Strength creates opportunities

Fredrik von Oelreich has been CEO of Duni since 2007.

The recession had a firm grip on the past year with the global economy shrinking by almost one percent, and in the west by no less than four percent. Companies around the world have had to struggle to show a profit. Even if most countries are now on the way out of the recession, many analysts do not expect any rapid recovery.

In light of this, it is particularly pleasing to be able to report once again a year of strong finances and a good result.

Nonetheless Duni faced tough market conditions in 2009, with sales declining by around 3% at fixed exchange rates. The decline was relatively modest when compared with many other industries. The market was weak mainly during the first half of the year. Demand stabilized gradually during the second half.

Volumes declined slightly across the board, but Duni's core markets withstood the recession relatively well. The Professional business area and the German market reported particularly pleasing results. Income improved gradually within Retail, while Tissue experienced a clear improvement during the second half of the year.

Favorable exchange rates contributed to Duni being able to report increased sales as well as improved earnings. At the same time, I wish to emphasize that we have strengthened our position on many markets. The underlying operating income of SEK 436 m and operating margin of 10.3% demonstrate the strength of Duni's brand, unique concepts and close relations with our customers.

Substantially reduced net debt

The financial crisis and accompanying recession have demonstrated the importance of solid and stable finances. Thanks to healthy earnings and successful work in reducing the working capital, primarily through a substantial reduction in inventory, Duni generated a very strong cash flow of SEK 626 m during the year. This meant that the net debt was reduced from SEK 1,100 m to SEK 631 m at the end of 2009. All in all, this provides financial flexibility and strength which create strategic freedom to act.

Strong development within Professional

Sales within our largest business area, Professional, grew by 4.1 percent, thereby clearly demonstrating our position as the leading company within the premium segment.

The important German market showed strong resilience in face of the weak economy and, towards the end of the year, stabilization could be discerned on most markets, with the exception of Eastern Europe. However, we take a positive view of the long-term potential in that region. Currently we are strengthening our presence on the Russian market by a build-up of our own sales organization in the Moscow area. In times such as these, we see interesting opportunities to establish a platform for future growth.

Aided by a weak Swedish krona but also thanks to a successful defense of our leading market positions and the cost-cutting measures that were implemented early on, Professional succeeded in increasing operating income from SEK 368 m to SEK 402 m. Lower prices for input materials also played an important role in supporting margins.

Private consumption has been subdued in the wake of the recession and, consequently, 2009 was also a challenging year for the Retail business area. Nevertheless, we are able to report relatively stable sales. Income continues to improve, but at 2.2% the operating margin has not yet reached a satisfactory level.

Duni strengthened its positions during the year on the tough UK market and the work of focusing on customer profitability has yielded results. The Nordic region has also improved and a new co-operation with an external partner within sales is creating new conditions for growth on the Swedish market commencing 2010. It is also pleasing that approximately 600 ICA stores in Norway have chosen to carry Duni's range.

Within Retail, focus is on measures for profitable growth on existing markets. A continuous improvement in the product mix and diligent product range optimization work constitute important elements in this effort.

2009 was a turbulent year for the Tissue business area, with a weak first half resulting in production stoppage at the mills in order to avoid inventory buildup. The main causes for this were inventory reduction and reduced sales to major external customers. The second half of the year brought with it an increase in demand, particularly within the hygiene products sector, and Tissue ended 2009 with sales largely unchanged. However, the operating income was detrimentally affected by production stoppage and a less favorable product mix.

Duni has succesfully managed the recession

Provided that we have now passed the bottom, we can conclude that Duni withstood the recession well. The reason for this is that we operate on markets which, relatively speaking, are less sensitive to a recession, combined with Duni's unique business model and strong sales organization.

The trend towards replacing linen napkins and linen table covers with premium quality tissue-based products proceeds also in less favorable economic times. In addition the takeaway segment continues to expand as a result of changing lifestyles.

The cost-cutting measures came into full effect during the second half of 2009 and the previously announced savings of some SEK 50 m on a full-year basis were achieved. This underlines the importance of adapting costs early on and with sufficient force when the market conditions change rapidly.

Focus on the environment

During 2009, Duni raised its ambitions within the environmental area. This is based on the new environmental policy containing ambitious targets which was adopted at the end of 2008. We are now increasing the activity level and, here too, we strive to be an innovative industry leader. Products, production and distribution shall have as little impact on the environment as possible. The new biofuel boiler, which is expected to enter into commission during the second half of 2010, will provide good assistance to Duni in achieving its targets. In addition, an environmental manager for the entire group has assumed office during the year to increase efficiency in the environmental work. During 2009, Duni received FSC-certification regarding 90 percent of its paper-based products. This means that the raw materials are sourced from environmentally sustainable forests (FSC - Forest Stewardship Council).

Opportunities and challenges

The bottom of the recession has now likely been passed but developments in the near future are uncertain and we expect a slow recovery. Despite the decline in the economy, prices for important raw materials have continued to increase rapidly recently, and this represents a challenge since demand remains at a low level.

At the same time, there are opportunities for geographic expansion and diversification towards new HoReCa concepts. New, innovative products and concepts create conditions for continued success. Duni today is financially strong and well positioned to tackle challenges and to exploit opportunities in the market.

Malmö, March 2010

Fredrik von Oelreich

President and CEO

• This is Duni
• The Year in Brief
• CEO statement
• Market & Strategy
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• Personnel
• Environment
• Financial targets
• The Share

Fredrik von Oelreich has been CEO of Duni since 2007.