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Edited Transcript of DUNI.ST earnings conference call or presentation 12-Jul-19 8:00am GMT

Q2 2019 Duni AB Earnings Call

Malmo Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Duni AB earnings conference call or presentation Friday, July 12, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Johan Sundelin

Duni AB (publ) - CEO & President

* Mats Lindroth

Duni AB (publ) - CFO

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Conference Call Participants

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* Gustav Sandström

SEB, Research Division - Research Analyst

* Karri Rinta

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Duni AB interim report January to June. Today, I'm pleased to present Johan Sundelin, CEO; and Mats Lindroth, CFO. (Operator Instructions)

I will now hand over to Johan Sundelin. Sir, please go ahead.

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Johan Sundelin, Duni AB (publ) - CEO & President [2]

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Thank you, and welcome. In the quarter 2, we saw a historically strong second quarter result but we will start by looking at the sales. We saw a net sales increase of 13% and an organic pro forma growth of 1%. The growth in the quarter is negatively impacted by fewer days of sales versus last year, and when it comes to the order trends they are very much in line with previous quarter. That meaning, we still see very high growth rates in our sustainable packaging business. We also see continued good growth in premium napkins and continued declining sales in table covers. And we also continue to see challenging market for private label in our consumer retail business area, and we see there a negative development of volumes.

Then when it comes to the operating income, it increases with SEK 15 million, up to an all-time high level and I'm happy to see that the improvement program now starts to deliver and supported then by increase in prices and our cost efficiency program. We are also helped by the pulp prices that continues down in the quarter, but we have a negative impact on the profit on the -- our logistical costs due to limited market supply of forwarder that drives cost increases in that area.

If we take an external look, also the external environment has clear similarities with the first quarter where we are again helped by the exchange rate with the general weaker Swedish krona. We continue, as I said, to see pulp prices going down in the quarter and overall, our HoReCa market are long-term growing in line roughly with the GDP.

And you probably also all have seen the still very strong antiplastic trend driven by both consumer, customers, politicians and media, and that drives the strong growth for our sustainable business products while we then see our plastic products being in decrease but more than compensated by the increase in our sustainable packaging area.

From a more long-term perspective, we are in a phase of transforming Duni into even more sustainable and customer-oriented business, and one key area for us to drive the sustainability agenda is the growth of our sustainable packaging. And we now see sustained growth of this part of the business above 25%. And when we're looking at our 3 business areas of sustainable packaging, both our Duni European ecoecho business, our acquired Biopac in U.K. and the acquired BioPak business in Australia and New Zealand, they all 3 performed very well. So this means that our turnover on this fast-growing segment now have reached SEK 850 million. So it's now constituted a significant part of our business.

If we now take a closer look at our 4 business area and start with Table Top, we see that sales are in line with last year and profit improves somewhat. And I'm happy to see that from a geographical perspective, our biggest market, Germany, continued to perform well and increases its performance in the second quarter. But in the quarter, we see some decline in Southern Europe and the U.K.

The other comments you will see are very much in line with the overall summary, meaning, we see the premium napkin growth, we see decline in table cover, we see that the result is impacted by the raw material development and our price increases, and we have now fully implemented our price increases, and we see that in the results. And Table Top is also impacted by the negative development in the logistical cost, especially in our Central European business area.

With that, I move to our second business area, Meal Service, where we continue to see good improvement, both in growth and profits. And basically, we see good growth in almost all markets, and this, as I said, is driven by the positive development of sustainable packaging, which then replaces our single-use plastic articles.

The latest launch we have done in the ecoecho assortment is the launch of a grass fiber-based concept, which we have directed towards the important bakery segment. And when we'll -- moving forward, we will continue to focus on synergies of the European Duni ecoecho business with the BioPak business in Australia and New Zealand.

Then if we look at our consumer, our retail-oriented business, we see decreasing sales but margin are basically in line with last year. And the decrease in sale is coming from our private label business since the Duni brand are basically in line with last year, but we see, as I said, a decrease in our private label. And here we have lost some contracts following our necessary price increases last year. And this is a demanding market driven by high price focus and also some overcapacity. So focus forward is going to be to regain some contracts and also optimizing our value chain to decrease our cost base.

Then finally, the New Markets. We see a stable quarter and the performance has been improved by BioPak. So the big change in terms of sales and profit is mostly driven by the positive development in BioPak Australia. We also see good growth in the Middle East and North Africa region, but Singapore continued to be a -- to show a negative development both on top and bottom line. And important to note this when comparing numbers between our business areas that we have moved two markets, Russia and North America, from this new market business area into Table Top as from the beginning of this year.

With that, I hand over to Mats Lindroth, our CFO.

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Mats Lindroth, Duni AB (publ) - CFO [3]

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Thank you. Yes. In the P&L, we can see that we -- as Johan has said, we had a strong increase in sales mainly then driven by acquisitions and FX rates. We have a record operating income for the quarter of SEK 111 million, an improvement of SEK 15 million.

So looking at the financial net. We have a financial net of SEK 7 million -- minus SEK 7 million, which is a normal financial net for the quarters this year. Last year, we had exceptional currency gains in the financial net. Therefore, we had 0 in last year.

Going over to looking into the segments. Very encouraging developments in Meal Service, both increasing sales and increasing profitability. Strong effects from the sustainable -- from the growth of the sustainable packaging assortment.

Also positive in New Markets, where the sales increase and the profit increase is absolutely attributed to the acquisition of BioPak that we made in October last year.

In Table Top, it's a stable development with a slight improvement. And as Johan also have mentioned, we have volume losses in consumer, mainly in the private label area, but the effects on the operating income is limited. And it's also like that, that the second quarter for consumer is seasonally weak quarter.

I will move over to cash flow, and we have a strong cash flow -- relatively strong cash flow in the quarter. That is, of course, driven by the increased profits. We have less -- much less capital expenditure and we have also a better development of our inventories than we had in previous years.

Looking into the financial position. Of course, the net debt to EBITDA is now at a 2.95 level but it's still dependent on or due to the acquisitions and the investment that we have made in the recent years.

In the second quarter, the cash flow and the ability to amortize debt will be stronger than in the first half of the year, so we should keep in mind that this year we have a split dividend payout, so we also have the same level of payout over SEK 170 million in November as we had in May this year.

And then looking into the financial targets. Sales growth that's slightly more than marginal sales growth. The operating margin is still not reaching 10%, although we have signs of improvement this quarter. They have moving upwards, now at 8.5%. And the dividend we have -- we are paying out this year is at SEK 5 per share, which is more than 40% of the net profit.

And with that, we conclude the presentation part of this setting.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We now have our first question from Gustav Sandström from SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [2]

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I have a few questions, if I may. Firstly related to the sustainable packaging, which you argue is growing at 25% or more in the quarter year-over-year. Could you please give us a little bit more flavor on this number? To what extent it relates to perhaps one or a couple of bigger new customers that are driving volume, if it's an effect of mix as customers shift from perhaps lower priced plastic products into these alternatives or whatnot? So a little bit more color on that would be very helpful.

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Johan Sundelin, Duni AB (publ) - CEO & President [3]

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Yes. If I give you some -- a bit more data on that. We expect that the market is growing by roughly 20%, and that meaning that with our estimate is that we are also on top of that taking some shares in the market. There is a transition, so we're using our existing customer base to buy plastic products from us today and we transform them into sustainable solutions. And when we do that, we do increase our sales in terms of a mix impact since our sustainable offer is 20% to 30% more expensive than our plastic offer. So there's a, so to say, positive mix impact. Then there is -- so most of the sales increase I would say is organic through our existing customer base but we are also seeing that we are taking new customers on top of that.

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Gustav Sandström, SEB, Research Division - Research Analyst [4]

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That's helpful. Then in terms of the cost efficiency program, you mentioned that you had some impact on profitability this quarter. Putting aside the price, pricing and pulp effects, is Q2 fully representative of where you are now in terms of the cost base? Or should we see a sequential improvement on the cost side into Q3?

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Mats Lindroth, Duni AB (publ) - CFO [5]

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No. I think we -- as we said, we see positive impact on that. And then a big part of the cost efficiency program that we initiated last autumn is now implemented but we will have some continuous decreases in the coming quarters. So coming into Q4, the full effect of the program will be there. But as I said, most effects we have will get into books of sales.

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Gustav Sandström, SEB, Research Division - Research Analyst [6]

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Great. And you mentioned in the report some initiatives relating to the consumer business in terms of efficiencies. Is that included in what you just stated, Mats? Or is that something that we're more looking into latter part of this year?

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Mats Lindroth, Duni AB (publ) - CFO [7]

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That's another program that we are initiating. So it's not -- it's also, of course, related to cost efficiency but it's not related to the program that we initiated last autumn.

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Gustav Sandström, SEB, Research Division - Research Analyst [8]

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But does it relate to the program you mentioned earlier regarding logistics optimization? Or is this a third program of yours?

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Mats Lindroth, Duni AB (publ) - CFO [9]

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No. It's a third initiative.

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Gustav Sandström, SEB, Research Division - Research Analyst [10]

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Could you give us a ballpark figure, what you're hoping for here with this program as you mentioned it?

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Mats Lindroth, Duni AB (publ) - CFO [11]

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No. It's just -- it's initiated and we are working on it but we have to come back with more of the expected effects.

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Gustav Sandström, SEB, Research Division - Research Analyst [12]

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All right. And on the consumer side, obviously, quite a big drop in organic sales, 15%. And I would assume as you state that it's on the private label side that you are losing volume, which I would assume carries lower prices, the mix should be somewhat positive. So volume's down more than 15%. Is that a fair assumption?

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Johan Sundelin, Duni AB (publ) - CEO & President [13]

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Yes. You see that volumes are down but profit are stable. So that meaning that, yes, when we lose customers, we, of course, try to make sure that the customers we lose are the one with the lowest profitability because the customers we lose are more tender-based business, where you basically could almost decide if you want to have that business or not. So yes, you can say that it's correct, that has been a positive mix impact.

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Gustav Sandström, SEB, Research Division - Research Analyst [14]

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And what we saw now in Q2 in terms of organic growth for consumer, that is, all else equal, something that will transcend into Q3, Q4 volumes as you've lost these contracts now? Or is there any reason to assume that the volumes or organic growth will be better in this latter half of the year for consumer?

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Johan Sundelin, Duni AB (publ) - CEO & President [15]

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I don't want to give a detailed forecast but in this tender-based business contracts come and go and you win some and you lose some. And so yes. But I can say that it has been a tough quarter so -- in terms of volume. So I would be a bit disappointed if it got even worse, put it that way.

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Gustav Sandström, SEB, Research Division - Research Analyst [16]

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Okay. And 2 more questions, if I may. You mentioned the calendar impact on volumes here affecting organic growth negatively. Could you give us a ballpark figure, what do you think is the underlying organic growth?

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Johan Sundelin, Duni AB (publ) - CEO & President [17]

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I don't want to do that, unfortunately. But since we mentioned it, the day's impact, at least, I can tell you that it's a significant impact.

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Gustav Sandström, SEB, Research Division - Research Analyst [18]

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Okay. And lastly then on Meal Services growing quite okay at 6%. I guess, here too there is a mix and price impact positively and then volumes are growing less than 6%. Are you -- do you believe that you're taking market shares in the Meal Service segment as a whole or in the quarter?

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Johan Sundelin, Duni AB (publ) - CEO & President [19]

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It's a limited price impact on Meal Service, since the price increase, it has been more on the consumer and especially Table Top areas. So most of the growth you see in Meal Service is volume driven.

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Operator [20]

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(Operator Instructions) We now have our next question from Karri Rinta from Handelsbanken.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [21]

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Yes. Karri, Handelsbanken. A few follow-ups on the New Markets. Maybe specifically you mentioned Singapore and New Zealand where you're taking some efforts through that -- reorganization efforts. So maybe how much roughly are these markets of the New Markets in total? And in terms of Singapore, where are we in this process? Or when should we expect that you are done with this process and thereby we should start to see an improvement again on a year-on-year basis? That's my first question.

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Mats Lindroth, Duni AB (publ) - CFO [22]

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Yes. It's fairly limited numbers as such. But still it is a decrease from last year. We have had some changes in management of some organizations in New Zealand, which is now -- where we now have new management in place, and we are also working on the improvement in Singapore. At least, we have the -- we're in a better position this -- the first half of this year in Singapore than we were in the second half of last year. So going forward, and of course, with the improvements that we are making that we expect Singapore to have a better result in the second quarter this year than last year. I think that is what we can say at this moment.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [23]

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All right. That's helpful. Then maybe the single-use plastics. Where are we on this -- in this process? How much do you still have left in terms of revenue from single-use plastic items? And at what point do you expect this to be pretty much 0?

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Johan Sundelin, Duni AB (publ) - CEO & President [24]

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We have less than 10% of our turnover is from single-use plastic, and before this year is over, we will have delisted it all from our consumer retail business and only have it in our HoReCa business. There, we will keep it for a while still because we are using that as a tool to transfer volumes into sustainable business and that goes slower in HoReCa than in retail. But what we do see is that the declining trend in our plastic business is now double-digit and the kind of declining rate is growing basically faster quarter-by-quarter.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [25]

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All right. Good. Very helpful. And just to clarify, that less than 10%, that applies to all of Duni's sales not only consumer retail?

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Johan Sundelin, Duni AB (publ) - CEO & President [26]

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Correct. No, yes.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [27]

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Then finally about table covers. Can you discuss a bit on the sort of the structural growth or decline rate that you are seeing in that business and both in terms of volume but maybe more importantly in terms of value? So that's the -- product category, what's happening there?

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Johan Sundelin, Duni AB (publ) - CEO & President [28]

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Yes. The market trend that drives this decline is a trend of bare tables. So also premium restaurants using less and less table cloths in totality. We are still successfully transferring some linen restaurants into our products but the total market of, so to say, covered table is in decline. So that is what we see impacting our volumes and value as you say. What we have managed to do historically is that we have managed to compensate this decline in table cover by growth in premium napkins and that we still see that we manage to do. That's why you see kind of a stable situation, slight growth in this business area of Table Top.

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Operator [29]

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(Operator Instructions) There are no further questions at this time.

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Johan Sundelin, Duni AB (publ) - CEO & President [30]

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Okay. Then I'd like to thank you for attending, and wish you all a nice summer. Thank you. Bye.

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Mats Lindroth, Duni AB (publ) - CFO [31]

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Thank you.

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Operator [32]

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Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect.