Duni AB

STO:DUNI

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to the Duni Group First Quarter Interim Report Conference Call. [Operator Instructions] Please note, this call is being recorded. Now I would like to pass the call over to Robert. Please begin.

[Robert Dackeskog, executive]

Thank you, Yes. Hi, and welcome to Duni Group Interim Report for Q1 2024. The headline for the quarter is a stronger operating income and strategically niched acquisitions. Moving into the agenda. We'll run through some highlights, the market outlook, summary of the total Group for Q1. And then we're moving into more details into the 2 business areas.

And then innovations and also looking to our sustainability targets and then a deep dive into the financials, and then we have a summary and the Q&A in the end.

So if we move into the highlights, 3 things here. Improved operating income being the highest first quarter measured. Gross profit increased by 11.2% compared to the same period previous year. And continued expansion in the Food Packaging with strategically niched acquisitions. Those are the top 3 highlights we present here. If we look at the market outlook -- outlook. Our general market outlook has not really changed since last quarter. The HoReCa market will continue to have a gradual and potentially volatile recovery short term and a stable recovery long term, mixed signals and uncertainty for the coming quarters as we all know.

Duni Group's complementary business areas, Food Packaging Solutions and Dining Solutions with a diversified product portfolio provides resilience. The Group's financial position enables addressing profitable long-term growth opportunities. And if we look a little bit on the graphs here, top right graph shows the German HoReCa market and especially the red line here shows the number of visits versus 2019 and for 2024, it was projected that actually going up a little bit, but still 10% down versus 2019.

And if we look at more real live data, so to say, shows the graph from open table and measuring versus last year 2023, and it's a bit weaker German market than actually expected then from the top graph. So we can see that, yes -- down here in both Jan, Feb and March and also a little bit in April where actually the [ Easter ] was hitting, of course.

Left graph in the bottom there shows that the -- in most regions, in Europe, actually respondents share a more positive outlook than actually they did in December. And if we look more particularly into Europe, it's actually up from [ 22% to 38% ]. And this is the -- we're looking into the next coming 6 months. So that's the stakes on a little bit more macro level. Short the key financials with net sales of SEK 1.7 billion, a little bit more, which was a little bit down versus last year. The operating income, SEK 140 million, which was up then SEK 10 million versus last year from SEK 130 million. And our operating margin ended up at 8.1% in the quarter and last year it was 6.9%. So the improved margin in the quarter versus last year.

Looking more into the Duni Group's Q1 on a higher level here with, as I said, net sales is down, and it's down minus 7.5%. And the market data indicates a softer Q1 compared to the last year. And the drop, in a way, consists of 3 different parts. So we have partial price decreases. The retail U.K. and German has a drop for us and mainly on low-margin contracts and also fewer invoicing days has negative phasing impact. And in the quarter, we acquired Relevo and Huskee, while already acquired Decent Packaging was console -- consolidated in February and Relevo in March, and Huskee will be in, as from 1st of April.

If we're looking at the profit level here, it was up plus 7.6%. We had an improved pricing cost balance for raw material and the sea freight compared to same period previous year. Lower cost for stock keeping been more normalized now after the pandemic peak. And the customer mix improved with a higher share towards HoReCa versus then retail compared to the period previous year. [indiscernible] cost has increased due to the investments in digital transformation, our innovation projects and also market expansions outside of Europe. Now I'm handing over to Magnus, who will go into more details into the 2 business areas.

[Magnus Carlsson, executive]

Thank you, Robert, and good morning, everyone. So as usual, I will now go through our 2 business areas in a little bit more in detail, and I'll start off with business area, Dining Solutions, that represents products for setting the table. So Q1 ended with lower sales versus the same period last year, down with approximately 8.8%. That equals SEK 100 million. Operating income is slightly down from last year with SEK 13 million. But as you can see, margin in percentage is kept and above 10%. So a little bit deeper look on the business area, Dining Solutions. So as Robert said, the macro statistics looking on the HoReCa in general and consumer spending indicate a softer demand. And this is especially noticeable in Germany, and that is our biggest market, as some of you might know. One of the reasons for challenging HoReCa is that Germany has announced a return to the VAT rate of 19% for restaurants and catering services. That is in effect from 1st of January this year. This is a move that follows the temporary reduction we had during the pandemic period down to 7%.

So nonetheless, the decrease for Dining Solution could be summarized into 3 main explanations as we touched upon. First, we have adapted the price on some of our tenders and commodity business. And this price decrease explains roughly 1/3 of the drop. Second, we have lost some bigger retail contracts in U.K. and Germany. This also explains roughly 1/3 of the decrease. And finally, we clearly have fewer invoicing days in March as some Easter effect. For the quarter, this explains roughly 2 to 3 percentage points.

So consequently, the volumes in the [ Professional ] segment against restaurants and hotels is relatively flat although we do see significant movements up and down when it comes to markets and products. And since we are vertically integrated in this business area, we have paper mill and converting units, we have an effect from less volumes and that means lower cost absorptions. So naturally, we carefully try to evaluate every contract and how it contributes to the group's profit.

We are a premium-priced company, and that means that we sometimes move in and out of tender business. And it also means that we need to quickly adapt to temporary lower volumes. But I think for good cost control, we have managed to keep the margin above 10% and balance the price level versus the cost level.

So if we look on our other business area, Food Packaging Solutions, focusing on products with sustainable food packaging, we see a sales decrease of 5.5% in the quarter. However, we have strengthened the profit, both in absolute terms as well as in the margin. So if we take a look a little bit more in the details, the slightly lower sales is fully explained by lower prices. And I think that reflects very much that sea freight has come down from the very high level we saw some 1.5 year ago. And the volume continued to be positive outside of Europe, although we do see a somewhat weaker development compared to previous quarters, especially in Australia, which had experienced a high growth over the years.

In Europe, volumes continue to fall behind high levels that was boosted during the pandemic period. In parallel, also with Dining Solutions, main part of the volume decline in Europe could be there, [indiscernible] from these lost retail contracts in Germany and U.K. I think for the business area, since 2 years back, we have worked hard to decrease the stock level that was built up during a period of very high costs, connected to the sea freight. It has been a challenge to decrease the inventory since we lost competitiveness versus some competitors that didn't face the same issue or problem. However, I think now we are in a much better position to take on big attendance and defend our position.

So I think we have mentioned before that we experienced a very dynamic packaging market with many new companies offering different types of solutions for the future packaging. I think this reflects very much what is going on and the guidance we get from the European Union on how to manage single-use plastics and waste in general. I think we firmly believe that there is no one single answer to this or offer that can meet all the necessary requirements. And that is why we have, in the last 3 years, invested in both the companies but also new business models with reusable solutions, but we have also invested in new assortment, new materials, new barriers, that is in the forefront for this new regulation that is already here or on its way.

So we can, therefore, support our customers with a complete offer. It doesn't matter if it's reusable, recyclable, combining the most [indiscernible] solutions for every occasion and at the same time, having a very -- have a convenience as a leading factor. So I think during the quarter, it has been an intense one for Duni Group when it comes to acquisitions. First, we have acquired a majority stake in Relevo as a leading company based in Germany, offering reusable solutions for the HoReCa industry. So with this, our offer broadens, and consequently, we can have a complete solution -- solutions to provide for festivals, campus or if it's just a single restaurant.

Second, and as we press released at the end of the quarter, we acquired Huskee as a market leader with innovative, sustainable dining solutions. They have a very special design on coffee or if you like, tea cups in high-quality materials that utilize waste and recycled material to enable it to transition into a waste-free world. So that's why we're very happy about it. The acquisition is [ done in ] BioPak Group, and that will be consolidated, [indiscernible] said, from 1st of April in this business area, Food Packaging Solutions.

And finally, I think we already communicated -- know we communicated in the Q4 report, Decent Packaging was acquired also through the BioPak Group. Decent packaging has a strong foothold in New Zealand but also in U.K. and offers a great selection of plant-based solutions to complement our offer we already have today. So all 3 companies will contribute to increase our relevance. It will accelerate our growth agenda. And they have an annual net sales of approximately SEK 200 million and the profitability is aligned with Duni Group.

[Robert Dackeskog, executive]

All right. Great. Thank you, Magnus. Yes, our aim to be the trusted sustainability leader in [ own ] industry. We are focusing a lot of initiatives and innovation on -- within the circularity area. And as Magnus mentioned here, we are looking into a lot of things here. And we have a couple of startup projects that consists today of Idun and Relevo within the reuse sector. And I think for us, it's very important to have an offer within -- combined offer actually with recycled products and reuse products. And I think that's what we believe the market will -- what they want in the future here. And also, we are investing in start-up in Unmo which is a social platform for a dialogue between restaurant owners and the people who want to work in the industry long term, and that's also creating a sustainable industry in the HoReCa sector. That's there with those things. So a lot of things going on here. .

If we look at our decade of action 2030, we have 3 focus areas here, becoming circular at scale, going Net 0 and living the change. And I will focus a little bit what we have done in the quarter. On becoming circular at scale, we have done a collaboration with Notpla for plastic-free packaging, which is a seaweed barrier, very interesting going forward here. Also acquisition, as Magnus mentioned, within the sustainability in our [indiscernible] Food Packaging Solutions with the company Magnus talked about.

Number two, we are going Net 0. We have started reporting Scope 3 for '23 completed, which is great, a good achievement here. And also, we've got the EcoVadis Score for 2023. We've got a 77%, which is a good increase from last year, and we are now top 2 present in our industry. Last year, we were a top 3, and we have a gold level in Ecovadis. So good progress in these 3 areas. Moving into the financials.

[Magnus Carlsson, executive]

Thank you, Robert. Yes, if we start with the income statement, we can see that the gross margin has strengthened versus last year and also above the rolling 12 months level. I think since a year ago, there were raw material prices like pulp has decreased from very high levels, but it has seen summer increased again, and it's actually up quite significantly with around 25%, 30%. So we have adjusted our price downwards on certain contracts, as we have said, to maintain our competitive edge. But the volatility on raw materials, you can say, freight as well and energy in combination with inflation, that is still above 2%, forces us to be very agile on price compensation measures.

So as you can see, we continue to invest in digital solutions but also to develop new materials, for instance, as Robert said, the collaboration we have in Notpla, it's a British company that has developed a unique [indiscernible] material from seaweed, to be used as a barrier. So this is something we must and should leverage from going forward in relevance with our customers.

Finally, net income is slightly down, although we have higher operating income, and that could be traced to the taxes, as you might see, that was exceptionally low last year. But if you look on the rolling 12 months' time, it is relatively stable on 24% plus/minus -- [indiscernible] up or down. So looking on the business areas, the profit improvement, as we have seen from last year comes from Food Packaging Solutions and especially so in Europe that improved from a weak result in the same period last year.

And quarter 1 is normally seasonally weaker quarter, and that goes for both business areas. If we look on the cash flow, it is negative with SEK 124 million, I think this is a very normal development for the first quarter. It explains, mainly through a stock buildup, from the low levels we had at the year-end. Contrary, last year, we managed to take down the stock from very high levels, we saw in end of 2022. And this, of course, resulted in a good strong cash flow at that time. But again, it's a normal year to have a stock buildup in the first quarter.

Finally, CapEx is still relatively low and below depreciation, but as we have communicated and indicated before, we expect this to increase going forward. If you look on the financial position, it remains very strong, although we've done some acquisitions in the quarter. Inventories has increased, as I said, but we also see a potential to optimize them and take them down further. That's also a seasonal pattern that we see. So -- and I think the inventory is very much connected to how well we can manage, which I must say, a fragile and a bit uncertain supply chain, especially deliveries from Asia to Europe and Australia.

But we also see a slightly softer demand as we have talked about, the lower volumes. And it takes some time to adjust production and the planning processes. And I think here, still, we have some more to do to decrease the overall stock base. Still, as you can see, the net debt remains, I think, historically low, and that enables various activities to further accelerate our growth agenda for the Group.

And finally, our financial targets. Looking on the organic growth, we are down, as you can see, 2%. This is mainly explained by weaker market demand as we have seen, I would say, since end of Q3. Last year, and especially Germany has experienced a consumer that is much more cautious as a result from less disposable income with high interest rates, but the pattern is basically shown all over Europe on a global level.

Furthermore, in the last 2 quarters, we are also seeing a slightly negative effect from lower prices compared to a year ago. If you look at our operating margin, it has improved slightly from previous quarter and now very close to the 10% target. And finally, the Board recommends a dividend of SEK 5 which equals roughly 6% -- 60% of net income and consequently, above targets. So with this, I hand over -- thank you all and I hand over to Robert for final comments.

[Robert Dackeskog, executive]

Thank you, Magnus, yes. So a short summary here for Q1 2024. yes. As we talked about, market data indicates a softer Q1 compared to last year reflected in our net sales, especially Germany then. The improved operating income being the highest first quarter measured historically. Our gross profit increased by 11.2% compared to the same period previous year. And here we are, as Magnus mentioned, the mix between the majority of the loss in retail versus HoReCa in Dining Solutions is the main driver of a good mix. Continued expansion in Food Packaging with the acquisitions good for the quarter as well. And we have a continued strong financial position going forward. So that was the presentation today. Moving into Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Johan Fred.

[Johan Fred, analyst]

Firstly, although sales fell in Dining Solution, operating margins were roughly flat year-over-year, which I gather has a lot to do with the positive mix effect from the volumes that you've lost in the -- mainly the retail segment. If volumes and demand were to improve going forward, do you expect to see a reversal of these effects? Or how should we think about that? That's my first question. .

[Magnus Carlsson, executive]

No. I think if we see -- Johan, you talked about if we increase the volumes going forward and the margin effect, is that the -- what's the question -- I'm sorry.

[Johan Fred, analyst]

Yes, exactly, exactly. You've lost some low margin contracts, I gather. So if we see margin or volumes returning, is -- could you -- we expect that the mix effect will continue, i.e., volumes increase from higher-margin segments? Or should we expect sort of a volume uptick be in low-margin product segments?

[Magnus Carlsson, executive]

Yes. I think you will have -- see 2 effects from increased volume. One is that we will see better cost absorption in our production facilities. That is good. And that's a positive contribution to the margin. That's one effect that we should see when we have higher volumes. And that goes for both low-margin contracts and higher-margin contracts. Then, of course, if you're growing with low-margin contracts, you get more effect from this cost absorption, then you get high margins. But overall, it is positive and we should leverage from that, especially on the operating income. The gross margin slightly more -- I can -- if you take a large low-margin contracts that might not beneficial for the gross profit margin, but for sure in the operating margin. .

[Robert Dackeskog, executive]

Yes. And I think, of course, it depends a little bit on the market there, what's happened. And I think historically, we've been quite good at managing the balance during period. So it's been -- sometimes you win some lower, sometimes you gain the higher. So I think this a little bit depends on what happens with the consumers in the end and going to restaurants versus maybe retail and so on. So I think -- but we -- I think we've historically been quite good at balancing this during periods.

[Johan Fred, analyst]

So it's not a strategic sort of shift or focus towards higher-margin products. It's rather effect of -- or a market effect, you would say?

[Robert Dackeskog, executive]

I think we always have a strategic, of course, to drive to the best, yes, in a way whereas the best segments are in a way and the best products. But of course, you have to -- yes, yes, see also what happens around you anyway and manage that -- those kind of demand sources. So I think that's been our strength in the way to do that. But of course, the main aim is, of course, to be where the relevance is and people are prepared to pay for quality.

[Johan Fred, analyst]

Of course, makes sense. And you've lowered prices in what I gather most categories and geographies. Could you add some color on as to where in terms of subsegments and geographies, you've seen the highest price pressure or market price pressure and why that is so?

[Robert Dackeskog, executive]

I can start a bit. I think as we said in the report, it's mainly contracts in a way in the U.K. and Germany that it's affected in a way, and that maybe doesn't have so much to do with the market actually, in that sense. .

[Johan Fred, analyst]

Okay. Very clear. And is this effect of you having raised your prices quite drastically last year? Do you think you overdid it, so to speak, on price increases last year? And do you think that this will -- this sort of price pressure due to contracts will continue coming quarters? Or do you feel that your product portfolio is at a sustainable level as of now? .

[Magnus Carlsson, executive]

No, I don't think we overdid it. The inflation and especially some raw materials were dramatic. So I think we were in a tight and good dialogue with our customers. Our competitors did the same. So I don't not see what we all did it. But I think it's natural when the sea freight come down, for instance, or certain tenders that you adapt the price levels. So we've not said that we overdid it. And as you can see from the margins, they are not -- they are aligned with what we saw before the inflation period but they are not -- and I think the volume is also in balance. So I would not say we overdid it at all. I think we were in a good balance .

[Johan Fred, analyst]

And in Food Packaging, you saw a significant uptick in margin despite lower volumes, and you elaborated a bit on this in the call, but could you add some more color on the dynamics driving the margin improvement for the segment.

[Robert Dackeskog, executive]

I think on -- I can start a bit, Magnus can fill in. But I think on a high level, we've done a lot of basic work here within the business area, looking -- yes, turning every stone in a way and also, of course, working with the inventory, a lot in the past year here in Europe where it's been tough after the pandemic and all the things that happen historically. So it's been a lot of hard work, nitty-gritty, I have to say, in the business area. So I think we -- in a way, we're trying to fix the base and then going forward and try to move into more relevance and drive growth. .

[Magnus Carlsson, executive]

Johan, just to fill in, yes, that's absolutely correct. We also done a lot of investments here on new technology, new business models since it is a very dynamic segment that happens a lot. And we do see huge opportunities as we have said many times, long term, and this is something we want to benefit from. But it demands investments and -- but it's an exciting area. .

[Johan Fred, analyst]

Yes. And speaking of investments, you guide for higher CapEx going forward. Could you remind us what investments you've planned for the coming years and what we should expect going forward?

[Magnus Carlsson, executive]

I think what we have said before and I can underline it again, is that, for 3 years, we have had lower investments that goes for our production facilities. We're normally around, you can say, SEK 150 million, SEK 160 million per year, that's a depreciation. We have been clearly below that in the last 3 years, and it's now naturally to come back to more normal levels and maybe also come back to slightly higher levels to accelerate some areas which we think is interesting. So it's more in the context of that and not specifying any specific CapEx, but it's related to our own production facilities. .

[Johan Fred, analyst]

Okay. Makes sense. And one final question from my side here on guidance. In the report, Robert, you're right that you hope for a better market towards the end of the year. Is this sort of -- you guys speculating in sort of the broader macroeconomic indicators that all -- we all see, all market observers see such as inflation having peaked and potentially interest rates cuts, et cetera? Or do you see any additional indicators for your channels? .

[Robert Dackeskog, executive]

No, I think you're spot on in a way. I think we're looking at the macro indicators actually. And of course, looking into data, how people are visiting and so on also. But I think it's the macro that we are looking into because it's putting a lot of pressure on consumers in Europe in generally. And I think it's pretty low confidence, actually, and as I showed in the graph in a way, actually, yes, you start to believe at least that it's a positive outlook.

So I think as you said, it's more the general with interest rates and all this and what's happening around us because I think especially the HoReCa industry is very -- yes, yes, it's important for the industry. And I think there's a lot of stuff going on, of course, after the pandemic and so on with -- and also the VAT in Germany is raised, as Magnus said before, from 7% to 19%. So that's a short term maybe an implication and people hopefully get used to that when interest rates get back. So yes, it's more on your line.

[Operator]

[Operator Instructions] our next question comes from the line of [ Kim Hallquist ].

[Unknown Analyst]

Of course, a lot of stuff here has already been covered. But I can start with retail, it doesn't seem to be doing very great at the moment, and there are price pressures. And of course, the contracts in the U.K. and Germany, but I can also ask here, does this have anything to do with [indiscernible] more private label usage in the stores. For example, these contracts that were not renewed or what it was? Is this a thing that you see?

[Robert Dackeskog, executive]

Yes. I think most contracts are private label today. So it's more about -- yes, a little bit, tendering contracts. So -- but I think in general, if you -- yes, if you look into the retail sector, there is a shift towards maybe lower price in general, I mean, food, everything in a way. So there is a shift, private label is winning, but that's not related to our, in a way, loss in these contracts.

[Unknown Analyst]

Okay. But -- okay. So you do also your own brands, but you do mostly private label in retail. Is that correct? .

[Robert Dackeskog, executive]

Yes, you could say that. Exactly.

[Unknown Analyst]

Okay. And yes, okay. On the CapEx, you didn't seem very eager to talk about specific projects. And my question was if you could just elaborate on like what's your single largest CapEx project going forward. But I guess that's not -- you don't want to do that.

[Magnus Carlsson, executive]

No, we have not disclosed that type of details in our reports, but of course, we have paper mills, and we have converting factories. And the paper mills are big machines and in converting, there are more smallers. So -- but today, we are not specified -- specific on machines, but it's related to machines and our infrastructure.

[Unknown Analyst]

Okay. And I was -- I have a question on the price cuts, the partial price cuts. It seems it has to do with -- I mean, your input costs have come down and so on, but is it also a competition question, let's just say, increased competition?

[Magnus Carlsson, executive]

I would not say that it has increased. There's always quite precious competition in certain segments. We talked about retail, that's one area. And we, of course, evaluate every tender, every contract we're in and sometimes we step out, sometimes we actively go in. So that's a bit of a -- especially so in retail. Where it's quite dynamic is in the food packaging industry with a lot of companies trying to come up with new technologies and so on. And here, we see both exciting things that is happening and that we want to be part of. So it's a different type of competition, different types of things happening in the industry.

[Unknown Analyst]

Okay. And regarding -- I think this is my last. Regarding Packaging Solutions. So I was a bit surprised to see shipping cost -- freight costs down. And I mean you still haven't seen any meaningful like Suez Canal impact with regards to shipping from Asia to Europe.

[Magnus Carlsson, executive]

I would say the -- you're right, it went up end of last year and also in the beginning of this year. You can see that on the spot price on the market, due to the services that we had in the Red Sea. However, the increase was much, much less significant than we had 1.5 year ago when the increase was 700%, 800% and where we also timed wrongly to say the stock buildup. So for us, it has not had that severe impact the last happenings in the Red Sea, although we do follow it, and we are slightly impacted by it.

[Unknown Analyst]

Okay. But I mean, shipping rates were -- in Q1 were up significantly versus Q1 last year. But in the Autumn before that in '22, then prices were about what they are now. So maybe there's a lag effect there. And that's -- that can be [indiscernible] you don't see, yes?

[Magnus Carlsson, executive]

I think it's also related to a stock buildup we did when the prices were even higher than we saw a couple of months ago, where we have been trying to focus to get that out. But that has been a bigger challenge for us. .

[Robert Dackeskog, executive]

Yes, in a way, we have sold out, yes -- while the things we had on stock actually. So that's also not [indiscernible] so much.

[Operator]

[Operator Instructions] As there are no further questions, I will turn the conference back to the management.

[Robert Dackeskog, executive]

Yes. Thank you. Busy day today in the market. So yes, I just want to thank you for good questions and listening in, and see you soon again. Thank you. Bye-bye.