Duni AB

STO:DUNI

Earnings Call Transcript 2023-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.

Please go ahead.

[Robert Dackeskog, executive]

Thank you, and welcome to this -- let's see. I get some echo here. Let's see. If we take out the [indiscernible]. Just a minute. [indiscernible]. Hello, everyone -- yes, yes. I'm sorry. [ I think I'm getting some ] [indiscernible] yes, yes, yes. Hello. All right, I hope you can hear me. And yes, welcome to Duni's Q1 report.

And then we will start a little bit with, yes, short highlights here. We'll come back to a lot of these things during the presentation, but the highlights for Q1 is that we have sales at record levels; and of course, [ the right ] broad market demand for -- from the restaurants visits that has improved since last year, of course, with a lot of restrictions. We had volumes and efficiency gains in manufacturing, strengthened operating income. Cost compensation supports our sales growth and margin recovery. And of course, this has been a historically strong Q1 result, as also that we have the sustainability assortment that is meeting the consumption patterns in the market. And our operating cash flow has improved by over SEK 300 million in the quarter.

And the agenda for today is that, yes, we're looking in a little bit to the market outlook; a little bit summary of the Q1; moving into the 2 business areas and looking at the 2 innovations we are driving currently; and looking into our sustainability initiatives and targets; and then in the end, the financials; and then a Q&A.

So the market outlook. We have some data from market. It's always hard to get a lot of data from this market, but bookings have recovered really good for the restaurants, when we look at the open table [ graphs. This is one from ] Q4. And in general, the market [ volumes ] are a bit below 2019; and I think our sales is in line with the overall market developments there. And we can also see that -- some data for hotel booking indicating that bookings are still a little bit below the 2019 volumes.

Moving on to the key financials. We grew by 30%, which is SEK 434 million. The operating income was at -- ended up at SEK 130 million versus SEK 51 million last year. And our operating margin in the Q1 was 6.9% versus 3.6% last year.

So a little bit comments around Q1. The net sales: Of course, our net sales recovered from the previous year then and came from cost compensation and, of course, the volume demand in the market. And we have also had a good growth in BioPak outside Europe. And the operating [ impact ] improved significantly with, of course, volumes coming in and also working with a lot of efficiency improvements in manufacturing that have strengthened our operating income. It's a little bit slowdown in the inflationary pressure, yes, and that enables also compensating price adjusts to better meet increased costs. It's a historically strong result in absolute money here. And although, of course then, the gross margin is still a little bit below the from -- the pre-pandemic levels.

And we're moving over to Magnus here [ and seeing ] the BA Duni first.

[Magnus Carlsson, executive]

Thank you, Robert. And good morning, everyone.

So I will now, as Robert said, go through our 2 business areas in more detail. I'm starting off with BA Duni, representing our products for dining solutions like the napkins, table covers and candles.

So Q2 showed a growth of almost -- more than SEK 300 million. And that is equal to 34% in comparable currencies, ending slightly above SEK 1.1 billion for the first quarter. And as you can see, profit also improved, by SEK 100 million; and operating margin is now above 10%.

Some more in-depth comments from business area Duni. Last year quarter was still impacted by COVID, if you might remember, so the strong sales development is partly, of course, related to a normalization that we see in the HoReCa segment, but the sales development is broad and valid for almost all markets that we are present in and particularly strong for our napkins and premium napkins. And that is a trend that we also saw before the pandemic. Cost compensation measures have been initiated already last year. And this had a positive contribution to sales, explaining more than half of the increase in sales. And this is also an important factor for the margin recovery in the quarter.

As Robert said, the first quarter is historical strong for the business area in absolute terms. The gross margin has improved. And a significant part comes from operational leverage in the factories from the improved volumes and, in addition, high efficiency from lower share of indirect costs. It's important to say that the inflationary pressure is still severe, although we do see trends of some raw materials decreasing from the peak levels that we saw in Q4. Energy, gas and biofuel continues to be on very high level, so in the quarter, we accelerated the launch of fossil-free and fully compostable napkins with Bio Dunisoft. And this is a crucial part of our sustainable target, not least to secure our target of being net zero 2030.

So to sum up: a historical strong first quarter with [ benefits ] and improved margins from efficiency measures and also cost compensation actions that have taken off.

So if we now move over to business area BioPak, selling products within sustainable food packaging like take-away trays, cups and other fiber solutions for meal service. We also here see a healthy growth of around 11% for the quarter. As you can also see, operating income is down 8 -- down to SEK 8 million; and that is equal to 1.1% for the quarter.

If we take the next page here, yes, and look into some of the details. We can state that the growth comes from the business outside of Europe, especially strong in Australia. Volumes in Europe is down versus last year; and partly explained by the boosts from the pandemic that was still present, as mentioned. We're also accelerating the shift out of plastic products to fiber-based solutions in Europe. And the remaining plastic usage goes down rapidly, but nevertheless, it is apparent that the underlying demand for more sustainable food packaging solutions in fiber is significant. But there is also high dynamics in trying to adapt to new business models for a more circular economy, focusing on the materials [ attached ], naturally, but also recyclability, reusable options and -- manage wastes in more efficient way, so although a healthy sales level, the margin is down to 1.1% and -- a reduction from previous year on 4.8%.

Spot prices on container costs, which had a significant impact on profitability last year. That has come down significantly in the quarter, but due to the lead times and the high inventory levels that we have in this business area, the positive effect from the lower container costs are delayed, which together with the higher storage cost explain actually the lower income.

So I will now hand over to Robert again to inform you about our ambitions to strengthen our position of being the trusted sustainability leader. And that means our sustainability targets as well activities involved through innovation.

[Robert Dackeskog, executive]

Thank you, yes.

As -- we have our mission and our vision to be the trusted sustainability leader in our industry. And we are starting to work on a lot of things, of course, but we have 2 projects that we are in a prelaunch phase. We have the Idun project, which is focusing on circularity, to close the loop in a circular system and based on some subscription model and an infrastructure around that. And of course, this is the prelaunch. This is testing and so on, so this is a different -- a little bit different way of working in here. Maybe we want to make money on a product. It's more a system and a transaction in that sense but focusing really on circularity.

The other project is called the Unmo project. And there we are focusing on a digital platform where actually restaurant owners and potential employees can meet. And we want to be part of the solution and also provide a home for the young professionals who are seeking long-term career in the industry. So these are 2 really interesting areas we are putting some innovation and thinking around and actually going back to the industry's main problems also that staffing is a big issue in the industry. So Unmo is a really interesting project we are looking at.

And moving over to our, yes, Decade of Action which we have said, our sustainability initiatives and our targets. We want to become circular at scale, and both these 2 initiatives are focusing on that. Of course, we are also focusing on going net zero, looking at scope 1 and 2, to become net zero in that; and also that we will -- living the change and become this trusted sustainability leader.

And we will go then to a little bit -- what the activities has been in this quarter around this is that we are piloting then the Idun concept [ group for ] trying to find a system for reusable packaging. That's the first step in that, and then focusing also on single use in that. And also we are looking at recycled plastic in our packaging solutions. And I am really happy to say that now we are following the virgin fossil plastics use for the single-use items. And we are moving down now to an index 70 for Q1 2023, so that's a reduction by 30%, which is fantastic.

Looking at the "going net zero" target. The achievement this quarter is that we have submitted our Science Based Targets information. And hopefully, we'll get a positive response there later this year. And we are also measuring, as we said before, the CO2 per ton self-produced product. And we reached -- progress at the moment is that we reached 38 index now in Q1 2023, so progress there as well.

And living the change is -- maybe to mention this quarter is that we got an EcoVadis score of 73, so gold rating in this -- last year in [indiscernible], so that's also fantastic. So we are really working towards these 3 goals in everything we do and really happy about the progress here, yes.

Handing over to the financials, Magnus.

[Magnus Carlsson, executive]

Thank you.

If we start with the income statement and looking into that. So the improved volume situation, together with price compensation measures to manage the inflationary pressure that we have talked about for quite some time now, are the main explanation for both the margin improvement and the historical strong Q1 in absolute terms. So gross margin has improved but still slightly below pre-pandemic levels.

If you look on the earnings per share, that's also improved from SEK 0.11 per share in the quarter to SEK 1.65. As we can see, in the last 12 months, we are now on SEK 5.79 per share.

So if we'll may -- if I may comment a little bit on the business area. We see that BA Duni has improved significantly from previous year and now above 10% for the quarter and 10% for the last 12 months, meeting our financial targets for the group, but as mentioned previously, we do see a more challenging situation in BioPak Europe, thereby from high cost pressure. But we work diligently to come back, of course, to levels seen before the pandemic up until basically 1, 1.5 years ago. So again I think this also shows that Duni Group has benefited from having 2 business areas that is complementing each other and working a little bit of hedging versus the other. And we consider this as a strength also going forward but naturally with the ambition to regain margin growth again in BioPak Europe.

So from -- to look on quarter 1 from a cash flow perspective. And this is normally a seasonal weak one with often a negative outcome and mainly due to stock buildup and outcome from some numbers in Q4. However, this quarter 1 is positive exception with a positive operating cash flow and an improvement from -- with more than SEK 300 million versus the same period last year in which [ the numbers ] were very weak. So we are now seeing a healthy level for our cash conversion with positive operating cash flow of more than SEK 400 million for the last 12 months.

And as you can see, the net debt, if you look on the financial position, has come down from last year. And that's a result from the high profits, of course, but also that the inventory is starting to decrease in the last 2 quarters, I will say, and although we have a significant growth. And that means, of course, less stock days. So with lower debt, we are now seeing an overall stronger financial position, stronger balance sheet with improved headroom.

And finally, our return on capital employed, excluding goodwill, continues to strengthen and now on 18%.

Finally, as you can see and as mentioned several times, we have now a very strong growth, as you can see to the left, explained by volume increase, price compensation measures and, I will say in general, solid market demand; unfortunately, not yet able to reach our margin of 10%. Although, the trend is positive and linked very much to the price compensation measures taken and with higher-cost-efficiency production as well as for our indirect costs.

And finally, our target to pay out at least 40% of our net profit in dividend. And as previously communicated, Duni Board of Directors recommended to AGM, in May, SEK 3 per share as dividend. And that would fulfill the third target and equal to 70%.

So with that, I thank you all for listening in. And I will hand over to you, Robert, for final comments.

[Robert Dackeskog, executive]

Yes, thank you, for listening in.

And yes, as a summary then: We have a historically strong Q1 result. And I think it's great to see that it's we are at more normalized levels in the market. And the whole HoReCa industry has really recovered from the past years. And it's been very tough years, of course, for Duni and the whole HoReCa industry, but I think just we and the whole organization has done a fantastic, hard job here to come back here, so yes, it feels good in that sense.

So thank you and handing over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Karri Rinta from Handelsbanken.

[Karri Rinta, analyst]

Yes. I figured it was me, Karri, Handelsbanken. I have a few questions I'll ask, starting with the Duni division. I see that your sales are roughly 30% higher than what they were in first quarter of 2019. And surely, there's some FX in there as well, but is the rest pricing? Meaning that, have you raised prices by up to 20% compared to pre-pandemic levels in the Duni division? That's my first question.

[Magnus Carlsson, executive]

Thank you for the question, Michail (sic) [ Karri ]. That is correct. [ I mean roughly it seems that you ] calculate backwards. So [ the connect ] from price compensation [indiscernible] number, yes, versus '19...

[Karri Rinta, analyst]

Yes. I'm sorry. I was on mute.

[Magnus Carlsson, executive]

I'm sorry, yes.

[Karri Rinta, analyst]

Yes. Table covers product category: It was the best quarterly sales since first quarter of 2020. Is there anything structural that is sort of boosting these numbers? Or is it simply a recovery plus price increases?

[Magnus Carlsson, executive]

On the -- of course, we are seeing a strong comeback for the covers [indiscernible] being a very important segment for us with high margins, so we are happy for that. Part of it, I think, is related to, after the pandemic, that we see a lot of conferences and people meeting up and traveling again. This is a product that is very much linked to that. So part of it, I think, is a good indication that we're out of the pandemic. I think we're, I'm a little bit careful of saying, "Because we have had a negative trend in the last [ 10, 15 ] years in this product group, is this really the end?" I think it's a little bit early to say that, but of course, we're happy to confirm that we're back with the numbers again in table covers, yes.

[Robert Dackeskog, executive]

And catering is an important customer segment for us in table covers, so with them back, it's -- yes, that's an important part.

[Karri Rinta, analyst]

All right. And then moving over to BioPak, if we look at the declining sales in Europe in the first quarter. Is that, in your opinion, purely about [indiscernible] consumer behavior as restrictions were lifted and people could eat out instead of ordering? Or I guess the question is that are you seeing any impact from these tougher regulations on single-serving food serving. I mean I'm referring to France and Germany that have imposed some new regulations on single-use serving solutions.

[Robert Dackeskog, executive]

[ I'll take that. So ] I think, [ with this year ], that we are comparing quite high numbers with the take-away market actually. So that's [indiscernible] compare with the dynamic. And we have a shift to more of dining in then and dining solutions [ and whether ] people are going to the restaurants. That's the major one I would say. And then of course, we have a couple of, yes, deals then maybe in Italy and Germany that has -- that isn't there anymore. So I think that is what we're seeing. I think the whole take-away trend with fiber packaging is still there. And we are -- yes, we are moving a lot of products into the sustainability area, so I think it's more about the pandemic effect, what we can see now at least.

[Magnus Carlsson, executive]

I would also like to add on to that, that we are shifting out. We have some plastics left, and we are shifting out those products as well. And of course, that has a negative impact in our volume assumption, but the higher share of fiber growth [ develops positive here in long term ], so I will say no. We do not see any singular effects from the new legislation coming up [ in the end ]. And also I think, I mean, this is on the long term actually positive for us and finding of new ways and opportunities.

[Karri Rinta, analyst]

And then the sequential decline in BioPak's margins. Is it -- I mean there shouldn't be that much volume leverage because of the way that you run this business, so what is -- what are the main reasons for this sequential decline in BioPak's margins?

[Magnus Carlsson, executive]

Yes. Some -- I think [indiscernible] the total levels taken this period with very high costs connected to the [ components ] but also in other raw materials. So of course, with the higher stock and the longer lead times we have on phasing out this, at the same time, we see that the prices are going down a little bit in the market, of course, when the margin goes down. And this is a challenge, of course, to manage this in the best way and to do this quickly, but it's also a bit of a temporary problem. So of course, we want to come back to the margins we were seeing before this, 1.5 years ago, as soon as possible.

[Karri Rinta, analyst]

And a question related to that: So are we past the peak in terms of big costs in terms of what you have in inventory and peak costs in terms of freight? Or how should we think about this margin recovery going forward?

[Magnus Carlsson, executive]

Yes. It's a little bit difficult to answer [ because that's dependent on several parameters ]. The -- of course, the volume, in itself, the higher volume, [indiscernible], but I will say that we have [ a certain lead time on the containers ]. So they went down [ end on the half the ] last quarter. So there is a certain lead time on that. There is certainly, of course, lead time in this inventory connected in itself which is quite high, but of course, the timing of that, if I fully understand your question, is a little bit difficult because it's not only dependent on the inventory level itself [ but, of course, the volume out ]. If I -- we do have a lot of activities, [ as part of new opportunities ], to get these out [ as soon as possible ]. And that is, of course, also dependent on the price levels that we can do these deals on. So we're doing our very best to [ making the job possible ]. That's for sure.

[Karri Rinta, analyst]

Okay. And then final question on that front. I mean minority interest was quite high, so that should mean that the BioPak Australia had a very -- continues to have a very strong profitability. What kind of seasonality does that operation have given that they have their so-called winter now? So do they typically have stronger earnings in Q3 and Q4 and then weaker in -- yes, sorry, Q4 and Q1 and weaker in Q2 and Q3? Or is it pretty stable throughout the year?

[Magnus Carlsson, executive]

It's relatively stable, both the year and quarterly. And as you say, it's they have seen -- we have winter [ in this as well ] [indiscernible]. So basically [ Australia is, yes ], a stronger seasonally Q4. And for us, this situation with the Q2 approaching summer [ means that we go out to put in ] cups and trays and so on, [ on the go ]. So that's the effect we see. It's a good complement to each other. They are not that [ different. They're ] relatively stable [ for every year ].

[Karri Rinta, analyst]

Then the final question, the gross margin. That was 21% in the quarter. And it was 25%, 26% before the pandemic. Is there any structural reason, i.e., BioPak now being a larger part of the group, that would mean that those pre-pandemic levels are not realistic? Or should we still expect that, at some point when cost inflation has eased and you have fully compensated that, we should see those gross margins again?

[Robert Dackeskog, executive]

Yes, [indiscernible].

[Magnus Carlsson, executive]

I think, of course, this is -- in some ways, you can always look on history, although that is not valid. And then you know that the gross margin has been on a higher level. And that is, of course, we work to get back to. It's also a very dynamic environment with both challenges and opportunities. And if we play it right, it can go quickly back and in a good way, but I think the most important factor here is that we see objectively, if we look on market data, that there is a strong demand for sustainable food packaging solutions. That can be in different forms, but I think that is a good indicator that we should see a positive future [ again ].

[Karri Rinta, analyst]

Then one final, final question. The -- given the inflation that we are seeing everywhere, are you starting to get any pushback from your customers in any segments about the price increases that you are implementing?

[Robert Dackeskog, executive]

I think there is [indiscernible] now in that. And I think we base it on that. I think we have really [ baked ] everything, as we've said, in the report and as we have been flagging as well, so -- but we can see that [indiscernible] still is higher than 2019. So [ that will be here ] as well for us.

[Karri Rinta, analyst]

No real resistance at this point from any major customers in major segments.

[Magnus Carlsson, executive]

I mean this is all -- [ I think this has shown we have taken ] responsibility in the dialogue with the customers in this very difficult situation [indiscernible] inflationary pressures. Of course, we need to continue [ to have ] dialogues with the customers. And for sure, I think the strong brand that we have has proven that they are loyal, and then -- but we do see that the costs are coming down. Of course, that can then -- that could lead to certain discussions, but as also stated, we are still not back in the gross margin, so that needs to be balanced and [indiscernible].

[Operator]

[Operator Instructions] The next question comes from the line of Johan Fred from SEB.

[Johan Fred, analyst]

Johan Fred here from SEB. Starting off: So just building on Karri's question here on price increases. Do you feel that you have made all the necessary increases thus far? Or are you continuing to raise prices in Q2, building on your statement that some inputs such as energy, gas and biofuels are continuing to increase?

[Robert Dackeskog, executive]

Thank you. I think we're always taking actions. As we said, it's still a bit [ early ]. We have chased this wagon [ always thoughtfully ]. I mean we are not [ over with inflation ]. We still have some lag, but the main point is this is taken. So I think that's where we are at the moment.

[Johan Fred, analyst]

Okay, great. And just to follow up on the inventory situation in BioPak, do you mind providing some color on the situation? When do you assess that the inventory that you have acquired during the -- or during 2022 at higher input prices will start to cycle through and we will see a material impact from that?

[Magnus Carlsson, executive]

Maybe just a 10-second background on that. It was built up during last year, in a very turbulent market where we have to protect to deliver to our customers. At the same time, we did a lot of [indiscernible] demanded from the market to come through with good, improved, sustainable food packaging solutions, so it was a lot of things going on at the same time. Reviewing now, of course, we are in a situation where we have too-high inventories. And those, we want to take down as soon as possible, not doing and -- more than we used to do, so to say. Then of course, we still will be in a situation in coming quarters where we have a little bit too-high inventory, but in addition, we're working very hard [ with a lot of these ] extraordinary activities in the market to promote and get the products out. And that could be for discounts and that could be for various actions. It's very good products, but they are too high. So not giving an exact answer on that because, as I said before to Karri's question, it's dependent on several factors, not at least volumes, but I think we have passed the peak. And it's actually going down since 3, 4 months back, so the trend is positive. And we want to accelerate that, of course.

[Robert Dackeskog, executive]

Yes.

[Johan Fred, analyst]

Okay, perfect. I think Karri covered the rest of my questions there.

[Operator]

Thank you very much. We have no further questions at this time. Please continue.

[Robert Dackeskog, executive]

Okay. [ Let's say with the sound ]. Sorry. Yes, thank you, [indiscernible] [ and everybody ]. I look forward to the next quarter, and yes, see you soon.

[Operator]

Thank you very much. That does conclude our conference for today. Thank you all for your participation. You may now disconnect.