Earnings Call: Q3 2021

Oct 21, 2021

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 listen-only mode, and afterwards there'll be a question and answer session. I will now hand over to Robert Dackeskog. Sir, please go ahead. Thank you. Hello, everyone. Welcome to this Q3 report. It's great to see that the restaurants visits finally are back all over the world, actually. Of course, it's mainly due to that restrictions are taken away and eased up during the quarter, and that the restaurants are truly open in a lot of markets. We have still some restriction, of course, where you need a required vaccine passport and so on. That's very happy to see that demand is back again. I think that's critical. If we take 4 bullet points here, just the period, in short, is that, as I said, it's eased restrictions here has led to the recovery within business area Duni. That's 1 major point. Of course, that has also led to rapidly increased volumes in the factories, and that's led to strong efficiency. That's really good. Also that business area BioPak continues to grow really rapidly here with good operational leverage in the quarter. As everyone else sees, is that raw material, energy prices, sea freight cost continues to increase to concerning levels, of course. It's everywhere, in a way, pallets and energy costs, definitely. Still, the demand is there. That's the good thing. If we go a little bit more into details, we had a net sales increase of 6.2% here, as I said, the restrictions has been removed. That has led to really good business for especially Duni products then versus before. Good thing, growth in BioPak continues despite some disruptions then in the freight market on the sustainable packaging in the takeaway market. We had a strong demand for eating and drinking products, which is good for the quarter, where it's more serving products for event catering. We see that's kicking off a bit as well. That's really good. Of course then, the volumes that are returning into the factories give very high efficiency, so that's positive as well. In both then Duni and BioPak we have rise in raw material, energy costs, and the containers, of course, that everyone knows about. All in all, good demand in the quarter and positive in that sense. If we look a little bit on the full year, so year to date here, as you know, it was really heavy restrictions, they've been lifted then, especially in Q3. If you look at the whole year, we're coming back now, so today. The major thing, demand for business area Duni's portfolio was very low in the beginning, end of May, then started to recover slowly in Q2 and now really kicked off there in Q3. It's good to see also that demand for BioPak product is here as well. That's also positive. The high volumes, as I said, high government support and strong costs for the full year then has strengthened our results then. That's really good. Of course, we have raw materials that are increasing and costs for the full year as well. All right, we move to the business area Duni, Magnus will take over here. Thank you, Robert. Yes, I will now go through our two business areas, starting with business area Duni. As mentioned, third quarter confirmed the positive development and actually momentum that we saw by the end of the second quarter. The restrictions were gradually lifted also in the third quarter and in many countries. I'm sure you know it, Sweden and Denmark, it's basically back to normal situation involving our restaurants and hotels and social gatherings. As you can see from the slide, the improvement was broad in all regions. It's very positive. It should be noted that the third quarter already last year was positively impacted by the then temporary easing of restrictions that we had over summer up until mid-October. The rebound we are seeing in the quarter is actually historically strong, even looking on the third quarters before the pandemic. It is also noticeable that our retail channel reached pre-pandemic levels, when people all over Europe now finally could celebrate at home, and that had a positive influence on our retail channel. We indicated earlier that we have a positive view on the operational leverage that comes from the improved volumes. Factories are running with high efficiency and productivity, while we still have a low indirect spend. This is one of the main explanations for business area Duni being back to margin levels above 10%. However, we have experienced high raw material and logistics costs that further accelerated by the end of this quarter, third quarter, with all-time high levels on energy and pulp. Basically all raw materials components have reached all-time high levels. The cost inflation is indeed severe, and that will impact us further. This is something we are working hard to mitigate in both with price compensation measures and cost reductions have been taken. If we now move over to BioPak segment, which is offering sustainable food packaging. We continue to see a strong demand with growth beyond 20% for almost all regions, as you can see, and that includes Australia being the biggest BioPak market. Even here, we see a strong operational leverage on these volumes, and we managed to maintain an operating margin level above 9%. The product segment, as we refer to as eating and drinking, as Robert has mentioned, had suffered over the pandemic, since it is strongly associated with events and catering. That has also improved, and while we still have a strong demand for our take-away segments. We have, for several quarters now, indicated a worrying trend with a shortage of containers that is causing challenges in our supply chain and for us ensuring flawless deliveries to our customers. This totally exploded during the third quarter, and we are seeing now cost increases 5 to 6 times versus 1 year ago. Recently, we also experienced close down due to a shortage of electricity from our suppliers in Asia, and this is, of course, putting another challenge to the situation. We are working around the clock to mitigate the effects towards our customers, but it will result in disturbances and necessary price increases since this situation is indeed exceptional. This is not only a challenge for BioPak and Duni Group, but for the whole industry, and that is important information. Summarizing third quarter, strong demand, but with accelerating cost levels in our supply chain. On this slide, as stated by Robert and mentioned also earlier, the demand has really lifted in the third quarter, and that is especially noticeable for Duni. This is, of course, related to the easing of restrictions that we see throughout Europe. We're all very happy for that. As you can see on the map to the left, and I think it was also mentioned in some of the news this morning, there is an increasing trend of new cases, especially in Central and Eastern Europe. We are, of course, carefully following this, but we are positive that we will not move into a new area of lockdowns or restrictions in our main markets. That is explained by the graph you see to the right, and that is indicating the deaths related to COVID, which thankfully is still very low and linked to the successful vaccination rollout. However, on the next slide, as we see a positive underlying demand, positive in our demand, it is worrying that every raw material, energy, and cost component is actually increasing rapidly. As you can see, that is exemplified by the graph below, the container prices from Asia is up almost 600% than versus a year ago. Of course, this is something that affects, as I said, basically all industries, but we feel that there is an understanding from our customers that we need to increase our prices. Of course, for BioPak concerning, but also Duni business area Duni. All right. Of course, more than a little bit maybe short-term things that we are focusing on, our goal is to be an innovative, sustainable, and delivering circular product and service and solutions for the future. I think we have a lot of good examples here. One is that we launched the world's first fossil-free airlaid, which we use in our premium napkins, which is a fantastic step for us. During the quarter, we also announced that our paper machine, Skåpafors, has initiated a transition to the fossil-free biogas, which is fantastic also. That's really positive. Also we are doing a lot of partnerships and collaboration in order to work towards a more sustainable future. In the quarter, we also took a minority holding in the Spanish reuse company, Bumerang Takeaway. This complements our previously announced minority ownership in the German company, Relevo. Both of these work with reusable systems for takeaway product using digital platforms then to reduce litter in our cities. This is little what happened in the quarter towards our more sustainable future. All right. Thank you, Robert. I will now go and comment a bit on the financials, starting with the income statement. As Robert mentioned, volumes increased with more than 15% in the quarter from previous year. Main explanation for that is a strong rebound in business area Duni. You can also see that gross margin strengthened from previous year. Year to date, still below levels that we saw pre-pandemic. Looking on the rolling 12 months numbers compared to the end of last year, we are now on a positive development on the profit curve. We have actually been on the positive development since February this year, when we reached bottom, and now we are gradually progressing in a good speed, linked to the lifting of restrictions. Looking more specifically on the business areas, BioPak continues to leverage on the growth. At the end of this quarter, we are, as mentioned a couple of times now, facing some cost increases. Duni is even more capitalizing on the volumes with healthy improved margins. You can also note that year-to-year, that both business areas are equally sized when it comes to the revenue. In the third quarter, Duni is once again with higher share. On the cash flow, it's positive for the quarter and indicating a healthy cash conversion. However, we do see negative effects from the accounts receivable when the volumes are picking up. This is expected, and we are carefully monitoring our overviews. Although many of our customers are operating in an industry that has been severely hit by the restrictions from the pandemic, we have so far not seen higher levels previously in our bad debts. Inventories are increasing in absolute numbers, but actually with lower days in stock for many of our product groups. Looking on the financial position in our balance sheets and some of the key financial numbers, it is clear that the net debt is stable versus year-end, slightly higher than a year ago, though. That is mainly for the reason I just mentioned about higher accounts receivable, but also that inventory has picked up a little bit. Return on capital develops positively, aligned with our strengthening of the result, and I would say firm control of our balance sheets. Finally, our financial targets, we are still behind, although we are developing in the right way. I think that's all for me. I'll leave it over to you now, Jonas. Before we go over to questions here, summarize then, in a way, I think we see very positive of a more normalized existence now in the world here, and that we get a good demand. As we mentioned here today, it's accelerating cost increases in almost all raw materials. Of course, we need to compensate and increase efficiency, that is really important for us to do. Yeah. That's maybe a bit of a summary of today's report. Yeah. Thank you. Thank you. Ladies and gentlemen, if you do wish to ask an audio question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, please press 01 to register for a question. Our first question is from Gustaf Hagéus of SEB. Please go ahead. Thank you. Good morning, guys. Thanks for taking my questions. I have a few, if I may. Firstly, on BioPak then, quite exceptional growth given that it was a rather decent year last year as well for BioPak. I think combined growth versus 2019 then 25% plus 16% stacked. If we can start by going through sort of the components to that organic growth, whether or not there's a big price mix element to it or if it's mainly volume related, and if you can also talk a little bit about regional differences where you see bigger growth versus other regions. I know that you have in Oceania, but still, a little more granularity than that would be helpful. Thanks. Sure. First question related to the price volume mix from 2019, if I understood correctly, and it's very little, if known, price effect on that development. It's very much driven from the organic growth as such. Second, the increase where it comes from. As mentioned, it's quite broad, and it's on relatively the same levels everywhere in all regions, including Australia. It's a similar development in Australia as in Europe. Going even further, of course, there are some markets with lower market share that might have a slightly higher increase than others. I would say it's quite broad, the increase. Where do you see internally normalized growth for BioPak in a post-pandemic world, 2022? I assume takeaway has been a boost. Again, conferences, festivals, so forth, has been a drag, and so forth. Where is the normalized growth as you see 2022, 2023 for BioPak? Yeah, that's a very good and tricky question. I would answer it like this. Before the pandemic, we saw we had a stable development, especially linked to our sustainable food packaging segment. That is confirming that there is an underlying good demand for our products. Of course, pandemic has boosted that, but we are positive that there is also in the future a strong demand for our solutions and products. Of course, we are carefully looking into this, and continuously need to develop solutions that our customers request. I think that it's a very important component. We are positive on that. Nice. Without giving you a certain percentage. Okay you can go back to the pre-pandemic levels and give you a hint or what? Yeah, history is quite limited since the business unit is quite new. Could you remind us what the pro forma growth has been, say, 15-2019 for BioPak to get a sense of the normalized growth First of all, BioPak, going back a number of years, has been two parts. One is more related to the plastic shift, where we actually had plastic products, and that we are now shifting out. Now we have a much more bigger share of what we refer to as sustainable products, and they have a higher growth than the others, of course. Going back, we are positive that we should at least have a higher number than historically from that, looking on what we refer to as food service. We are positive, and the pro forma, we have seen a very stable development in BioPak over the last, I would say, 7-10 years. Yeah. Yeah. I think on a higher level, in a way, the behavior, I think we also believe that people will take more takeaway in the future, and I think that trend has been going on for many years, in a way. Maybe it's accelerating, and people have got that type of behavior will actually stay. Yeah. I think, without maybe it's hard to mention a percentage number. Yeah. Okay. I guess your confidence level in terms of M&A has gone up a little bit, given that it seems to have been quite successful, the two recent acquisitions within BioPak, in retrospect. Now that you start to see the light at the end of the tunnel, and you, in contrast to many smaller peers within the BioPaks segment, have access to capital markets to a great extent, doesn't it make sense to pick up that M&A agenda again here, while we're not fully back to the top of the cycle, or how do you think about that? I guess it's a board decision as well, but if you could give some color on that'd be helpful. No, you're right. We are starting now to be back on our feet, so to say. We're getting some headroom in our balance sheet. M&A has always been important for us in the last 10 years, a very vital part of the strategy. During the pandemic, however, we worked slightly different with taking shares in smaller companies. I think that we will continue to work with. We will also, of course, coming back to more the traditional part of the M&A, also looking into bigger companies and how we can expand in Europe and elsewhere if there is any opportunities. That will be, of course, very important for us going forward. Yeah. Definitely. Okay. In the Duni segment, quite a nice pickup in terms of profitability. If I calculated correctly this morning, 31% incremental EBITA margin on the incremental top-line growth year-over-year. Are there any temporary cost savings still in these numbers? Trying to get a sense of where the normalized margin is for Duni now, if the market continues to come back into 2022. Thanks. No. I think we had significant cost reductions during the pandemic, and it's fair to say that many of those were linked to the pandemic as such. We have a government support program and so on. Of course, we want to maintain a firm cost control going forward so we can get this operational leverage on the volumes. That's for sure. At the same time, we need to develop and so on. It is important to keep a firm cost control and to keep as much as possible of the savings that we did during the last one and a half year. Okay. Sorry, a lot of questions, but final one from me. You know what? I'm going to save that question for later. Thank you, guys. All right. Okay. Yeah. Thank you. Thank you. Thank you. Our next question is from Karri Rinta of Handelsbanken. Please go ahead. Yes. Thank you. A few questions from me. Firstly, just a clarification. There is no government support in Q3 numbers, right? Correct. Yeah. Good. About the cost inflation. I think historically, I think you might have mentioned at some point that pulp is roughly 10% of your costs, but since then, BioPak has increased quite significantly as a percentage of total sales. Ballpark numbers, how much is pulp of your costs? How much is energy of your costs? Those two refer to Duni, whereas then the freight costs, that's more of a headache for BioPak. Yeah. That's a good observation. That relates to that now BioPak is a big part of the Duni Group. Of course, pulp is still very important for us. It is the biggest component in our raw materials, and of course, vital for Business Area Duni. Bearing in mind the magnitude of the increase in the containers, of course, this will have an impact for the group, but also specifically, of course, for BioPak. It is a bit of a new post-pandemic world, and we need to look into other components as well that might have an impact. Since this is a new dynamic, do you have anything that you can share with us in terms of what kind of contract structures and durations you have with your freight partners? Will they hit you directly with a short delay, or how should we think about this? It's more shorter delay, I would say. Yeah. Okay. Yeah. We're seeing the prices. There's just a couple of months delay when we're actually facing the costs. It will move into the fourth quarter. The relationship is very good with our forwarders and our suppliers in Asia. It's with long history. However, the situation in general is quite demanding and difficult. We are in a good position to manage this, I would say, better than many else. Of course it is a challenge. Okay. A few more strategic questions. You mentioned that retail is back at pre-pandemic levels. Where is hospitality roughly at the moment compared to pre-pandemic levels? Yeah. The restaurants and the catering and so on, you mean? Yeah, exactly. Yeah. I think they're not really back on track yet. We get some data from some markets where saying that maybe 2021 then will be at maybe 70% in total, I think, in Holland, for example, and in the U.K. Not back on track yet 100%. I think that there is in Europe in general, there is a problem for restaurants now with staff, actually. Getting staff, and I know we have some customers in Holland that has opened maybe two, three days a week only because they don't get chefs and staff. It's not 100% back of course there. You have catering, maybe events is still not back as well. We see what's positive, I think in the quarter that we see that we have some serving products that are starting to grow again, and that's for the event catering business. That was really positive. Maybe not the biggest, but we see the trend. That looks good. Definitely not back on track yet. Right. Yeah. Give you a good answer. That's what we see. Finally, when you look at your competitors that you had pre-pandemic in different markets, do you see any changes in the competitive landscape, i.e., have some of the smaller players maybe been forced to shut down, or is there any change in competitive landscape compared to pre-pandemic levels? I think luckily we have two legs, BioPak, which has developed really positively during the pandemic, and Duni that has suffered. I would say that we have managed the pandemic very well in business area Duni. Meeting competitors in business area Duni, which is smaller and do not have the support of a second leg, so to say, BioPak. Of course, we see that we are relatively strong and will come out of this in a good way, which we already saw now in third quarter. Hopefully we can utilize on this and take further market shares and leave the other ones behind, so to say. Yeah. All right. No major bankruptcies. No the competitors that you had before the pandemic, the main competitors you have? You continuously see certain movements. Of course the balance sheets has been a bit diluted for everyone. No major ones. No No. All right. Thank you. Those were all my questions. No, thank you. Thank you. Thank you. We have a follow-up question from Gustaf Hagéus of SEB. Please go ahead. Thanks. Just to follow up on the external price inflation. What do you think in a scenario where you have a rapid decline in freight costs and raw materials from here contrasting what you're seeing right now, to what extent will that also, you think, carry a lag between prices from your end of including rebates coming down to represent this new cost level? How long will they be able to keep that positive lag, you think? I think there are two aspects of this. First one is historically that we've always been good in compensating. I think that is something that you should keep in mind. We are now in an extreme situation. We have a very close dialogue with our customers where there is a good understanding that we need to compensate for this. It also means that we might need to work slightly differently with our customers to come through here and to support them and to support, of course, to do what's necessary for us. Your question, if there is the risk if we go down, of course, if the cost will go down, of course there will be perhaps a new dialogue with our customers. Normally over time we are good in compensating for this. That's what we're focused on to do as fast as possible. Yeah. No, I appreciate it. My question was more like in a scenario with a rapid decline, do you think there's a lag between your higher margins and them normalizing? Do you think that it's sort of one quarter lag when prices go up for you and the instant reaction downwards when prices come down for you? Normally there is that type of a lag or a delay 1-2 quarters. It goes both ways. In both scenarios? Okay. Yeah. All right. Thank you, guys. Yeah. Thank you, Gustaf. Thank you. Thank you. Once again, if you do have a question, please press zero one on your telephone keypad now or press zero two to cancel. There'll be a further pause while questions are being registered. As there are no further questions, I will return the conference back to you. Okay. Thank you everyone for today, and see you next time. Thank you. Bye-bye