Earnings Call: Q2 2021

Jul 15, 2021

Ladies and gentlemen, welcome to the Duigny Q2 Interim Report. Today, I'm pleased to present President and CEO, Robert Daskot and CFO, Magnus Carlsen. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a Q and A session. I'll now hand it over to our speakers. Please go ahead. Thank you. Yes. Hi, and welcome to the Duni Group report for Q2 2021. Me and Magnus will go through what has happened during the year and, Of course, especially in Q2 here. And I hope everyone enjoyed the summer. It has been a very tough year in many expect and I want to take the opportunity to thank everyone in our company for a fantastic job during the past year. We have faced a lot of challenges during the past year, which we have handle in a very good way, and I believe that many of these challenges will actually become really good opportunities for the future for Yes. So we'll go through the period first here in short. The COVID-nineteen restrictions eased during the 2nd part of Q2 with strong result improvement as a consequence. I think a lot of countries have gradually opened up, and especially in June, we've see much better momentum in the restaurant business. Strategic partnerships accelerate the sustainability agenda through new materials and new business models. And here, we believe that cooperation and partnership will be really important for the future for us. The impact continues to grow rapidly with strong operational leverage. And the 4th one here, German support program, contributes to the That was a little bit the period in short. We'll go a little bit more into details. Our net sales increased by 37% to one A little bit more than SEK 1,100,000,000. It was the ease restrictions as vaccination rates accelerate and the number of confirmed COVID-nineteen cases drop Good. Sales increased in the business area at Duigny as private events increased and restaurant visitors report on earlier and at a quicker pace than previous Q2. So especially in June this year, it's been a good The business area B pack continues to grow as takeaway benefits still from the COVID-nineteen restrictions The business area in Germany was well prepared to meet the demand While the business area, the FX delivery performance has been a bit challenged here, I'll come back to that by lack of containers and report. Our operating income up with SEK 150,000,000 versus last year to SEK 58,000,000 The main explanations for the improved results are the recovery of sales due to the market opening up earlier and faster compared to last year, coupled with growing 2nd point is that the German government support and continued cost control strengthens the results further, while significant raw material and freight cost increases have Year to date highlights, net sales, minus 1% to to EUR 2.56 billion. Still very low sales to the hotel and restaurant industry until end of May to report that we have a very strong quarter and then, of course, from due much more positive development. The restriction was in place last year as well, but And we see continuously strong growth in BIPAC, which is the reason Bimini Group's turnover ends in line with last If we look at the operating income, it was up SEK 30,000,000 versus last year to SEK 18,000,000. Steel volume decreases and high share fixed costs in the business area, given me, has a significant impact on our results. The strong operational leverage for Bifak generates high operating income growth in BIPAC and the government supporting cost saving activities supports the results yesterday as well, Further with while the raw material done and the freight cost increase have a bit of a negative impact. So I hand over to Magnus here to go into the Thank you very much, Robert, and good morning, everyone. So I will now go through our 2 business areas in more detail, and I'll start with business We are Duni representing our products to set the table like napkins, table covers and candles. So leaving quarter 1, which were heavily influenced Directly linked to the easening of restrictions towards restaurants and, I would say, society in general. We are not Yes, in a normalized situation, we are not out of the pandemic, but clearly with giant leaps in the right direction. The improved situation is noticeable in all markets, but of course, very much linked to the vaccination development, where U. K. Was one of the countries to open up, and we saw that clearly in our orders coming in with almost no delay also in the sales announce that we have a very strong focus for these markets. But as you can see, all regions increased significantly from last year, although Central region with Germany as the biggest market still have some restrictions that's just very recently been eased. Retail channel indicates levels that we have seen pre pandemic, While the professional channel like the restaurants, hotels and catering is still not back to normal levels, but again, with significant improvements So the result improvement is directly linked to the better market condition I just mentioned and volumes from the negative results we had last year of €118,000,000 were now close to 0. Additional to the increased volumes, the indicated German support program contributed with almost report $5,000,000 in the quarter, which, of course, is very important factor. However, we already benefited from various support So the result improvement is linked to an underlying better situation with better utilization in our factories And in general, a much better cost coverage. The inflationary pressure, as we have seen already in Q1, Has remained and we are on historical high levels on pulp and other key raw materials. And we have, during the quarter, taken to announce that we have a very strong financial performance in the future. So I will now move over to bring sustainable food packaging. We continue to see a strong demand. Essentially, the growth is even stronger than we have seen in the Q1. And it is clear that BioPak has benefited from the shift towards takeaway solutions coming from the lockdown, With the comparable figures towards 2020, we already had a lockdown situation last year. So that indicates It is also noticeable that the growth in our 2 biggest markets, Australia and Germany, shows strong Since end of last year, we have seen an acceleration cost development in container shipments. Robert touched upon that. From Asia, the increase is almost 600% versus a year ago And especially dramatic only in the last month. This is not only impacting Dunia, of course, but basically the whole trade between Europe and Asia. We are doing everything we can to protect the satisfying development in our delivered performance towards welcome customers, but we have been forced to initiate price increases starting gradually from Q3. To summarize, Q2 was very strong for Biopac with a clear leverage on the volumes as seen in the strengthening of the margin, But again, with cost challenges seen in the last 4 to 6 weeks on logistics. I hand back to Thank you, Magnus. All right. If we look a little bit at the COVID-nineteen situation, I mean, although we are approaching a more normalized situation with less restrictions. There is a bit of uncertainty, and we have this delta variant that may cause some changes in the restrictions. So There's still some uncertainty, but it looks more positive, as Magnus mentioned here, as last And of course, we follow this carefully with the aim of being well positioned in a world where the need to meet and travel Another focus for us is, of course, accelerating within the sustainability agenda and the digital In the quarter, but for the time here, it's building up strategic partnerships, which will enable us to remain more and well positioned to And there are Three important parts, Steve, that we want to highlight in this quarter then is that we have partnered up with OrganiClick, which is an award winning Swedish company, which We're honored for their innovation in designing renewable functional solution based materials. There, Duni has developed a new DuniSoft napkin, where we're using a bio binder. So the binder is like the glue with the fibers. And this one is made from corn, lemon peels and other food waste, which is fantastic. And in addition to that, we have our new Diodunicell premium table covering, which we use renewal binder, which is made from potato starch. And this one is developed by Duny's factory team in Germany, It's a great, great innovation. And both napkins and the tape recoverings are recycled by paper. The second partnership here NRP offers a smart deposit system return system to restaurants and offices that make it easy to recycle take The 3rd partnership start in a way with that we are dedicated to offer the most sustainable solution for any customer occasion. And we believe In a combination then, obviously, we use or other upcoming innovation innovative solutions that will transform to to a more circular society. That's pretty important. So partnering up with Relivo GmbH strengthens Our existing offer within the takeaway packaging, mainly today's supply of Biobipac brand in Europe. So We are really happy with these innovations and partnerships and looking forward to many more in the future to take us to our goal of becoming fully circular and All right. L. Maik, I hand over to you. Thank you. Some comments on the financials. So if we start by looking on the income statement. And as Robert mentioned, volumes increased almost with 40% in the quarter from previous year. It It should be noted that Q2 last year was very weak for business area, doesn't it? Nevertheless, the growth seen in both business areas is the most important factor for report the result improvement of almost SEK 150,000,000 in the quarter versus last year. The other important factor for the quarter is the German government support program, as we have mentioned before. But we did receive support already last year, so the net take a look at the market is still positive of around SEK 25,000,000. If we look more specifically on the business areas, They both grow fast, close to 40% versus last year for the quarterly period. Again, looking on business area, Duni, for the first half year, it is still burdened by the Q1, which Basically, it was not affected in 2020 by the pandemic. As previous quarter, BioPak remains the biggest business area since the growth has been significant also before the pandemic, but accelerated even further in the last year. The operational margin is 10% for the quarter, indeed strong development leveraging from the volumes. The sharp increase on logistics costs, which have had a negative impact on bag pack, has mainly impacted the second half of the quarter. So looking on back on the rolling 12 months curve, On the profit curve, it is clear that we now have a positive development since mid-1st quarter and it accelerates close. Looking on the cash flow, it is unfortunately so that although we have a clear profit improvement in the quarter of EUR 150,000,000, the operating cash flow decreases. And this is strictly related to the effect on accounts receivables, which decreased quite significantly last year moving into the pandemic And now, obviously, this year, moving out from the pandemic with increased volumes. All other aspects So the cash flow, including the inventory and CapEx, have improved from last year. And Finally, looking on the financial position and our balance sheet and some other key financial figures, it is clear that net debt is stable versus year end slightly higher than a year ago, mainly for the reason I just mentioned about higher accounts receivables. And also, finally, if you look on the financial targets, Unfortunately, we are not able to deliver on those in this tough year, as Albert mentioned initially. But they are progressively progressing in the right direction So we had a tough start of the year, clearly influenced by the lockdowns in almost all markets, last Basically up until end of May. But now we have finally seen clear steps towards a more normalized situation where we can meet meet and socialize together. So this is something I think we all have been longing for, for Douni Group, and Douni Group will be there to make these occasions So I thank you all and hand back to Robert. Yes. Thank you for listening, and We stop there and then for Q and A. Thank you. Press 1 on the telephone keypad now. If you do wish to withdraw your question, you can do so by pressing 2 to cancel. It seems like we have no questions from the audio. I'll hand it back. Okay. So we have one question coming from Kara Ritter from Handelsbanken. Please go ahead. Your line is open. Yes. Thank you very much, Karl Johan Spankton. A few questions. I guess I'll start with 2 clarifications. 2nd quarter, when I look at the sales per product category, it was stable coverage that was weak again. And I'm guessing that's about indoor seating and Germany, but I just wanted to confirm that, That is the main reason behind the weakness in table covers. Yes, that's right. Yes. And I think, I mean, as you say, there has no big any indoor seating, especially Germany has been the one who has been The latest in a way to lift the restrictions. So you're spot on. All right. And then Similar observation in Biopac, and you had a really strong sales in West. So is that also all about the UK? And is there anything other than just relaxing restrictions behind that? You're right. UK had a strong development. But basically, I would say it's been relatively strong in all regions. And in some markets, Depending on the size and so on, it's been even stronger than others. But as we have seen, it also It is partly related to the lockdown that we've also seen since we had a strong development in Australia, which has not had a lockdown, where we also had a strong development. So it's slightly difficult to say. We can only confirm that the increase has been quite broad everywhere, but particularly West, to As you say. And I think you may have some clarity in the presentation where you were. I don't remember if it was for Duni or Biotech, but you mentioned that sales in June were sort of almost back to June 2019 levels, but if we would look at the Duni division overall, is there any way to compare Sales in June to what the sales were in June 2019 to get a sense of where are we in terms of recovery? Yes. As we have clearly said throughout this year, The sales in Business Area Durney is strictly very linked to the restrictions. And once we have seen the restriction, we also saw that last year, Quickly and as we said in June, the restrictions were eased almost everywhere in Europe, and we were approaching 2019 levels. Still, there are restrictions, which is also seen in the numbers. So we're quite not there yet, but we saw a Good acceleration gradually in the Q2. All right. And then a follow-up to that would be then typically if we look at the historical to Assuming that there are no new restrictions that would be put in place during Q3, it would be safe to assume that we should Higher Q3 sales compared to Q2? Yes, with the logic of having less restrictions for that throughout the period, the Q3, that makes sense, absolutely. All right. And then on the cost side, you mentioned both pulp prices and especially container prices. And you mentioned with container prices That you had seen this cost inflation towards the end of the quarter. So how should we think about gross margins in the Q3? Because there is still the incremental pressure from higher pulp prices compared to the Q2 since pulp prices continued to increase through the quarter. So if you didn't manage any price increases for your own products, then gross margins Should come down assuming unchanged volumes. But how should we think about how much of these cost pressures Should we expect you to be able to offset already in the Q3, if any? Yes. As I think we have mentioned earlier, there is always a bit of a delay once you initiate the price increases. You are in a dialogue with the customers trying to come up with the best solutions. So there is always a delay, and that varies with customers and regions. And I think it's fair to say that we will not be able to come through early in Q3, rather later in Q3. But this is something that is dynamic, and we are in the middle of it. So it's difficult to say. All right. And then final question, maybe more on the long term then sort of so what is your best sense when it comes to Your customers and your customers' customers that what's the rate of Bankruptcies or similar that you have seen? And is there any category because I would assume assume that maybe the catering sector has been hit the hardest and probably due to the structure of that sector being a lot of Smaller players that there's maybe quite a few that haven't survived the pandemic, but what's your sort of best assessment? Post pandemic, what percentage of your customers and their customers' customers have survived? Any rough ballpark number would be Very helpful. Yes. I think it's hard to say a number in a way. I think we believe actually that I mean, the world will normalize, and people will start to, yes, start to do Trains thought to do, yes, travel, thought to do events and so on. So I think we believe strongly in that, and I think there will be, of course, in some areas, Order hits, maybe restaurants will close down and so on. But I think that the consumer want to eat again. They want to so maybe there are less Restaurant, but give a bigger case in a way, and of course, then it should be the right restaurants and takeaway places for us And it's really hard to say actually, I have to say. But I think we believe in that it will normalize for the future. Just compliment on that. I think there's 2 observations. One is for us is that we have had very low bad debt losses. I mean, there has been a good resistance in the industry, supported by government programs to basically survive over this tough period. The second reflection is that the obstacle of coming back and starting up the new restaurants is normally very low. And the It's normally very low. And the more important to observe is the fundamental need to go out and eat and socialize. And that, I think, we have seen it there. So the prerequisite for not For being hurt in that sense and for a quick comeback is good. And I Unfortunately, not answering on a percentage number, but it's low. It's low. That I can say. All right. I mean even the catering sector, you feel comfortable and confident that even that sector will come back. The catering sector is also linked to hotels and to bigger companies and So when it's not only small players, and due to the programs, they have been able to survive through these tough periods to a big extent. And time will tell when we see the first big conferences and so on, if it's during the autumn or later in the winter and so on. But there will be a market that will quickly pick up the demand from this, I'm sure. All right, thanks. That's very helpful. Thank you. Thank you. We have no more questions from the line. I'll hand it back to our speakers. Okay. Great. Thank you for listening. And yes, we want to wish you a great summer and looking forward to next quarter.