Directors' report - 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 for 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 70% 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 17% 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 develop new products and concepts for new segments.

Market development 

During the year, there was a recovery in demand on most of Duni's markets within the hotel and restaurant industry, thanks to the improved macroeconomic climate. The long-term trend continues to indicate an increasing number of restaurant visits and an increase in the number of hotel nights, primarily driven by changed consumption patterns and economic growth. New restaurant concepts, as well as take-away food in grocery stores, take-away and quick service restaurants, are continuing to increase in number and these concepts are winning an ever greater share of the market.

On the other hand, market data (Nielsen) indicates a weaker demand for Retails product assortment on several of Duni's main markets. It can also be noted that several grocery store chains have increased their focus on low-priced products and private labels. Despite tough competition, Duni sees continued possibilities to expand its product range and its unique premium products.

Within Tissue, there was a slight fall in demand for airlaid to the hygiene products industry. The second half of the year was particularly weak.

Prospects

In the long term, demand is driven primarily by increased purchasing power combined with eating habits 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 single use premium quality solutions. Furthermore, growth within the take-away segment is expected to continue since the number of single-person households is increasing and urbanization is continuing.

In the short term, Duni believes that the main markets will continue to grow, although certain risks remain regarding economic stability in Europe. At the same time, prices for important input materials are at historically high levels, which may create inflationary pressure in the market.

Reporting  

The annual report covers the 2010 financial year. "Preceding year" means the 2009 financial year.

The reported operating income includes two non-recurring items: a restructuring charge of SEK 0 (-2) m as well as an unrealized valuation effect of electricity and currency derivatives of SEK 1 (54) m. 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 3,971 (4,220) m. Sales for the year fell by 5.9 percent, primarily attributable to the stronger Swedish krona. At unchanged exchange rates from the preceding year, net sales for the year would have been SEK 263 m higher, representing a slight increase in sales of 0.3 percent. Professional demonstrated stable growth, while Retail and Tissue experienced a weaker trend.

During 2010, sales in the Professional business area fell by 3.6 percent. However, at fixed exchange rates, sales increased by 3.7 percent. The business area showed growth in all regions, but it was strongest in Southern and Eastern Europe, where sales efforts yielded results, combined with an improved market situation in these countries.

Within the Retail business area, sales develop negatively and declined by 12.9 percent. At unchanged exchange rates from the preceding year, sales decreased by 6.2 percent. Demand remained weak on most markets. The market share in the Nordic region declined due to intense competition from the retail trade's private labels.

Sales within the Tissue business area fell by 8.2 percent. The second half of the year was weaker than the first, with reduced demand primarily from the hygiene products sector.

Income 

The underlying operating income was SEK 435 (436) m. At unchanged exchange rates, operating income for the year would have been SEK 49 m higher. Despite continued high prices for input materials, the operating margin strengthened to 10.9 percent (10.3). This was primarily due to sound cost control and lower logistics costs.

In June, a fire broke out at a machine in one of Duni's production lines in Skåpafors, Sweden. This resulted in a stoppage in production and reduced sales, primarily in the third quarter. However, following reported insurance compensation, the fire has had no material impact on income for the full year. The insurance matter was still not concluded by the end of the year, but has been reported based on best assessment under the items "Other operating income" and "Other operating expenses".

Financial items amounted to SEK -18 (-43) m, which represents an improvement compared with the preceding year, thanks to a reduced indebtedness and lower market interest rates. Income before tax was SEK 418 (444) m.

A tax expense of SEK 112 (108) m is reported for the financial year. During the year, the deferred tax asset relating to loss carry-forwards was reduced by SEK 37 (22) m.

Net Income for the year was SEK 306 (336) m. 

Investments  

The Group’s net investments amounted to SEK 236 (121) m. The investments are mainly related to the Group’s major production plants in Poland, Germany and Sweden. The increase compared with the preceding year is due primarily to the investment in a biofuel boiler and the acquisition of a previously operationally leased machine at the paper mill in Skåpafors. Depreciation and write-downs amounted to SEK 102 (102) m.

Cash flow and financial position 

The Group’s operational cash flow was SEK 296 (626) m. The change is attributable primarily to working capital, which has normalized during the year following the forceful measures taken in 2009.

The Group’s total assets on December 31 amounted to SEK 3,487 (3,489) m.

The Group’s interest-bearing net debt was SEK 582 m. On December 31, 2009, the interest-bearing net debt was SEK 631 m. The cash surplus and positive cash flow after investment activities have been used to repay SEK 75 m of external loans.

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 very important in order for Duni to achieve satisfactory 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 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.

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 

In accordance with an adopted environmental strategy, Duni works according to policies and goals covering development and information concerning products, efficiency and controlled production, as well as knowledge 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.

Duni has also been granted FSC (Forest Stewardship Council) certification regarding the sale, production and distribution of, among other products, napkins, table covers and serving products. This means that Duni's cellulose 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 hold 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

During the year, the Board of Directors comprised five members. All members were re-elected at the annual general meeting on May 5, 2010. The Board also has two employee representatives and one alternate employee representative. During the year, the Board held eight meetings at which minutes were taken. For further information regarding the work of the Board, see the Corporate Governance Report.

Employees 

Initiatives and contributions by personnel are of crucial importance 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, 2010, there were 1,914 employees. On December 31, 2009, there were 1,906 employees.

Remuneration for the CEO and senior executives

For more information regarding remuneration to the CEO and senior executives and relevant guidelines, see the Corporate Governance Report and Note 13.

Foreign companies and branches

Duni conducts operations under its own management and has employees in 17 European countries.

Important events since December 31, 2010

No important events have occurred since December 31, 2010.  

• The Group
• The Parent Company
• Ownership and share
• Proposed allocation of earnings
• The Board’s assurance and signatures