Duni AB

STO:DUNI

Earnings Call Analysis

Duni Group's Q3 Performance Highlights Growth Amid Challenges

In Q3 2024, Duni Group achieved net sales of SEK 1.9 billion, a slight decline of 1.3% compared to last year, marking the second best Q3 in its history. The operating margin improved to 7.9%, despite a 5% decrease in organic growth mostly due to weak consumer demand in the HoReCa market, particularly in Germany. The company acquired Seti, expanding its presence in Southeast Europe. Looking ahead, the company's profit margin target remains at 10%, with a dividend set at SEK 5, indicating a commitment to shareholder returns despite current market volatility.

Strong Financial Performance Amidst Challenges

Duni Group has reported its Q3 2024 results, showcasing the strength of its financial performance despite a backdrop of economic volatility. The company achieved net sales of SEK 1.9 billion, marking it as the second-best third quarter in history, albeit with a slight decline of 1.3% year-over-year. Organic growth was more challenging, registering at -5%, primarily due to reduced consumer spending and a dip in the HoReCa market (hotels, restaurants, cafés) in Germany.

Market Dynamics and Rebounding Opportunities

The HoReCa sector remains a significant focus for Duni, but it is currently underperforming, especially in Germany, where turnover is still below pre-pandemic levels. The company noted a 10-15% volume drop in this segment, indicating persistent hurdles from consumer hesitancy to dine out. Nevertheless, Duni is optimistic about long-term growth opportunities in the sector and continues to address market demands with sustainable product offerings.

Insight into Business Segments: Dining Solutions and Food Packaging

Duni's Dining Solutions saw a sales decline of approximately 7.7%, impacted by price adjustments in a competitive retail marketplace. While sales volumes improved slightly, this led to a negative mix effect with retail sales taking a larger share. Conversely, the Food Packaging segment reported a 9% increase in sales, largely attributable to recent acquisitions, despite profitability plunging from SEK 55 million to SEK 27 million due to heightened storage costs and excess inventory.

Operational Efficiency and Strategic Investments

Duni’s operational efficiency has been a key focus, especially with initiatives aimed at reducing costs amidst unstable raw material prices. Notably, the company has concluded several strategic acquisitions this year, including a 70% stake in Seti, a firm headquartered in Slovenia that produces tableware. This acquisition is projected to deepen Duni’s footprint in Southeast Europe and contribute approximately SEK 100 million in annual sales.

Long-Term Sustainability Goals Take Shape

Sustainability remains a core strategic pillar for Duni, with ongoing investments aimed at promoting eco-friendly products and processes. The company continues its partnership with Notpla for developing plastic-free packaging solutions, and recent advancements in their logistics infrastructure should soon lead to a reduction of CO2 emissions by about 700 tonnes annually. Such measures are integral to Duni's aspiration to achieve net zero emissions by 2030.

Financial Strength and Growth Outlook

With a strong financial footing characterized by reduced net debt near 1x EBITDA, Duni has substantial financial capacity to pursue growth initiatives. The company has declared a dividend of SEK 5, exceeding its target for net income distribution, underscoring its commitment to returning value to shareholders. However, the company’s rolling 12-month operating margin stands at 8.2%, slightly below its 10% target, signaling the need for continued vigilance in navigating ongoing market challenges.

Market Sentiment and Future Considerations

Despite the challenges faced in Q3, Duni's management remains optimistic about recovery in consumer confidence and subsequent market stabilization. The incremental increase in consumer sentiment in the Euro area, despite its still low levels, may herald some easing in the downturn experienced in the HoReCa market. As the company looks ahead, the balance between sustaining profitability while investing in market expansion and innovation will be crucial.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the Duni Group Third Quarter Interim Report 2024. [Operator Instructions] Please note, this call is being recorded. I would now like to hand the conference over to your speaker today, Robert, President and CEO of Duni Group. Please go ahead.

[Robert Dackeskog, executive]

Thank you. Yes. Hi, and welcome to our interim report Q3 2024. The strong quarter meets high comparison numbers.

A look at the agenda today, first, short highlights and then we'll talk a little bit around the market and then an overview of the Q3 summary. And then we will go into the 2 business areas we have, Dining Solutions and Food Packaging Solutions. Then we'll talk a little bit around the innovations and sustainability and then, at the end, financials and a summary. And then you will have the opportunity to ask some questions to us.

All right. Great. Our highlights for this quarter is that we have a strong quarter facing historically high comparison numbers. The revenue is the second best third quarter in history. We had a continued low net debt and strong financial position. We made the acquisition of Slovenian company Seti during the quarter, which we are very happy to further strengthen our position in Europe and with Seti mainly in the Southeast of Europe.

We also announced a partnership investment to modernize our logistics setup in Germany. And together with CEVA Logistics, we will set up a new center in Germany. And this means that we can consolidate 9 warehouses into 1.

That was the highlights. Going into a little bit the market outlook, it's still very volatile. And at the moment, the HoReCa market is declining, especially in Germany. If we're looking into numbers versus 2019, the turnover in HoReCa Germany is still lower.

Looking at the latest data downright from April to June, the market in volume, Real there is down 10% to 15%, but Normal positive then, of course. We are down around 5% organically.

The main thing about the price increases, of course, is that the AT in Germany is one driver as well as the inflation in the past year. Also, the number of visits in Germany have not recovered yet since the pandemic, so people are not yet really back into the restaurants.

Looking at OpenTable, the bookings top right graph here, that's also down for the year versus 2023, but actually showing some less deviation in the last weeks and better booking numbers.

Duni Group is in a good position to address the long-term opportunities in the HoReCa market, which will stabilize and continue to grow in the long term.

Looking in on the key financials, the group net sales amounted to SEK 1.9 billion versus SEK 1.910 billion and then versus SEK 1.935 billion versus last year. And this is actually representing the second best in the third quarter in the group's history. It's a decline of 1.3% and, organically, it's minus 5%.

Operating income comparing with an exceptionally high 2023, but strong versus historical numbers for Q3. Accordingly, operating margin ended up at 7.9%.

And then, going into a little bit more details around the quarter, so the total sales decrease, as I said, was 1.3% in fixed currencies. During the quarter, we acquired companies. The acquired companies, Decent Packaging and Huskee and Seti, contributed with SEK 73 million. So that means that organic growth is at minus 5%.

The group's net sales represented the second best in the third quarter in the group's history. Primarily, we see good progress driven by the expansion of the [ entire ] Group and its acquisitions carried out in the [ Pacific ] region during 2024.

The lower figure for organic net sales should be seen against the backdrop of exceptionally high comparative figures following the easing of the pandemic restrictions as well as the lower demand throughout 2024 with weaker purchasing power among consumers. And in Germany, the restaurant market, as I said at the beginning, is developing more weakly than in the rest of Europe, and growth has been negative during the first 9 months of the year. And as I said before, the VAT is a contributing factor on meals in Germany. It has now then returned to 19% after having been temporarily reduced to 7% for several years as part of the pandemic support.

Looking at the operating income, it amounted to SEK 151 million versus SEK 2.5 million last year, and the margin at 7.9%. And the operating margin was impacted primarily by lower sales volumes as well as higher cost of raw materials and sea freight compared to last year. Also, pulp price has gone up by 30% compared with the comparative period last year, and the cost of sea freight has increased gradually in the last 10 months due to increased geopolitical unrest.

Now I'm handing over to Magnus here to move into the 2 business areas.

[Magnus Carlsson, executive]

Thank you for that, Robert, and good morning, everyone. So I'll now provide a little bit more detailed overview of our 2 business areas, starting, as usual, with Dining Solutions, which covers our table setting products.

So looking at the numbers, sales have decreased by SEK 87 million compared to last year, and that represents a 7.7% drop. Operating income has declined from SEK 170 million last year to SEK 125 million with a margin of 11.3%.

So we observed a similar trend for Dining Solutions as we have seen throughout the year with sales down by approximately 6% to 8%. This decline is partly due to price reductions in the highly competitive retail segment. So despite maintaining and even improving volumes in the third quarter, this has led to a negative mix effect as retail sales is now accounting for a larger share compared to last year.

Market demand remains weak, as Robert said, in the Professional segment, HoReCA, with a notable decrease in customer visits across Europe, particularly so in Germany and the DACH region, with decreases in volume that is even worse than we experienced in our numbers.

Raw material cost has been highly volatile over the past few years, rising through the end of 2022. And we saw it decreasing, slightly decreasing, a year ago and then climbing back again at the end of last year. And now we see a stabilization at historical high levels in the third quarter.

So while inflation has slowed, wage increases remain historically high. We mitigated some of these cost pressures through effective cost control in production. But towards the end of the quarter, we have introduced price compensation measures to reflect rising costs over the past year. However, I think the most critical factor remains, and that is the low volumes. And as Robert showed earlier, the number of visits continued to be significantly below the pre-pandemic levels.

However, we continue to invest in being on the forefront of offering sustainable solutions to our customers. And one example is our paper mill celebrating 15 years of the FSC certified pulp sourcing. This is, I think, a key milestone in ensuring sustainable forest management, promising and promotes biodiversity.

If we move on to business area of Food Packaging Solutions, focusing on sustainable Food Packaging, we see a 9% sales increase this quarter, and that is primarily driven by acquisitions. However, the profit has decreased to SEK 27 million from SEK 55 million last year.

Looking more closely at the quarter, as I said, sales rose 9%. But yet again, if we exclude acquisitions made in the first half of the year, sales are more in line with last year's performance.

Volume growth remains strong outside Europe, particularly in the APAC region, with Australia as our largest market. We have secured several major customers in the past year through -- however, for product portfolio adjustments, we have led -- we have significantly higher inventory levels compared to the previous year, and that has resulted in higher storage costs. And this is the main factor in declining profitability this quarter, which remains below pre-pandemic levels. Especially, sea freight cost volatility has impacted pricing and the pricing is below last year's levels.

If we look at Europe, the demand remains weak with lower volumes compared to previous year. And this is due to what we already mentioned, the overall weaker consumer demand and the ongoing transformation as we see also in the food packaging industry, which faces increasing regulation at both regional and national levels and making it very challenging for customers and producers to navigate. Despite this, we remain confident in the long-term outlook for sustainable solutions, particularly so on the fiber-based products, and we continue to invest in new solutions and materials through partnerships, in-house innovations and close collaboration with suppliers and customers.

During the quarter, as mentioned, Duni acquired a 70% stake in Seti. That is a Slovenia-based company that produces napkins, coasters and other tabletop products made from tissue and airlaid materials. And this acquisition expands Duni Group's reach and footprint in Southeast Europe. Seti has annual sales of approximately SEK 100 million and profitability in line with Duni Group's Dining Solutions business area, and it has been consolidated in the group since 1st of September.

[Robert Dackeskog, executive]

All right. Yes. If we're looking into it, we are continuing our investments on our journey to become the trusted sustainability leader in our industry. And to mention here is the cooperation with Notpla continues with our plastic-free food packaging made from kraft paperboard coated with natural seaweed, which has been very positive for the market.

We also decided in the quarter to consolidate our activities within reusable to Relevo in the quarter. We're still moving on that path.

Looking into our decade of action here, our sustainability initiatives, we have 3 becoming circular at scale, going net zero and living the change.

And if we look into a little bit more details, a lot of activities going on. And I just want to highlight the main things in the quarter is -- as Magnus mentioned here, is the implementation of the drying system that will improve energy efficiency in Rexcell paper mill. Also, the decisions to invest in the new logistics solution will contribute to our net zero goal. And this will decrease our CO2 emission with around 700 tonnes and the logistics solution will be CO2 neutral. So great investments from many aspects.

Now we'll move into the financials.

[Magnus Carlsson, executive]

Thank you, Robert. So if we look -- start with the income statement, as you can see, it shows a significant drop in the gross margin, and this is attributed to SEK 125 million in restructuring costs related to the relocation of our warehouse to Meppen. That is about 70 kilometers from our main factory in Europe, in Germany. This move is a critical step in securing future storage capacity in a very cost-efficient and automated way, and it also supports our journey towards net zero 2030.

So by partnering with CEVA, a logistics provider, we've been able to consolidate our satellite warehouses, as mentioned earlier. But excluding these restructuring costs, the gross margin stands at 23.7%. And despite lower volumes and rising costs over the past 12 months, the gross margin has remained stable due to strong cost discipline and efficient production adaptations.

As seen in the breakdown of our business area, the profit is down in similar proportions, I would say, although the margins are holding up above 10% in Dining Solutions although we see a weak HoReCa market.

The profitability for Food Packaging is, as I said, impacted by high storage costs in the APAC region and the continuous weak demand in Europe. Year-to-date, we are on at 7.7% versus last year at 9.1%. That's a drop of 1.4 percentage points, derived again from the low volumes in HoReCa, but also higher cost levels during 2024 versus '23.

Looking on, the operating cash flow year-to-date is SEK 238 million and SEK 626 million in the last 12 months. And that indicates that the fourth quarter was strong last year from a cash flow perspective, but this is also historically the seasonal strongest one.

We have, in the quarter, a positive development in the inventory levels seen at the end of the quarter, and this is aligned with the positive development we see in APAC. That comes from the high levels that we built up, especially so in the beginning of the year.

Our financial position remains strong with net debt reduced and now on par with the previous year, although we have done 4 acquisitions in 2024 and dividends during the first 9 months.

Net debt is close to 1 versus EBITDA and consequently continues with significant headroom for investments in growth and growing the company.

And finally, some comments on our financial targets. Organic growth stands at minus 5.6%, largely due to 2 factors. The first is continuous weak consumption across all our markets, particularly so in the DACH region. And I think the prolonged inflation has led to hesitation among consumers when it comes to dining out.

We saw that consumer confidence in the Euro area in the numbers published yesterday, and that's a very important leading indicator for many industries, including ours, It increased slightly by 0.4 points to minus 12.5% in October 2024. It is the highest since February of 2022, although it remains clearly below long-term average and very low in Germany and continues to be so.

The second factor for the organic growth is selective pricing reductions we implemented over the past 9 to 12 months to remain competitive in certain areas. Again, at the end of the quarter, we announced price increases to compensate for higher costs from inflation and raw materials we have seen recently.

Our operating margin is at 8.2% on a rolling 12-month basis. That is slightly below our 10% target. And finally, the dividend is set to SEK 5, exceeding our target of distributing more than 40% of our net income.

So thank you for this and listening, and I hand over now to Robert for his final comments.

[Robert Dackeskog, executive]

Yes. A short summary here, I think we had a strong quarter versus historical numbers, also a strong quarter where we invested to strengthen our position in Europe with the acquisition of Seti and also the new logistical setup in Germany. And we operate in a market, the HoReCa market, that, long term, will grow, so we see positive on the long-term horizon.

All right. Thank you. Now we'll move to questions.

[Operator]

[Operator Instructions] Well, there are no questions on the line at the moment. I'll pass the conference call back to the management.

[Robert Dackeskog, executive]

All right. Thank you. Yes, a busy day today with a lot of reports. So yes. So if no questions, yes, I want to thank you for listening in. And yes, we're coming back in the next quarter. Thank you.

[Operator]

This now concludes today's presentation. Thank you all for attending. You may now disconnect.