Duni AB (publ) (DUNI) Earnings Call Transcript

Welcome to the Duni Q3 presentation for 2026. [Operator Instructions] Now I will hand the conference over to the CEO, Robert Dackeskog; and CFO, Magnus Carlsson. Please go ahead.

Thank you. And yes, welcome, everyone, to Duni Group's third quarter presentation. Our theme today is operational progress in a continued challenging market. We restored delivery stability and returned to organic growth, while logistic costs and weak European restaurant demand continue to affect profitability of the company. Today, in the agenda, we'll cover the quarter's highlights, the logistic transition and development in our offering, followed by market conditions. We will also review group and business area performance, and we'll then discuss our strategy and targets and then a detailed financial run-through and our priorities for the rest of the year before opening for questions at the end. Q3 then in brief. So, the quarter brought clear progress in delivery performance. Organic sales growth reached 1.7%, supported by Australia and higher napkin volumes in Europe. So growth was 3%, including acquisitions and currency effects. And we have worked through the backlog during the summer, which supported sales as delivery capability improved then in the quarter. The quarter then carries cost for that we have 2 warehouse solutions and distribution to customers remain less efficient than we want. Higher fuel prices added pressure. But yes, our direction remains unchanged. We are completing the operational transition while developing the offering and working on strengthening our market positions going forward. So looking into the main activities in this quarter. And, of course, the most important change since the second quarter is the greater stability of our logistics operation. By the end of July, we had cleared the back orders accumulated during the spring. The focus then shifted a bit towards delivery precision and improving the underlying logistics processes. We'll come back to that during this. We're also postponing the transfers of German volumes in Q2, gave us some room to stabilize the operation. During Q3, we are resuming that transfer, and we will complete the remaining German volumes during the fourth quarter before year-end. And then, of course, our service recovery and cost recovery followed a little bit different time lines here. So we have resolved the earlier delivery issues. But then, of course, dual warehouses arrangements and inefficient distribution still affect the income. Freight costs remain a priority to work with. The freight costs are driven by that the utilization in the trucks are not 100% and the broader fuel prices pressure that we can see in the market continues. We expect the transition-related effect to decrease over the coming quarters. And alongside this work, we continue the sales and administration efficiency program we announced in Q2. And of course, our immediate priority is to complete the transfer now in a controlled way and improve efficiency without losing the delivery stability we have regained during the quarter. Other key activities is that in Dining Solutions, we have preorders ahead of the Duni Lighting Solutions platform, which was launched in 1st of October, and that indicates a strong initial interest from restaurants and wholesalers across several European markets. These are, of course, early indication of interest, rather than evidence of full quarter of launch dates, but that will come, of course. And also the recently introduced Softiq and Velviq products are also developed well in the South of Europe. Our concept Duniform brings together machines, packaging and service with advisory support for customers and large parts of the range transition to pure polypropylene mono material, improving recyclability and compatibility with existing recycling system, which is very important. The new brand concept makes that integrated offer much clearer. The new PPWR-related requirements enter into force during the quarter, and we have prepared our operation and the full portfolio over several years to meeting this, which we are doing. And if we move on to the market development, and I think this is a picture we all have seen before, it's the German numbers, the German DEHOGA numbers that shows that the market remains difficult, especially then for the food service restaurant. So same picture as in the past quarters. And if we also look into a little bit into the other countries than Germany, it's a little bit the same trend. It is the food service restaurants that continue to face pressure. We see that the European food service traffic remains broadly flat in the countries. We had the summer here. There is one area that actually are growing is the morning meal. It's actually gaining share globally. That's maybe a longer-term trend we've seen, but still a challenging market. All right. If we look into the key financials for the group, net sales reached SEK 2.033 billion compared with SEK 1,972 million last year, and that is a 3% growth and 1.7% was organic and 0.3% came from acquisitions and then 1.1% from currency. And at constant exchange rates, sales increased by 2%. The operating income was SEK 133 million compared versus last year with SEK 168 million. And of course, the higher sales, therefore, did not translate into the higher profitability. And as I said before, logistics and freight costs, together with a little bit of product mix explained that main pressure on the margins. If we look a little bit into net sales and outlook in a little bit more detail for the group then on sales, better delivery capability helped us clear the remaining back orders and Australia continued to perform well, while European restaurant traffic remained weak and customers focused on controlling costs. We see that, of course, the Middle East remained under pressure from the geopolitical situation and lower activity in the hotels and restaurants in that area. On income, the extended warehouse implementation then created cost, as mentioned before, for the dual solutions. Freight costs also reflected both from fuel prices and less efficient distribution then. Savings program we have in Europe contributed positively and helped offset increased IT costs from ongoing investments and Australia contributed positively, while Middle East then did the opposite for the operating income. So all in all, positive with organic growth in the quarter and that we cleared the backlog, but freight inefficiency and increased higher fuel cost line costs. Now handing over to Magnus to go through a little bit the BAs.

Thank you for that, Robert, and good morning, everyone. So as usual, I'll take you through the 2 business areas in a little bit more detail. I start off with Dining Solutions. So net sales, as you can see, amounted to SEK 1.2 billion, basically flat from last year. Operating income declined from SEK 140 million to SEK 92 million. That's a decrease of SEK 48 million. And the operating margin came in at 7.5% compared to a strong 11.5% last year. So Dining Solutions carries the largest share of the logistics transition costs, and this is the main explanations for the decline. So on the next slide, I will walk you through the main drivers here. So, starting with sales, improved delivery performance allowed us, as Robert said, to clear the remaining back orders from the second quarter. And we saw an increased napkin volumes in Europe measured in pallets. So that was actually slightly positive. However, part of this volume that reflects the catch-up from Q2. So underlying demand from our brand and premium assortment remains soft. So we also saw at the end of the quarter once the backlog had been cleared. And as Robert said, the market itself gives no support. And if you look on the numbers, as Robert showed, visits to the full-service restaurants in Germany are actually down 6.1% from January to August, the latest number and that is equal to now being around minus 25% versus 2019 level, so quite significantly. So restaurants continue to face weak consumer demand and elevated costs for labor, food and energy. So against this backdrop, private label demand remains strong as customers continue to focus on the cost control. We are winning these volumes, but at a clearly lower margins than our branded products. Geographically, sales to Germany remained weak, while we generated growth in Italy, supported by our cooperation with SETI, that's an acquisition we did 2 years ago. And this illustrates the value of being a more balanced geographically having a more balanced footprint. Business in the Middle East continued to be negatively affected by the instability we all see. Turning to operating income. The decline of SEK 48 million, as mentioned, is mainly explained by 3 factors. First, as we have mentioned several times, logistic costs, double warehousing and inefficiencies in the transition, combined with elevated fuel prices that has led to clearly higher warehousing and transport costs. And the majority sits here in Dining Solutions. Second, mix and price, the shift within branded products towards value assortments, a higher share of lower-margin private label deals and higher customer rebates all put pressure on the gross margins. And third, Middle East, we see activity being at a distinctly lower level in this region. But there was also some commercial progress alongside these pressures. We secured several customer contracts in the core business, Softiq and Velviq, as Robert mentioned. The Duni Lighting Solutions launch adds another element to the offering. And these developments support the future business, while the current financial priority remains restoring a better relationship between the sales, the product mix and the cost base. So if we summarize, delivery performance has somewhat normalized and volumes have recovered from a disrupted Q2. The challenge remains that the share of branded sales, which together with the transition cost explains why margins are well below our ambition. So if we now move into Food Packaging Solutions, focusing on sustainable food packaging. So there, we see that the net sales increased to SEK 860 million from SEK 751 million last year. That's an increase of 5.1% in comparable currencies. We also see that operating income improved from SEK 27 million to SEK 41 million, and that's an increase in the margin from 3.7% to 5%. So if we look a little bit more in details, growth was driven by Australia and our acquired companies. In Europe, sales were broadly stable with growth in Denmark and Norway were offsetting a weaker development in Germany. Duniform has been mentioned a couple of times lately, that's our all-in food packaging concept that continued to outperform the rest of the takeaway portfolio, supported by the development in machines. We have services here and packaging solutions. So during the quarter, Duniform also launched a brand-new concept and mono material solutions with improved recyclability, very important. So the improvement in operating income is mainly explained by gross margins, particularly in Europe, but also in BioPak Group, continue to grow and improving their gross margins. But you can also see that the freight cost was burdening around SEK 7 million only in Australia. We also have higher indirect costs here. And lastly, with the new PPWR, the packaging waste regulation, these requirements coming into force, we are well prepared. We have a portfolio that is predominantly fiber-based, and that is a structural advantage versus competitors when we see that the regulation tightens. So if we just summarize quickly, Food Packaging showed a clear margin improvement versus last year. Margins remain below our target, must be said, but the improvement is driven by gross margin rather than one-offs. So I hand over back to Robert.

Thank you, Magnus. Yes. And if we look at the next page, our strategic framework, then that remains unchanged. The quarter's activities is directly connected to this. And we're -- yes, we're really proud of the new lighting platform and our Duniform development, and those will expand our customer offering. SETI, as Magnus mentioned, in Slovenia, supports a stronger presence in the Southern Europe, while BioPak continues to strengthen its Australian position. So completing the logistic transition and implementing then the efficiency program addresses operational performance. And of course, sustainability remains integral to that direction. The targets cover circular input materials and emissions together with workplace safety and responsible supplier practices. These measures allow us then to follow progress beyond the financial results, of course. And if we move into our targets then, a number of targets. And of course, we can see on sales growth and operating margin, we are a bit way off those, of course, as you all know, in the recent 12 months here, but really working on a lot of activities to strengthen that, of course. If we look into climate target, there, we already reached the target for the future and really had a good change since 2019. That was a bit of a short summary, and we move into the financials.

Thank you, Robert. So if we dig into the numbers now and start by the income statement. So we saw that net sales increased by 3.1%. In comparable currencies, growth was 2%, of which organic growth was 1.7%. So there you have the numbers. Operating income amounted to SEK 133 million compared to SEK 168 million last year. It's a decline of SEK 35 million, and the operating margin was 6.5% compared to 8.5%. Again, to repeat ourselves a little bit, the main driver again is the logistics transition. It had a cost impact of approximately SEK 25 million in the quarter, around a third from double warehousing and around two-thirds from higher freight costs linked to the warehouse quality. But in addition, price and input costs, mainly higher customer rebates and energy, as well as higher transportation costs, driven by elevated fuel prices and tariffs has reduced the gross profit. So although pressure on the mix and increased input prices, gross profit was mainly negatively impacted by logistics, less so from other factors because we have efficiency savings and good discipline in pricing, and that has mitigated some of these negative factors. Also mentioned that currency has contributed positively by around SEK 10 million. All in all, gross margin declined to 22.3% from the relatively strong 25.2% last year. On indirect costs, our cost savings measures has contributed positively and more than offset inflation and higher IT cost in Europe. So the cost increase is thereby from Australia, but this also reflects a growing market. Total indirect cost as share of sales was slightly lower than last year, and that is important. Restructuring costs of SEK 21 million were charged in the quarter and were excluded from the operating income. I also mentioned that financial net was minus SEK 48 million compared to SEK 14 million last year, mainly reflecting higher net debt and interest on lease liability related to the new setup we have. Net income amounted to SEK 32 million and earnings per share were SEK [ 0.70 ] compared to a little bit more than SEK 2 last year. So for the first 9 months, net sales amounted to SEK 5.6 billion, down with roughly SEK 100 million and operating income to close to SEK 300 million, also down by SEK 100 million. That corresponds to a margin of 5.3% versus 7%. So if we look a little bit on the financial areas, on the business areas on the financials. In Dining Solutions, operating income for the first 9 months amounted to SEK 205 million compared to SEK 341 million last year, and that's a margin decline to 6.2% from close to 10%. So on a rolling 12-month basis, the margin is 7.5% compared to 10.1% for the full year 2025. So it is a sharp decline, and it's concentrated in the second and third quarter and it's mainly explained by the logistic transition and the weaker share of branded sales, so not by a structural change in the business. If we look in the Food Packaging Solutions, the trend is opposite. Operating income for the first 9 months has increased to SEK 92 million from SEK 57 million and the margin to 4% from 2.6%. So on a rolling 12-month basis, the margin is also 4% compared to 2.9% for the full year 2025. So that's also driven by a steady improvement by -- in the gross margin. For the group, the rolling 12-month operating margin is 6.1% compared to 7.3%. All right. For both business area, this is clearly below the 10% level we have. In Dining Solutions, the gap is primarily about volumes, branded mix and temporary, I must say, transition costs. And we know from experience that operational leverage supports margins clearly once the volumes recover. In Food Packaging, the work is about continuing to safeguard our gross margins, scale the acquired businesses and work with the cost base. So if we now go over to the cash flow, just some words on that. So operating cash flow was SEK 44 million compared to SEK 229 million. Operating EBITDA declined to SEK 175 million from SEK 207 million, while capital expenditure was also clearly lower in the quarter, reflecting the stricter prioritization of investments we have now. So the main difference is working capital, which had a negative impact of SEK 106 million compared to a positive contribution last year. Accounts receivable has increased by SEK 110 million, and that's reflecting a higher sales towards the end of the quarter as back orders were cleared. Inventory has increased by SEK 55 million, partly value driven by higher input prices. So reducing inventory is a clear priority now going forward. So once the logistics setup has stabilized, and we expect working capital to be a source of cash in the fourth quarter, which is seasonally our strongest quarter for cash flow. So finally, the financial position. Net debt amounted to SEK 2.8 billion, and that's an increase versus SEK 1.6 billion at year-end. Again, roughly SEK 600 million of the increase is a lease liability related to our long-term logistics partnership. This is not traditional interest-bearing bank debt that should be considered when you look on the net debt in relation to other key numbers. So the remainder reflects the dividend, acquisitions and the weak cash flow during the first 9 months. Strengthening cash flow and reducing net debt is, of course, here our top financial priority for the coming quarters. Thank you for listening. I will now hand back to Robert for concluding remarks.

Thank you. Yes. Some summary here. We entered the final quarter then with a more stable logistics operation and with growth, selling more napkins, which is important for us, of course, in this market. Looking at the profitability that, of course, as we said here, remains under pressure from the logistics and freight costs and a bit less favorable product mix even if we're selling more napkins then. And we expect the logistics transition and related effect cost to decrease gradually here. And then at the same time, we are continuing to develop the business, a lot of focus on the lighting launch, the Duni Lighting Solutions portfolio offering and our stronger Southern European presence and also, of course, continued growth in Australia to support that effort. And yes, of course, all the changes we are doing in production, logistics, and then with the portfolio should give us a stronger operational platform entering into 2027. And of course, our focus is to convert that progress into more efficient operations and a better financial performance in the end. So thank you for listening in, and we welcome your questions. Thank you.

[Operator Instructions] The next question comes from Fredrik Reuterhall from SEB.

I had a question regarding the mix for the SEK 25 million logistics cost, but you gave the split there. And as I understood or heard correctly, it's a third due to double warehousing and two-thirds of higher freight costs. What is the view on the higher freight costs going forward? Is this a level that will be consistent? Or will it come down over time?

Yes, it should come down because today, we have some inefficiencies when we load the trucks with the fill rate, but also the cost for forwarders has been a bit higher than it should be. So that's something both those we are working on to take down.

Okay. Good. And how large share of the Q3 sales is backlog catch-up, would you say, just rough number?

Yes, it's always hard to say in a way because some customers order and maybe don't order, or maybe they order again and so on. So it's a bit hard to say. But...

No, I would say a couple of percentages. It's a minor part. It's an important part, but it helps the organic growth, so to say. So it supports that one.