Duni AB

STO:DUNI

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Duni Q1 report. Today I'm pleased to present Johan Sundelin, CEO; and Mats Lindroth, CFO. [Operator Instructions]I will now hand you over to Johan Sundelin, CEO. Please begin.

[Johan Sundelin, CEO & President]

Welcome. If we'll start with the quarter 1 highlights, we can see that in the quarter we saw a marginally improvement in the operating income. This comes from improvement in volumes and positive exchange rate effects.In the quarter, we saw acquired Biopac UK and the logic behind the acquisition was to strengthen our position in the sustainable packaging market. If we have a closer look at the growth, we see a total growth of more than 7%. But if we then deduct the growth generated from acquisitions and exchange rate impacts, we see an underlying organic growth of 2% in spite of less invoicing days in the quarter.Then over to the topic of pulp prices, where we last time -- in the end of last year we saw an increase in pulp prices and we have now negotiated price increases to compensate for that, but during the quarter we have seen a continuing increase in the pulp prices, so that means that we are carefully monitoring the development to evaluate potential need for further price increases.Quick look at the different business areas, we see that our biggest business area, Table Top, there we see an operating income on par with previous year. In Meal Service we see an improvement in both growth and profitability and Consumer also had a positive development in the quarter. In the New Market, it's more about mixed picture where some markets are doing very well in growth and some less well, and we see an overall pressure on the margin due to some investments for growth in the region of Asia.With that, we move over to the market outlook and the long-term trend continue. We see the overall HoReCa market growing in line or slightly above GDP. And if we zoom into the HoReCa sector, we see that the growth is driven by fast causal and also take-away. That means there is a bit of a challenge for premium sales. But it will support our initiatives in the take-away sector.As mentioned, we see strong changes in our exchange rates and they move right now in a favorable direction for Duni and especially when it comes to the weaker Swedish krona. In the quarter, we have also noticed some capacity constraints for key sustainable materials and that has somewhat impacted our delivery service in the quarter. But at the moment, the delivery service is at -- is back at a good level. And as mentioned already, we continue to see increases in the raw material prices, both for pulp and also in plastics.If we then have a look at the different business areas, starting with Table Top, you would see a quarter where we can show growth and we actually see growth in almost all our markets, only exception if Nordic. And as I said, this growth, we see despite 2 fewer invoicing days. In the quarter, we have also launched a new marketing concept that allow us to segment the market and target all different occasions in a simple and powerful way. It's going to take a while during the year before it's fully in place in the market, but the launch has now started. And as I mentioned before, of course, Table Top is heavily impacted by the pulp prices and they have worked hard to compensate these both. But price increases, but of course, so we had a focused on continuous cost reductions.If we then move on to Meal Service. We already mentioned the acquisition of Biopac. It's a company in U.K. and that really strengthens our position in the area of environmental and sustainable disposal solutions. And this, we see the strong increasing need for environmentally profile assortments also in our sales development for our Ecoecho products to continue to drive our growth and increasing in terms of share of our sales.However, we see less positive developments when it comes to sales of that more traditional base products like plastic cups and glasses. And as I mentioned, we had some delivery problems for sustainability -- sustainable materials and that did impact Meal Service delivery service in the quarter. But it feels now like those problems are behind us.If we then turn our eyes to the Consumer, we see that we have a positive development both on the top and on bottom line. Part of the reason for the strong top line development is successful campaigns in Germany. We also see positive development in U.K. despite the weak British pound.One initiative that we have done that is now starting to have an impact is that we have done a segment analysis and show some priority customer segments and we have now aligned resources and organization to be able to serve this customer in a more efficient way. And again, also the consumer business area is impacted by the increase in pulp prices.Then, finally, New Markets. We have a wide global coverage and we see some areas developed very well and some has less of a positive development. But in overall, we have a good strong development in our most important priority market, which is Asia and Oceania. We see, however, that the margin is continues to be pressured by investment for growth that we have done in this region.Now I hand over to Mats to the financial situation.

[Mats Lindroth, Chief Financial Officer]

Thank you. Looking into this P&L, yes, we have an earnings per share in the quarter which is on par with previous year. And in fact, if we look at many of the result lines, they are very close to or on par with previous year. However, underlying there are 3 main items influencing the outcome of this quarter. Out of these 3, we have one which is positive, which is the FX development. Since the Swedish krona has weakened, we had several positive effects on our results and sales coming from that.On the other hand, as Johan has mentioned, we had high raw material costs, particularly then from the paper pulp, which has developed to record high levels. And we have also, compared to last year, a calendar effect of fewer invoicing days due to the Easter coming into March this year versus April last year. So all in all, this is satisfactory results level considering these 3 items.Coming into -- looking into the different segments. Yes, also here it's a quite stable development in most of the business areas, with some positive touch on both the Meal Service and Consumer. Meal Service improving the results, not only due to the Biopac UK acquisition but also in general with a better development. We do have some -- continue to have some impact in New Markets from the market investments we are doing in this area.Coming to cash flow, the cash flow has improved from last year. That is mainly due to 2 items. First, we have less of a buildup of inventories in this quarter which is good, of course. And we also have a lower CapEx level. Last year in Q1 we had the acquisition of the German logistic facility impacting with some SEK 50 million to SEK 60 million. This year we do have, during the first half of the year, we have the announced investment in the airlaid capacity in our paper mill. However, in the first quarter, out of this SEK 50 million, we have only taken some 20% of that. So cash flow improved mainly then from lower CapEx in the quarter, but also a more favorable development when it comes to inventories.The financial position, yes, not much to comment versus before. Still a strong position. We note -- we can note, however, that whilst the weaker Swedish krona has a positive effect on the P&L, it has a negative consolidation effects when it comes to the financial positions since most of the debt is in foreign currencies and dominated by euros.And then, as the final comment, we look into our financial targets where we, as you know, have proposed -- will propose or has proposed for the AGM coming in the beginning of May, a continued SEK 5 per share dividend. The operating margin is still above the 10% hurdle. And the sales growth has improved a little bit in the quarter but is still only modular about the 1.1%.And with that, we thank you and conclude the presentation part of this session.

[Operator]

[Operator Instructions] And we have a question from the line of Karri from Handelsbanken.

[Karri Rinta, Research Analyst]

Few questions. First, I would like to just confirm that these capacity constraints that you mentioned related to Meal Services, that's bagasse, right?

[Johan Sundelin, CEO & President]

Yes, that's correct.

[Karri Rinta, Research Analyst]

And how is that in terms of their cost of goods sold and in terms of its strategic importance and number of alternative suppliers? Do you feel confident that you will be able to sort of comfortably rely on this raw material and your suppliers or is this sort of a raw material that is in short supply and high demand?

[Johan Sundelin, CEO & President]

I would say, at the moment, we don't see any long-term strategic risk. We believe that the supply and demand should be able to be in balance long term. However, it's a bit difficult to assess exactly how quick the demand will rise and what kind of alternative materials could come on the market. So we see this mostly as a short-term issue. And of course, here we are bit helped with that we are not vertically integrated. We don't own any factories -- so here we have high flexibility. So if there is one producer having a problem, we will have the opportunity to change to another producer.

[Karri Rinta, Research Analyst]

And this very nice organic growth number, 2% growth, despite 2 fewer invoicing days. So I saw that you mentioned that Germany was good in Table Top, but maybe if you would give us a sort of top 3 drivers of organic growth in Q1 that would be helpful.

[Johan Sundelin, CEO & President]

I think the -- in general, I would say, it's quite a broad-based growth and that is for me a very positive picture. So it is not 1 or 2 single markets that strongly drive the growth and then we have big problems in many others. So it's quite a broad-based stable performance. And then with some peaks, and we mentioned campaigns in Germany and we mentioned the continuous strong growth in Ecoecho products. But -- and we can also mention stronger than average growth in premium napkins. Those are some areas that drive growth at the moment.

[Karri Rinta, Research Analyst]

Then this segment analysis that you are doing or have done in Consumer, how would that then -- now that you start to implement it, what kind of implications would that have on top line growth and margins? It sounds like you are maybe deemphasizing some of less profitable segments and therefore it might have sort of top line wise a bit of a -- or put it another way, top line is probably not your major focus when it comes to Consumer.

[Johan Sundelin, CEO & President]

I wouldn't overemphasize it in the way that it's not a dramatic shift. It's not like we're going to close down big customer segments or big parts of our portfolio. It could be interpreted like that what I said. It's more that we are focusing our attention and focusing our resources where we've got 3 customer segment that with a long term this is going to be of higher importance for us than the others. And then we have aligned our organization so we can focus on those. And then we are now starting to align resources, so we can satisfy those even better. That means I hope, of course, that we're going to see a long-term improvement in our performance due to this. But it will not be a short term quick impact as it can be when you do more dramatic changes.

[Karri Rinta, Research Analyst]

And then finally, maybe just sort of a housekeeping remainder. What -- if you can remind us of your pulp exposure i.e. what percentage it is of your total costs. And then also may be a quick sort of a ballpark number of when euros [ translates ] by let's say 10% versus Swedish krona, how much will that then impact your earnings. Doesn't have to be precise, but some sort of a ballpark numbers would be helpful.

[Johan Sundelin, CEO & President]

Yes. I mean, you can say that pulp, of course, it depends a little bit on the level of the pulp and so forth. But we are on a level between 5% to 10% of sales in general, and it is on the high side. It's closer to 10% than to 5%. Yes, then, the SEK versus the euro. Depends a little bit, of course -- I mean, you really have to take it with a grain of salt, because it also depends on the development of other cross rates and currencies and so on. But you can say it's a SEK 5 million to SEK 6 million on a yearly basis with 1% movement in the euro versus the SEK.

[Operator]

[Operator Instructions] As there appear to be no further questions, I'd return the conference to you.

[Johan Sundelin, CEO & President]

Okay. Then we conclude this conference and thank you for attending. Thank you bye.

[Mats Lindroth, Chief Financial Officer]

Thank you very. Thank you.

[Operator]

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