Ladies and gentlemen, welcome to the Duni Q3 Interim Report. Today, I'm pleased to present President and CEO, Robert Dackeskog, and CFO, Magnus Carlsson. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question- and- answer session. I will now hand you over to Robert. Please go ahead.
Hello, yeah, welcome to the interim report for Q3 2023, where we're building a platform for sustainable growth. Yeah, starting out a little bit with the highlights of the quarter. Sales continue to increase with the strong market resilience, but we saw some weak demand at the end of the quarter, and we'll come back a bit to that, but we met quite strong numbers from Q3 last year after the pandemic, and all the restrictions opening up last year in the summer. The margin came in with a trend shift and are back on levels before the pandemic. The operating income had a significant improvement compared to the same period versus last year, and also a very strong quarter, historically, of course.
We had good cost control and reduced inflation rates are the main drivers behind the results. We'll come back to that as well. So, the agenda today, market outlook, Q3 summary, looking into the business areas, talking a little bit our innovations, and where we are with sustainability targets and then financials, and at the end, Q&A. So if we look into the market outlook, the HoReCa market will continue to have a volatile recovery, short term, and a stable recovery, long term. That's what we see. And if we look at the below left graph, it shows the volume in the HoReCa industry in Germany compared to 2019. And to the right there, it's around 10% below in Germany. Also, visits are 10% lower versus 2019.
If you look at the graph on the top right there, visits, but it's actually increasing and has increased, of course, from the bottom in 2020. And the outlook 2024 is that, the visits will come back, in 2024, a bit more, versus than 2019. So that's quite stable, stable market in 2023, 2024. Below right shows reservations versus last year and shows stability towards 2022. So that one is also Germany bookings, seat reservations, and it's pretty stable, at the end there, you can see as well. In Sweden, it's a bit different, where we are back at the 2019 numbers, in reservations and the visits in the market.
So for us, we feel also that we have a resilience in having two business areas, one focused on the restaurants and the dining location, and the other one, takeaway on-the-go products. It's very good balance if consumer behavior is changing. Also, our Duni Group's good financial position will enable us addressing profitable long-term growth opportunity in the future. Short key financials, the net sales increased by 5.5% to SEK 1.9 billion, and the operating income was SEK 225 million versus SEK 154 million last year in Q3. And operating margin is 11.6%, which is above than the 10% target we have, and is back to the pre-pandemic level, so to say.
More in details overall, then the net sales up then, and are record high in absolute terms. That's important to know. And the turnover, of course, increases from currency and price adjustments, while we saw a slight volume decrease in the quarter. There are negative growth in fixed currencies, mainly due to the high comparison numbers versus last year, where we had the Q3 coming back from restrictions, mainly in Europe, until June, and then the autumn was very good last year as well, coming back a bit more into the those business areas around that. And operating margin plus 46%, all-time high there. And it's back to the historical levels for the margin percentage, of course.
And, I think the balance between cost increases and cost compensations are the main drivers for our improved results during the quarter. So I hand over to Magnus to go into those business areas.
Thank you, Robert, and good morning, everyone. I will now go through our two business areas more in detail than as usual, and start with business area Duni, represents our products for the dining solutions like the napkins, table covers, and candles. Q2 showed a growth of SEK 146 million, that is equal to 14%, ending close to SEK 1.2 billion for the third quarter. And as you can see, operating income grew by almost 50% to SEK 170 million. That's a margin improvement by 3.3 percentage points, ending at 14.3%. So a little bit deeper look at the business area, Duni. We can see a continuous strong sales increase. However, this is impacted by favorable currency rates. And if you also...
Take the price compensation measures that has been taken in the last 1.5 year, we see that we're actually down a little bit in the volumes for the third quarter versus last year. So the recovery in the HoReCa market has been volatile, but I think it indicates strong resilience. The decrease in, as we see, disposable income for the restaurant visitor, is clearly mitigated by a strong wish and, and need to continue to meet, as mentioned several times. Reviewing the Duni sales, we see that the restaurant segment indicates slight growth, while the retail segment decreases in volume for the quarter. So this is actually a positive mix effect, while we see contrary, slightly negative mix effect, that we're growing a little bit faster in commodity napkins versus premium napkins for this particular quarter.
The margin improvement, as you see, is mainly coming from cost reduction program that we already initiated during the pandemic, now being leveraged when we reach better volumes since that time period. Second, we do see that the inflation is coming down from the very, very high levels we saw by the end of 2022. Still, I think it's important to notice that we continue to see high cost levels, many more than 20% above pre-pandemic level in 2019. Some raw materials that have been decreasing over the year, the last year now, from extreme levels, is actually, with a slight trend break and now on the way up again. So that's something we watch carefully. To stay competitive, we have adapted the price level from certain tenders and commodity business. That means price reductions versus previous quarters.
When it comes to the Duni branded business, we are confident that our efforts and investments we have done to have the best, superior, sustainable solutions with low emission is in materials, will be interesting for both the existing but also for new customers. So the fully compostable and fossil-free Bio Dunisoft napkin that we launched earlier this year in the third quarter had continued to develop well, but we also launched several new series of Bio Dunicel, and that's the table cover, a new material with significantly lower emission impact. If we look on the business area, BioPak, which focuses on products within sustainable food packaging, like takeaway cups and other fiber products for meal service, we see a sales decrease of 5%, but the operating income is actually developing well and increases to 7.4%.
So if we take the next page, then, the slight decrease is partly linked to strong, strong numbers last year that Robert mentioned, especially outside of Europe. We, at that time, secured some significant large contracts, with a lot of pipeline filling in the third quarter. We had a result that was, at that time, 20% increase versus 2021, a 60% increase versus 2019. So again, exceptional numbers in comparison. But nevertheless, decrease is confirmed in the quarter, and I think it's attributable to lower growth level outside of Europe, that previously, up until now, explained fully the growth seen in the last year or two. Despite the lower sales levels in the quarter, we see better mix and clearly lower cost connected to our inventory. This is contributing positively to the margin improvement that we see.
We not only have a lower stock, but clearly with higher quality, meaning less risk for further write-down costs or obsolescence. We are operating, thinking in the industry with a fundamental change from plastic to fiber that has been going on for quite some time, and as well as other business models in reusable and recyclable alternatives with mono materials. I think this gives some short-term challenges for some product groups, but even more possibilities in a market that is esteemed to grow up to double-digit long term, meaning 2030 and beyond. So finally, the business area began its launch of reusable range of mugs, plates, and cutlery that will comply with the legislation, coming to Sweden, for instance, January 1, 2024, as well as some other countries in Europe.
I will now hand over to Robert again to inform you about our ways of working and securing the trusted sustainability leader in our industry.
Yeah, thank you, Magnus. Yeah, we are engaging in a lot of different things around sustainable innovations, and of course, we try to structure it as we have our own lab, where we're looking into changing binders in our materials, which Magnus touched upon with the napkins, the Dunisoft, and also for the table covers, the Dunicel, with a bio binder. So there, we've done a lot of work and now launching all these products in Duni. And then we work a lot with corporations, OrganoClick, which has been involved in the binder of the Dunisoft, and also with &Repeat and Bower and BicyCompost in France, to look into different type of circularity to aspects of the market and potential solutions.
And then we also invested in two minority investment in the reusable area, where Bûmerang and Relevo is two companies that have startups that is started to look into reusable for cups and mugs and bowls and plates and so on in Europe. Bûmerang is in Spain, and Relevo in Germany. And then we also have two startup products within Duni Group, and it's Idun, also focusing on solving the circularity around cups and plates and those kind of things both single use and for reuse. And Unmo, which is a platform, we'll come back to that. So we'll take the next slide a little bit more in-depth there. But our two startup projects, they progressed positively during the quarter.
The Unmo system, that's tapping now into the circular economy, and we launched a couple of pilots in Sweden and Denmark during the quarter and got some new customers into this system, which is very interesting. It's, of course, an early stage for the whole reusable market in Europe, and everyone is testing and trying here, and I think we've been good here. We've been quite early in this and learning and understanding a lot around this. So here, we're looking forward to see how things evolve, but it's a little bit blue ocean for us, these things, since we're not that big in certain of these areas where these kind of systems will be part of the solution for the restaurants and also for consumers.
The Unmo project, it's a digital community of restaurants, owners, and potential employees hooking up, and driving the socially sustainable HoReCa market. This is, we tested it in Malmö here and started to get some pilot test and traction in that. Very interesting projects that are driving us to become this trusted sustainability leader in the industry. If we look at, yeah, our action, our decade of action here, our sustainability initiatives, we have three: Becoming Circular at Scale, Going Net Zero, and Living the Change. I'll move to the next slide directly. Becoming Circular at Scale, here, we are doing the pilot test of Iden, which is an important part in this.
Going Net Zero, we are doing initial upgrade of the dry unit enables in Skåpafors, our paper mill, where we then enable energy efficiency and improvement and also helping us reaching our target for net zero. So we are working towards all this. The Living the Change is a target we measure mainly yearly. But if you look at the net zero, we are at 37 in index, so that's good. That's the target for this year, and we're working hard to decrease that even more for the next year. So yeah, I hand over to Magnus with the financials.
Thank you, Robert. So to start with the income statement, we see that the sales increased by SEK 100 million versus the same period last year. And as previously stated, this is the best third quarter from a sales perspective, but in terms of operating income perspective, the SEK 225 million is actually the best quarter ever, including fourth quarter, which historically is the season of strongest one. The gross margin, as well as the operating margin, has improved significantly and is now on par with levels before the pandemic. And the operating margin is now above our 10% target, namely 11.6%. We also have, in the last year, initiated several significant projects that Robert just informed you about, to secure our relevance in terms of offering services and material solutions, fulfilling our high ESG standards.
You can see this in the R&D for higher cost, but also in the digitalization seen in the admin expenses. The saving program we have mentioned, especially on the Bio Duni, is contributing to COGS, mainly in the gross margin, and that enables investments in this sector of R&D and other areas to future-proof our offer. Finally, earnings per share is now close to SEK 8, as you can see for the last 12 months. Commenting a little bit on the business areas, we see that both business areas improve, not only in absolute terms, but also from a margin perspective. Bio Duni share of sales is now 60% for the quarter, that's also equal to the proportion for the last 12 months.
We take the next one and look a little bit on our cash flow, continues to stay strong, especially so, I would say, in the third quarter, SEK 350 million for the operational cash flow. The amount for the last 12 months is SEK 1 billion. A very strong cash conversion, leveraging on the improved result, of course, but also that we have significantly lowered our stock, and that's mainly in BioPak. And that goes for both the stock inside Europe and also outside, meaning Australia. And of course, this gives us very good position in terms of headroom for future investments.
As you can see on the next page, showing our financial position, the strong cash conversion has led to that the net debt has decreased with SEK 800 million versus a year ago, and I would say an overall stronger financial position with increased headroom going forward. And finally, the return on capital employed is now 27%, excluding goodwill. Lastly, as you can see, we continue to stay well above our growth target of 5% organic growth and 11%. We're closing in on the margin target, 8.8%, rolling twelve months. And finally, as you are aware of, the dividend target decided in May of 3 Swedish crowns per share would fulfill our third target, and that equals 7% of the net income.
With that, I thank you all for listening in and hand over to Robert.
Yeah, and a short summary then of Q3. We had a strong quarter in a volatile environment. Our operating margins are back to pre-pandemic levels, and the uncertainty in consumer confidence is balanced by a basic need to socialize. And I think there, for us, it's people go to restaurants not just to satisfy the hunger, it's also a way to socialize. And I think that need is very strong, and we—I think we can see that in the German reservation numbers, that it's actually stable versus 2022 still. So I think that feels that the balance is good there for the social need. So with that, I open up for questions and-
Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press star one one on your telephone keypad. Once again, that is star one one to register for a question. And there will be a brief pause now while questions are being registered. And our first question comes from the line of Karri Rinta from Handelsbanken. Please go ahead. Your line is now open.
I have a few, starting with the energy prices that you mentioned, that was a positive factor in Q3. Could you quantify that to some extent? Are we talking about low single-digit million SEK impact, or was it higher compared to Q3 last year? Because in Q3 last year, you commented in the opposite fashion. So that's my first question.
Thank you very much, Karri. Yeah, it is clearly lower, the energy cost. That is the case, and it's mainly attributable to our paper mill in Sweden. For the quarter, I would say it is double digit, but it's on the lower side.
All right. Thank you. That's very, very helpful. Then you make some comments around volume outlook, n ot volume outlook, but volume trends that you have seen, so that the, and maybe it's been flat and then softening towards the end of the quarter. Are there any signs of, customers pushing back on your sort of price compensation measures? And do you still have some price increase in the pipeline, or do you feel that you have now implemented the necessary price adjustments, and now going forward, you're trying to stick to the, the price levels of today?
Okay. Yeah. Well, yeah, two questions there. I think we start with the demand in the market, in a way. I think for us, we had a very strong quarter last year in Q3. A lot of business was made, and also with the restrictions moving away in the summer. So it's a little bit hard maybe to see, but I think what we lean towards is that the numbers we're seeing in Germany and Sweden is that still people are out eating and so on. So, it feels, yeah, this need of socializing is balancing up maybe the consumer confidence. And I think, yeah, we have a low share, I would say, in Sweden.
So if you look at the rest of Europe and the world, it's a little bit different situation, maybe with the consumer confidence, actually. And so I think we see a balance, and then we will see during the Q4 what happens in a way, but we still are quite. I think we're quite positive that the need of socializing is there very much, and they're driving us. And I think with our napkins, we fulfill maybe the mid-segment quite a lot. So if you are maybe eating at a more expensive place before, you're moving down a little bit, maybe, and that's our, in a way, core. So that's a positive thing.
And when it comes to price adjustment, this is something, especially on the big maybe contracts, where we see, of course, then we need to adjust to competition, all the time. So that's maybe where we need to adjust, of course, according to... And of course, pulp prices are driving quite a lot, but that's also we see it stabilizing and actually moving up a bit in the end quarter, in the end here now. So, yeah, we try to adjust, of course, and be competitive, in on the big contracts.
Yeah. And maybe just to add on to that, that I think you should separate in two things. One is the commodity business, the bigger tender contract, as Robert is mentioning, where we try to be, and we need to be competitive. But then we have more the brand business, where we invest in having superior quality materials with low emissions and so on. There, we need to get paid, and we see that there is a wish to pay for it as well, and it's increasing. So that's another agenda, and we need to stay relevant here to offer the best solution to the customers. Then we will get paid.
Of course, as you also, also with the price increases, of course, we monitor the prices, of course, of the raw materials and everything, and the rest, and adjust to that. I think that's we are- yeah, we're usually quite good at adopting. Sometimes it takes a bit longer because of we are in the distributions, and the wholesalers are in between, in a way, but we are, of course, monitoring and adopting.
Thank you. And one moment, please, for our next question. And our next question comes from the line of Johan Fred from SEB. Please go ahead, your line is now open.
Thank you and good morning. I think you briefly touched upon this, but could you provide some additional color on the inventory situation in BioPak? I think you mentioned in the Q2 report that you're past the peak, but in terms of timing, when do you expect to fully have cycled through the inventory acquired at higher prices? That's my first question. Thank you.
Yeah, as mentioned in the third quarter, I think we're starting to reach a level where we see that it's not, maybe it's not an optimum level still, but it's definitely in a much better situation we've seen in the first half year. That goes for the size as well. We have taken down the stock, but it also goes for the quality, meaning that we have lower risk in write-downs, but we also have more adapted to the price level seen in the market. So we shifted out a lot of these items. We're maybe not there fully, but very, we're on a good way, I would say.
Okay. Okay, thank you. And continuing on segment BioPak, you stated that in the report that you see increased demand for environmentally sound product. And of course, the industry is undergoing a shift where demand for BioPak's newer product portfolio is rising, while the more plastic-oriented part is falling, which I gather will be a short-term headwind. But could you give us some insights to the portfolio composition of BioPak or BioPak's portfolio composition, I should say? How much of sales stem from the new products versus the old? Thank you.
I think the absolute majority of the portfolio we see as future-proof in the sense of meeting both the regulations and having the, you know, the best quality in terms of sustainability. There are still a small part, I would say it's an absolute minority that we need to continue to shift out. I would also like to underline that plastic as such, it could be recycled plastic and so on, if there is a good infrastructure to support it, is not necessarily a bad choice, viewed in many markets. But the majority is fiber products that we offer, and we do offer some plastic product that is made from both bioplastics, but also from rPET, that can be recycled.
So, there are different levels of materials into this that we need to review, but I think where our absolute majority is in very good position, you know, in our portfolio.
Okay, thank you. And speaking of operating margins in the wider sense, they're back to pre-pandemic level, while you're right that the cost profile remains at a higher level versus pre-pandemic. How much of additional margin expansion do you think that sort of the cost savings and operational leverage can support going forward? Thank you.
Yeah, when it comes to the operational leverage, I mean, we have done some good investments over the years, so we are confident that when the growth comes, we can grow in an efficient way, meaning that we leverage from these additional sales. When it comes to, yes, it's true that the cost is clearly higher than versus last year, but we also have made some price composition levels. Of course, most of the margins actually comes from our cost reductions program being initiated in the pandemic, in our factories and paper mills and so on. And that's something, of course, very positive, and we continue to utilize from. Yeah.
But my question really is, do you think that this will support a higher margin profile going forward than what we've seen historically?
I think there is a good chance that, of course, with growth, that we can, with good operational leverage, that the, also the bottom margin, could increase from that. It's more difficult to grow the margin if the volume is down, of course, that's given. So looking ahead long term, we are in a good position to utilize from that. Yes.
Okay, thank you. A final one from me here. Yeah, of course, the improved profitability translates into some solid cash flows. And what are your thoughts on capital allocation going forward? Do you plan to sort of increase the returns to shareholders through additional dividends or buybacks or M&A, or something else? It would be great to get some insights on your thinking around capital allocation. Thank you.
Yeah, I think yeah, a lot of those are probably the board's task to decide on. But I think we're looking into all areas in terms of yeah, investing in the business. And yeah, we touched upon the last question you had, how do we drive growth in the future and so on? I think that's-
Where we look into how we can build up on that. I think that, and also, of course, with investments regarding what we do now in Skåpafors with the investments in our paper mill, where it reduces energy cost and also moving our to Net Zero as well, of course, that's also important. But dividend is the task for the board to decide that one.
Now, can I just add on to that, that if you look on the headroom, you can see that there are good possibilities for capital allocation in many areas, and dividend has been a vital part of building as a company, but also acquisitions over the years. So, we're in a position now with a strong financial position, with good headroom. That's good.
Thanks so much. That was all from me. Thank you.
Thank you.
Thank you, and one moment for our next question, please. As a reminder, it is star one one to register for a question. We have a follow-up from Karri Rinta from Handelsbanken. Your line is open.
Yes, thank you. Two quick follow-ups. On the BioPak volumes, we have seen volumes down in the last two quarters. Is this all due to the post-pandemic normalization, or do you think that there starts to be an element from this shift towards reusable containers in some of the markets? Or is that something that we will see going forward?
Yeah, I think you start. I think the first part is yeah, probably most likely that the effect from reusable is a very absolute not nothing for us. Reusable is more a big potential, actually, because we, we're not that big in certain areas of these products, so it's more a little bit of a blue ocean for us, reusable. So it's more maybe post-pandemic and also a little bit differences in Europe versus Australia also. So reusable hasn't really come into play yet. We can see that in, for example, in Germany, the shift, the load that comes into Sweden now from first of January, that you're supposed to have an alternative. That was happening in Germany last year in January, and we don't see a major shift actually there.
So I think reusable will take time, but I'm also. It's really good that we have been exploring this and investing in this and understanding. I think there's a lot of understanding here, and it's interesting, you know, yeah, you want to ask about the plastic here, and with the reusable, of course, plastic comes into play. So it's really hard sometimes to know what leg should you stand on in this, and there are a lot of unanswered questions in this. So I think... But short, yeah, we haven't seen anything yet, but there might be certain niches and areas that this will grow really, really well, actually, and that's, I think we are well positioned for that.
All right. Yeah.
All right, thank you. That's, that's all for me. Thank you very much.
Yeah, thank you.
Thank you. As a final reminder, it is star one one for any questions. As there are no further questions, I will return the conference back to our speakers.
Yeah, thank you. Yeah, thank you for your questions, and, yeah, we'll see each other in a couple of months. Thank you.
This now concludes our conference. Thank you all for attending. You may now disconnect.