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Edited Transcript of DUNI.ST earnings conference call or presentation 7-Feb-20 9:00am GMT

Q4 2019 Duni AB Earnings Call

Malmo Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Duni AB earnings conference call or presentation Friday, February 7, 2020 at 9:00:00am 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) - Executive VP of Finance & 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 year-end report. 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 good morning, everyone. Let's start immediately with the financial highlights for the last quarter of last year before I will also show you the financial highlights of the full year of 2019.

But as I said, let's start with the quarter where we see a net sales increase of about 7%, and an organic pro forma growth close to 2%. And as previous quarters, the high growth rates in sustainable packaging is the key reasons for the growth in the quarter. And we also see continued decline of the plastic assortment.

If looking more at the all produced part of the portfolio, we continue to see growth in premium napkins and declining sales in table covers.

From a more business area perspective, we continue to see a challenging retail market for Consumer, but we also see improvements in the quarter versus earlier quarters of the year.

In the New Market, we see very strong growth, and this is driven by the acquired company, BioPak in Australia.

We will then have a look at the operating income. We see that the operating income in the quarter increases by 45% or SEK 62 million versus last quarter of 2018, and this strong margin improvement is coming from 2 parts. One part is our own cost efficiency program, including the indirect savings of SEK 30 million and the second part is coming from our implemented price increases and the decline of the pulp price in the market.

We do, however, see continued strong increases of the logistical cost, which we partly have managed to compensate by own cost saving activities.

I'd, also on this slide, like to point out that we had a very strong operating cash flow in the quarter of SEK 358 million versus SEK 186 million last year.

Then as I said, I move to a few highlights of 2019. And since many of the trends are the same as in the quarter, I will not repeat those, but we see that we -- in the year, has an organic pro forma growth of 2.5%, which is now the second year that we see a significantly higher growth than the historical 1% that we normally has displayed. So that is positive.

I also like to point out the operating income increase of SEK 103 million, which is an increase of 24% versus the performance in 2018. And then, of course, we should remember that 2018 was a tough year.

Then I again also like to mention the very strong operating cash flow that ends on SEK 665 million, so significantly higher than the operating income of SEK 533 million for the year. So I think, overall, a strong 2019, both in terms of growth, profit and cash flow.

If we then take a look at the outside market, we see that during the year, the exchange rate has, in total, developed favorably for Duni and the biggest impact has come from the still weak Swedish krona.

When it comes to pulp prices, the average pulp price for the year is roughly the same as for the previous year '18, but the trend has been declining during the year. Right now, in the quarter, we see that pulp prices, however, have stabilized.

The HoReCa market continues to grow in line with GDP. And we don't see any major decline anywhere in our markets concerning any indications of recession. So of course, still a good market for us.

And we also continue to see very strong demand for our sustainable products, while plastic has an accelerating decrease. So the very strong antiplastic trend is still impacting our business, and we're looking forward to a continued strong growth of our sustainable packaging offer. And finally, yes, we still see that the retail market is highly competitive.

Then I move to a few key activities that is in line with the new strategy that we launched 1.5 year ago, and the strategy is about transforming Duni into even more sustainable and even more customer-oriented business.

And as previously announced, we have decided to build 2 brands globally. In the past, we are focused only on the Duni brand, but due to the acquisition of the strong brand, BioPak, we are now taking a decision to build 2 global brands, where the BioPak brand will be the global brand for our sustainable business.

In line with the new strategy and in line with this new brand strategy, we have also decided to change our sales and marketing organization. So this is the next step in our strategic development. This organization simplifies and strengthens the sales and marketing organization by taking away the 4 previous business areas and replacing them with 1 global marketing organization and 1 global sales organization. Due to that, we are reducing some duplicating work. There will be cost savings in this reorganization, which we assess to be in the area of SEK 20 million on an annual basis. And we will occur restructuring costs for about SEK 40 million that we're mostly going to take in quarter 1 of 2020.

But I want to reinforce, the purpose is not cost saving only, the purpose is to strengthen the organization, and we will reinforce the competence and resources in areas such as innovation, sustainability and digitalization.

As a consequence of this organization, we will also -- as from quarter 1, changed the reporting and instead of reporting the results divided by the 4 business areas, we will report the result based on Duni and the BioPak segments.

I also want to stress the very strong growth, our sustainable packaging. If we're looking at the yearly growth, during 2019, we see that we now grow this segment above 30%.

We have also, in the last quarter of the year, acquired another, a third company in this segment called Horizons Supply, which is based in Australia, and they will be integrated into BioPak Australia. They have an annual turnover of about SEK 60 million. And we're now -- during the year, we have also seen good performance in all our sustainable packaging areas, both in Duni ecoecho business in Europe, Biopac U.K. and BioPak Australia.

So the combined turnover of this segment has now grown from about SEK 200 million 2 years ago to now more than SEK 1 billion. And of course, this now becomes such a significant part of our business that we start to see a growth impact of the total Duni Group.

So with that, since I just mentioned that we will change the reporting structure, that means that for the last time, we will now share with you the results for the 4 business areas.

Starting with Table Top, where the headline is sales in line with last year and improved margins. And those trends are also clearly visible in the 2 graphs. So we can see that net sales show a slight increase, and we see a quite strong increase in operating income, moving up from SEK 97 million to SEK 131 million in the quarter.

And most markets show sales in line with or slightly above last year with the exception of U.K., where we see a decline. The trend continues with premium napkins growing and table covers declining. And of course, in this business area, we see a strong positive impact of the raw material increase and our cost control program. And also, as I mentioned, the increase of logistical inflation is visible, especially in the Central Europe. But overall, a strong quarter for Table Top.

If we then move into Meal Service, with an improved profit margin and also continued strong momentum in sustainable packaging. So we see, in terms of numbers, that the net sales is growing again and also operating income is growing. So we see improvement on both top and bottom line.

And I mentioned already several times, the importance of sustainable packaging and the decrease in sales in plastic. But I here -- I also want to stress that we now are moving into building a global BioPak brand, and you will see that the Duni ecoecho product in Europe gradually will be replaced by BioPak products.

Then we move into Consumer. And we can see if we're looking at the total year that the sales are almost stable and profit are also almost stable. So after some tougher quarters, we see that Consumer develops a strong profit improvement in the last quarter. And that improvement is due to both successful Christmas sales and campaigns, but also to some new customers that we have acquired. But the overall competitive situation is still very toughie in this market segment. And of course, also here with a positive margin impact from the raw material development.

Going forward, we're going to continue in the new organizational structure to continue to find synergy effects between the traditional Duni business and the acquired German Paper+Design business.

Then finally, New Markets. It's heavily impacted by the development of the BioPak business, and you see a strong improvement in both sales and margin, driven by the good performance of BioPak in Australia.

If we're looking at the other businesses, we have previously talked about the problems we have seen in Duni Song Seng in Singapore. We now see an improvement, but they are still below historical levels. We have also seen during the year that we have some weak operational development in Sharp Serviettes. We have now improvement programs ongoing in both Singapore and New Zealand, and we have also done an impairment test for these 2 businesses. And the result is a goodwill impairment of SEK 58 million that is done now in quarter 4.

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

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [3]

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Thank you. Looking into the P&L. We have an improved operating income versus the same quarter last year of SEK 62 million, which in fact, is the largest improvement we have ever reported year-on-year on a quarterly basis. In this respect, we should remember that the Q4 in 2018 was particularly tough, due to the very high pulp prices we had at the moment -- at that moment.

However, even looking further back to years 2016 and 2017, the result in quarter 4 is almost SEK 30 million higher than we have reported in Q4. And this result improvement that we have, as you can see, is, first and foremost, explained by improved gross margins.

Going over to the business areas. As Johan has said, this is the last time we are reporting in this structure of 4 business areas. And then, of course, it's nice to say that in this final report for the business areas, the -- all of the business areas improved their results and their profitability. And perhaps it is most relevant to mention the strong improvement of Consumer, where the development have been tough in the first 3 quarters. But due to the strong seasonal sales and the seasonal performance of Consumer, the results -- the yearly results -- full year result is almost on par with 2018.

Cash flow. Yes, we are satisfied with the result of development. But we are maybe even more satisfied with the strong cash flow that we have, and the cash flow have been high priority for Duni in 2019 in order to strengthen the balance sheet after the significant acquisition that we made in 2018.

The strong cash flow can be explained, of course, by the improved EBITDA, but also that we have limited investments. So we have CapEx below depreciation. And we have also worked on the working capital, including inventories. So the yearly operating cash flow of SEK 637 million is, therefore, significantly above the operating income.

And then looking into the financial position. This strong cash flow has helped very much to improve the financial position. So we are ending the year at a net debt to EBITDA of 2.03 versus the 2.56 in the same period last year.

Also the net debt has gone down. In the net debt of 2019, there is included SEK 192 million of leasing debt. That was not included in 2018. And this is due to the accounting standard change.

Finally, looking at the financial targets. Yes, the impact of the lower sales in Consumer this year has taken down the organic growth rate to below 0. However, we are now almost back on the 10% operating margin. That is our target. We are ending the year at 9.6%. And the Board is proposing a dividend per share of SEK 5, which is the same as last year.

Adjusted for the SEK 58 million impairment, the payout ratio of the dividend versus the net profit is at 72%, which is still well above the 40% that is our -- in our financial policy -- the financial targets.

And with that, we are concluding the presentation part.

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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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I have a few questions, if I may. Starting off with the cost savings and reorganization that you have announced. Could you please enlighten us a little bit on the phasing of these costs and also the cost savings during 2020? And if there's any spillover effects to 2021 as you see it now?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [3]

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Yes. We are doing this reorganization now in quarter 1. And of course, as we do that, we will -- and people will leave the organization. We also move this cash flow and the cost from that -- from the normal operations to restructuring. So I think that we can say, as from Q2 and onwards, most of these savings will be recorded in the operating income. So let's say, SEK 15 million to SEK 20 million savings for the rest of the year.

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

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And the entire SEK 40 million is cash, yes?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [5]

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That will be -- that's the cash related over 2019 and with some -- over 2020, and with still some spillover into 2021.

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

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(inaudible) Of the costs will also incur in 2021? Or of the savings?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [7]

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No. We take -- if we take the SEK 40 million basically, the -- most of the SEK 40 million, we will take in quarter 1 2020. And then, of course, from that there will be some cash effects as the payout of redundancies, et cetera, will happen for the rest of the year and into 2021.

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

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Right. Right. And could you give us an update, I think you previously have mentioned that you're looking into initiatives potentially on the logistics side, and you previously see amounts that there might be something you could do there in terms of costs. So you again now repeat that this is an element of increasing cost for you in Q4. So could you give us an update on where you are with that?

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Johan Sundelin, Duni AB (publ) - CEO & President [9]

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Yes. I think we see in the external market a strong inflation in logistic-related costs. And of course, we want to combat that ourselves as much as possible by more efficient internally. So we have worked on that during 2019, and we will continue to work on that during 2020 and into 2021. But we can't give you any concrete numbers of the impact of that, but that is a strong focus for us.

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

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Okay. That's helpful. And turning to your acquisitions, the 2 BioPaks, you've said, if I recall correctly, that gross margins are somewhat lower with these products. But is it also true for EBITDA margins? Or are they still in line with the company average?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [11]

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Yes. I think when we now start to report in the new segments, it is a little bit different business model or operational models, you can say, that we are deeply vertically integrated in the Duni segment. But there's also with some higher operating margins, but of course not the same turnover of capital. In the BioPak segment, you will see somewhat lower operating margins but on the other hand, a higher turnover of capital. Meaning that the return on capital on these items -- or on these segments will be roughly comparable. So somewhat lower operating margins, yes.

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

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And would you be able to quantify the operating margin roughly for the BioPaks in 2019?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [13]

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I think we will wait with these computerizations until we report in Q1. What we can say is, I think, is that the Table Top, most of what you see in Table Top today, that will be reported into the segment Duni and most of the things that you see in Meal Service will reported into the segment BioPak. And there you can see some of these differences.

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

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Okay. And I appreciate that you mentioned that you grow within sustainable packaging at 30% in Q4, but would you be so kind to let us know what the growth has been in the BioPak companies in Q4 or in 2019?

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

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Similar numbers. So they have been growing by more than 30%.

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

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And that is true for both the BioPak companies?

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

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Yes.

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

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Okay. And could you also let us know what the Horizon acquisition, how much incremental growth they had in Q4? Or what they grew in 2019, please?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [19]

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That's -- I think we have said that the sales in this business is around SEK 60 million on a yearly basis. So that is, of course, by -- divided by 4 is about 40 pips.

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Johan Sundelin, Duni AB (publ) - CEO & President [20]

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And they are showing similar growth levels.

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Gustav Sandström, SEB, Research Division - Research Analyst [21]

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As BioPak?

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Johan Sundelin, Duni AB (publ) - CEO & President [22]

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Yes.

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Gustav Sandström, SEB, Research Division - Research Analyst [23]

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Okay. And 2 more questions, if I may. Firstly, the -- can you quantify the provisional pricing impact in Q4, please? I think you're right that it's negative, but a smaller number than we've seen in Q3.

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [24]

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I think you need to explain what you mean.

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Gustav Sandström, SEB, Research Division - Research Analyst [25]

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The provisional pricing effect or the pricing of the inventory related to the pulp prices.

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [26]

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Okay, okay. Now it's small impact in Q4. I think you're referring to the -- that the pulp prices are going down, and we have to adjust the inventory for that, which, of course, have been significant for the 3 first quarters in 2019. Pulp prices are being reduced until October. So there is some effect between September and October. But since then, going forward, in November and December, that was very small movement. So we are talking about maybe a couple of million SEKs but it's insignificant in comparison.

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Gustav Sandström, SEB, Research Division - Research Analyst [27]

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Okay. And then finally, you mentioned 2x EBITDA net debt here going into 2020. Could you please elaborate a bit on where you see your maneuverability in terms of M&A for 2020? Perhaps what sort of multiples you see out there for potential assets within sustainable packaging? And also, if you could assess the probability and perhaps your ambition to land further acquisitions in 2020?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [28]

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I think that we'd like to grow both organically and acquisition. And then as Johan has said, we are -- we prioritize, we have a high priority, I should say, on sustainable packaging acquisitions. And of course, there has to be the right opportunities in the market, and we are continuing to look for that. I don't think that we would like to assess any probability. But of course, the financial position now to make such acquisitions has improved substantially during the year, both due to the lower debt, but also due to the higher EBITDA that we have now. So we see that we have good opportunities to make acquisitions and more than one if needed, on a mid-sized level, absolutely.

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Gustav Sandström, SEB, Research Division - Research Analyst [29]

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And just to be clear, what's your sort of reference in terms of ceiling with the net debt if an interesting acquisition were to open up for you?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [30]

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I think we can go up a little bit more. We should -- we are now at about 2. And there are some, seasonalities in our net debt level. But going up to that level that we had last year is absolutely a possibility to be at 2.5 or a little bit over 2.5 if needed.

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Operator [31]

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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 [32]

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I have 3 questions. To begin with, you mentioned that you had seen some weakness in the U.K., if I'm not mistaken, is all of that in the sort of the legacy Duni? Or how did the Biopac do in the U.K.?

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Johan Sundelin, Duni AB (publ) - CEO & President [33]

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It's more related to the Duni business.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [34]

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So Biopac U.K. was also more than 30% growth?

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Johan Sundelin, Duni AB (publ) - CEO & President [35]

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Yes.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [36]

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Excellent. Then I think you have mentioned a few times in the past that you have never lowered list prices for your products. Do you think that you can stick to that policy? Also this time around, is there any pressure in sort of any segments like maybe lower-end napkins and the like to maybe price more aggressively given that the pulp prices are down quite a bit year-on-year?

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Johan Sundelin, Duni AB (publ) - CEO & President [37]

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As I said, if you compare the average prices, '19 to '20, it's actually on the same level. Yes, there has been a downward trend, but we now also see that the prices are stabilizing and forecast is saying that they will increase. So we will not do any general price decrease. That has been decided. And we cannot -- sticking to our policy. And also, we know the reason why we have that policy that firstly, we are a premium quality brand and provider; and secondly, that the trend is long-term upward going. And then there are always short-term volatility, but the long-term trend of pulp is upward.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [38]

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Great. And then finally, the goodwill impairment or write-down that you made related to Sharp Serviettes. Can you briefly discuss what went wrong? And sort of what kind of lessons have you learned, any red flags that in hindsight you maybe should have spotted? Or sort of how can you avoid similar mistakes in the future, if I put it that way?

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Mats Lindroth, Duni AB (publ) - Executive VP of Finance & CFO [39]

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I think we all learn as we make acquisitions. Of course, we should remember, this is a small company and a complementary acquisition. We were -- we are -- we were and we are interested in having a footprint in this region. And we also see New Zealand as a good market to be in. But it's a small company, and we have had some management changes and so forth. And we can see now that not everything has gone well when it comes to working with the productivity and the costs, et cetera, in the company. We are now taking actions to correct that, but we also see that there will be some time before we have significant or enough of cash flow coming in to cover the values that we have on the balance sheet, and therefore, we have made this impairment. But this is, though, that it's more a question of the costs and the operational efficiency in the company more than losing customers. We are quite stable in -- on the sales side.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [40]

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All right, perfect. Then finally, if I look at the sort of the regional numbers that you discussed for different European regions, it seems to be that Southern Europe continues to be a very important driver of growth for you. Is there any customers, countries, products, in particular, that are behind this growth?

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Johan Sundelin, Duni AB (publ) - CEO & President [41]

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No, I think that's a general trend more that we see across categories and across regions. So I couldn't point out any in more specifics there.

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Operator [42]

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

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Johan Sundelin, Duni AB (publ) - CEO & President [43]

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Well, the final comment is very simple. I just like to say thank you for attending, and we wish you a good Friday. Thank you. Bye.

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Operator [44]

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This now concludes today's webcast. Thank you all for attending. You may now disconnect your lines.