Duni AB (publ)

Hello and welcome to the DUNY Group Q4 Report 2024. Throughout 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. Today, I am pleased to present Robert Dakuskov, President and CEO. Please begin your meeting.

Thank you and welcome to the year-end report 2024 where we have the statement acquisition driven safe in continued soft market and if we go to the agenda today we'll have a brief highlights and then talk around market outlook general overview of the Q4 and then moving in more details into the two business areas dining solutions and food packaging solutions Then regarding our sustainability initiatives and then a little bit around our strategy ahead and then coming into the financial and the summary and then at the end question and answer session. So if we move into the next slide here highlights Q4 and it's been an acquisition driven sales in the quarter. We announced the acquisition of UK converter poppies and this will make UK to one of our biggest markets second to Germany in Europe. Low net debt and continued strong financial position in the quarter. And we reached 2025 climate KPI for scope one and two. We'll come back to that as well. So on the next slide, we talk around the market outlook. And there are signs of increasing consumer confidence after a year of low confidence among the consumers in the world. Restaurant owners continue to face challenges with higher costs for materials and energy. Also paying back tax to authorities, etc. Of course, there have been a lot of restaurants going bankrupt during the year in many countries. There are some positive signs. The table seating is slowly picking up globally, but Germany is still facing a weak recovery. We still anticipate a gradual recovery in the mid-term as we said before and a stable recovery in the long term for the global forex market. Germany then remains a bit uncertain of course. Globally we see that Southeast Asia and the Pacific are projected to grow more than other markets in the world. And then we're moving into next slide Q4 key financials. It's the highest quarterly sales actually in the company's history. Net sales increased by 4.4% to 2057 million and the operating income decreased to 178 million from 191. And we ended up with an operating margin at 8.7% versus 9.7 last year. If we look into the comments on the next slide, the increase was driven from the acquired companies, but also from the good development in Asia Pacific. Sales towards restaurants and hotels almost on par for business area dining solution, which is the napkins and table covers, after several quarters with weak numbers. This despite the still weak development in the Dutch German market. If we look at BiPAP Group, which is mainly our Australian business, came back to a double-digit growth in the last quarter. Look at the operating income, it was affected by continued high cost for PALT and Freight compared to the same period last year. The price for PALT flattened out during the quarter but was still high compared to the same period last year and that affected the margin negative. Margin was also affected by increased storage cost for the BIPAC group. We have reduced the indirect cost during the quarter in Europe and this mitigated the due diligence cost for the announced acquisitions and also the high cost a little bit outside of Europe. So now we're moving into the two business areas and a little more details and I'll hand over to Magnus.

thank you Robert and good morning everyone so I will now provide a more detailed overview of the two business areas starting with the dining solution the summary slide which covers our table setting products so looking at the numbers sales remain largely in line with previous year in absolute terms closing at 1.2 billion SEC operating income declined slightly from 75 million sets, 252 milliseconds, resulting in a margin of 12.6%. If we take the next slide, diving into the numbers, we observed slightly lower volumes compared to last year. However, of the several weak quarters in the Horeca segment, particularly in the DASH region, as we have said many times, Q4 nearly matched last year's performance. So overall organic growth was slightly negative around 3%, but this was partially offset by the acquisition of the Slovenian company City that we did in Q3. We have noted an increasing preference for private label products and some downgrading in product selection among certain customer segments. And this is due to the economic uncertainty and the high cost we see. And this trend continued in Q4. As a result, Duni has experienced a negative mix effect and in some cases has made strategic decisions to exit the low margin or unprofitable business. Pulse costs increased gradually in 2024. It has stabilized on historical high levels since autumn. However, a more significant challenge has been inflation, which has remained at exceptionally high levels for the last 40, 50 months or so. And additionally, we see rising salary costs are adding further pressure. So following a period of price reduction that started actually in 2023, due to the intense competition, and at that time, we saw a lower sea freight than raw materials. We've seen it already in our Q3 report that price adjustments were necessary to offset these higher costs. And these measures have now been prepared during the fourth quarter and will gradually have an effect from Q1 2025. So to mitigate inflationary pressures, we have also focused on improving internal efficiency. Our cost reduction efforts in 2024 are already yielding results in the quarter, as Robert mentioned, as we see a decline in our indirect costs, possibly impacting profitability. And this remains a key focus area moving forward. So if we take the next slide, just before Christmas, We announced the acquisition of Poppys, and we have now finalized the transaction. Poppys officially joins Dune Group and Dining Solutions as of February the 1st. And this acquisition significantly strengthens our presence in UK and Ireland, making it our second largest market after Germany. So Poppys alone is expected to contribute approximately 650 million in sales. And as Robert said, we see significant synergies and are excited about increasing our relevancy in UK. And that's clearly one of the Europe's largest and most dynamic food markets. If we take the next slide, turning into business area food packaging solutions, which focus on sustainable food packaging, we recorded a 12% sales increase this quarter on comparable exchange rates. This growth was primarily driven by acquisitions, but also supported by strong organic growth in Australia. Profit improved to 26 million with a margin of 3.1%. We take the next slide. Looking closely at the quarter, as said, sales increased double digits. Acquisitions done in the first half year further contribute to the sales increase. And volume growth remains strong outside Europe in Q4, particularly so in Australia. That's our largest market for food packaging. However, meanwhile, in Europe, we continue to struggle with weak demand and intense competition in the takeaway segment. We also see the loss of several major contracts over the past year has negatively impacted growth in this region. Additionally, it's fair to say that the sector faces complex regulatory challenges and ongoing shifts in technology to replace plastics. Despite these challenges, we remain positive and optimistic about the long-term growth in food packaging, particularly as regulatory clarity improves. A combination of sustainable driven consumer behavior and a demand for convenience will drive future success. So our focus remains on responsible and sustainable consumption. So while profitability improved in Q4, we still have progress to make to reach our historical levels and financial targets. We have been operating on a high cost environment with rising sea freight and material expenses. To stay ahead, we continue to update our product portfolio, ensuring that we have a market leading solution in place. The one key initiative has been the launch of non-peer-pass-added products introduced almost a year ago. More recently, we have been focusing on reducing food waste by providing ceiling solutions for fresh takeaway food that are both hygienic and environmentally superior. So these investments have temporarily increased costs, but position as well for future growth and customer relevance. So I now hand back to Robert to give an update on our ESG initiatives.

Yeah, when it comes to our decade of action, 2030, we have three initiatives becoming circular at scale, going net zero and living the change. And if we look a little deeper on the next slide regarding becoming circular at scale and what activities we've done in the quarter is that we got confirmed that sugar cane fiber products or also called bagasse can now be recycled as paper, which is really great. Also our range of packaging without PFAS was awarded in Norway. When it comes to going net zero we got our CO2 calculator certified for our packaging portfolio and during the quarter we also switched to renewable electricity at the facility in Thailand. This and many other activities has led to that we reach our goal by the end of 2024 compared to the 2019 base year. And this is a reduction with 62% from 2019. When it comes to our third initiative, Living the Change, the Duna Group was on Time's list for world's best companies in sustainable growth, which means that you can grow and work with sustainability at the same time. So just to summarize on the next slide, we have a strategy for growth and wants to become a trusted sustainability leader in our industry by 2030. Our strategic priorities are to increase innovative offering to customers and consumers. An example here is that we can potentially expand our lead lightning into smart lightning and also expand our uniform offering into more industrial food packaging solutions. Second priority, grow our positions in Europe and Asia Pacific. An example here is that we're building a manufacturing hub in Bangkok, Thailand to support our expansion of dining solutions in Asia. The third priority is to enhance operational efficiency and enable regional differentiation. Here we have an example that we have invested in a more efficient logistics solution in Germany Meppen that will be ready in 2026. So with our strategic priorities and sustainability initiatives combined, we can act as a trusted speaking partner to our customers. Now to Magnus and more details regarding the financials.

Thank you Robert. So if we start with the page showing the income statement. The gross profit for the quarter remains above the average level for the year. However as you can see Q4 performance was slightly below last year due to the elevated cost levels. To address this we have implemented price adjustments as said earlier. and a cost reduction program in production and also indirect expenses. During Q4, we also had temporary due diligence costs related to the purpose acquisitions. However, these costs were offset by the benefits of our cost reduction initiatives. Operating margin for the quarter stood at 8.7%, slightly below our financial target. Net income benefited from lower tax expenses during the quarter and consequently higher than last year. Additionally, restructuring costs of the 125 million SEK that we recorded in Q3 were related to reallocating our main warehouse in Germany. Preparations will take place throughout 2025 and with an actual physical move starting early 2026. To correct that for the restructuring cost, the earnings per share approaches almost 8% per share, slightly down from previous year. If we take the next page, shown is our business area breakdown. Business area food packaging solutions improve its profitability, albeit from a low base, we must say, reaching a margin of 3.1%. Dining solutions, which represents around 60% of the total sales, and operates with a vertical integration model, maintained a solid margin of about 10%, closing at 12.6% for Q4 and close to 11% for the full year. So this is essential to achieve our financial target of 10% margin and ensuring high returns on capital and product. If we take the next page, looking on the cash flow, The operating cash flow for the year is close to 500 million SEK, with nearly 300 million SEK generated in Q4 alone. Our cash conversion remains at historical strong levels, providing the flexibility to invest in organic growth through CAPEX and follow future acquisitions. For 2024, CAPEX is slightly exceeding 200 million, aligning closely with the depreciation levels. Most of our investments were directed towards enhancing production efficiency but also to our IT infrastructure to support the digital transformation and future business needs. We take the next page the financial position that remains robust with net depth at low levels despite we have completed four acquisitions and also issuing dividends during the year Look on the inventories. They are more than 200 million higher than last year, contributing to increasing storage costs, as we have mentioned a couple of times, particularly so in food packaging outside Europe. And we are actively addressing this issue to optimize cost efficiency. Excluding Goodwill, return on capital employed remains strong at 25%, so slightly lower than the 32% recorded a year ago. And finally, if we look on the next page of financial targets, organic growth stands at minus 4.9%, primarily due to wheat consumption across all markets, especially in the DAF region. Recent Q4 data from German restaurants suggest an even steeper decline in demand compared to our numbers. However, Q4 data indicates a slightly more positive trend, supporting a relative improvement in our performance. Key drivers for improved consumer confidence, which is very important for us, includes the lower interest rates, increased disposable income, and a more stable geopolitical environment, and that we follow very carefully. So our rolling 12-month operating margin is at 8%, slightly below our 10% target. And also the board has proposed a dividend of 5 sec per share to be decided later on in May. So this exceeds Our target and the last one of distributing at least 40% of net income reaching 66% when we adjust for the restructuring costs. Thank you all for listening in and I will now hand over to Robert for his final comments.

Yeah, some final comments here. It's been an interesting year for Dynigroup with a number of acquisitions and started restructuring within the logistics plus a number of investments in production. And after last year, 2023, 2024 is the second best year regarding our operating income. And going forward, we are cautious, optimistic, giving the investments and the work that was done during 2024. We are now focusing to integrate our acquisitions and continue to drive our relevance in our offer to the market. Thank you. And I'm handing over to the Q&A.

Thank you. If you do wish to ask an audio question, please press star 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing star 2 to cancel. Once again, please press star 1 to register for a question. We'll pause for just a moment while we compile the Q&A roster. And your first question comes from the line of Johan Fred with SEB. Please go ahead.

Thank you and good morning Robert and Magnus. Thank you for taking my questions. First one on the organic decline in dining solution. As I interpret from the report, price or price slash mix was positive in the quarter, but given your operating margin, of roughly 13 percent. Could you give any insights as to how the volume growth was in the quarter?

Thank you Johan and good morning. Yes when it's looking on we see a slight decline on the organic growth that is correct. We have a very little price effect on this so I would say it is related to volume mainly and also in the retail segment. So we do see some improvements in the Horeca numbers and the Horeca segment where we see close to flat levels actually in the portfolio.

And I think that's a big change from Q3 actually that the Horeca sector on diamond solution is coming back to flat levels.

Okay, very clear. Thank you. and the follow-up on your commentary here on the call in regards to the price increases that will take effect in 2025. How much roughly have you raised or intend to raise prices in dining solutions?

I think we

We started to raise prices here during the Q3, or initiated the price increases in Q3, which will then be delivered during the Q1 and Q2. And the aim is to compensate the inflation we had during the last year here, actually. Not without saying any numbers in a way, but that's, yeah.

But just to add some color to that, how much did inflation impact your input costs during 2024?

No, you can read it differently that you see that we are below our financial target and that is what we are guiding us and then we need to compensate with, you know, it's rough numbers, you know, it's between one and five percent and on the maybe on the higher side there. But it differs quite a lot between the customer segments. We still need to be price competitive and we still need to show value for our offer. But we need to take a couple of percentage up in the profitability here to compensate for the cost.

Got it. Thank you so much. And on moving on to food packaging. Margins have roughly been at 3-4% over the last two years. How should we think about the operating margin development for this segment going forward? Is this the profitability level that we should expect going forward or essentially what are the tangible drivers for margin expansion in 2025?

We are not guided or committed to any numbers for food packaging solutions isolated, but we have continuously said that this is a level where we are not satisfied. That's for sure. Historically, we have seen levels between, I would say, six to nine percent. And if you're on that level, we have a good return on the capital employed in this area. And we do believe with the investments we have done and the our offer to the customer, that's the level we should aim at.

And I think we've been through a lot of volatile years here. So hopefully it will stabilize a bit and we can work more long term as well with this. I think that's the key here. It's been a lot of ups and downs in different areas. And I think going forward, we have an aim to put a lot of focus on certain product areas in packaging. both trying to solve the food waste with uniform and so on. So that's that same.

But given the information you have today and in regard to the current market environment, do you see any chance of reaching sort of this range or the low range of this range next year?

I mean, our ambition has been throughout this turbulent period, of course, to as quickly as possible improve the profitability. But it is a quite dynamic and turbulent environment and it's still huge uncertainties with the regulation steering this area. We are comfortable. We are investing in the right things. We see a future in this area. We do see that we get support from the consumer behavior or want to consume food and drinks on the go. How quickly can that go? That's a lot of factors that can impact, but they're also factors that is slightly outside our influence, but we're doing our best for sure.

Okay, thank you. Very clear. And speaking of the dynamic environment and essentially a follow up on your commentary in regards to the higher inventory in food packaging. Are you referring to sort of a overall higher inventory in the market or is this specifically relating to Duni?

Yeah, it's hard to tell how peers or competitors are doing, but I think this is the comment we are doing is related to a group in Australia here in that part.

Yeah, I think We are not satisfied with that level. We see potential to take it down. And then this is one of the factors we can actually influence to improve the profitability. I think a lot of our peers have also struggled with high inventories when you need to shift out the portfolio rapidly to adapt to the new circumstances. So I think this is a general challenge, but of course we should do better and we are focusing quite a lot to take the inventory down.

there's a lot of work with you know shifting out PFAS for example which we've done of course you have steel products with that and and that will make a challenge sometimes in in in terms of how the customer buys and so on so but a lot of these shifts and that will probably continue a bit because materials are new materials are coming and going in a way got it very clear and then sorry

for us is that sugar cane fiber now has been we can be able to recycle that as paper I think that's a huge step actually yeah got it thanks so much and and if I may a final one here on the on the outlook in in Asia and the Pacific region what have you seen or what are some of the changes that you've seen in the market that has driven the improvement in demand and and Do you expect this trajectory to continue?

Yeah, I think, I mean, if we look at the projection and the research that's done is that Asia and Southeast Asia will grow more than other parts of the world and that the middle class is growing and demanding more, maybe premium products. I think we see a shift there. in restaurants and hotels in in in that part of the world that demands maybe more premium napkins for example with profile printed uh on them so i think there we see a demand and There are products actually that we are moving lines to our factory in Bangkok and there to produce more premium with the airline and so on. And that is a shift, I think, because those products are pretty new and innovative in that way. It's been maybe in Europe for many, many years, but there it's a new type of product and also with colors. I think that market is growing with the middle class, actually.

Okay. Those were all of my questions. Thank you for your time, Robert, among us. Thank you.

Thank you. And once again, if you would like to ask a question, please press star one. And I'm showing no further questions at this time. I'll pass the conference back to Robert.

Thank you. Yeah, thanks for the questions. And yeah, have a nice day and we'll see you soon again. Thank you.

And this now concludes today's presentation. Thank you all for attending. You may now disconnect.