Duni AB

STO:DUNI

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Duni Q1 Interim Report. Today, I am 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, executive]

Thank you. Hello, and welcome to the interim report for Q1. It's been, of course, a strange past year and so on, and we will come into that during the day. I will first kick off here by short highlights for the quarter. And of course, we had a significant increase of the sales in the business area Duni and that definitely confirms that when all the restrictions are eased up and so on, we recover very quickly. We'll come back to that a bit more.

We have a continued strong cost pressure, as we all know, with inflation in the world and all the uncertainty that we are facing at the moment. But we are mitigating by implemented price increases in the quarter. We have during the quarter also supported UNHCR as well as sending trucks to the refugee camps in Poland for serving food and beverage at the border there. We also, during the quarter, have closed down our Russian entity in a very responsible way. And we have, during the past year and also in this quarter, continued to work to reach our sustainability targets. We'll come back to that as well. And lately, we installed solar panels in our factory in Bramsche and electricity to our paper mill in Skapafors is being supplied by Bra Miljoval Vind, which is a huge step for us.

The agenda here, Q1 summary, business areas, we're going to do a little bit sustainability, financials and then Q&A in the end. So a short summary of the Q1. We have had an increase of 55% of net sales, so SEK 1.4 billion. And the operating income then ended up at SEK 51 million versus minus SEK 41 million last year, so an operating margin of 3.6%. And a little bit comments around that then. Of course, all the restrictions that were placed in the Q4 last year, they continued into Jan-Feb. And I think, especially in some countries, it's been still there in a way. Germany and Holland, which are our main markets had eased up during the -- maybe a late part of the quarter. But I think Sweden is a special place in that. We have a quite open environment versus other countries.

And if we then look at the business area BioPak, it continues to grow, especially in Australia, as the demand here for takeaway and all the sustainable packaging is continuously high and changing out plastic to sustainable packaging. We have an increase in our inventory to meet all the challenges, of course, to deliver performance in the business area BioPak.

And the operating income then, of course, ended up on a high increase here, of course, versus last year and especially coming from the Duni business area, more than double versus last year. We have a strong margin pressure that comes from still the sea freight cost of containers and so on, but we mitigated by price increases that we've been implementing during the quarter. And in this quarter, no government support was received if we compare them to last year, when we got SEK 33 million in comparison.

Yes, I hand over to Magnus.

[Magnus Carlsson, executive]

Thank you, Robert, and Good morning, everyone. I will now go through our 2 business areas in more detail, and I'll start off with the business area Duni, representing our products like napkins and paper cups and also candles.

So as already indicated in February when we presented the Q4 report, the initial part of the first quarter was very much characterized by restrictions in the HoReCa industry. But we also saw a gradual easing of the restrictions throughout the quarter. And consequently, the end of the quarter moved towards more of a normalization in demand. So as a consequence, the sales almost doubled from a very weak first part of the quarter and increased so much. The month of March was double versus January.

Overall, throughout the whole quarter, the sales almost doubled from SEK 400 million to SEK 800 million. This resulted in a profit improvement of more than SEK 100 million from minus SEK 83 million to SEK 21 million. So quarter 1 is our seasonal weakest, but also the relative weak margin should be seen as a result that we are still not fully back to normalized levels in volumes for the full quarter.

Again, as mentioned, the quarter as a whole is not back to what we can see as levels seen before the pandemic. But the improvement was clearly strengthened throughout the quarter, and we are, therefore, optimistic. Sweden, as Robert mentioned, has continuously been like in Ireland in Europe, where the restrictions has been significantly lighter versus rest of Europe. Still, in the beginning of March, you had to show COVID pass and negative tests even to enter restaurants in Germany and Benelux. But I think, now in April, we can finally state that also here and consequently, in all our markets, we are back now to some kind of normality with no real restrictions, and we are optimistic that we hopefully can see an end of this long period of pandemic.

The war in Ukraine has accelerated raw materials and energy prices even further to extreme historical levels. As an indication, as some of you might have seen, macro numbers that was published just some days ago in Germany indicated an increase of 31% versus a year ago and energy prices with 88%. So although we successfully managed to increase prices during the quarter, new prices has been initiated, and we'll see an effect in the third quarter to mitigate this margin pressure.

If we move over to the BioPak segment, which is offering our sustainable food packaging, we continue to see a good growth of more than 20%. However, as indicated previously, the margins are reduced to around 5%, which is a lower level than we have seen before, and this is directly linked to the extreme levels we now see in raw materials and especially in sea freight. The result is, therefore, slightly down versus last year from SEK 43 million to SEK 31 million. Throughout the pandemic, we have seen how BioPak have complemented business area Duni with a reverse effect in volumes. Strong growth when business area Duni had experienced weak demand from seated diners. However, we are confident that the need and demand for environmentally smart food packaging is strong. And this is further supported by the immense need to shift out plastics in packaging.

So although continuous -- we see continuous healthy and firm growth, the margins in the last quarters have been impacted by the extreme cost levels and price increases have gradually been implemented. And we will see new ones to come back to the levels, as I've said, where we need to be. Beginning of Q2 this year indicated lower cost levels on the sea freight, but maybe it's a bit too early to state a clear trend here.

[Robert Dackeskog, executive]

Okay. Then we move into little bit what we have been up to here in the past year that we worked a little bit on updating our strategy. And we have created a purpose for the company and that is to inspire the world to give more than we take to enable all people to enjoy good food, well-being and togetherness today and for generations to come. So we really want to be a purpose-led company. So why do we go to work every day? And I think this is a really good direction.

And also, we worked out the vision for 2030. And we call that Our Decade of Action as Duni get back in and -- yes, looking at the UN Decade of Action, of course. And we have put some targets to 2030, and our vision in 2030 is that we have achieved full circularity and we passionately lead our industry towards a world where we give more than we take. We care for our planet and our well-being. We create joyful, safe and easy-to-use solutions for all people to embrace food, togetherness and design. So I think it's important here we have the sustainability targets, of course, but also we have our business idea and model is to be where we actually can create a joyful and get people in good mood when they meet and so on in restaurants and on-the-go and all that.

So we worked out that and put down a lot of targets for that. And 3 initiatives then is that we're going to Becoming Circular at Scale in 2030, Going Net Zero in 2030 for the net carbon emission for Scope 1 and 2, and we're going to Living the Change to become a trusted sustainability and I will come a little bit into that in detail here. We also measure, as an overall target here, an index carbon intensity index scope of Scope 1 and 2, and that is tons of carbon per ton self-produced product. And we have a base year of 2019, where we have an index of 100, and we have put a goal in 2025 of 40. And actually, we worked really hard on this. So in order, when we moved over to renewable energy and the biggest shift here is for our Skapafors factory, of course. So just to get some ideas here, we had 45,000 tons of carbon emission in 2019. And now in 2021, we were down to 27,000 tons, and now we are tracking at 21,000 tons for 2022.

A little bit different slide here, the next one, but these are the 3 areas we are focusing on, where we put a goal for 2030. And also, we have an interim target for 2025 and what activities we are following. So this we're going to follow every quarter and then, of course, every year. Some of those will be more easy to follow per year. But we have taken a couple of examples, Becoming Circular at Scale. There, we need to -- for 2025, and if we take the shorter term here, it's a reduction of virgin fossil-based plastic in single use product by 50% towards 2019. Today, we have 5%. So we're going to have 2.5% in 2025. We need a large number of end-of-life solutions. So looking at circularity here, going from take-make-dispose logic to more close loop. And also, we look at FSC-certified products then for 2025, working on that.

And then we have Going Net Zero. Zero vision for this under the Scope 1 and 2, of course, then, and doing a lot of activities there. So we have activities to be approved on the science-based target initiative. And we're going to have a 60% reduction in carbon intensity with, then, as I mentioned before, 2019 as the base year. And then Living the Change is that we're going to become a trusted sustainability leader in our industry. And there, we're looking at maybe more measurable parties looking at the Ecovadis system where we're going to achieve 75 points in 2025. So it's a way to measure that, as you probably know.

And activities according to this in the different parts. So as I mentioned in Going Net Zero, for example, we moved to renewable energy electricity in our paper mill in Skapafors and that makes a huge difference, of course. So lots of great initiatives here and what we're working towards is fantastic, I think.

[Magnus Carlsson, executive]

Thank you, Robert. Just some comments on the market outlook. It has, of course, been extremely difficult to predict the future in the last 2 years. And I think this graph shows the extreme volatility between the months and the quarters. The graph to the left show how many restaurants that is taking orders and coming from a level around 60% in the beginning of Q1, and that has increased to March to current level of 90%. In other words, we're reaching a normalization. The graph to the right shows the seated diners as walk-in and reservations and where you see a clear improvement from the end of February, and we're both looking on -- both graphics Germany. So they basically triangulate the same pattern that Q1 indicated a gradual progress towards normalization and as we speak, a good level.

So looking on the -- some of the financials and we can jump to the income statement. We see that we have a clear improvement in the gross margin and improved significantly from the previous year. Still not back to the levels we want to see versus the historical average. So the inflation on almost all cost components is still accelerating further and of course, very much linked to the war in Ukraine. As said a couple of times now, we are confident that we are able to cover this, and we are in a good position for further price increases and having the best products in the market. The unique situation is, of course, always associated with risks, but we think this is manageable.

You can also see that indirect cost has increased and explained by very low levels last year, supported by governmental support. We have accelerated investments in sustainability, as Robert just talked about, but also in our digitalization to secure our position of having the most attractive offer and efficient way to the market on all platforms, including online. So operating margin increased by 8 percentage points, but the road towards further strengthening of the margins should be supported by additional price increases but also improved absorption in production and further efficiencies.

So if we're looking on very quickly on the business areas to sum up, you can see significant growth, both in Duni and in BioPak, it's very positive. But as mentioned, full focus is now on the margins and due to the accelerating inflation, further price increases are initiated that should bring us back to the levels where we want to be and aligned with our financial targets.

The cash flow is normally negative for the first quarter being a seasonal weak as well for Duni. However, as you can see, inventory is up quite significantly, and this is for 2 reasons. First, it is a result from higher costs for our products. But it's also a deliberate way to secure our deliveries, especially in BioPak, which has been a challenge for the whole industry I think in the last 2 years. And the supply chain situation, especially from Asia, has been very fragile.

A little bit on our financial position. It continues to be good. Net debt has increased in the last quarters, but the ratio towards our EBITDA decreases. And also, as you can see, return on capital employed, excluding goodwill, continues to increase and is now on a level of 16%. And finally, as you can see, looking on our financial targets and outcome, we have now a very strong growth, of course, from lower levels coming through the pandemic, but it's clearly above the level of 5%. BioPak continues to be the growth engine within Duni Group. And I stated several times, our margins suffer from the extreme cost levels that we have seen, but will be mitigated by further price increases. And we should also see, as I said, a positive effect in better absorption in our production units, especially for business area Duni.

And finally, as we already indicated, there is a recommendation from the Board not to have any dividends for the year of 2021. So with this, I hand over to Robert for final comments.

[Robert Dackeskog, executive]

Yes. Thank you. Yes, it's been a change, of course, versus last year, which is very positive, I think. And hopefully, we are seeing the last of the pandemic now and not returning to that. I think that's -- we all hope for that, and we'll get a really good spring and summer here, which is a good season for Duni Group in general. So yes, with that, I'll open for questions.

[Operator]

[Operator Instructions] There are no further questions at this time. So I'll return the conference back to you.

[Robert Dackeskog, executive]

Okay. Great. Yes, if no further questions, then we end the call here. And yes, we look forward to a great year here.