Duni AB

STO:DUNI

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, welcome to the Duni Q1 Interim Report. Today, I'm pleased to present President and CEO, Robert Dackeskog; and CFO, Magnus Carlsson. [Operator Instructions] I will now hand over to Robert Dackeskog. Sir, please go ahead.

[Robert Dackeskog, President & CEO]

Thank you, and welcome to the Q1 report presentation. Yes. I will first start with the period in short term. Of course, the new COVID-19 waves and the slow vaccination continues to affect the markets and It's pretty similar to Q4. And of course, we had hoped for a really big opening here for the market around [indiscernible], but that didn't happen, unfortunate. But on the other hand, the really strong takeaway trend continues. So BioPak nearly doubled the operating income in the quarter. In the quarter, we also adjusted our loan agreement for another 2 quarters. The market outlook is still, of course, with very high uncertainty, but there are light in the tunnel. And positive is that we've seen some openings now in Denmark where the restaurant actually has been closing seventh of December. So that's really positive. And also Finland is starting slowly to open up. So we see some light in the tunnel. So that's very positive. If we go into the Q1 highlights here. We had a drop in the net sales of minus 25%. And of course, the restrictions significantly impacted the Duni Group throughout the quarter. And of course, it's the area Duni that continues on low levels as, of course, all the sit-down restaurants are forced to, yes, either limit or in many, many markets, it's fully closed on-premises, but on the other hand then, the business area BioPak continues really strong as the takeaway benefits due to the COVID-19 restrictions are increasing. If we look at operating income, we were down with SEK 121 million versus last year, a significant number. And of course, this decrease comes from the Duni business area with less fixed cost coverage and limit economy of scale into the logistics. We have a cost reduction program, and of course, the strong BioPak growth continues to support the results on the other hand, then. I will hand over to Magnus to dig a bit detail then into the 2 business areas.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you very much, Robert. So I will now go through our 2 segments in more detail, and I'll start with the Duni segment, which represents our products at the table like napkins and table covers and candles. So as all of you are fully aware of them and Robert mentioned, we continue to be in a lockdown situation and almost all markets in Europe have been affected by this in the quarter. The decrease for business area Duni is dramatic with a 50% decline and even more so for our main segment for hotels, restaurants and catering. And also, like previous quarters, retail channel has not been that severely affected with only a modest decline. We have seen a gradual strengthening during the quarter, but again from very low volumes. We should also be aware that it's only the second part of March that was negatively influenced by pandemic last year in comparison. So we continue to work hard with mitigating the negative effect from these very low volumes, especially demanding is the situation in our production facility. We have to a great extent been able to lower fixed costs and our breakeven points, but our gross margin has been hurt by the net fixed cost coverage. And also as earlier communicated, we are in the process of seeking support from German authorities. The application in sales is quite complex and based on implications on these new set of legal frameworks, but we estimate the effect to be somewhere between EUR 5 million to EUR 6 million. and naturally a very welcoming contribution to the cover of [indiscernible] costs. But again, since we have not finalized the application, Q1 has not been affected by this. So if we now move over to BioPak segment, which is offering sustainable food packaging, we continue to see a very strong demand parallel to the development of business area, Duni or I should say, contrary that was being burdened by pandemic. BioPak has been contributed by a very strong growth of 25% in the quarter. And that is driven that the industry is now more actively looking for takeaway and sealable solutions, and we have seen that more -- that traditional fine dining and sit-down restaurants are now shifting over also to offer more premium takeaway solutions with [indiscernible] packed design with high quality of sustainable materials. That is exactly what BioPak is offering. Australia, which is our biggest market for BioPak and the second biggest of the group, have seen a tremendous good quarter, which was also the case for 2020. The brand is well known in Australia and New Zealand. clearly associated of having the most sustainable, environmental-friendly packaging on the market with the ambition to champion compostable packaging. So it is clear that the shift from plastic to different fiber-based solution develops at increasing speed. This shift is good news for BioPak offer, but we still have areas where we are more dependent on different solutions that include different plastics to fulfill certain product features. One of these areas is eating and drinking, but the share of total sale is continuously decreasing with a more future proven mix as a result. The cost -- the cost focus has been dominant in the last year, and this had also a spillover effect from BioPak, and the increase, as I mentioned, of almost 25% in sales has resulted in almost doubling the results for the quarter. So in other words, a very strong operational leverage on these additional volumes. So finally, we indicated already in previous quarter, the challenges in lack of container capacity formation. It has led to higher costs, but I would say that due to hard work, we have managed to mitigate delivery delays to customers.

[Robert Dackeskog, President & CEO]

All right. Then if we look at the COVID-19 situation, a little bit actions and outlook here. Of course, as we talked about here is the delay in the vaccination rollout resulting now in the prolongation of lockdowns in almost all markets. And I think almost -- I think Q1 has been the toughest one in Europe actually in terms of lockdowns in the restaurants during the quarter. Of course, we think that the demand to eat, meet and travel will still be there after the pandemic and the vaccinations are coming in place. And then that's -- we saw that last year. So that still reinsuring for us. And I think in times of crisis, we have shown that we have 2 really strong brands that has been very good for us that we are able to balance here with the BioPak part when we don't have the sales in the Duni part. And we have a really high focus now on helping our customers now, first, with the packaging side with the BioPak, but also now for when it starts to be open with new concepts, the increased hygiene focus, and we have a lot of different types of products like [indiscernible] and so on that are perfect for the hygiene safety, to dine safe in that sense and especially for the outdoor as well. Of course, it's very difficult to forecast at the moment depending on vaccinations and different other things, of course, regarding the COVID-19 and so on, but we have a good hope that the society will open during the next quarter. And of course, there will be some restrictions in different countries and so on. But when the summer starts and especially the outdoor comes in, then it's be hopefully, a really good summer. So on that topic, I think we are very well positioned for the future. I think what we've done now in the Q1 here is that we have a new organization set up with the business areas now responsible for the whole category assortment marketing, and to that, having the sourcing and production in 1 basket, so to say, we've never had that. So that's really positive. And then on top of that, we have one sales force that are able to sell both BioPak and Duni. And I think that has been really strong now in these times when it's been a bit volatile. Then the salesforce can focus on maybe one thing a little bit more during that period. So these 2 things are feeling really good for the next coming years here. We are actively, of course, working with different type of sustainability projects and working to closely look for our products, the new solutions for reuse, recycling and composting. That's also a very important part for the future for us. So you have a little bit of examples here on the next slide, where we have -- what we've done in the Q1 is that we launched a new packaging foil around our napkins. So it's now a paper foil instead of a plastic foil. And this is starting, of course, on certain type of product group, and then that will be rolled out, but that's a really good initiative. We have also the [indiscernible], which is in the middle on the top there. That is a very important product for us now when it opens up here. That is really hygiene and that you can have the cutlery inside this little packaging. We also worked a lot on the digitalization and we have a visualizer that will also, of course, now when the pandemic has been, we haven't been able to use it that much, but that will come in hand now for the restaurants to create great atmosphere and the high hygienic atmosphere in the restaurants. And in the bottom, Q1 is actually the quarter where we have most fares in Europe and it's a good launch point for us when we launch a lot of products. But this year, we've been able to transfer a lot of customers then into our digital fares platforms in the different countries. That's been also a very high focus in the Q1. So that's positive. Okay. Magnus?

[Magnus Carlsson, CFO & Executive VP of Finance]

All right. We're moving into the financials and first income statement. And as Robert mentioned, we are down with more than SEK 300 million sales. This is not a bad in absolute terms as in the fourth quarter 2020, but in relation versus last year, it is a similar development. One of the biggest challenges that have been mentioned several times now is the inefficiencies caused in logistics and also less utilization in our production facilities. which is very visible in the numbers with a 50% reduction in gross profit. The lower indirect costs can't compensate for this, and we are showing for a loss in the quarter of minus SEK 41 million. During the quarter, we prolonged our waiver period and consequently with higher financial costs. The adaption of our bank covenants to better reflect the current business environment is naturally very important for us to enable us to also focus on preparing ourselves for the possibility that open up once the restrictions are lifted. We can all enjoy a social life as we are used to be traveling and eating at restaurants and replacing some of all the teams meeting, I guess, we all had in the last years. So now if we look on the -- more in the business areas. It is clear that the historical dominant business area Duni has reduced its share of sales and at the same time, BioPak is very fast moving to the SEK 2 billion level and closing in on business area Duni. It is also notable that the BioPak managed to leverage on the volumes and strengthen the operating margin, that is now 8% both for the quarter as well as for the rolling 12 months. We're looking on the cash flow. Protecting the cash flow has been on the highest importance throughout the year, the last year, and although quarter 1 is seasonally the weakest to Duni. Where normally, we have a negative operational cash flow. The reduction is less in cash flow than the EBITDA decline. I think it could have been even a smaller gap, but we have, during the quarter, invested in having good stock levels on high runs to be able to deliver once the restrictions are lifted. That is a learning from Q3 last year, where we tripled volume within 2 weeks. and have some deliberate challenges when we were ramping up the factory. So this is something we are comfortable in managing and better prepared off. Looking on the CapEx. It's naturally kept very low, but we are not taking unnecessary risks. In addition, we are investing in new web tools and other tools that would keep us relevant in the market. So all those look on the -- some comments on the financial position. Although the disappointment from the slow pace in vaccination rollout and the lifting of the restrictions, we are in a financially good position with lower debt in comparison to time when we entered the pandemic. This is naturally with support from canceled dividends and significant cost reductions we had and other measures we have taken to support the cash flow, but this has proven to be vital for us to stay strong and being able to meet the demands we have during the corona, but also the opportunities that will open up after corona. So finally, our financial targets. Unfortunately, we are not been able to deliver on these and can conclude that the significant volume decline we are experiencing had a negative effect, both in our sales growth, of course, our operating margin, and as earlier communicated, we will not have any dividend for the year 2020. That's all for us. So I will now hand over for questions.

[Operator]

[Operator Instructions] Our first question is from Andreas Lundberg of SEB.

[Andreas Lundberg, Analyst]

I wonder if you can talk a little bit about BioPak, how is it growing in the markets that are open. I think you mentioned Australia, for instance. What trends are you seeing in those markets where the society is open when it comes to BioPak?

[Robert Dackeskog, President & CEO]

Yes, as I mentioned, Australia specifically had more open net restrictions than in total, and we are seeing a strong development also after the restrictions are lifted. So that's the conclusion we are seeing. And there are some signs of opening up now, as I say, in Europe, and we are not seeing any -- we are not seeing the BioPak should be hurt by that. We had a very strong development in BioPak before the pandemic, through the [indiscernible] and the general trending takeaways. So it's not only pandemic that's surprising.

[Andreas Lundberg, Analyst]

Okay. But is the growth similar in the market in Australia? Or is it lower or higher after society is opened?

[Robert Dackeskog, President & CEO]

I would say it's been even slightly better, I would say, if not so good.

[Andreas Lundberg, Analyst]

Why do you think that's the case?

[Robert Dackeskog, President & CEO]

I think that mainly related to that we have a very strong offer and we are very good in delivering on time and so on. So there are other parameters connected to that. So we have a very strong offer in itself and that's the thing of interest.

[Andreas Lundberg, Analyst]

And in the same area, you reached a rather nice operating margin as you say, from leverage and so forth. Do you think you can sustain that kind of margin also going forward for BioPak?

[Robert Dackeskog, President & CEO]

I mean, that's a tough question, a good question. What we have seen in Q1 is that we had a really good operational leverage on the volume. It's all about how we scale this -- continue to scale and accelerate the BioPak business. The gross margin in sales has been quite stable. So it's more about the need for investment to accelerate the growth further, but the operational leverage on the additional volume has been improving really good. Absolutely.

[Andreas Lundberg, Analyst]

Okay. And lastly, on the -- you mentioned raw materials, higher costs for logistics and so forth. How do you view your own potential price adjustments?

[Magnus Carlsson, CFO & Executive VP of Finance]

Yes. I think, I mean, Duni's ambition is -- has always been to compensate for increased raw material. So -- and of course, sometimes with some delay in the different markets, but that's our position we take now.

[Operator]

[Operator Instructions] There are no further questions at this time, so I will return the conference back to you.

[Robert Dackeskog, President & CEO]

Okay. Great. Thank you all for listening today. And yes, we'll speak soon again, and we hope that it's been some -- the lockdown has been less than in the next coming months, but thank you.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you.