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Edited Transcript of DUNI.ST earnings conference call or presentation 18-Oct-19 8:00am GMT

Q3 2019 Duni AB Earnings Call

Malmo Oct 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Duni AB earnings conference call or presentation Friday, October 18, 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 September. Today, I am pleased to present Johan Sundelin, CEO; and Mats Lindroth, CFO. (Operator Instructions)

I will now hand you 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 also from my side.

And let's start immediately with the highlights page. And Duni has always been a very stable and profitable business, but we have struggled to get the growth above the 1% level. So I'm happy to see in Q3 that we have now had a net sales growth of 16% and an organic pro forma growth of above 3%.

And for those of you who know Duni, you would recognize that the growth drivers are the same. We still see very high growth in sustainable packaging, while we're also happy to see a plastic decline. And we also continue to see growth in premium napkins, compensating for the decline in table covers. That's related to our HoReCa market which is the biggest part of the Duni business. We do, however, continue to see a challenging retail market, which impacts the Consumer business negative in terms of volume development. In Meal Service, we see good growth and also then strong growth in new markets driven to a large extent by the acquired company BioPak in Australia.

If we then shift our focus to the operating income, we see an increase in the quarter of SEK 23 million or 21%. This improvement is partly due to our margin improvement program, where we both have implemented price increases and also a cost efficiency program. But we should also be fair and say that it's also due to lower pulp prices in the quarter. The impact of the pulp price decline has, however, been negatively impacted by inventory revaluations. We also continue to see increase of our logistical costs driven by the limited market supply of forwarder in the market.

If we look at the outside markets, we see also similar trend as in the last quarters that we had positive impact from the exchange rates and mostly the general weaker Swedish krona. And again, you see pulp prices decline also in the third quarter. And overall HoReCa market is developing in line with GDP, and we, so far, don't see any signs of recession in our markets.

And as already stated, very strong demand for sustainable products. And everyone, of course, are aware of the war on plastic that's going on, and that drives the market away from plastic into more fiber-based solution, where Duni has a good and competitive offer. And as I said, continued strong competition in the retail market.

With that, we move over to the very strong growth of sustainable packaging. And if we now combine our business in sustainable packaging, so both the business of the newly acquired Biopac in U.K. and Australia and the Duni ecoecho business, all of these 3 areas now show a growth of above 30%. And this gives us a total combined turnover of sustainable packaging of more than SEK 900 million. And this business was SEK 200 million a year ago. So due to acquisitions and strong organic growth, we now have a substantial part of the Duni growth in this high-growth area. We are now working on integrating the 3 units into global BioPak-branded business. And we also have launched the BioPak brand into the first new market, which is Singapore, during the quarter.

And then we have last week announced that we made a complementary acquisition of another sustainable packaging business called Horizons, with a turnover of around SEK 60 million and profit in line with Duni. And that took effect as from the 1st of October, meaning that it's not officially part of the Q3 numbers. But I thought I'll mention this here when we talk about the focus that we do have on sustainable packaging. So that's a good complementary acquisition for us.

Then if we move into the business areas. Starting with our biggest business area in Table Top, you will -- since it's such a big area, you will recognize many of the messages from my overall introduction, but we see in the area sales that are basically in line with last year's and an improved profit margin. And again, premium napkins continue to increase, and table covers goes down. And of course, this area is heavily impacted by the raw material development and the price increases we have done but then, again, limited by the inventory revaluations. And also here, logistic cost increased, but positive cost control continues to contribute positively in the area.

Then in Meal Service, we see a stable growth momentum and driven again by sustainable packaging. And we're also happy to see that the margin goes up, so both good growth and improvement in margin and, no surprise, driven by the sustainable packaging, as I've said. But we also see good impact from the acquisitions of our 2 BioPak businesses. And we now work hard to achieve the synergies between these businesses. And as I've said, we launched in Singapore, and we have now also launched the first BioPak products in Continental Europe in terms of the ArtSeries cup -- designed cups.

Then if we move over to Consumer, here we see net sales development basically in line with last year but a decline, as you see, in operating income due to the very high price competition in the retail market. And here, due to that, we focus in the coming quarters to further find efficiency in both product portfolio and the way we go to market in terms of sales force.

And then finally, New Markets, heavily impacted, as you see, in sales and profit from the acquisition of BioPak, where we see a very good development. We also see good growth in the Middle East and North Africa. And we start to see an improvement also in our smaller Singapore units, where we in the last quarters have had a negative development. In our business in New Zealand, we had a bad quarter both in terms of top and bottom line. And just when it comes to the numbers, it's worth to notice that both Russia and North American market have moved from New Markets business area into Table Top as from the beginning of this year.

And with that, I hand over the word to Mats Lindroth, our CFO.

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

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Thank you. Starting to look into the P&L, we can, of course, see that we have a significant sales increase driven by, first and foremost, acquisition but also the weaker Swedish krona giving us a higher sales level. On the operating income, we have a stable, continued improvement versus last year. This quarter, we have a SEK 23 million improvement on the operating income versus some SEK 15 million in the last quarter. So we are definitely moving in the right direction. In the quarter, we can also see that the trend of decreasing operating margin has stopped. We have increased the margin from 9% last year to 9.5% this year.

Going to the segments, a little bit repeating then what Johan has also already mentioned. But in Table Top, there is a good and strong improvement, of course, influenced by the pulp price development in combination with the price increases that we have made. Meal Service, also a very good quarter both from a profitability point of view but also from a sales development point of view, where we have a faster increase in sustainable packaging than the decline in some plastic products, definitely also good. Consumer then, we've continued some lowering of the sales though at a lesser pace than in previous quarter, still, as Johan has mentioned, with a very competitive environment, leaving a modest profit of only SEK 4 million in the quarter. And New Markets, where the acquired BioPak is the main explanation for the profit increase.

Cash flow is a focus area in Duni even more than before. And then it's good to see that we have a very strong cash flow both year-to-date and in the quarter. This is driven, of course, by the increased EBITDA and lower CapEx as well as better inventory control, giving an operating cash flow of SEK 202 million versus SEK 69 million last year in the quarter.

This has been even more important now when we look into the financial position since we have taken on more debt with the recent acquisitions. Then of course, the cash flow is helping us to amortize some of that debt and, again, strengthening the acquisition capacity for the future.

And then finally, looking into our financial targets. Sales growth, yes, measured in the traditional way that it's a slight decline. However, this is not reflecting the current structure of Duni with the recent acquired company. So if we make a pro forma LTM sales development, we are at 2.9% versus the minus 0.1% here in the numbers you can see. Operating margin then, we are still then, as we have been talking about then, lower than the target 10%. But in the quarter, we are taking steps in the right direction versus the 10%. It's now at 8.6%. And we have the SEK 5 per share dividend paid out in -- partly in May and partly now coming up in November.

With that, we conclude the presentation part of this conference. And over to you?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Gustav Sandström from SEB.

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

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If I may start with one question regarding price, you obviously have a nice spread now with prices of the raw mats down. And I guess your clients also recognize the situation. So could you please tell us in a little bit on your discussions currently with your clients, do you expect to just list prices downwards if market conditions remain? And also to what extent do you see price slippage in the wake of this declining raw mats with larger clients already?

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

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I understand your question as in terms of customer pressure to reduce our prices. Is that correct?

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

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Yes.

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Johan Sundelin, Duni AB (publ) - CEO & President [5]

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Yes. We have a tradition in Duni of not lowering our prices and that we are, at the moment, sticking to. If we're looking at the price development long term, it is rising. And then what we have seen has been short-term fluctuations. And also the forecast is that the prices should now start to stabilize then and start rising again. So at the moment, we have no plans of reducing any prices towards customers.

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

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And when you say stabilizing price, do you refer to pulp prices, correct?

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Johan Sundelin, Duni AB (publ) - CEO & President [7]

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Correct.

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

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Yes. All right. And then the -- onto the cost-savings program that you initiated, would you say that we see the impact fully now in Q3? Or is there more to come also in Q4?

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

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Yes. I would say that almost fully, I would say there are some changes also in the last quarter. But more or less, the full effect -- or we can say that the full effect will come more or less in Q4. And some for the savings than we had in Q3. But the main part is already behind us.

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

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Okay. And you previously discussed further cost initiatives related to logistics and whatnot. Could you shed some light on if you have continued to work with this? And is there something we can expect you to announce more materially going forward?

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Johan Sundelin, Duni AB (publ) - CEO & President [11]

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Yes. I mean logistical cost is a big and important area for us, and it has been in the last years and will remain so for the coming years. So it's important due to its size. But it's also now important because we see this underlying strong inflation in the market partly due to the shortages of drivers in Europe. So that's why it's important and will be important for us to continue to work to try to mitigate this cost increase. With that said, we're not going to promise that we will not fully or even more than mitigate the inflation. So I think our focus is more to kind of limit the impact of that inflation.

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

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Okay. And sustainable packaging growing 30% in the quarter, if I recall correctly, grew about 25% in the first half of the year, so acceleration. Could you shed some light a little bit on how much of this is rather converting existing customers from less sustainable packaging into your sustainable packaging offering? And how much is the market share gain? You've previously talked about the market growing around 20%. Has that changed in Q3?

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

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No. I think that it's roughly the truth again that we see continuous strong market growth around those 20%, so we see that we still take share. Then we have the converting situation that you described, where we convert our current plastic customers into sustainable packaging. That's the case in Continental Europe, but that's not the case in Australia, which now is even bigger market for us, and in U.K., where we more grow organically by taking new customers and expanding our portfolio.

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

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Okay. And do you see any signs of price pressure on your sustainable packaging at the moment? You previously mentioned, if I recall correctly, 30% higher price on average for these products compared to their lesser sustainable alternatives.

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

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I wouldn't say that has changed. I think in this, it is still more -- the market dynamics is more growth than innovation rather than a lot of focus on price. Then of course, that differs between markets, but that is the general trend still.

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

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Okay. And finally one from me, just a housekeeping question. You're getting close to 2020 now. I guess you're getting some sense to how your budgets will be next year. Do you envision, from what you can see now, any potential CapEx opportunities or you think is a good opportunity to invest? Or should we rather expect CapEx to be in line or below depreciation? Is that still a reasonable assessment?

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

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No, I think that -- yes.

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Mats Lindroth, Duni AB (publ) - CFO [18]

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No, I think that we -- a couple of years ago, we had a lot of CapEx that we decided and that we made in 2016, '17 and '18. At the moment, we don't see that CapEx need, but rather, we've been focused on keeping a strong cash flow and investment level at or below the depreciation level fully.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Karri Rinta from Handelsbanken.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [20]

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First, a follow-up on the renewable packaging. And then in recent -- in some recent quarters, you have had some problems with raw material sourcing and with the supply chain. And now I think I saw you commenting that you have solved those issues. How would you, in general, characterize sort of the sourcing size of the business given that the market is growing very rapidly and your growth is even higher? Would you -- do you expect that you can grow at this rate in 2020 as well from the sourcing perspective? Or do you see some sort of challenges in that respect?

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Johan Sundelin, Duni AB (publ) - CEO & President [21]

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It's a relevant question, of course, in a fast growing market if supply can keep up with the growth. And you're right that we had some historical issues. At the moment, we have a good balance between supply and demand. And in the near future, we can't either forecast any problems so far. With that said, of course, anything could happen, but so far, it's a much more balanced situation than we've seen historically.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [22]

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What specifically has improved on the supply side?

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Johan Sundelin, Duni AB (publ) - CEO & President [23]

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It's our work with the suppliers. And of course, with the acquisition of BioPak, we have now a larger pool of suppliers and larger volumes that we have used to gaining good and even stronger relationship with our suppliers, and we have a good priority with them.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [24]

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Great. That's very helpful. Then just some numbers questions to get a sense of perspective. You mentioned that Table Top or tablecloths and single-use plastics continue to decline. Can you give us a sense of how much of your, let's say, Table Top is tablecloths? And how much of your Meal Service is single-use plastics? And what are the rough rate of decline in those specific product categories?

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Johan Sundelin, Duni AB (publ) - CEO & President [25]

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Yes. If I answer on Meal Service, we don't have any classical plastic business in BioPak Australia or BioPac U.K. to start with, so that's only in the kind of old Duni Continental Europe business. And so that, as you can in the numbers, is in what we call the Meal Service. So of the Meal Service business today, roughly 2/3 are plastic, and 1/3 is sustainable packaging. And we already talked about the growth rates of sustainable packaging, so that you have. But the decline rate in plastic is around 10% at the moment. And we're on the situation, of course, at the plastics, that decline, the better it is both for the environment and for us because we want to get our customers over to sustainable packaging as quick as possible.

And then you had a question on Table Top. I leave that to Mats.

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Mats Lindroth, Duni AB (publ) - CFO [26]

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No. I think the napkin sales, in a broad sense, both the premium and standard napkins is a bigger business and a bigger sales for us than table covers. I think we can say that 30%, 40% of our sales is in the table cover, in Table Top. And the remaining product, 60%, 70% is napkins.

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

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Great. That's very helpful. And then the 1/3 in the traditional Meal Service, which is not plastics, is that all ecoecho? Or is there -- and then I guess my follow-up question was -- would be what kind of growth rates are you specifically seeing for the -- for your own ecoecho collection.

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

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Yes. That's basically all ecoecho one. And there we see growth rates above 30%, so 1/3 of the business growing by more than 30% and 2/3 of the business going backwards by 10%. That's why we see a total increase.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [29]

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All right. Fantastic. Then about regional growth, I've glanced at it briefly, and it looks like Nordics is pretty flat. Central Europe is growing a bit probably or helped by currency, but what stands out as positive is Southern Europe. So what specifically, which countries, which categories are doing the best in Southern Europe?

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Mats Lindroth, Duni AB (publ) - CFO [30]

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Yes, that the Mediterranean countries, it's Italy and Spain mainly where we have the strongest position. France is also in our category -- categorized as a Southern Europe country in this case, but I would say the Mediterranean countries. In the Eastern part of the Mediterraneans, there is a much lower market for our products, like in Greece and in the Balkan countries. So it's mainly Spain and Italy.

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Johan Sundelin, Duni AB (publ) - CEO & President [31]

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And we see growth in both Table Top and Meal Service categories in Southern Europe.

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Mats Lindroth, Duni AB (publ) - CFO [32]

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Absolutely.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [33]

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Good. Then finally, a few technical questions. You spoke revaluations, can you give us a ballpark estimate of how much was that in the third quarter? And it -- obviously, it affects gross margin. But if I look at the cash flow there -- I mean if I look at the cash flow, that should give a better picture of the sort of the underlying situation?

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Mats Lindroth, Duni AB (publ) - CFO [34]

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Exactly. Exactly. So I mean there is a saving. There is a net saving also on the -- which is, yes, in the range of SEK 10 million to SEK 15 million in -- on the P&L. But you are right in the sense that in the cash flow, it has a bigger impact. So I think that we would have, yes, not fully the double but almost the double gap versus last year if it weren't for the stock adjustments. And then we have to remember that last year, of course, we have some positive stock adjustments because the pulp prices were rising. And now we have negative stock adjustments because the pulp prices are more going down. So that is how we can describe the situation.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [35]

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Okay. And now since the pulp prices will be down less in Q4, then the sort of the negative impact from stock having revaluation should be fairly smaller in the fourth quarter?

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Mats Lindroth, Duni AB (publ) - CFO [36]

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Yes. Time will tell. I think we still see now, coming into October, that we have significant drops in the market prices of pulp. However, I agree with you. I also believe that the pulp prices will stabilize and rather move upwards from now on. But if that is the case, of course, the gap should be bigger, that there is no further big drops in pulp prices, but time will tell.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [37]

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Sure. And then the last question. Other operating expenses has been rather high for the last 4 quarters. Is that -- what would be a sort of -- is there anything nonrecurring that are related to the cost savings? Or should we treat it as new normal?

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Mats Lindroth, Duni AB (publ) - CFO [38]

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Yes. The main part of that is amortizations from intangible assets related to acquisitions. So -- and of course, since we made the BioPak acquisitions in October last year, we still see that this is increasing, of course. But -- and now we have made a small acquisition in Q4, so -- which will not move that number so much. But the main part of that is the amortization from intangible assets related to acquisitions.

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Operator [39]

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Thank you. And as there are no further questions registered at the moment, I will hand the word back to the speakers for closing comments. Please go ahead.

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Johan Sundelin, Duni AB (publ) - CEO & President [40]

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Okay. Then I only say thank you for attending, and have a nice weekend. Bye.

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Mats Lindroth, Duni AB (publ) - CFO [41]

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Thank you.

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Operator [42]

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