The Group

Duni is one of the leading companies in Europe within attractive quality products and concepts for table setting as well as packaging for take-away. The Group enjoys a leading position thanks to a combination of high quality, established customer relations and a well-reputed brand, as well as strong local presence in Europe. Operations are conducted within three business areas: Professional, Retail and Tissue.

In the Professional business area, Duni offers concepts and products primarily to hotels, restaurants and catering companies. The offering includes table and serving products such as napkins, table covers, placemats, candles, as well as serving products such as glasses, cups and cutlery, produced either in plastic or paper. Duni is a market leader in the Benelux countries, the Nordic region, Germany, Switzerland, France and the UK. The Professional business area also offers customer-adapted packaging solutions for food storage in conjunction with sales of take-away meals and catering. As a niche player within this area, Duni enjoys a leading position in the Nordic region. The Professional business area accounts for approximately 68% of Duni’s sales.

Within the Retail business area, Duni offers consumer products to, primarily, the retail trade. The range includes napkins, table covers, candles, glasses, cutlery and, to an increasing extent, various product range combinations. The products are marketed primarily under the Duni brand. To a limited extent, Duni also develops and manufactures products for customers which market them under private labels. Duni enjoys a leading position in the Benelux countries, the Nordic region, Germany, Switzerland and the UK. The business area accounts for approximately 19% of Duni’s sales.

The Tissue business area produces airlaid and tissue based material which is used in products within the other business areas and is a subcontractor to external customers mainly within the hygiene products industry. Tissue accounts for approximately 13% of Duni’s sales.

Product and concept development

Within product development, Duni’s work involves new designs and color schemes, as well as new materials and solutions. Duni focuses on product and concept development, and possesses a unique strength within form, design and functionality. Duni’s innovation process is characterized by the ability to quickly and flexibly develop new collections, concepts and products which create a clear added value for the various customer categories on the market.

Duni primarily engages in development within the market segments in which the Group traditionally enjoys a leading position. At the same time, the Group continues to further develop new products and concepts for new segments.

Market development       

During the year, demand on most of Duni’s markets was relatively weak due to the state of the economy. Demand was particularly weak during the first half of the year, with the situation stabilizing somewhat during the second half of the year.  
   
The hotel and restaurant industry was negatively affected by the weak economy. However, the long-term trend continues to point towards an increase in the number of restaurant visits and an increase in the number of hotel nights, primarily driven by changing patterns of consumption and economic growth. New restaurant concepts, as well as ready-to-eat food in grocery stores, take-away and fast-food restaurants, are continuing to increase in number and these concepts are gaining ever greater market shares.
  
During the year, demand within the Retail business area was relatively stable on most markets. However, we were able to note that on certain markets several grocery chains have increased their focus on low price products, in response to the state of the economy. At the same time, the trend in the grocery retail trade towards developing and marketing private labels within Duni’s segment has stagnated somewhat, and over time we perceive that branded products can regain space in the product range.

Within the Tissue business area, demand from the hygiene products industry for airlaid material decreased. The first half of the year in particular was weak, with a recovery during the second half of the year.

Prospects

Demand in the long term is driven primarily by increased purchasing power combined with changing behavior patterns which are leading to an increasing share of meals being eaten outside the home. In addition, demand for Duni’s products is positively affected by the fact that an increasing number of restaurants choose to replace linen with disposable premium quality solutions. Furthermore, growth within the take-away segment is expected to continue since the number of single-person households increases and urbanization continues.                   
In the short term, there appears to be a slow recovery from the weak market situation. At the same time, prices of important raw materials have increased rapidly during the second half of the year, which will represent a challenge since demand remains weak.

Reporting

The annual report covers the 2009 financial year. “Preceding year” means the 2008 financial year.
         
The reported operating income includes two non-recurring items: a restructuring charge of SEK 2 m (41), attributable primarily to production rationalization measures, as well as an unrealized valuation effect of electricity and currency derivatives of SEK 54 m (-48). The operating income is commented on in the text below, excluding these non-recurring items.

Non-recurring items

Sales

Duni's net sales amounted to SEK 4,220 m (4,099). Sales for the year entail an increase of 3.0 per cent, an improvement which is attributable to the weak Swedish krona. At unchanged exchange rates from the preceding year, net sales would have been SEK 230 m lower for the year, i.e. a decrease in sales of 2.7 per cent.
        
In 2009, Duni saw an increase in sales of 4.1 per cent within the Professional business area. However, at fixed exchange rates this corresponds to a decline in sales of 2.8 per cent. Since the market trend during the year was generally weak, this reflects a sales trend which was somewhat better than the market. The weak economy had an unfavorable impact on sales in Southern and Eastern Europe, while several markets in Central Europe, particularly Germany, demonstrated rather stable sales. Packaging solutions for take-away meals continued to develop favorably.

Within the Retail business area, sales developed positively with an upturn of 1.9 per cent compared with the same period of the preceding year. At fixed exchange rates, this corresponds to a decline of 3.0 per cent. Due to structural changes on the market, the Nordic region has experienced the weakest development.
  
Sales within the Tissue business area declined by 1.5 per cent, primarily due to low delivery volumes during the second quarter.

Income

The underlying operating income was SEK 436 m (414). At unchanged exchange rates from the preceding year, the operating income would have been SEK 54 m lower for the year.
The improvement in income is due to lower raw materials prices and implemented cost savings, in addition to exchange rate fluctuations. Lower volumes have had a negative impact on income.
        
Net financial items amounted to SEK -43 m (-75). The interest expenses are lower than the preceding year thanks to a reduced indebtedness and lower interest rates. Income before tax was SEK 444 m (251).

A tax expense of SEK 108 m (60) was reported for the financial year. During the year, the deferred tax asset relating to loss carry-forwards was reduced by SEK 22 m (45). Income for the year for the continuing operations amounted to SEK 336 m (191). Income from discontinued operations amounted to SEK 0 m (6). The Group's total income was SEK 336 m (197).

Investments            

The Group's net investments amounted to SEK 121 m (139). The investments related primarily to the Group's larger production plants in Poland, Germany and Sweden. Depreciation and write downs amounted to SEK 102 m (97).            
During the year, a decision was taken to invest in a new biofuel boiler amounting to approx. SEK 55 m at the paper mill in Skåpafors. The new boiler will reduce carbon dioxide emissions since the use of fossil fuel will be significantly reduced. It will also reduce waste disposal. The biofuel boiler will be operational during the second half of 2010.    

Cash flow and financial position             

The Group's operational cash flow amounted to SEK 626 m (274).

The Group's total assets as per December 31 amounted to SEK 3,489 m (3,811). The reduction is due primarily to the fact that Duni has implemented systematic measures over time in order to improve the supply chain and an efficient follow up of accounts receivables which has had a significant impact on working capital, which thus is reflected in the strong cash flow.           
The Group's interest-bearing net debt was SEK 631 m. In December 2008, the interest-bearing net debt was SEK 1,100 m. Net repayments on external loans during the year amounted to SEK 391 m. 

Operational and financial risks

Duni is exposed to a number of operational risks which it is important to manage.

The development of attractive product ranges, particularly the Christmas collection, is extremely important in order for Duni to achieve satisfying sales and income growth. Duni addresses this issue by constantly developing its range. Approximately 25% of the collection is replaced each year in response to, and to create, new trends.

A weaker economic climate over an extended period of time in Europe could lead to a reduction in the number of restaurant visits, reduced consumption by consumers and increased price competition, which can impact on volumes and gross margins.

Control and management of fluctuations in prices of raw materials and energy have a major impact on Duni’s competitiveness.

Due to the fact that Duni does not apply hedge accounting, Duni has an increased accounting exposure, since unrealized reappraisals of derivative instruments are reported in the income statement. During the second quarter of 2009, the Board decided to cease hedging of operational cash flows.

Duni’s finance management and its handling of financial risks are regulated by a finance policy adopted by the Board of Directors. This work is presided over and managed by the Group’s Treasury, which is included as a unit within the Parent Company. The Group divides the financial risks into market risks, consisting of currency risks, price risks and interest rate risks, as well as credit risks and liquidity risks. These risks are controlled in an overall risk management policy which focuses on unforeseeability on the financial markets and endeavors to minimize potential adverse effects on the Group’s financial results.

With respect to Duni’s long-term financing, since 2007 this has been secured through a financing agreement which extends until 2012. Regarding risk management, see also Note 3 .

Legal disputes

Upon closing of the accounts, there were a few disputes with customers and suppliers involving small amounts, as well as regarding intellectual property rights. Provisions have been made in the annual accounts which, in the management’s opinion, cover any negative outcome of these disputes.

Environment

Towards the end of 2008, Duni adopted a new environmental strategy with policy and targets including development and information concerning products, efficient and controlled production, as well as know-how and communication from an environmental perspective.

Environmental and quality systems in accordance with ISO 14001 and ISO 9001 have been implemented and certified at all of the Group's production units. Suppliers are evaluated in accordance with the Group's Code of Conduct, which covers both environmental and social responsibility.

During 2009, Duni was awarded FSC certificate DNV-COC/CW – 0000148 regarding sales, manufacture and distribution of, among other things, napkins, table covers and serving products. The certificate ensures that Duni's paper products are sourced from sustainable forests.

Rexcell Tissue & Airlaid AB conducts two operations which are subject to permit requirements pursuant to the Swedish Environmental Code. The Group holds permits for the production of 45,000 tonnes of wet laid tissue per year and 26,000 tonnes of airlaid tissue per year at the mill in Skåpafors and 10,000 tonnes of airlaid tissue in Dals Långed. The mills holds a permit issued by the Administrative Board in Västra Götaland County regarding emissions of carbon dioxide, CO2. The allocation of emission rights involves 2,779 tonnes in Dals Långed and 14,154 tonnes in Skåpafors.

The Board’s work

Pursuant to the Articles of Association, the Board of Directors shall comprise at least three and not more than twelve directors. During the year, the Board comprised six directors until the annual general meeting, and thereafter five directors and two employee representatives with one alternate. During the financial year, the Board held 10 meetings at which minutes were taken.      
           
At the Annual General Meeting held on May 6, 2009, Tomas Gustafsson was elected as a new director, and Anders Bülow was elected Chairman of the Board after the previous Chairman, Peter Nilsson, declined re-election.
        
Rules of procedure set forth guidelines for the work of the Board and describe the allocation of work between the Board and the CEO. The guidelines for the Board’s work shall ensure that the Board possesses comprehensive information and that all important aspects of the Group’s operations are addressed. The rules of procedure are reviewed and adopted by the Board each year. The auditors report to the Board their observations from the audits carried out and their assessment of the Group’s internal control.           
The Board has two committees: a Remuneration Committee and an Audit Committee. The Remuneration Committee addresses issues concerning remuneration to senior executives and negotiates with the CEO regarding the latter’s remuneration, based on guidelines adopted at the annual general meeting. On May 6, 2009, the general meeting adopted the guidelines for the coming year proposed by the Board regarding the CEO and other senior executives; see also Note 13 .

The Audit Committee prepares the Board’s work by reviewing routines regarding the Group’s risk management, governance and control, financial reporting and tax situation. In this work, the Audit Committee maintains regular contacts with the CFO and the Company’s auditors.

Employees

Initiatives and contributions by personnel are of crucial significance for Duni’s continued development, presentation and marketing of successful products and concepts within table setting and packaging for take-away meals. Thus, Duni works regularly to recruit and develop employees. Development work is carried out with respect to both skills and management development and Duni endeavors to ensure that a personal development plan is in place for each employee.       
          
On December 31, 2009, there were 1,906 employees. In December 2008, there were 1,952 employees. The reduction in the number of employees is largely a result of the rationalization measures initiated towards the end of 2008.

During the year, Duni held a development and training program for some ten younger managers and employees.

Remuneration for the CEO and senior executives

It is proposed that the annual general meeting adopt the following guidelines regarding remuneration for senior executives:

“Remuneration for the CEO and the other senior executives shall normally consist of basic salary, variable salary, and other benefits and pensions. The total remuneration package shall be on market terms and competitive and be related to responsibility and authority. The variable salary shall be based on the outcome relative to defined and measurable earnings targets. The variable salary shall never exceed the basic salary. In the event of termination of employment initiated by the Company, salary during the notice period together with severance pay shall not exceed 18 months’ salary. Pension benefits shall be contribution-based, in the absence of any specific reasons to the contrary. Senior executives shall normally retire at the age of 65, but in no case below the age of 62. The Board of Directors may deviate from these guidelines only where there are special reasons in an individual case.”

For more information regarding remuneration to the CEO and senior executives, see also Note 13.

Foreign companies and branches

The Group conducts operations in 17 countries, including the Parent Company’s branch in Turkey. However, this branch is in the process of being wound up.

Important events since december 31, 2009

No important events have occurred since December 31, 2009.

• The Group
• The Parent Company
• Ownership and share
• Proposed allocation of earnings