Duni AB

STO:DUNI

Earnings Call Transcript 2020-Q1

[Operator]

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

[Johan Sundelin, CEO & President]

Thank you and welcome to this quarter 1 result presentation. Yes, officially, quarter 1 result presentation. But since Duni, for the first time ever, today has released forecast for quarter 2, I know there's probably a lot of interest in talking about that. And I will come back to that. But since it is the Q1 presentation, let's start with some highlights from the first quarter before we move into what we think about the COVID-19 impact of quarter 2. So if you're looking at the net sales in the quarter, we saw totally a bit of decline with a couple of percentages. However, it was quite a difficult -- a different situation depending on which month you look at. We had actually a very good development in January and February, but then sales started to drop quite dramatically as from the middle of March due to, of course, the shutdown of restaurant and hotels across Europe in the -- because of COVID-19. And we see that sales drop continue in Q2. And as I said, I'm coming back to what that means in terms of forecasts. If you're looking at the profit, that had a similar pattern, meaning we saw a decline totally in the quarter, but we actually had a very good profit development also in January and February. But then due to the volume drop in March that impacted the profit of March, dragging down the total quarter with SEK 13 million. During the quarter, we also implemented a new sales and marketing organization, as previously announced. Reason being that we now are focusing on building 2 global brands, Duni and BioPak. That means that we also at from this in Q1 result presentation, also changing the way we're reporting our financial situation. Instead of the 4 previous business areas, we're now reporting into the Duni and BioPak segments. The reason for the new sales and marketing organization was to strengthen our innovation, marketing and sales capabilities. That is a long-term objective. However, if you’re looking now at a more short-term impact of this COVID-19 situation, it also meant that we were able to very fast implement our mitigation activities that proved to be important for us. And we also know that we will get to SEK 20 million yearly savings coming out of this new sales and marketing organization, which, of course, also contributes to better situation. With that, I'd like to have then a closer look at our 2 new segments then. First, starting with segment Duni. So in this segment, we provide innovative and sustainable solutions, mostly for the set table, and the biggest categories are napkins, table covers and candles. And it is in this segment that we see the biggest impact of COVID-19 situation, as you can see in both sales and operating income, which declined in the quarter. And again, it is the March numbers that impact the total quarter. We see a bit of a difference between the different regions where Southern Europe is hit faster and stronger than Northern Europe. And that is, of course, in line with the more severe shutdown that has been in Southern Europe. All product categories are affected negatively, but mainly premium napkins and table cover. And although we see a positive impact on our material costs, it's overshadowed by the negative impact from the lower volumes. If we then move to the second segment, segment BioPak, which offers environmentally sound concepts in packaging and service products, and these products are sold a lot into the takeaway and ready-to-eat meals segments. There, we see that, actually, the sales and operating income growth also in quarter 1 and especially good growth in rest of the world. So here, actually, the COVID-19 restriction increased demand for takeaway products during the end of the quarter. When restaurants were shutting down their sitdown services, they try to change into takeaway and delivery options. The results were negatively impacted by weak Australian dollar, which, of course, now without big business in Australia, it's impacting the total pictures. I'd also like to mention that the Horizons business that we acquired in October is included in these numbers now in the BioPak segment. Now with that, I'd like to leave the quarter 1 results and look at the situation moving into quarter 2. And if we're starting with having a look at what I've written to the right, that is a key message I want to communicate. It is that we -- in Duni Group, we're strong going into this situation. And with activity plans, we will also be strong after the COVID-19 situation. So if we start then by looking at the sales situation, the basic situation to get good sales is, of course, that we have a healthy organization. And so far, we have no reported cases of corona or COVID-19 in the business. So we have put a lot of focus on keeping our organization healthy. And so far, we did success. And also, despite the work time reductions, we are also fully operational business. Including all our own operations, but also all our suppliers are operational. So that complete value chain is working, and we have still a very good customer service level. So that is the basic is in place. Then, of course, as we saw in the end of March, the COVID-19 lockdown is having a very strong impact on restaurants and hotels across the globe and especially in Europe. When that is said, there's also an opportunity in takeaway, as I mentioned. Restaurants are shaping -- changing to more takeaway options. Now since the sales start to decline already mid-March, we now have about a month of sales data, and sales have started to stabilize. That's why we feel pretty confident in when we now forecast sales. And if we assume that the lockdown will remain for April, May and June, so total lockdown for the complete quarter, then that means that the sale will be reduced with more than 50% in the quarter. Of course, we all can hope that the lockdown will start to ease before that, but that would be the consequence if the lockdown remains for the full quarter. Of course, we all then hope for a recovery, and we expect the recovery to take place during the second half of the year, but it's very difficult to forecast at what rate that recovery will take place. So with sales starting to come down, we quickly started planning for actions. And number one is, of course, to then adapt our production capacity in line with the lower demand, and that has taken place. We have, through work time reduction, managed to decrease capacity in our converting factory and also at Rexcell. In Rexcell, we also have the opportunity on selling jumbo rolls for other applications than our table cover and napkins. And that work has proven to be successful, so we are now increasing our production times at Rexcell, which is very positive. So work time reduction is the biggest cost reduction -- biggest part of the cost reduction program, but we are also initiating and have initiated already many other initiatives, including cutting down of consultants, short-term employment, marketing spending, et cetera. So the total cost-cutting program in quarter 2 is now in the level of SEK 150 million. And there, we see no restructuring costs, and it will have an impact already as from the beginning of April. We have also previously announced that the Board proposed to withdraw the already proposed dividend for this year. So with these activities, we see no need for additional liquidity. We have confidence that the loan facilities we have will cover and bridge us in this situation. So that is, of course, positive news. But overall, you can say that we plan for the worst here. In most normal business situation, you do a forecast, which is realistic, and then you do best case and worst case. We did a forecast, which we believe was realistic. Then we did a worst case and much worst case, and we planned our costs according to the much worst case. So hopefully, we will get into a better situation that we plan for, but we feel we are ready for the worst situation. That is quarter 2. If we then dare to also lift our eyes a bit what's going to happen when the market starts to open up again. I think we're all aware of the discussions and the difficult balances of short-term health impact versus the long-term financial and long-term health impacts of the shutdown. So many countries now are planning for opening up the countries again. One interesting aspect that we see is, of course, that a lot of people being in quarantine situation now at home have a very strong need for social interactions. That's why we believe that when the restaurants do start to open up again, there could be an opportunity for quite a quick recovery. We also believe that when the restaurants open up, there will still be demand for more and stricter hygiene routines and hygiene products in the restaurants. And there, we feel well equipped. We have good table covers that will secure totally hygiene situation between each of the guests. We have napkin solutions that covers the cutlery, and we have wet tissue, et cetera. So good product offers in the area of hygiene, and we can help restaurants to build confidence to their customers that they have a hygienic operation. We also now have built in the last year up a very strong business with 1 billion turnover in takeaway products. And here, we can also help our restaurants to build a second leg of their operations with strong takeaway business. And we expect that the take -- the increase in takeaway demand will also continue when the market starts to open up. So in total, we believe that we are well positioned to be not only strong, but maybe even stronger in the post COVID-19 situation compared to before. When that is set on the forecast, we also feel confident that our long-term strategy is still the right one. And we are actually happy that it -- we did develop this strategy because it has helped us in the current situation. With the even stronger customer focus, we now manage to keep a good customer service despite strong work time reductions and with -- despite high volatility in the market. So that has proven to be very important.And also, the increased digitalization of our business have helped us to be able to, again, support customers and markets our products in other ways than through physical sales visits. So there were many parts of the strategy that has helped us in this situation. And we will continue to put also long-term focus on our sustainability and building together a more sustainable offer across the business. And finally, as I said, we feel well positioned in the post corona area with 2 main brands. One, Duni brand that will help the restaurants and hotels to build up even more hygienic offer. And secondly, with the BioPak that can help the restaurants to increase their takeaway business. And with that, I'm handing over to Mats to talk you through the financial situation.

[Mats Lindroth, Executive VP of Finance & CFO]

Thank you. And starting to look at the income statement where we can see that we had an operating income of SEK 80 million this year in quarter 1 versus the SEK 93 million in quarter 1 2019. So there is a drop of SEK 13 million. This drop of SEK 13 million can more than be explained by the second 2 weeks of March, where the sales were dropping. And we also had the effects of very low production volumes or even closed factories in this period to adapt to the much lower volumes that we are seeing coming through in -- as from the end of March. And also is that, as Johan have mentioned, we have the strong mitigation program, and the strong mitigation program is more or less coming into effect as from the 1st of April. So a very substantial effect at the end of March impacting the results of quarter 1.Going to the new segments, segment Duni and segment BioPak. We can see that the reduction of operating income is fully in the Duni segment. And it's in the Duni segment that is mostly impacted by the lockdowns in Europe where, in most markets, restaurant activities are more or less forbidden at the moment. So a drop from SEK 76 million to SEK 56 million. On the other hand, in BioPak, we have had a strong development throughout the quarter. And also, as Johan has also mentioned, that we see very small effects on the sales. And then at the end of March, also some positive effects for takeaway product, et cetera, starting the COVID-19 lockdowns. Cash flow. We feel we enter this special period of COVID-19 pandemic and lockdowns in a strong position in 2019 and also during the last 12 months. We had an operating cash flow of SEK 646 million. And compared to the EBITDA, it's very close to 100% cash conversion ratio. And this has been a focus for us during the last, I would say, 18 months to strengthen our balance sheet. And if you look into the balance sheet in -- specifically, you can see that we have a stronger position today than we had a year ago. The net sales-to-equity is -- no, the net debt-to-equity -- excuse me, net debt-to-equity is 62% versus 67% a year ago, and the net debt-to-EBITDA is 2.2 versus 3, more or less 3 a year ago. And finally, our financial targets. Sales growth, again, impacted by the very low sales we had in the last weeks of March. The operating margin at 9.4%. And as we have said, we have withdrawn -- the Board has withdrawn the recommendation to the AGM of the SEK 5 dividend per share. And instead, no dividend to be proposed to be paid during this year. And by that, we -- this will end the presentation part.

[Operator]

[Operator Instructions] The first question comes from the line of Gustav Sandström from SEB.

[Gustav Sandström, Research Analyst]

Starting with the SEK 150 million in cost savings as of Q2. First of all, if you can confirm that this is sort of a year-over-year impact and if you could break it down a little bit more in terms of how much is furloughs, permanent personnel reductions, discretionary spending, et cetera, would be very helpful.

[Mats Lindroth, Executive VP of Finance & CFO]

Yes, absolutely. This is definitely a unique activity. And of course, part of it is that we have -- are reducing costs for consultants, traveling and all indirect items that we can find. But the main part is, of course, that we are closing down production and reducing the working time for our employees. That's really the main part of these savings to adapt personnel to the lower volume. And that goes for both indirect personnel and direct personnel working in the factories. And the major part -- absolute major part of the personnel in Duni are impacted by work time reductions.

[Gustav Sandström, Research Analyst]

Great. And you mentioned here in the report, you see no need for additional liquidity. Could you explain a little bit on your assumptions going into that statement? I would assume that on the long term, if you draw this on long enough, also you would have some problems. So I assume there's some assumptions on where the market should return going into this. So if you could elaborate a bit on that, that would be helpful.

[Mats Lindroth, Executive VP of Finance & CFO]

Yes. That's, of course, if the lockdown would be for several years, that's clear. But if we make realistic assumptions that the markets, at least towards the end of the year, will start to come back slowly, we see that we have the -- absolutely the liquidity and the financing that we need. So I think -- so that's what we can say.

[Gustav Sandström, Research Analyst]

Okay. And regarding your leverage, as I recall, you previously talked about 3x EBITDA sort of a ceiling where you would feel comfortable in terms of leverage. Is it a fair assumption that your covenants are then perhaps at 4x EBITDA or something a little bit above that? Or how do you think we should model?

[Mats Lindroth, Executive VP of Finance & CFO]

No, we see that we have the financing and the liquidity that is needed for this period that we are talking about.

[Gustav Sandström, Research Analyst]

And you wouldn't give us a sort of a rough indication of where your covenants are?

[Mats Lindroth, Executive VP of Finance & CFO]

No.

[Gustav Sandström, Research Analyst]

Okay. Then sort of on the market share perspective, it's been a bit of a fragmented market. I assume that some of your competitors will go out of business or at least need some type of structural actions to carry on. Where do you see -- do you see the potential here to be a little bit aggressive in terms of M&A or approaching clients in a more of aggressive way? Or how do you try to navigate this landscape sort of to make something positive out of it?

[Johan Sundelin, CEO & President]

We are continuously scanning the market for opportunities. But I would be lying if I'm saying that M&A would be the main focus of our activities right now. We have now a lot of focus on making ourselves as strong as possible in this situation, and we believe there are organic opportunities for us with our offer to come out stronger. That is our main focus.

[Gustav Sandström, Research Analyst]

Right. And in terms of sort of customer -- your customers' willingness to pay for shipped goods and credit losses and whatnot, have you seen any indications that you might see some credit losses in April or push to payment terms or so forth? Or where are you with that right now?

[Mats Lindroth, Executive VP of Finance & CFO]

I think this is something that we follow very, very closely. We see as yet no major effects on this. So of course, the situation is not totally normal, but there is no major effects on this as at least not for the moment. But this is a very important KPI that we are following day by day.

[Gustav Sandström, Research Analyst]

So we shouldn't expect any sort of heightened -- a less favorable working cap development in Q2 versus Q1 from what you can see now? Is that how I should interpret your answer or not?

[Johan Sundelin, CEO & President]

I think one thing that is important to keep in mind when assessing this is that we are having most of our sales through distributors, most of them are big and strong. And we're not really selling directly a lot to the restaurants. So that is protecting us a lot in this situation.

[Gustav Sandström, Research Analyst]

Yes. Okay. Lastly for me, I mean, there used to be a discussion on logistics cost. I guess that is a minor effect now with everything that is happening. But at the same time, e-commerce and all that distance shopping has obviously -- has accelerated through this crisis. Where do you see sort of your availability to logistics and the pricing and whatnot? Has that had any material impact on this? And where do you see that going forward?

[Johan Sundelin, CEO & President]

At the moment, we don't see a material impact of that. Of course, there is a high volatility in many aspects of the market. So it's, again, difficult to forecast. But at the moment, we could get our supplies in, and we could distribute as we want to our customers, and we don't see a big impact in terms of costs. And that is, I guess, what we can say at the moment.

[Operator]

[Operator Instructions] There are currently no further questions registered. I'll hand the conference back to you, speakers.

[Mats Lindroth, Executive VP of Finance & CFO]

Okay. Then all we can do is say thank you, and stay healthy. Bye.

[Johan Sundelin, CEO & President]

Thank you.