Duni AB (publ)

Hello, and welcome to the DUNE Group first quarter interim report conference call. Through the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Please note, this call is being recorded. Now, I would like to pass the call over to Robert. Please begin.

Thank you. Yeah, hi, and welcome to DUNE Group interim report for Q1 2024. The headline for the quarter is a stronger operating income and strategically niched acquisitions. Moving into the agenda, we'll run through some highlights, the market outlook, a summary of the total group for Q1, and then we're moving into more details into the two business areas, and then innovations and also looking into our sustainability targets and then deep dive into the financials and then we have a summary and then Q&A in the end. So if we move into the highlights, three things here. Improved operating income being the highest first quarter measured. Gross profits increased by 11.2% compared to the same period previous year. And continued expansion in the food packaging with strategically niched acquisitions. Those are the top three highlights we present here. If we look at the market outlook, our general market outlook has not really changed since last quarter. The Horeca market will continue to have a gradual and potentially volatile recovery short term and a stable recovery long term. Mixed signals and uncertainty for the coming quarters, as we all know. Dynigroup's complementary business areas, food packaging solutions and dining solutions with a device product portfolio provides resilience. The group's financial position enables addressing profitable long-term growth opportunities. And if we look a little bit on the graphs here, top right graph shows the German Horeca market and especially the red line here shows the number of visits versus 2019. And for 2024, it was projected that actually going up a little bit, but still 10% down versus 2019. And if we look at more real live data, so to say, shows the graph from OpenTable. and measuring versus last year, 2023, and it's a bit weaker German market than actually expected then from the top graph. So we can see that, yeah, the down here in both Jan, Feb, and March, and also a little bit in April, where actually the Eastern was hitting, of course. Left graph in the bottom there shows that the In most regions in Europe, actually, respondents share a more positive outlook than actually they did in December. And if we look more particularly into Europe, it's actually up from 22 to 38. And this is looking into the next coming six months. So that's the states on a little bit more macro levels. Short, the key financials, we had a net sales of 1.7 billion, a little bit more, which was a little bit down versus last year. The operating income, 140, which was up then, 10 million versus last year from 130. And our operating margin ended up at 8.1% in the quarter. And last year it was 6.9. So improved margin in the quarter versus last year. Looking in more into the Unigroup's Q1 on a higher level here, as I said, net sales is down, and it's down minus 7.5%. And the market data indicates a softer Q1 compared to the last year. And the drop, in a way, consists of three different parts. We have partial price decreases. The retail, you can, German – has a drop for us and maybe on low margin contracts. And also fewer invoicing days has negative facing impact. And in the quarter, we acquired a relevo in Husky, while already acquired a decent packaging was consolidated in February and relevo in March. And Husky will be in us from 1st of April. If we're looking at the profit level here, it was up plus 7.6%. We had an improved price and cost balance for raw material and the sea freight compared to the same period previous year. Lower cost for stock keeping, been more normalized now after the pandemic peak. And the customer mix improved with a higher share towards Horeca versus then retail compared to the period previous year. Inner cost has increased due to the investments in digital transformation, our innovation projects, and also market expansions outside of Europe. Now I'm handing over to Magnus, who will go into more details into the two business areas.

Thank you, Robert, and good morning, everyone. So, as usual, I will now go through our two business areas a little bit more in detail, and I start off with business area dining solutions that represents product for setting the table. So Q1 ended with lower sales versus the same period last year, down with approximately 8.8%, that equals 100 million. Operating income is slightly down from last year with 13 million, but as you can see, margin in percentage is kept and above 10%. So a little bit deeper look on the business area dining solutions. So as Robert said, The macro statistics looking on the Horeca in general and consumer spending indicate a softer demand. And this is especially noticeable in Germany. And that is our biggest market, as some of you might know. One of the reasons for challenging Horeca is that Germany has announced a return to VAT rate of 19% for restaurants and catering services. That is in effect from 1st of January this year. This is a move that follows the temporary reduction we had during the pandemic period down to 7%. So nonetheless, the decrease for a dining solution could be summarized into three main explanations as we touched upon. First, we have adapted the price on some of our tenders and commodity business. And this price decrease explains roughly one third of the drop. Second, we have lost some bigger retail contracts in UK and Germany. This also explains roughly one-third of the decrease. And finally, we clearly have fewer invoicing days in March as an Easter effect. For the quarter, this explains roughly two to three percentage points. So consequently, the volumes in the professional segment against restaurants and hotels is relatively flat, although we do see significant movements up and down when it comes to markets and products. And since we are vertically integrated in this business area, we have paper mill and converting units. We have an effect from less volumes, and that means lower cost absorptions. So naturally, we carefully try to evaluate every contract and how it contributes to the group's profits. We are a premium price, and that means that we sometimes move in and out of tender businesses. And it also means that we need to quickly adapt to temporary lower volumes. But I think for good cost control, we have managed to keep the margin above 10% and balance the price level versus the cost level. So if we look on our other business area, food packaging solutions, focusing on products with sustainable food packaging, we see a sales decrease of 5.5% in the quarter. However, we have strengthened the profit both in absolute terms as well as in the margin. So if we take a look a little bit more in the details, the slightly lower sales is fully explained by lower prices. And I think that reflects very much that sea freight has come down from the very high level we saw some one and a half year ago. And the volume continued to be positive outside of Europe. although we do see a somewhat weaker development compared to previous quarters, especially in Australia, which had experienced a high growth over the years. In Europe, volumes continue to fall behind high levels that was boosted during the pandemic period. In parallel, also with dining solutions, the main part of the volume decline in Europe could be derived from these lost retail contracts in Germany and the U.K., I think for the business area, since two years back, we have worked hard to decrease the stock level that was built up during a period of very high costs connected to the sea freight. It has been a challenge to decrease the inventory since we lost competitiveness versus some competitors that didn't face the same issue or problem. However, I think now we are in a much better position to take on bigger tenders and defend our position. So I think we have mentioned before that we experience a very dynamic packaging market with many new companies offering different types of solutions for the future packaging. I think this reflects very much what is going on and the guidance we get from the European Union on how to manage single-use plastics and waste in general. I think we firmly believe that there is no one single answer to this or offer that can meet all the necessary requirements. And that is why we have in the last three years invested in both the companies, but also new business models with reusable solutions. But we have also invested in new assortment, new materials, new barriers that is in the forefront for this new regulation that is already here or on its way. So we can therefore support our customers with a complete offer. Doesn't matter if it's reusable, recyclable, combining the most circulable solutions for every occasion possible. And at the same time, having a very, have a convenience as a leading factor. So I think during the quarter, it has been an intense one for Juni Group when it comes to acquisitions. First, we have acquired a majority stake in Relevo as a leading company based in Germany, offering reusable solutions for the Horeca industry. So with this, our offer broadens and consequently we can and have a complete solution, solutions to provide for festivals, campus, or if it's just a single restaurant. Second, and as we press released at the end of the quarter, we acquired Husky. It's a market leader with innovative, sustainable dining solutions. They have a very special design on coffee, or if you like, teacups, and high-quality materials that utilize waste, a recycled material, to enable to a transition into a waste-free world. So that's what we're very happy about. The acquisition is done in Biopack Group, and that will be consolidated, as I said, from 1st of April in this business area, food packaging solutions. And finally, I think we already communicated, I know we communicated in the Q4 report, Decent Packaging was acquired also through the Biopack Group. Decent Packaging has a strong foothold in New Zealand, but also in UK. and offers a great selection of plant-based solutions to complement our offer we already have today. So all three companies will contribute to increase our relevance. It will accelerate our growth agenda, and they have an annual net sales of approximately 200 million, and the profitability is aligned with Dini Group.

All right, great. Thanks, Magnus. Yeah? Our aim is to be the trusted sustainability leader in our industry. We are focusing a lot of initiatives and innovation within the circularity area. As Magnus mentioned, we are looking into a lot of things here. We have a couple of startup projects that consist today of Idun and Relevo within the reuse sector. I think for us it's very important to have an offer within a combined offer actually with recycled products and reused products. And I think that's what we believe the market will have, what they want in the future here. And also we are investing in a startup in Unmo, which is a social platform for a dialogue between restaurant owners and the people who want to work in the industry long term. And that's also creating a sustainable industry in the Horeca sector. that stay with those things. So a lot of things going on here. If we look at our decade of action, 2030, we have three focus areas here, becoming circular at scale, going net zero, and living the change. And I will focus a little bit what we've done in the quarter. On becoming circular at scale, we have done a collaboration with Notpla for plastic-free packaging, which is a seaweed barrier. Very interesting going forward here. Also, acquisition, as Magnus mentioned, within the sustainability innovative food packaging solutions with the company Magnus talked about. Number two, we are going at zero. We've started reporting scope three for 2023 completed, which is great, good achievement here. And also, we've got the Ecovades score for 2023. We've got a 77, which is a good increase from last year, and we are now top two present in our industry. Last year, we were top three, and we have a gold level in Ecovades. So good progress in these three areas. Moving into the financials.

Thank you, Robert. Yes, if we start with the income statement. We can see that the gross margin has strengthened versus last year and also above the rolling 12-month level. I think just a year ago, the raw material prices like pulp has decreased from very high levels, but it has since summer increased again, and it's actually up quite significantly with around 25%, 30%. So we have adjusted our price downwards on certain contracts, as we have said, to main our competitive edge. But the volatility of raw materials, you can say freight as well and energy, in combination with inflation that is still above 2%, forces us to be very agile on price compensation measures. So as you can see, we continue to invest in digital solutions, but also to develop new materials. For instance, as Robert said, the collaboration we have in Notpla. It's a British company that has developed a unique coating material from seaweed to be used as a barrier. So this is something we must and should leverage from going forward in relevance with our customers. Finally, net income is slightly down, although we have high operating income, and that could be traced to the taxes, as you might see. That was exceptionally low last year, but if you look on the rolling 12 months time, it is relatively stable on 24% plus minus. not some percentage up or down. So looking on the business areas, the profit improvement as we have seen from last year comes from food packaging solutions and especially so in Europe that improved from a weak result in the same period last year. And quarter one is normally seasonally weaker quarter and that goes for both business areas. If we look on the cash flow, it is negative with 124 million. I think this is a very normal development for the first quarter. It explains mainly through a stock buildup from the low levels we had at the year end. Contrary, last year we managed to take down the stock from very high levels we saw in end of 2022. And this, of course, resulted in a good strong cash flow at that time. But again, it's a normal year to have a stock buildup in the first quarter. Finally, CapEx is still relatively low and below depreciation. But as we have communicated and indicated before, we expect this to increase going forward. Look on the financial position. It remains very strong, although we've done some acquisitions in the quarter. Inventories have increased, as I said. But we also see a potential to optimize them and take them down further. That's also a seasonal pattern that we're seeing. And I think the inventory is very much connected to how well we can manage, which I must say, a fragile and a bit uncertain supply chain, especially deliveries from Asia to Europe and Australia. But we also see a slightly softer demand, as we have talked about, the lower volumes And it takes some time to adjust production and the planning processes. And I think here still we have some more to do to decrease the overall stock days. Still, as you can see, the net debt remains, I think, historically low. And that enables various activities to further accelerate the growth agenda for the group. And finally, our financial targets. Looking on the organic growth, we are down, as you can see, 2%. This is mainly explained by weaker market demand, as we have seen, I would say, since end of Q3 last year. And especially Germany has experienced a consumer that is much more cautious as a result from less disposable income with high interest rates. But the pattern is basically shown all over Europe on a global level. Furthermore, in the last two quarters, we are also seeing a slightly negative effect from lower prices, compared to a year ago. If you look on our operating margin, it has improved slightly from previous quarter and now very close to the 10% target. And finally, the board recommends a dividend of five sec, which equals roughly 60% of net income and consequently above targets. So with this, I hand over, thank you all and hand over to Robert for final comments.

Thank you, Magnus. Yeah, so short summary here for Q1 2024. Yeah, as we talked about, market data indicates a softer Q1 compared to last year, reflected in our net sales, especially Germany then. The improved operating income being the highest first quarter measured historically. Our gross profit increased by 11.2% compared to the same period previous year. And here we are, as Magnus mentioned, the mix between The majority of the loss in retail versus Horeca in dining solution is the main driver of a good mix. Continued expansion in food packaging with acquisitions. Good for the quarter as well. And we have a continuous one financial position going forward. So that was the presentation today. Moving into Q&A.

Thank you. If you wish to ask an order question, please press star 1 on your telephone keypad. And if you wish to withdraw your question, you may do so by pressing star 2 to cancel. So once again, please press star 1 to register for question. There will be a brief pause while the questions are being registered. Our first question comes from the line of Johan Fred. Your line is open. Please go ahead.

Hi, good morning, guys, and thank you for taking my questions. Firstly, although sales fell in dining solution, operating margins were roughly flat year over year, which I gather has a lot to do with the positive mix effect from the volumes that you've lost in mainly the retail segment. If volumes and demand were to improve going forward, do you expect to see a reversal of these effects, or how should we think about that? That's my first question. Thank you.

No, I think if we see – you talked about if we increase the volumes going forward and the margin effect. Is that the – what's the question here? I'm sorry for –

Yeah, exactly, exactly. You've lost some low-margin contracts, I gather. So if we see margins or volumes returning, could we expect that the mix effect will continue, i.e. volumes increase from higher-margin segments, or should we expect sort of a volume uptick be in the low-margin product segments? Yep.

I think you will see two effects from increased volume. One is that we will see better cost absorption in the production facilities. That is good, and that's a positive contribution to the margin. That's one effect, so that we should see when we have higher volumes. And that goes for both low-margin contracts and higher-margin contracts. Then, of course, if you're growing with low-margin contracts, you get more effect from this cost absorption than you get higher margins. But overall, it is positive and we should leverage from that, especially on the operating income. The gross margin, slightly more. If you take large, low-margin contracts, that might not be beneficial for the gross profit margin, but for sure an operating margin.

And I think, of course, it depends a little bit on the market there, what's happened. And I think historically, we've been quite good at managing the balance during periods. So it's been sometimes, yeah, you win some lower, sometimes you gain the higher. So I think this a little bit depends on what happens with the consumers in the end and going to restaurants versus maybe retail and so on. So I think, but I think we've historically been quite good at balancing this during periods.

So it's not a strategic sort of shift or focus towards higher margin products. It's rather a market effect, you would say.

Yeah, I think we always have a strategic, of course, to drive to the best, in a way, where the best segments are, in a way, and the best products. But of course, you have to... Yeah, see also what happens around you anyway and manage those kind of demands also. So I think that's been our strength in the way to do that. But of course, the main aim is, of course, to be where the relevance is and people are prepared to pay for quality.

Of course, makes sense. Thank you. You've lowered prices in what I gather most categories and geographies. Could you add some color on as to where in terms of sub-segments and geographies you've seen the highest price pressure or market price pressure and why that is so?

I think I can start a bit. I think as we said in the report, it's mainly... contract in a way in the UK and Germany that is affected in a way and that maybe doesn't have so much to do with the market actually in that sense.

Okay, very clear. And is this effect of you having raised your prices quite drastically last year? Do you think you overdid it, so to speak, on price increases last year and do you think that this will this sort of price pressure due to contracts will continue coming quarters? Or do you feel that your product portfolio is at a sustainable level as of now?

No, I don't think we overdid it. The inflation and especially some real materials were dramatic. So I think we were in a tight and good dialogue with our customers. Our competitors did the same. So I do not see that we overdid it. But I think it's natural when the sea freight comes down, for instance, or or um certain tenders um that you adapt the price levels uh so i would not say that we overdid it and as you can see from the margins um they are not you know they are online but what we saw before the inflation period uh but they are not um and i think the volume is also in balance so i would not say we overdid it uh at all i think we were a good balance

Thank you. And in food packaging, you saw a significant uptick in margin despite lower volumes. And you elaborate a bit on this in the call. But could you add some more color on the dynamics driving the margin improvement for the segment? Thank you.

I think on a high level, we've done a lot of basic work here within the business area, turning every stone in a way. And also, of course, working with the inventory a lot in the past year here in Europe, where it's been tough after the pandemic and all the things that happened historically. So it's been a lot of hard work and nitty gritty, I have to say, in the business area. So I think we, in a way, we're trying to fix the base and then going forward and try to move into more relevance and drive growth.

Yeah, just to fill in, yes, that's absolutely correct. We also don't allow investments here on new technology and new business models since it is a very dynamic segment that happens a lot. And we do see huge opportunities, as we have said many times, long term. And this is something we want to benefit from. But it demands investments, but it's an exciting area.

Yeah, and speaking of investments, you guide for higher CapEx going forward. Could you remind us what investment you've planned for the coming years and what we should expect going forward? Thank you.

I think what we have said before, and I can underline it again, is that For three years, we have had lower investments, and that goes for our production facilities. We're normally around, you could say, 150, 160 million SEK per year, and that's a depreciation. We have been clearly below that in the last three years, and it's now naturally to come back to more normal levels and maybe also come back to slightly higher levels to accelerate some areas which we think is interesting. So it's more in the context of that. and not specifying any specific CapEx. But it's related to our own production facilities.

Okay, thank you. Makes sense. And one final question from my side here on guidance. In the report, Robert, you write that you hope for a better market towards the end of the year. Is this sort of you guys speculating in sort of the broader macroeconomic indicators that all We all see all market observers see, such as inflation having peaked and potentially interest rates cuts, etc. Or do you see any additional indicators through your channels?

I think you're spot on in a way. I think we're looking at the macro indicators, actually, and of course, looking into data, how people are visiting and so on. but I think it's the macro that we are looking into because it's putting a lot of pressure on consumers in Europe in general and I think it's pretty low confidence actually and as I showed in the graph in a way actually they start to believe at least that it's a positive outlook so I think as you said it's more than general with interest rates and all this and what's happening around us because I think especially the hurricane industry is very... Yeah, it's important for the industry. And I think there's a lot of stuff going on, of course, after the pandemic and so on. And also the VAT in Germany is raised, as Magne said before, from 7% to 19%. So that's a shorter maybe implication. And people hopefully get used to that when interest rates get back. So, yeah, it's more on your line now.

Makes sense. Those were all of my questions. Thank you so much, Robert and Magnus, for your time.

Yeah, thank you. Thank you.

Thank you. Once again, as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Yukim Hellquist. Your line is open. Please go ahead.

Yes, hello. So, of course, a lot of stuff here has already been covered, but I can start with retail doesn't seem to be doing very great at the moment, and there are price pressures. And, of course, the contracts in the UK and Germany, but I can also ask here, does this have anything to do with more private label usage in the stores? For example, these contracts that were not renewed or what it was. Is this a thing that you see?

Yeah, I think most contracts are private label today. So it's more about a little bit tendering contracts. But I think in general, if you look into the retail sector, There is a shift towards maybe a lower price in general. I mean, food, everything in a way. So there is a shift probably. But that's not related to our, in a way, loss in these contracts.

Okay. So you do also your own brands, but you do mostly private label in retail. Is that correct? Yeah, you could say that. Yeah, exactly. Okay. And... Yeah, okay. On the CAPEX, you didn't seem very eager to talk about specific projects. And my question was if you could just elaborate on what's your single largest CAPEX project going forward. But I guess you don't want to do that.

No, we have not disclosed that type of details in our reports. But of course, we have paper mills and we have converting factories and In the paper mills, there are big machines, and in the converting, there are more smallers. But we are not specified specific on machines, but it's related to machines and our infrastructure.

Okay. And I have a question on the price cuts, the partial price cuts. It seems it has to do with, I mean, your input costs have come down and and so on, but is it also a competition question that you see increased competition?

I would not say it has increased. There's always quite fierce competition in certain segments. We talked about retail, that's one area. And we, of course, evaluate every tender, every contract we're in, and sometimes we step out, sometimes we actively go in. So that's a bit of a especially so in retail. Where it's quite dynamic is in the food packaging industry with a lot of companies trying to come up with new technologies and so on. And here we see both exciting things that is happening and that we want to be part of. So it's a different types of competition, different types of things happening in the industry.

Okay. And regarding, I think this is my last, regarding packaging solutions. So I was a bit surprised to see shipping costs, freight costs down. And I mean, you still haven't seen any meaningful like Suez Canal impacts with regards to shipping from Asia to Europe.

I would say you're right. It went up end of last year and also in the beginning of this year. You can see that on the spot price on the market due to disturbances we had in the Red Sea. However, the increase was much, much less significant than we had one and a half year ago when the increase was 700-800%. And where we also timed wrongly, you could say, the stock buildup. So for us, it has not had that severe impact the last happenings in the Red Sea, although we do follow it and we are slightly impacted by it.

Okay, but shipping rates in Q1 were up significantly versus Q1 last year. But in the autumn before that, in 2022, then prices were about what they are now. So maybe there's a lag effect there. That's a big reason that you don't see.

I think it's also related to a stock buildup we did when the prices were even higher than we saw a couple of months ago. where we have been trying to focus to get that out. That has been a big challenge for us.

In a way, we have sold out one of the things we had on stock actually, so that's also not bought so much.

Okay, thank you. I think that's it for me.

Thanks. Thank you. Thank you. Once again, if you'd like to ask an other question, please press Star 1 on the telephone keypad. To answer a question, please press Star 2. Once again, as a reminder, if you would like to ask a question, please press Star 1 on the telephone keypad. If there are no further questions, I'll return the conference back to the management.

Yeah, thank you. Busy day today in the market. So, yeah, I just want to thank you for good questions and listening in and see you soon again. Thank you. Bye-bye.