Earnings Call: Q4 2020

Feb 12, 2021

Ladies and gentlemen, welcome to the Duni Interim Report. Today, I'm pleased to present President and CEO, Robert Dalsgaard 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 question and answer session. I will now hand over to Robert Dalsgaard. Sir, please go ahead. Thank you. Yes, and welcome for Today's Q4 presentation from us in Dooney Group, from me, Robert Dakerskoogne and Magnus Carlsson. This is our first report as we both started here 1st January. And for me, it's great to be back in Downey, really inspiring and, Of course, also a bit challenging at the current situation we are in. So yes, but really nice to be back. The period in short here, of course, we're hit by the 2nd wave of COVID-nineteen that has broken the recovery trend we had in Q3. And the important markets we are operating in and the segments, they've been fully or partly closed, especially, I think, in the middle of Europe where you have, Yes, Germany, Holland, Switzerland, Spain, France, those have been very closed, a little bit maybe different from the Nordic area. We have a very strong takeaway trend that continues for us. We also had a good cost control and risk mitigation that has decreased our net debt in the quarter. Yearly, we have saved EUR 270,000,000 including the government support. We are, I think, very well positioned for the future. We have worked on taking the next step in the reorganization where we actually I've put the 2 segments. They have become 2 business areas and with full value chain responsibility, Which is the major difference there. Of course, there's a large uncertainty ahead here. The restrictions from Q4 are continuing As we are. So we'll see where that takes us. A little bit 2020 Q4 highlights. We have a net sales that is down by 24%, so from 1.6% last year to 1.2% this year. And of course, as I said, the recovery trend from Q3 were interrupted here by the new restrictions. And it's mainly the Duni segment Well, sales dropped significantly as, of course, the restaurants are forced to close down on premises. So the sit down dining in the key markets Isn't there? The retail channel is impacted, but less. Of course, it's less private parties are held, so we see a drop there as well, of course. And the BUPAC segment continues to grow as Takeaway then benefits from the restrictions and restaurants move into more takeaway. If we look at the operating income, it's down SEK 148 1,000,000 versus last year from 199,000,000 to 51,000,000. And of course, the lower Sales of volumes in the Uniti segment has generated limited fixed cost coverage for us, but cost reduction program, which we initiated in March 2020, and the BUPA growth has supported our results in a positive way. If we look then at the full year 2020 year to date and highlights, it's a little bit the same as we have in the quarter 4, But minus €19,000,000 on the net sales, so from €5,500,000,000 to €4,500,000,000 this year 2020. And here's the same in a way the Douni segment, much lower volumes that has dropped due to the restrictions despite we had a great start in the year in Jan Feb and mid March actually before the corona hit us. The Beopac segment growth trend has boosted more by this, of course, because of the demand on takeaway increasing. If we look at operating income for the whole year, we are down by EUR 384,000,000 versus last year from EUR 533,000,000 to EUR 149,000,000. And the volume decreases, of course, here as well. The high share of the fixed cost in the Dooney segment has, of course, then impacted the result in a major way. We are having a major focus, of course, on adjusting the production capacity, cost reduction programs and also gaining from government support, together with lower raw material cost and the BPAC growth has actually strengthened the result in that sense. Then I hand over to Magnus, who will go through the both segments, Duni and Vipak. Thank you very much, Robert, since this is the first time I have the honor to share our results as Dooney CFO, I would like to very quickly present myself. My name is Magnus Carlsen. And although I am new as CFO, starting from 1st January as Orbot, I have been in the company for 10 years with various positions within Finance and Corporate Development. So even though it's currently challenging times with the pandemic, I'm thankful to be part So I will now go through our 2 segments more in detail, starting with the Douni segment representing our And already mid October, it was apparent that a second wave were approaching restrictions were being implemented throughout Europe. Our main customers like restaurants and hotels were once again forced to close or at least to adapt to a much lower demand, which naturally have spillover effects to Douni, sales was down with 38% from SEK 1,100,000,000, as you can see, to SEK 670,000,000. The decrease was also broad across all regions and product categories, But more severe in the traditional restaurant segments with products like table callers and premium nattles. Retail channel as well as some hygiene assortment had a more stable development. Douni segment is characterized of own production, we have factories in Germany, Poland and Sweden and so on, and Consequently, with a vertically integrated value chain. And this is, for sure, an advantage for us, but in times with high volatility in volume, as we have seen with a sharp decline in the Q4, then we are hurt with limited coverage for our fixed costs, especially connected them to our factories. So we have been working very hard to mitigate this effect, and we try as much as possible to quickly adapt to variabilize our costs and cost reduction program, governmental support and also additional external sales from our paper mill has contributed positively to the result in the quarter. If you look in 2020 in total, we can confirm that we have seen we have been severely impacted by the pandemic with a reduction of the volume equal to almost onethree. And as I commented just now in Q4, the decrease is valid for all regions. But as you can see, it's particularly south of Europe with their sharp lockdowns that has been very much affected with a sales decline of almost 50%. So although this year has been very tough for Duni segment, I think the cost saving program and the ambition for us to be more flexible with high volatility is something that we will be beneficial from once we see a normalized situation. If we now move over to Biopak, which is offering sustainable food packaging, we continue to see a strong demand. This is mainly driven by 2 factors similar to the previous quarters. The shift first one is the shift from plastic solutions to more eco conscious products on different fiber solutions and second, that the industry are now actively looking for takeaway solutions And sealable solutions for the food packaging. Australia continued to have indicated solid growth, started already in Q3 when the restrictions were lifted. There's been some local or regional lockdowns in Australia as well as New Zealand, but in general, a much better situation than we have seen in Europe. 4th quarter shows an improvement in the result, I think both in absolute terms and as well as the operating margin, which is now close to 10% for the quarter. Looking on the complete year, we have seen a healthy operating leverage on the additional volumes and that has consequently strengthened the margin with 1 percentage points. However, by the end of this year, we experienced difficulties in securing products from Asia due to the shortages on containers, and this is a result you can say from the changed patterns in world trade. Consequently, it's not only Dooney affected by this, but more or less All the industry and all everyone purchase information. But we are in a good position to with close contact to freight forwarders as well as our Asian suppliers. But of course, this is something that we'll continue to work within 2021. Thank you. All right. If we look ahead here on the COVID-nineteen situation and actions and outlook then, of course, we continue With the cost control and risk mitigation, that's very important as we are in a little bit defense position still with the restrictions going on. We have a very strong liquidity, which is great. The Board suggests to the Annual General Meeting in May 2021 that no dividend should be paid out. We have a very high focus here on helping our customers in this difficult situation. Of course, we need to create new concepts Definitely in the takeaway area, on the increased hygiene and auto products, there's a big potential, of course, And we saw that last year when the summer came. And I think the demand to eat, meet and travel will still be there. And of course, when it's open up opens up, it's expected to boom once possible then. Of course, it's still very difficult to forecast, but the ongoing vaccination here gives good hope of a return to a more normal life for all of us. And yes, we'll see when that happens. On a little bit broader point here, I think we are very well positioned for the future. I mean the big trends here of digitalization, customer Experience and sustainability have definitely increased during the pandemic, and these are areas that we are focusing on. And also, the hygiene have become more increasingly Important. I think it's quite interesting that Duni was actually built on Hygiene in 1949 when the company was founded. So that's quite interesting. And of course, we try to make significant changes and efforts in all areas we are working in. And we will be very well positioned for the post pandemic world when people start to travel more and meet and eat and so on. A little bit our 2 brands here. They will become more business areas with full responsibility now for the value chain. So that's a step we're taking, and I think that will actually also increase our possibility to be much faster in the future. Okay, great. I hand over to Magnus Ingen with the financials. Thank you again, Robert. Yes, if we look start with the income statement. So as previously communicated, sales are down with almost SEK 400,000,000 in the 4th quarter. This is fully derived from DUMI segment. For the whole year, the decrease is more than SEK 1,000,000,000. So and the sharp decrease in demand as a result from the pandemic and lockdown is also visible in our gross profit, which has been burdened with less fixed cost coverage and less efficiency in logistics, for instance, with lower utilizations, 4th quarter is also normal, our seasonally strongest one with Christmas sales driving the demand for naphnis and table covers and not being able to sell these high margin products is partly the explanation for the drop in the gross margin of 10 percentage points. If you look on indirect costs below gross margin, it's down with more than EUR 120,000,000. And looking at our total program, including costs connected to secure gross profit that equals SEK 270,000,000 as Robert mentioned earlier. As communicated in a separate press release end of January, the result is down significantly and ended on €51,000,000 versus The previous year on €199,000,000 and for the full year that is we ended on €149,000,000 and that is a significant drop from the 2019 number of which were best yet with EUR 533,000,000. As you also can see in earlier communicated, we have high financial Cost is partly related to that we did a renegotiation adapting our bank covenants to better reflect the current business environment Burdened by the pandemic. Taxes are insignificant and net income just above 0. If you go to the next slide, if you look specifically on our 2 segments, Dooney and Biopac, it is very clear that the losses are fully attributable to DUNI segment. And basically, all profits has been eroded and related to the sales we continue to strengthen Biopak, but not close, of course, to compensate for the dramatic decrease of SEK 1,200,000,000 in lost sales for Douni. Protecting the cash flow has been of highest importance throughout the year, and here, I think we can confirm that the situation, bearing in mind, of course, the circumstances looks slightly brighter. We have managed to keep the CapEx low without Taking uncontrolled risks. We got additional working capital that follow the development and with insignificant write downs, That's indicating good risk control. Inventory at year end is slightly higher than previous year, and this is mainly explained by higher growth in Biopac and we are securing deliveries from Asia, but it's also related to Duni being able to deliver once the restriction is being lifted. And of course, finally, it was decided at the Annual General Meeting to cancel the dividend we have naturally also contributed to strengthen our balance sheet. So the learnings we had from the Q3, I think, is very important. We saw how quickly the demand returned, reflecting the eagerness for people to come out and socialize, and we strongly feel that we are now in good position to support our customers with what they need once the restrictions again are lifted And we can look beyond the pandemic. So operating cash flow is therefore a good thing, and we have been But of course, it's really impacted by the lower EBITDA. With a positive operating cash flow also for 20 2020, we can confirm that this is still a tough year behind us in a good financial position with our debt being almost more than SEK 200,000,000 lower than a year ago. But of course, the return on capital reflecting the lower profit is down significantly from the levels we have seen a year ago. Finally, our financial targets. Unfortunately, we are not able in 2020 to deliver on these. We can conclude that the significant volume decline resulted operating margin being 3.3%. And as Robert mentioned, the Board's recommendation to our shareholders is that we will not there will not be any dividend from So that was the last slide, and thank you very much for listening. And I think we now hand over to questions. Press 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 2 to cancel. Once again, please press 1 to register for questions. Our first question comes from Gustaf Hajjat from SEB. Please go ahead. Your line is open. Hi, good morning, guys. This is Gusto Hagios with I have a few questions. First, a few shorter ones and then a little bit more on sort of perhaps directed Robert, what he wants to do, if he has any longer term view. But starting off with your organic decline here in the quarter, if you could put some color on the To what extent it refers to price mix or if it's only a volume component and if there's price pressure in the market? That'd be helpful to understand. Great. I can maybe start with the first question, what I intend to do. Of course, it's 2 months, almost 2 months into the job here. But I think for me, first, it's To create stability in the organization is one thing, of course. That's number 1 here. And of course, then to lay out a plan here In terms of where we want to go, I think we have really good high level plans in terms of on the sustainability side, digitalization side And so on and also driving customer experience, I think next step here is to be more detailed in that, be more specific actually. It happens a lot, especially if you take In the biliary, a lot of things are happening there. So it's me maybe a little bit more specific on the detailed actions. So it's the how in a way we need to Great now, and that's what we focus on start to work on definitely. And yes. Magnus here, maybe I can answer your second question, Auguste. Thanks. The organic growth, it's related to volume. There are no general Price changes. Of course, we have a close dialogue with our customers on that, but it's related to volume. No price changes. Okay. That's reassuring. And then I'm a little bit interested in Where you see intermediate inventories right now, in a situation where societies would open up, People going to restaurants like we've seen in Australia, for instance. Would you foresee some type of lag between that happening and your sales to kick off and if you could talk about the lag there and if you have a view on Currently, the situation with the channel inventory, if they're historically high or low, that would be helpful. Thank you, Gustav. If I understand it correctly, you mean there is a lag for our customers opening up or you mean a lag in the inventory? I mean that you're selling to dealers partly and also your customers probably have a few shelves of inventory themselves. So What would you typically see if you have demand for your products going up? And how does that translate to your sales? Exactly. I think referring to the Q3 when we saw the restrictions being lifted during summer, There was a quick jump up in demand for our products indicating that the inventory at our customers were relatively low. And I think We can assume a similar situation that we will quickly come back once the restrictions are lifted. And that is also part of the explanations why the inventories is not as low as it might have been. We need to be prepared in order to deliver once the restrictions are lifted, which is still uncertain, Okay. Well, if I'll put the question like this. You have A rather high chunk of sales to Australia. I know that's mainly in the Beopak segment, I mean It's a takeaway and so forth. But Australia is rather open and restaurant visits have been going up at explosive rate once they opened in September, October. Did you see there that sort of tabletop assortment, you also or your competitors Follow that suit. So was there any lag in that sense from when Australia opened up, restaurant visits went up and the Tabletop is open, demand picked up. Yes. Still, first of all, main part of our sales in Australia is Biopact related products not so much to restaurants. It's more of a takeaway cup and trays and so on. When the sales we have with to directly to restaurants and so on, it's true if the restriction Lifted and then they are back to more of a normalized situation, but still there are uncertainties Of how much they will open up the restaurants. But it's not our main segment. We are more mainly So that's why we have seen the boots. So I think we should be careful not really too much from boots from Australia Being first out, so to say, on the tabletop segment, the business segment. It's limited. Right. Okay. And 2 more broader questions, if I may, and then I'll see if anyone else wants to ask some questions. But Robert, when I look at Dooney from an outside perspective, it seems a little bit like the organization has lacked a little bit of confidence in terms of the value you bring to your clients, and I'm referencing ability to raise prices and perhaps be prepared to lose a few clients that aren't prepared Those price increases, but maybe a good move still for profitability. And linked to that question, first of all, if you agree with that. And secondly, Linked to that question, how you feel about the R and D content into your products right now? Do you feel that there might be a route to invest a little bit more in R and D so that you down the road get a better price position towards your clients than you have at this stage. I'd be interested to hear your thoughts on that if you have any. I appreciate that you're quite early on your job. Yes. I think historically, I think in a way, we've been quite good in driving the price In the market, we have really high premium products, and that's been Dooney's strength over maybe 20 years in a way or more than that maybe. So I think in a way, we've been pretty okay. And going forward, I think, I mean, of course, we need to all companies need to develop the Product portfolio in that way you're describing actually. I think that's what we need to do. And I think it has as I said before, it happens so much now within Sustainability and so on and so there's, of course, a lot of great opportunities in those areas. So we are not I can't be that specific in a way, but I think definitely we need to look into those areas. And I think So it happens so many things and it goes quickly. I think Duni needs to be a little bit more agile in the future. I think that's maybe my aim, definitely. Okay. And lastly, then you mentioned being a little bit more agile, and I think Magnus referenced verbalizing costs. Is the vertical integration a holy cow for you? Is that something that you feel is at a core For Douni that cannot be touched, I guess why I'm asking is that exiting some of your fixed cost The Dooney segment would dramatically lift probably return on capital employed, which sometimes is good for creating Value and the perception in the market for in terms of quality of the company and so forth. That would be interesting to hear your thoughts. Yes. I thought you may add on, Robert. No, I don't think there are any holy cows, as you put it, Gustaf. But Being vertically integrated has been a strength for Douni over the years. Of course, 2020 is an extreme Situation with the pandemic and as I mentioned, we have been working hard to verbalize the cost. But as we have seen, it's been a strength, but there are no holy cows. And we are normalizing the situation. We also believe that there is a strength To be vertically integrated. No. But we do look very much on return on assets, of course. That's an important Okay. Well, thank you for taking my questions. I appreciate again that you're new to your job. So look forward to With more granular thoughts going forward. Yes, definitely. Yes. Thank you. Thank you. Our next question comes from the line of Karri Rinta from Handelsbanken. Please go ahead with your question. Your line is now open. Yes, thank you. Good morning. I will I have a few questions and I will start with the numbers. So if I look at the gross Profit in the Q4, it dropped quite a bit also compared to the Q3, so pretty much Roughly as much as your revenue decline. So was there anything specific that explained the sort of the sequential decline in gross profit compared to Q3. Magnus here. I think there are 2 explanations for this. One is that we the Christmas sales, which is normally a good high margin business for us, we're very limited in the Q4. And second, we saw the pandemic hurting us, And especially for the Douni segment where we have the factories and so on, and then we get we got less fixed cost coverage. And I think those two components Hurted us quite some bit in the 4th quarter. Okay. But nothing about Because if it wasn't for the pandemic, the only thing we would probably be talking about here is pulp prices, which Of course, they didn't go up that much in the Q4, but they have since then, we have at least heard a lot of price hike announcements. So I mean, Probably not your key concern right now, but what should we think about pulp prices for 2021? Correct. I think that has had a limited effect so far. There are indications during Q4 that the pulp prices is on its way up, And we follow this very carefully, of course. And but also we historically have been quite good on Compensating for that in different ways, cost reductions or price compensations. But it's true, it's on its way up. All right. Then the government support that you mentioned and the, I think, euros 270,000,000 in total in cost reduction in 2020. How much of that roughly was government support? How much of that was sort of Temporary cost avoidance and how much of that should be seen as structural? Around €90,000,000 so less than of the 2 70 percent. €270,000,000 so €90,000,000 around Government support. Okay. So €90,000,000 was government support. So €180,000,000 How much of that was just Less travel, less meetings, less sort of that comes back when conditions normalize and how much should we expect to Here to stay in terms of structurally lower costs? That is a lot of different components, of course, and I cannot comment on each and every one of them. They are, I think, all of it has contributed, sales costs being down, travel costs, Etcetera, all costs basically you find in the P and L, but I cannot comment specifically on the type. All right. Fair enough. And then when we look at your Duni business, how much of that goes via distributors and wholesalers? And you do make a comment about your receivables that so far you haven't seen any clear increases in bad debt. But is there any region, any sort of that you are sort of Growing a bit concerned when it comes to receivables, your customers and whether they will make it or not, Especially if we talk about distributors and wholesalers because individual restaurants, of course, will go bankrupt. But The middlemen, how are they doing? Yes. I mean, of course, absolute main part goes through wholesalers or There are various distributors, and of course, that is less risky than going straight to restaurants and so on. So But we have been following this very carefully. And of course, you see in certain markets that are higher risk than others. But so far, it's been manageable, definitely. And yes, We are of course, the more the longer we have the pandemic situation with lockdowns and So we need to be even more in control of this and manage it in different ways. All right. And when does typically I mean summer is a high season for hospitality. When does it typically sort of get into get started the preparations for the summer season, I. E, let's say that lockdowns start to be gradually eased from March. So does that mean that there is still enough time for the hospitality industry to prepare for summer In their usual fashion, so when should we get when should we become worried about the summer season, Assuming that lockdowns are extended beyond February. Well, I think if we look at 2020, it kicked off in May, really, yes. So if you look at last year in a way, there we had the boom from May, really. And that, of course, was part of the yes, depending on the restriction, of course, when there was eased up last year. No, I don't think it's Very difficult and it's impossible to speculate and we should not speculate on that. But what we can learn from 2020, as Robert said, is that once it opens up And the restrictions start to lift, the orders are placed, and it quickly goes out to the restaurants. So there is no long lead time in that sense. And actually, I think only it's a matter of if the restrictions are lifted, then it very quickly fills up, And the restaurants can open up and serve the customers. And that's the learning from last year. That's the learning from last year. And we believe it will be the same this year as it goes quickly. All right. Thanks. Then finally, Maybe about Biopak. Do you feel I mean, this is a strategic question and maybe I understand that it might be a bit too early, but do you feel that your Biobank portfolio is as comprehensive as it Should be or are you lacking some products that you could sell to the same customers that you are currently selling your existing products? Yes, maybe a bit but in one way, I think we have a really good portfolio, definitely. We are I mean, with the Biopak range, we are, yes, in the lead, so to say, in the market as well, yes, Compared to others, so I think we have a good portfolio. Of course, it needs to develop and especially what happens with, Yes, the trends in the market and so on there, those kind of things. So yes, I think definitely we have a good range. But of course, as you anyway, I mean, we need to develop it, definitely. It happens a lot of things. And I think the customers now, I think that's very positive in a way. They ask A lot of new IDs in terms of takeaway as well. A lot of actually restaurants that hasn't had takeaway are moving into takeaway. If you take maybe 5 star restaurants today. They 4, I don't know, 5 star or 3 star, whatever, the top ones, they didn't have takeaway before. And of course, now what happens They tried to do that, and they need maybe a more interesting packaging than maybe another maybe 1 star restaurant then if you compare. So I think this It's an area we need to explore more, definitely. Sure. And then one more final question. How much roughly is hotels as your sales? Maybe not direct sales, but how much of your product End up at hotels. If we look specifically for Duni, do you have any ballpark estimate that you can give us? I don't have that right. It's we do not have the percentage, but it's not the main segment. It's an important segment, it's not the main. All right. Fair enough. Thank you very much. Thank you. Thank press 2 to cancel. There will be a pause while questions are being registered. As there are no further questions, I will return the conference back to you. Yes. Thank you for today. And yes, it was really nice to do the first report here and looking forward to do many more in