Duni AB

STO:DUNI

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the Duni AB interim report January to March. [Operator Instructions] [Audio Gap]

[Johan Sundelin, CEO & President]

[Audio Gap] Pro forma figures. And the reason that we're introducing this is that we have recently acquired some companies with very high growth, and we want that organic growth that they are now generating to be reflected in the overall growth number of Duni, which we feel is the most transparent way of communicating our organic growth. In the past, that has not been the case since we have that quite confidence with very similar growth numbers to Duni.So if we now look at this organic pro forma growth, we see that it is on the level of 3%, so significantly above the historical 1% level. The growth here is driven mainly through the very high growth rate in sustainable packaging but also through continued high growth rates in our premium napkins. If we then have a look at the operating income which has increased with SEK 3 million, and the margin plan now starts to deliver in several aspects. The margin plan comprises of 3 activities. Number one is our price increases, and those activities have now been fully implemented during quarter 1. And as we speak, they are now fully compensating for the raw material increase.The second part of our margin improvement plan relates to cost efficiency program, which we launched in quarter 3 in order to reduce indirect cost, including a reduction in FTE, and we took a restructuring cost for this in quarter 4. That plan is now starting to deliver already in quarter 1.However, when it comes to our logistics project, that has faced some challenges due to the limited market supply for forwarding services. So the increase there in distribution cost is offsetting the positive impacts of this project. So in quarter 1, we see positive impact of 2 of the 3 initiatives in terms of our margin improvement. With that, we can turn our eyes to the outside world, and we like here to highlight 4 areas that has an impact on Duni performance. Number one is the exchange rates, which in the quarter has developed favorably and the most impact has been continuous weak Swedish krona against the euro in the quarter.When we then look at the pulp prices, they are in the quarter still on a high level, roughly 10% above the level in the first quarter last year. But since the end of 2018, we see that there is a downward trend in the pulp prices. The main reasons, as we have seen for the still high prices in pulp, is unplanned supply interruptions together with the increased demand on virgin fibers from China.Thirdly, the HoReCa market has continued to grow roughly in line with the GDP, and we see a stable development at the end of '18 and beginning of '19. And then, finally, we continue to see very strong demand for sustainable products. And to surprise for nobody, we see a decrease in demand for plastic. Then I talk to you about the short-term program we have for improving the profit. When it comes to generating growth, we rely more on our new strategy. And here, we have now about 20 activities going that's all aimed to transform Duni into even more sustainable and even more customer-oriented business. And those activities are all aligned to these high key areas, which you see illustrated in this pyramid. And 2 of the activities -- strategic activities to transform Duni into a higher-growth business has been the acquisitions of Biopac U.K. and BioPak Australia, which has strengthened our position in sustainable packaging. And through those acquisitions and through continued strong growth of the Duni ecoecho sustainable packaging, we now have a business in excess of SEK 700 million, which is now growing with numbers above 25%. And we see good performance in all of these 3 entities. So both Duni ecoecho, Biopac U.K. and BioPak Australia is showing very strong growth and business performance. With that overview, I'd like to go into our 4 business areas and shortly describe how they have been performing in quarter 1. Table Top, you see improved sales and profits are in line with last year. And looking at the geographical split of the growth, we actually see growth in most markets with the exceptions of the Nordic markets and U.K. where we see a small decline. And as mentioned previously, premium napkins are driving a lot of the growth in the markets.We have also improved our most premium napkin range of Dunilin during the quarter, and that has also made the full assortment now compostable, in line with our sustainability strategy. And as mentioned, price compensation activities have been implemented according to plan, and the last one were implemented during quarter 1.If we then have a look at Meal Service, we see good growth and improved profit. We actually see good growth in almost all markets, including the important markets here in Nordics. We also see that our acquisition of Biopac U.K. is also showing continued good growth and profit during first quarter. And the growth, as I said, is driven by our sustainable portfolios. And we have, in the last quarter also, extended the assortment through the launch of wooden cutlery. Then if we look at the Consumer business area, they have done here is that retail remains a highly competitive market. And this competitiveness is driven by the overcapacity in the market, which continued to increase the price competition. And that has resulted, as you see in the numbers, by a stable situation in both profit and growth.We have seen losses of a few big customers in some markets, but that has been almost fully compensated by growth in many other markets. An activity that we have decided to do during the year is to phase out all plastic products from our retail business, and we will not sell any plastic to our retail customers when the year ends, again in line with our increased sustainability focus.If we then finally turn our eyes to our New Markets outside Europe, we see a stable quarter with business improvement through the performance of our recently acquired BioPak business in Australia and New Zealand. We also see good growth in Middle East and North Africa, and most other markets are then in line with last year but with a slight decline in Singapore. The growth is driven by both our quality premium napkins and our sustainability products.And when comparing numbers, it's interesting to note that Russia and North America, which previously were reported into New Markets, are now reported into Table Top.And with that, I hand over to Mats, our CFO, to present the financial situation.

[Mats Lindroth, Chief Financial Officer]

Thank you very much. And starting with the P&L. We, first of all, see a very significant increase in sales of almost 17% -- or 17% up to $1.264 billion in the first quarter, which is our seasonally low quarter.However, more encouraging, of course, is that we now have a higher operating income than we had the previous year. We go from SEK 90 million in Q1 2018 to SEK 93 million this year. And this is, of course, very encouraging, as I said, looking back at the 3 last quarters of 2018, which was really challenging for Duni due to the strong increase of the pulp prices. Now we are on a better level again. Of course, as Johan said, raw materials are still higher in Q1. However, we have been now, after the price increases have been made, we are more or less in a stable or in a balanced situation. Looking into the financial net, you'll see that it's SEK 10 million, which is, of course, higher than it has been in normal quarters previous year. We have before around SEK 5 million per quarter. I would say that the normalized levels on the financial net now going forward is SEK 8 million to SEK 9 million, and this is, of course, due to the acquisition we made in Australia last -- in quarter 4 last year and also due to the changed accounting standards now having also some leasing costs into the financial net. Looking into the business areas. We see a continued very good development in Meal Service, and that is then particularly due to the increased sales of the eco assortment. Also in Table Top, after a challenging 2018, we now have a profit and operating income in line with previous year.In Consumer, we had a tougher quarter due to some lost volume contracts and some lower campaign volumes this year, in quarter 1 then last year. And in New Markets, of course, the big improvement come from the acquisition of BioPak. In Cash flow. Cash flow in is always seasonally low or negative, including in quarter 1. This year, we also see some higher buildup on inventory particularly in Meal Service, in the Meal Service eco assortment mainly. But as I said, cash flow is always seasonally low in the first quarter.And that's for the financial position. We have now a higher net debt after recent -- the acquisitions and investments we have made during the last years. And also, looking into the net debt at SEK 1.8 billion, some SEK 200 million of that is due to the new leasing accounting standard.And to conclude the presentation, we look into our growth numbers. LTM or last 12 months, we have 1.1% increase in organic sales or in an organic growth. And this is now with our traditional way of calculating that, so this is not including any pro forma numbers from our acquisitions.In operating income, although we have an improved operating margin -- although we have an improved operating income in the first quarter, we still have some way to go to come back to the 10% target level. And for the dividend, there is a proposal for the AGM of an unchanged dividend of SEK 5 per share, split in 2 installments, one in May and one in November. And with that, we conclude the presentation and move over to the questions.

[Operator]

[Operator Instructions] There are no questions at this time. Please go ahead, speakers.

[Johan Sundelin, CEO & President]

Okay. If there are no questions, then I'd like to thank you for listening. Thank you. Bye.

[Mats Lindroth, Chief Financial Officer]

Thank you.