Duni AB

STO:DUNI

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to the Duni 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. Yes, and welcome for today's Q4 presentation from us in Duni Group, from me, Robert Dackeskog and Magnus Carlsson.This is our first report as we both started here 1st of January. And for me, it's great to be back in Duni, really inspiring. And of course, also a bit challenging at the current situation we are in. So yes, but really nice to be back.The period in short here, of course, we're hit by the second wave of COVID-19 that has broken the recovery trend we had in Q3. And the important markets we are operating in and the segments, they've been, yes, fully or partly closed, especially, I think in middle of Europe, where you have -- yes, Germany, Holland, Switzerland, Spain, France. Those has been very closed. Yes, a little bit maybe different from the Nordic area.We have a very strong takeaway trend that continues for us. We also had a good cost control and risk mitigation that has decreased our net debt in the quarter. Yearly, we have saved SEK 270 million, including the government support. We are, I think, very well positioned for the future. We have worked on taking the next step in the reorganization where we actually have put the 2 segments. They have become 2 business areas and -- with full value chain responsibility, which is the major difference there. Of course, there is a large uncertainty ahead here, and the restrictions from Q4 are continuing, as we are, so we'll see where that takes us.A little bit 2020 Q4 highlights. We have a net sales that is down by 24%, so from the SEK 1.6 billion last year to SEK 1.2 billion this year. And of course, as I said, the recovery trend from Q3 were interrupted here by the new restrictions. And it's mainly the Duni segment where sales dropped significantly. As of course, the restaurants are forced to close down on-premises, so the sit-down dining in the key markets isn't there.The retail channel is impacted, but less. Of course, it's -- less private parties are held, so we see a drop there as well, of course. And the BioPak segment continues to grow as takeaway then benefits from the restrictions and restaurants move into more takeaway.If we look at the operating income, it's down SEK 148 million versus last year from SEK 199 million to SEK 51 million. And of course, the lower sales or volumes in the Duni segment has a generated limited fixed cost coverage for us. But with cost reduction program, which we initiated in March 2020 and the BioPak growth has supported our results in a positive way.If we look then at the full year 2020 year-to-date highlights, it's a little bit the same as we have in the quarter 4, but minus 19% on the net sales. So from SEK 5.5 billion to SEK 4.5 billion this year 2020. And here's the same in a way, the Duni segment, much lower volumes that has dropped due to the restrictions, despite we had a great start in the year in Jan, Feb and mid-March, actually before the corona hit us.The BioPak segment growth trend has boosted more by this, of course, because of the demand on takeaway increasing. If we look at operating income for the whole year, we are down by SEK 384 million versus last year, from SEK 533 million to SEK 149 million. And the volume decreases, of course, here as well. And the high share of the fixed cost in the Duni segment has, of course, then impacted the result in a major way.We are having a major focus, of course, on adjusting the production capacity, cost reduction programs and also gaining from government support. Together with lower raw material costs and the BioPak growth has actually strengthened the result in that sense.Then I hand over to Magnus, who will go through the -- both segments, Duni and BioPak.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you very much, Robert. Since this is the first time I have the honor to share our result as Duni CFO, I would like to very quickly present myself. My name is Magnus Carlsson, and although I am new as CFO, starting from 1st of January as Robert, I have been in the company for 10 years with various positions within finance and corporate development. So even though it's currently challenging times with the pandemic, I'm thankful to be part of the great journey ahead with Duni.So I will now go through our 2 segments more in detail, and starting with the Duni segment, representing our products like napkins, table covers and candles. And already mid-October, it was apparent that a second wave were approaching and restrictions were being implemented throughout Europe.Our main customers, like restaurants and hotels were once again forced to close, or at least to adapt to a much lower demand, which naturally have spillover effects to Duni. Sales was down with 38% from SEK 1.1 billion, as you can see, to SEK 670 million. The decrease was also broad across all regions and product categories, but more severe in the traditional restaurant segments with products like table covers and premium napkins. Retail channel as well as some hygiene assortment had a more stable development.Duni segment is characterized of own production. We have factories in Germany, Poland and Sweden and so on, and consequently with a vertical integrated value chain. And this is for sure an advantage for us. But in times with high volatility in volume, as we have seen in -- with a sharp decline in the fourth quarter, then we are hurt with limited coverage for our fixed cost, especially connected into our factories.So we have been working very hard to mitigate this effect, and we try as much as possible to quickly adapt and to variabilize our costs. And cost reduction program, governmental support and also additional external sales from our paper mill has contributed positively to the result in the quarter.If you look in 2020 in total, we can confirm that we have seen -- we have been severely impacted by the pandemic with a reduction of the volume equal to almost 1/3. And as I commented just now in the fourth quarter, the decrease is valid for all regions. But as you can see, it's particularly south of Europe with their sharp lockdowns that has been very much affected, with a sales decline of almost 50%.So although this year has been very tough for Duni segment, I think the cost saving program and the ambition for us to be more flexible with high volatility is something that we will be beneficial from once we see a normalized situation.If we now move over to BioPak, which is offering sustainable food packaging, we continue to see a strong demand. This is mainly driven by two factors, similar to the previous quarters. The shift -- first one is the shift from plastic solutions to more eco-conscious products from different fiber solutions; and second, that the industry are now actively looking for takeaway solutions and sealable solutions for their food packaging.Australia continued to have indicated solid growth, started already in the third quarter when the restrictions were lifted. There's been some local regional lockdowns in Australia as well as New Zealand, but in general, a much better situation than we have seen in Europe. Fourth quarter shows an improvement in the result, I think, both in absolute terms and as well as the operating margin, which is now close to 10% for the quarter. Looking on the complete year, we have seen a healthy operating leverage on the addition of volumes, and that has consequently strengthened the margin with 1 percentage points.However, by the end of this year, we experienced difficulties in securing products from Asia due to the shortages on containers and this is a result, you can say, from the changed patterns in world trade. Consequently, it's not only Duni affected by this, but more or less, all the industry and all -- everyone purchasing from Asia. But we are in a good position to, with close contact to freight forwarders as well as our Asian suppliers. But of course, this is something that we'll continue to work with in 2021.Thank you.

[Robert Dackeskog, President & CEO]

All right. If we look ahead here on the COVID-19 situation and the actions and outlook, then, of course, we continue to -- with the cost control and risk mitigation, that's very important as we are in a little bit defend position still with the restrictions going on, we have a very strong liquidity, which is great.The Board suggest to the Annual General Meeting in May 2021 that no dividend should be paid out. We have a very high focus here on helping our customers in this difficult situation. Of course, we need to create new concepts, definitely in the takeaway area. We are -- on the increased hygiene and outdoor products, there is a big potential, of course, and we saw that last year when the summer came.And I think the demand to eat, meet and travel will still be there. And of course, when it open ups -- opens up, it's expected to boom once possible then. Of course, it's still very difficult to forecast, but the ongoing vaccination here gives good hope of a return to a more normal life for all of us, and yes, we'll see when it happens.On a little bit broader point here, I think we are very well positioned for the future. I mean the big trends here of digitalization, customer experience and sustainability have definitely increased during the pandemic, and these are areas that we are focusing on. And also the hygiene have become more increasingly important. I think it's quite interesting that Duni was actually built on hygiene in 1949 when the company was founded. So that's quite interesting.And of course, we try to make significant changes and efforts in all areas we are working in. And we will be very well positioned for the post-pandemic work when people start to travel more and meet and eat and so on.A little bit our 2 brands here. They will become more business areas with full responsibility now for the value chain. So that's a step we are taking. I think that will actually also increase our possibility to be much faster in the future.Okay, great. I hand over to Magnus again with the financials.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you, again, Robert. Yes, if we look -- start with the income statement. So as previously communicated, sales are down with almost SEK 400 million in the fourth quarter. This is fully derived from Duni segment. For the whole year, the decrease is more than SEK 1 billion. So -- and the sharp decrease in demand as a result from the pandemic and lockdown is also visible in our gross profit, which has been burdened with less fixed cost coverage and less efficiency in logistics, for instance, with lower utilizations. Fourth quarter is also normally our seasonally strongest one with Christmas sales driving the demand for napkins and table covers. And not being able to sell these high-margin products is partly the explanation for the drop in the gross margin of 10 percentage points.If you look on the indirect cost below gross margin, it's down with more than SEK 120 million, and looking at our total program, including costs connected to secure gross profit, that equals SEK 270 million, as Robert mentioned earlier.As communicated in a separate press release, end of January, the result is down significantly and ended on SEK 51 million versus previous year of SEK 199 million. And for the full year, that is -- we ended on SEK 149 million, and that is a significant drop from the '19 number, which were best yet with SEK 533 million.As you also can see and earlier communicated, we have high financial costs. It's partly related to that we did a renegotiation, adapting our bank covenants to better reflect the current business environment burdened by the pandemic.Taxes are insignificant, the net income just above 0. If we go to the next slide, if you look specifically on our 2 segments, Duni and BioPak, it is very clear that the losses are fully attributable to Duni segment, and basically, all profits has been eroded and related to the sales decrease.We continue to strengthen BioPak, but not close, of course, to compensate for the dramatic decrease of SEK 1.2 billion in lost sales for Duni. Protecting the cash flow has been highest importance throughout the year. And here, I think we can confirm that the situation, bearing in mind, of course, the circumstances looks slightly brighter. We have managed to keep the CapEx low without taking uncontrolled risks. The additional working capital are for the development and with an insignificant write-downs, and that's indicating good risk control.Inventory at the year-end is slightly higher than previous year, and this is mainly explained by higher growth in BioPak and that we are securing deliveries from Asia. But it's also related to Duni being able to deliver once the restriction is being lifted. And of course, finally, it was decided at the Annual General Meeting, to cancel the dividend which naturally also contributed to strengthen our balance sheet.So the learnings we had from the third quarter, I think, is very important. We saw how quickly the demand returned, reflecting the eagerness for people to come out and socialize. And we strongly feel that we are now in a good position to support our customers with what they need once the restrictions again are lifted, and we can look beyond the pandemic.So operating cash flow is, therefore, a good thing, and we have been -- but of course, we're clearly impacted by the lower EBITDA. With a positive operating cash flow also for 2020, we can confirm that despite -- still a tough year behind us, in a good financial position with our debt being almost more than SEK 200 million, lower than a year ago. And -- but of course, the return on capital reflecting the lower profit is down significantly from the levels we have seen a year ago.Finally, our financial targets. Unfortunately, we are not able, in 2020, to deliver on these. We can conclude that the significant volume decline resulted in operating margin being 3.3%. And as Robert mentioned, the Board's recommendation to our shareholders is that we will not -- there will not be any dividend from the financial year 2020.So that was the last slide, and thank you very much for listening, and I think we now hand over to questions.

[Operator]

[Operator Instructions] Our first question comes from Gustav Hagéus from SEB.

[Gustav Hagéus, Research Analyst]

This is Gustav Hagéus with SEB. It's nice to hear your voice, Robert, even if we haven't met yet. So look forward to that whenever that's possible. I have a few questions, first a few shorter ones and then a little bit more on sort of perhaps directed to Robert, whatever he wants to do, if he has any longer-term view.But starting off with your organic decline here in the quarter, if you could put some color on the -- to what extent it refers to price/mix or if it's only a volume component? And if there's price pressure in the market? That would be helpful to understand better.

[Robert Dackeskog, President & CEO]

Great. I can maybe start with the first question. What I intend to do, of course, it's 2 months -- almost 2 months into the new year, but I think for me, first, it's to create stability in the organization is one thing, of course, that's #1 here. And of course, then to lay out a plan here in terms of where we want to go. I think we have really good high-level plans in terms of on the sustainability side, digitalization side and so on and also driving customer experience. I think next step here is to be more detailed in that, be more specific, actually. It happens a lot, especially if you take sustainability area. A lot of things are happening there. So it's me, maybe be a little bit more specific on the detailed actions. So it's the how in a way we need to create now, and that's what we focus on -- start to work on, definitely. And yes...

[Magnus Carlsson, CFO & Executive VP of Finance]

Magnus here. Maybe I can answer your second question, Gustav. Thanks. The organic growth, it's related to volume. There are no general price changes. Of course, we have a close dialogue with our customers on that, but it's related to volume, no price changes.

[Gustav Hagéus, Research Analyst]

Okay. That's reassuring. But then I was a bit interested in where you see intermediate inventories right now. In a situation where societies would open up, people going to restaurants, like we've seen in Australia, for instance, would you foresee some type of lag between that happening in your sales to kick off? And if you could talk about the lag there? And if you have a view on currently the situation with the channel inventory? If it's -- if they're historically high or low, that would be helpful.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you, Gustav. If I understand it correctly, if -- you mean there is a lag for our customers opening up or you mean a lag in the inventory?

[Gustav Hagéus, Research Analyst]

I mean then you're selling to dealers partly and also your customers probably have a few shelves of the inventory themselves, so what would you typically see if you have demand for your products going up? And basically, does that translate to your sales?

[Magnus Carlsson, CFO & Executive VP of Finance]

Yes, yes. Exactly. I think referring to the third quarter when we saw the restrictions being lifted in -- during summer, there was a quick jump up in demand for our products, indicating that the inventory at our customers were relatively low. And I think we can assume a similar situation that we will quickly come back once the restrictions are lifted. And that is also part of the explanations why the inventory is not as low as it might have been. We need to be prepared in order to deliver once the restrictions are lifted, which is still uncertain, of course.

[Gustav Hagéus, Research Analyst]

Okay. Well, if I was put the question like this, you have a rather high chunk of sales to Australia. I know that's mainly in the BioPak segment, I mean to take away and so forth. But Australia is rather open and restaurant visits have been going up at an explosive rate once they opened in September, October. Did you see there that the sort of table-top assortment you -- also your competitors follow that suit? Or was there any lag in that sense from when Australia opened up, restaurant business went up and the table-top assortment demand picked up?

[Magnus Carlsson, CFO & Executive VP of Finance]

Yes. Still -- first of all, main part of our sales in Australia is BioPak-related products, not so much to restaurants. It's more of the takeaway cup and plates and so on. When -- the sales we have with - to directly to restaurants and so on, it's true, it's -- the restrictions are lifted, and then they are back to more of a normalized situation. But still, there are uncertainties of how much they will open up the restaurants. But it's not our main segment. We are mainly [indiscernible] segment. So that's why we have seen the boost. So I think we should be careful of doing too much [ of business ] from Australia being first out, so to say, on the table-top segment, the business segment, it's limited.

[Gustav Hagéus, Research Analyst]

Right. Okay. And the 2 more broader questions, if I may, and then I'll see if anyone else wants to ask some questions.But Robert, when I look at Duni from an outside perspective, it seems a little bit like the organization has lacked a little bit of confidence in terms of the value you bring to your clients. And I'm referencing the ability to raise prices and perhaps be well prepared to lose a few clients that aren't prepared for those price increases, but maybe a good move still for profitability. And linked to that question -- first of all, if you agree with that?And secondly, linked to that question, how you feel about the R&D content into your products right now? Do you feel that there might be a route to invest a little bit more in R&D so that you, down the road, get a better price position towards your clients than you have at this stage? That would be interesting to hear your thoughts on that if you have any. I appreciate that you're quite early on your job.

[Robert Dackeskog, President & CEO]

Yes. I think historically, I think, in a way, we've been quite good in driving the price actually in the market. We have really high premium products. And that's been a -- that's been Duni's strength over maybe 20 years in a way or more than that, maybe. So I think in a way, we've been pretty okay, and going forward, I think -- of course, we need to -- all companies needs to develop their product portfolio in that way you're describing, actually. I think that's what we need to do. And I think it has -- as I said before, it happens so much now within sustainability and so on. So there's, of course, a lot of great opportunities in those areas.So we can't be that specific in a way, but I think definitely, we need to look into those areas. And I think, as I say, it happens, so many things and it goes quickly. I think Duni needs to be a little bit more agile in the future. I think that's maybe my aim, definitely.

[Gustav Hagéus, Research Analyst]

Okay. And lastly, then, you mentioned being a little bit more agile, and I think Magnus referenced variabilizing costs. Do you -- is the vertical integration a holy cow for you? Is that something that you feel is a core for doing it that cannot be touched? I guess why I'm asking is that, exiting some of your fixed costs in the Duni segment would dramatically lift probably return on capital employed, which sometimes is good for creating value and the perception in the market for -- in terms of quality of the company and so forth. That would be interesting to hear your thoughts.

[Magnus Carlsson, CFO & Executive VP of Finance]

Yes. I thought you may add on, Robert. No, I don't think there are any holy cows, as you put it, Gustav. But being vertically integrated has been a strength for Duni over the years. Of course, 2020 is an extreme situation, with the pandemic. And as I mentioned, we have been working hard to variabilize the cost. But as we have seen, it's been a strength. But there are no holy cows, and we are -- normalizing the situation, we also believe that there is a strength to be vertically integrated.

[Robert Dackeskog, President & CEO]

No.

[Magnus Carlsson, CFO & Executive VP of Finance]

And we do look very much on return on assets, of course, that's an important one.

[Operator]

Our next question comes from the line of Karri Rinta from Handelsbanken.

[Karri Rinta, Research Analyst]

Yes. I will -- I have a few questions, and I will start with the numbers. So if I look at the gross profit in the fourth quarter, it dropped quite a bit also compared to the third quarter. So pretty much roughly as much as your revenue decline. So was there anything specific that explained the -- sort of the sequential decline in gross profit compared to Q3?

[Magnus Carlsson, CFO & Executive VP of Finance]

Magnus here. I think there are 2 explanations for this. One is that we -- the Christmas sales, which is normally a good, high-margin business for us, were very limited in the fourth quarter. And second, we saw the pandemic hurting us, and especially for the Duni segment, where we have the factories and so on, and then we get -- we got less fixed cost coverage, and I think those 2 components hurted us quite some bit in the fourth quarter.

[Karri Rinta, Research Analyst]

Okay. But nothing about -- because if it wasn't for the pandemic, the only thing we would probably be talking about here is pulp prices, which of course, they didn't go up that much in the fourth quarter, but they have since then. We have at least heard a lot of price hike announcement. So I mean it's probably not your key concern right now, but what should we think about pulp prices for 2021?

[Magnus Carlsson, CFO & Executive VP of Finance]

Correct. I think that has had a limited effect so far. There are indications during fourth quarter that the pulp prices is on its way up, and we follow this very carefully, of course. And -- but also we historically have been quite good on compensating for that in different ways, cost reductions or price compensations. But it's true, it's on its way up.

[Karri Rinta, Research Analyst]

All right. Then the government support that you mentioned and the, I think SEK 270 million in total in cost reduction in 2020, how much of that roughly was government support? How much of that was sort of temporary cost avoidance? And how much of that should be seen as structural?

[Magnus Carlsson, CFO & Executive VP of Finance]

Around SEK 90 million, so less than -- of the 270% -- SEK 270 million. So SEK 90 million around that, government support.

[Karri Rinta, Research Analyst]

Okay. So SEK 90 million was government support. So SEK 180 million, how much of that was just less travel, less meetings, less sort of -- that comes back when conditions normalize? And how much should we expect to be here to stay in terms of structurally lower costs?

[Magnus Carlsson, CFO & Executive VP of Finance]

That is a lot of different components, of course, and I cannot comment on each and every one of them. They -- I think all of it has contributed, sales cost being down and travel costs, et cetera. All the -- all costs, basically, you find in the P&L. But I cannot comment specifically on the type.

[Karri Rinta, Research Analyst]

All right. Fair enough. And then when we look at your Duni business, how much of that goes via distributors and wholesalers? And you do make a comment about your receivables that so far, you haven't seen any clear increases in bad debt. But is there any region, any sort of -- that you are sort of growing a bit concerned when it comes to receivables, your customers and whether they will make it or not, especially if we talk about distributors and wholesalers? Because individual restaurants, of course, will go bankrupt, but the middleman, how are they doing?

[Robert Dackeskog, President & CEO]

Yes. I mean of course, absolute main part, it goes through wholesalers or various distributors. And of course, that is less risky than going straight to restaurants and so on. So -- but we have been following this very carefully. And of course, you see certain markets that are higher risk than others. But so far, it's been manageable, definitely.And yes, we are, of course, the more -- the longer we have the pandemic situation with lockdowns and so on, we need to be even more in control of this and manage it in different ways.

[Karri Rinta, Research Analyst]

All right. And when does typically -- I mean summer is a high season for hospitality. When does it typically sort of get into -- get started? The preparations for the summer season, i.e., let's say, that lockdowns start to be gradually eased from March, so does that mean that there is still enough time for the hospitality industry to prepare for summer in their usual fashion? So when should we get -- when should we become worried about the summer season, assuming that the lockdowns are extended beyond February?

[Robert Dackeskog, President & CEO]

Well, I think if we look at 2020, it kicked off in May, really -- yes. So if you look at last year in a way, there, we had the boom from May, really. And that, of course, was part of the -- yes, depending on the restriction, of course, when that was eased up last year.

[Magnus Carlsson, CFO & Executive VP of Finance]

No. I don't think -- it's very difficult, and I -- it's impossible to speculate and we should not speculate on that. But what we can learn from 2020, as Robert said, is that once it opens up and the restriction starts to lift, the orders are placed and it quickly goes out to the restaurants. So there is no long lead time in that sense.And actually, I think only, it's a matter of -- if the restrictions are lifted, then it very quickly fills up and the restaurants can open up and serve their customers.

[Robert Dackeskog, President & CEO]

And that's the learning from last year.

[Magnus Carlsson, CFO & Executive VP of Finance]

That's the learning from last year, and we believe it will be the same this year, that it goes quickly.

[Karri Rinta, Research Analyst]

All right. Then finally, maybe about BioPak. Do you feel -- I mean this is a strategic question, and maybe it's -- I understand that it might be a bit too early, but do you feel that your BioPak portfolio is as comprehensive as it should be? Or are you lacking some products that you could sell to the same customers that you are currently selling your existing products?

[Robert Dackeskog, President & CEO]

Yes, maybe a bit -- but in one way, I think we have a really good portfolio, definitely. We are -- I mean with the BioPak range, we are -- yes, in the lead, so to say, in the market as well, yes, compared to others. So I think we have a good portfolio. Of course, it needs to develop and especially what happens with, yes, the trends in the market and so on, the -- those kind of things. So yes, I think definitely, we have a good range, yes.But of course, as you -- I mean we need to develop it, definitely. It happens in a lot of things. And I think the customers now, I think that's very positive in a way. They ask for a lot of new ideas in terms of takeaway as well. A lot of actually restaurants that hasn't had takeaway are moving into takeaway. If you take maybe the 5-star restaurants today, they -- or 5-star or 3-star, whatever, the top ones. They didn't have takeaway before, and of course, now what happens is that they try to do that. And they need maybe a more interesting packaging than maybe another maybe 1-star restaurant then if you compare. So I think this is an area we need to explore more, definitely.

[Karri Rinta, Research Analyst]

Sure. And then one more final question. How much are -- how much roughly is hotels as your sales? Maybe not direct sales, but how much of your products end up at hotels, if we look specifically for Duni? Do you have any ballpark estimate that you can give us?

[Robert Dackeskog, President & CEO]

I don't have that right now.

[Magnus Carlsson, CFO & Executive VP of Finance]

It's -- we do not have the percentage, but it's not the main segment. It's an important segment, it's not the main.

[Operator]

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

[Robert Dackeskog, President & CEO]

Yes. Thank you for today. And yes, it was really nice to do the first report here, and looking forward to do many more in the future. Thank you.

[Magnus Carlsson, CFO & Executive VP of Finance]

Thank you.