Earnings Call: Q3 2020

Nov 4, 2020

Ladies and gentlemen, welcome to the Ginnie AB Q2 Report 2020. Today, I am pleased to present Johan Sundelin, CEO and Mats Lindrote, CFO. For the first part of this webcast, all participants will be in listen only mode and afterwards there will be a question and answer session. I will now hand you over to Johan Sundalyn. Sir, please go ahead. Thank you, and welcome to this presentation of what I must say is an extraordinary quarter 2 for Gini Group. If we start with the highlights for the quarter and looking at the net sales development, we see a drop of 39% in the quarter. All of this drop is related to the Dumi segment, and of course, the reasons for the sales drop are the very severe COVID-nineteen restrictions during the quarter. If we then look at the Biopac segment, we do, however, see that, that sale is basically in line with the quarter last year. What's positive is that we when we're looking at the sales development during the quarter, we see a strong improvement month by month. The decline total sales decline in April was minus 54%, and that is to minus 18% in June, meaning we have recuperated 2 thirds of the sales drop in April in 2 months. If we then look at the impact on the operating income, we see that Douni Group made a loss of SEK 92,000,000 in the quarter compared to a profit of SEK 111,000,000 last year. And of course, this profit impact comes from the decline in sales, which makes it difficult to cover our fixed costs. We did, however, very quickly start a cost reduction program already at the end of quarter 1 to cope with the sales decline. And the program has delivered above expectations, and we have seen a total of SEK 157,000,000 in cost reduction initiatives during the quarter. Then we can see that also the profit followed the improvement of sales during the quarter, and we even reached up to a breakeven result in June. If we then look at the year to date situation, this is close to being a schizophrenic situation considering that we did deliver very good results in January February, and then we started to see the COVID-nineteen impact during second half of March. And then we had the strong impact in the second quarter, as I just described. But there has been, of course, a very strong focus in the organization to adjust both capacity and costs according to the changes in the sales forecast. Before then going into describing the more details of the two segments, Douni and Biopec, let's remind ourselves that we now are reporting the results in a new way. Instead of the 4 business areas, we are now reporting into the DUNI segment and the Biopac segment since we're now focused on building 2 strong global brands. The purpose of a reorganization that we did in the beginning of the year was to build a stronger innovation, marketing and sales capabilities. But I also want to reflect and say that it was the good timing that we introduced this organization ahead just ahead of the corona situation since it has helped us. Number 1, since we now have 1 sales director or commercial director in each region instead of 3 in Europe. That means we have been very fast in implementing our mitigation activities. Secondly, previously, we had a large sales force working towards a sit down restaurant and small sales force working towards takeaway restaurants. Now what we have seen in the COVID-nineteen situation is that many sit down restaurants have wanted to offer takeaway solutions. And since we now have one common sales force working towards the total market, we have been able to very quickly help these restaurants with their takeaway solutions. And then finally, the new organization is also on a yearly basis SEK 20,000,000 cheaper. That, of course, helps in the situation we're in. But now over to the 2 segments of Douni and Biotech. And let's start with Duni, our biggest part of our business and also where we are vertically integrated. And this is the area which has seen the sales decline sharply in the quarter and then gradually improving during the quarter. And of course, the recent COVID-nineteen restrictions that has severely impacted our restaurants and hotel business, which is a key customer groups for us. If we're looking at the development across the different regions, we basically see strong declines across all regions and also across all categories. There is, however, a bit stronger decline in table covers, which naturally are not as much needed when sit down restaurants are closed and also logically stronger sales in our hygiene assortment, including wet wipes, for example. We have, during this situation, focused on maintaining our customer relationships, both with digital marketing, but also with digital sales activities like webinars, where we have had hundreds of customers attending digital webinars, but we have helped them how to open up the restaurant in the new world, how to set up hygienic operations and also how to include takeaway offers in their offering. We have also launched additional products and have more products ahead in the coming months that will even further strengthen our offer in the hygiene sector. Now if looking at what has impacted impacted the bottom line, we see that lower material cost and our cost mitigation program has impacted the result positively. But of course, it's more than override by the negative impact from the volume decline. It might be worth noticing that you actually see a sales increase in what we call other sales if we compare this quarter to the same quarter last year. That is because the internal demand has not been able to fill the capacity of Rexel, our paper mill in scopapores, and we have therefore managed we have turned to external customers. What you see here are external sales of Jumbo Rolls to customers outside of Germany. With that, we move to the 2nd segment of Biopacks. And here, the overall situation can best be described as stable, where we see both sales and profits being very much in line with last year. And that goes basically for all regions. It's a bit worse situation in South, and that is, of course, linked to that the restrictions in, for example, Spain and Italy were very severe, where even takeaway restaurants were closed down for a period of time. But within this stable situation, it's a mixed development. We see very strong increase in takeaway solution, including COBOL packaging solutions under our sub brand Uniform. So that has seen a strong increase in demand, but we have seen lower sales in eating and drinking, which are products a lot used for at home social events, which in this situation, of course, has been impacted negatively by the COVID-nineteen restrictions. When we have seen these big shift within the Biopac segment, that has put some strong demands on our supply chain, especially considering that we're sourcing many products from China, and that has led to some supply issues during the quarter. The situation has, however, significantly improved towards the end of the quarter, and we're now in a better situation to serve all customers of also takeaway products. We have also during the quarter sorry, we have also included, important to note, the acquisition of Horizon's in Australia in these numbers that we acquired at the end of last year. Now if we turn our eyes beyond quarter 2 and look at the sales and outlook for the coming months and quarters. First, I'd like to point out that we are a healthy and fully operational business. Despite that, we still have a lot of short term work reductions. We have so far no confirmed COVID-nineteen situations. We have also been able to take care of the health of our employees in a very good way. But of course, the COVID-nineteen restrictions are still impacting restaurants and hotels negatively. Although many of them are opened, the social distancing means that the capacity of the restaurants is a bit less and also larger gatherings are in most countries still forbidden. But the open situation has, of course, improved versus the situation in April in a quite significant way. There are also continued takeaway opportunity in the market, and we see many restaurants that previously only offered sit down service has now started with offering also takeaway. And we expect that many of these restaurants will continue to offer that in the future. However, it, of course, a lot of uncertainty when it comes to trying to predict how the development would be in the second half of the year. And all we can say is that we expect that the sales will follow the changes in restrictions and especially the restrictions impacting the hotel and restaurant business. What have we then done? Well, 1st, we have tried, of course, to adopt capacity in line with the first decrease and now sharply increasing sales. Then I mentioned that we have had the cost cutting program of SEK 167 1,000,000 in the quarter, and worth noticing is that there is no restructuring cost connected to this program. But with the increasing sales now, of course, this cost cutting program are gradually diminishing, and we are aligning cost base in line with the sales growth. We have also taken the decision in the AGM to have no dividend in the year 2020. And it's also worth mentioning that we have a strong financial business. If we then look even further kind of beyond the kind of current market lockdown and costs sorry, pandemic restriction situation, we expect to see an increased demand for hygienic enhancing products and solution. And here, we have good offers. Our products do help restaurants making their operations hygienic, and we see now when markets open up a strong demand for our products, and we have also started to take some new customer accounts. We also see that the shift that restaurants are making and offering takeaway, we expect that to continue, and that should provide good growth opportunity even in the new future for Biopac. Hence, we feel we are very well positioned for a strong post COVID-nineteen development. So short summary, we have 2 strong brands with clear offer that should be even more relevant in the post COVID-nineteen situation, Germany and Biopak. We have a clear strategy that we still believe is highly relevant in the near future. And we also have a strong commitment to continue building Dune into a highly sustainable company because we believe that is right for the society and also right for Dunne's business. And with that, hope all works. I'm leaving over to Mats to go through the financials in a bit more detail. Thank you. Yes, as Johan has mentioned, this is a very unique quarter for Wimmer Group. This is the first time that we have an operating loss in a quarter. And of course, the reason behind that is the sharp drop in volumes that we had initially in the quarter. And the effect of that is that you can see on the gross margin, the gross margin is 3.9%. And the reason behind that is not that we have lowered any prices or so. The full reason for that is that we are not able with these low volumes to cover our fixed costs in the production. And that's why we have this huge effect of the drop in volumes. More important, calcium, as Johan has said, is that along with the volume increase in the quarter, we managed to reach a breakeven operating income in the month of June. So looking at this segment, and as we have said, the drop in sales in the quarter is mainly attributable to the Douni segment. And that's also where we have the integrated production structure. So that's why there is such a big impact of the volume drop. So the loss in the Dura segment is SEK 118,000,000. And overall, a more stable development in Biofract, although we see we have seen some impact of, of course, in the markets where there were a complete lockdown in, for example, in Southern Europe in the first part of the quarter. And here, we have a good development in the takeaway segment and a negative development in eating and drinking. But overall, the result in operating income on par with previous year. The cash flow, although we had an operating loss and a negative EBITDA, We managed to have a positive operating cash flow in the quarter. That is, of course, due to that we have lowered the working capital. And in particular, we have lowered the accounts receivable following the lower sales numbers. The financial position, what is good now after this quarter is that we have substantially reduced debt versus the same period last year. And the reason and that can be explained by, 1st, of course, the strong cash flow that we have in the second half of twenty nineteen. We have not paid out any dividend in 2020. And we had, as I mentioned before, the lower working capital. But of course, this is a good position now that we when we enter the second half of this year and where we hopefully can see a better market situation and we can regain a strong totally strong financial position. And of course, looking at the financial targets, of course, with this very unique situation we had in this quarter, if we impact our financial targets numbers, of course, the sales growth is heavily impacted by this weak sales in the quarter. The operating margin, 12 months rolling, is going down, of course. And we had the decision not to pay out any dividend in order to strengthen our financial position. So with that, we conclude the presentation part. Thank And our first question comes from the line of Karri Rinta from Handelsbanken. Please go ahead. Your line is now open. Yes. Thank you. Good morning. I have a few questions. Maybe best to take them 1 by 1. Firstly, if we look at the Douni unit and if we exclude the increase in other sales, and your sales during the quarter were down by roughly 65%, 70% for most of the geographies. Can you give us any sense of the rate of improvement that you saw in the quarter? So was it like no pretty much no sales in April and then gradual improvement in May April? So similar numbers that you gave for the Douni Group. Can you share some ballpark numbers for Douni unit of the improvement seen during the quarter? If we're looking at the Dounis sales in the quarter 2, they were down in total during the quarter by 58%. And during the quarter, we had a stable situation of the Durney sorry, of the Biopak segment. That basically mean that all the improvements that we gave on the total numbers is coming from the Dieuene segment. So that is where the strong improvement has come from. All right. Fair enough. And then the you mentioned that you reached breakeven in the month of June. And since you don't give any guidance for Q3, so should we implicitly read this as if you expect to be profitable in Q3? Yes. I mean, this is, of course, a big uncertainty. But as you know, normally, we make a good profit in Q3, and the profit will now depend on the development in the market that there are no backlashes in when it comes to restrictions for restaurants, etcetera, in mainly in Europe. But of course, we hope for, of course, that the improvement that we had during quarter 2 will continue into quarter 3, and that will implicate in that case that we make profits. All right. Thank you. And then the hygiene assortment that you mentioned, can you give us a sense of the magnitude of how much that was of your sales in maybe 2019? And in which specific products are you investing in? And you mentioned some new product launches. Can you give a bit more detail on those as well? It's a good question, Koos. I know in this business, when you talk hygiene products, a lot of people think about products used in the toilets and restrooms, and that is not what we're referring to here now. When we're talking pandemic, suddenly hygiene has a different meaning. And for us, it's about helping the restaurants to run their operations more hygienically. And that actually goes for the most important part of that is actually our core products of table covers and napkins. And many customers feel that a bare table that's been wiped with a Webex towel in a bucket does not feel very hygienic today. So they are asking for paper table covers that are new leads. So they have new leads set fresh table when they come into the table. And the same with napkins, where we have good solutions today with napkins that you could put your cutlery into certain packs together with your napkins. So it's sealed and secured and hygienic at your table. Then we have also more products like wet wipes to help clean your hands when you are sitting down by the table, etcetera. So the most important part of our offer is actually our core products that we see will be even more relevant in the future. And then we will do complementary launches to even further strengthen this offer. All right. Thank you. And then finally, a small detail. This renegotiated covenant, should we expect a noticeable increase in your financial expenses until March 2021? Yes. There will be some increase per quarter in the coming three quarters. That's true. But I mean, any comments on the magnitude? Is it doubled financial expenses or no? No. I don't want to make any comments on that at this stage. All right. Thank you very much. Thank you. And as there are no further questions at this point, I will hand it back to the speakers for final comments. Please go ahead. I guess it's only final comment we have is thank you for attending, and I wish you all a safe and nice summer. Thank you. Bye. Thank you. Thank you. This now concludes today's webcast. Thank you all for attending. You may now disconnect your lines.