a bit of a shift there. And of course, as you know, in quarter 1, we had a lift in volumes as well. So we expected maybe in April and May, but it was a bit lower there. But definitely the volumes are better in the end of the quarter.

That's very helpful. So given that volume has been negative now over the last couple of years essentially, do you think we are sort of close to the bottom in terms of volumes?

Of course, it's hard to tell, as you know. But if we look at the consumer confidence and all that, that is a bit on -- it feels like it dropped bottom in a way. And as I referred to before, in a way, you had 2008, '12 and after the pandemic, it bounced back. I think when we went into the year, the predictions from some research and so on show that the first quarter would be maybe a little bit up. And I think that's what we predicted in a way. It's been maybe a bit tougher than we anticipated. And the second quarter then was supposed to pick up. But looking maybe at the curve we showed here, it's still a little bit negative trend versus '24 than in the consumer confidence.

Yes. Got it. Got it. And the final one on the inventory levels in food packaging, which have been an issue for the last couple of quarters. I note in your report that you've seen a significant improvement. Could you elaborate on sort of what the current inventory situation is, Australia versus Europe, et cetera? That would be helpful.

Yes. Thank you for the question. Yes, it has been reduced since it went up quite sharply, as we said, in Q1. And we -- as we mentioned after the Q1 report, there was a lot of focus to take it down again in Q2, which we succeeded with. So I think the inventory now in both in Europe and in Australia is much more in balance. There is an overall challenge, I think, for both areas in terms of that we are still shifting the portfolio quite a lot. We need to address new legislation and so on, which puts a challenge on planning and being control of each and every item in the inventory. But I think we learned a lot over the last years. And some of the mistakes, we should be honest in saying that, I think we will not do again, and there is super focus of keeping it as low as possible and efficient. But at the same time, it's also important to be able to deliver to the customer. And this is not rocket science, but it's sometimes more tricky in reality than we think. But I think we are in a much, much better situation and more in balance.

[Operator Instructions] There are no further questions at this time. I will now turn the call back to Mr. Robert Dackeskog for any closing remarks.

Yes. Thank you for listening in. And I just want to wish you a great summer. And yes, please make a lot of visits to the restaurants in Europe and visit many festivals and also choose take away when you're not out and about. So yes, have a great summer.

Thank you. And this now concludes your presentation. Thank you all for attending. You may now disconnect.