Directors' report – The Group

Duni is one of the leading companies in Europe within attractive, quality table setting products and concepts, as well as packaging for take-away. The Group enjoys a leading position thanks to a combination of high quality products, established customer relations and a well-reputed brand, as well as a strong local presence on most European markets. 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, tablecoverings, 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 customized 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 73% of Duni’s sales.

Within the Retail business area, Duni offers consumer products primarily to the retail trade. The range includes napkins, tablecoverings, 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 16% 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 11% 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 engages in development within the market segments in which the Group enjoys a leading position. At the same time, the Group continues to develop new products and concepts for new segments.

The end of 2011 saw completion of the development of Evolin ^® , a new and revolutionary tablecovering material which combines the feel and look of textile and linen tablecoverings with the advantages of the single-use product. Significant resources have been invested in the development work, which has resulted in an entirely unique, patent-pending product manufactured from a hybrid material based primarily on a renewable raw material. Evolin is aimed at those restaurants and catering firms that currently use linen. 

The advantage is that Duni is thereby entering a market segment which is significantly larger than Duni's current addressable market. The product is being launched in stages during the first quarter of 2012, with an accelerated roll-out thereafter. This represents a very exciting phase in Duni's development, since the Company's successes are largely based on unique premium materials such as Dunilin ^® and Dunicel ^® .

Market development

The recovery in demand which was seen in 2010 has leveled off somewhat in 2011 and, especially towards the end of the year, the market was characterized by a degree of uncertainty attributable to the Euro and sovereign debt crisis in Europe. However, the long-term trend points towards more visits to restaurants and an increase in the number of hotel nights, driven primarily by changed consumption patterns and economic growth. New restaurant concepts, such as ready prepared meals in grocery stores, take-away and fast service restaurants, are continuing to grow in number and these concepts are gaining an ever larger market share. On the customer side, we are witnessing continued structural changes within the restaurant industry, with restaurant chains that operate under a common brand growing faster than the market in general. This is a trend which benefits Duni's sales of customized concepts and, during the year, led to the initiation of cooperation projects with several new customers within the segment.

On the other hand, market data (AC Nielsen) indicates stagnating demand within Duni's product categories in the retail sector. One important factor is that several grocery retail chains are focusing increasingly on low price products and private labels. Despite tough competition, apart from the loss of a major private label customer Duni has enjoyed stable growth and, particularly in England and Benelux, also increased its market shares. This is largely due to an increased customer focus with an optimized customer offering and a sharper product range.

A degree of slowdown was noted within the hygiene products sector in the Tissue business area, due in part to inventory reduction at our customers.

Prospects

In the long term, demand is driven primarily by increased purchasing power combined with changed 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 are choosing 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 householders is increasing and urbanization is continuing. With the launch of Evolin, a potentially very large new market is opening up for Duni.

As regards the macroeconomic perspective for 2012, a degree of slowdown in the economy is expected in Europe in light of the problems associated with high sovereign debt levels in a number of countries and the attendant Euro crisis. This may affect volume growth to some extent, but may also bring with it lower prices for input materials.

Reporting

The annual report covers the 2011 financial year. "Preceding year" means the 2010 financial year.

The reported operating income includes two non-recurring items: a restructuring cost of SEK 6 (0) m as well as an unrealized valuation effect of electricity and currency derivatives of SEK -10 (1) m. The operating income is commented on in the text below, exclusive of these non-recurring items. For more information about restructuring expenses, see Note 9.                         

Non-recurring items

Sales

Duni's net sales amounted to SEK 3,807 (3,971) m. Sales for the year entail a reduction of 4.1%. At unchanged exchange rates compared with the preceding year, net sales would be SEK 131 m higher for the year, corresponding to a reduction in sales of 0.8%. Professional demonstrated stability, while Retail and Tissue experienced a weaker trend.

During 2011, the Professional business area experienced a decline in sales of 0.6%. At fixed exchange rates, this corresponds to an increase in sales of 3.1%. Growth has been strongest in Southern and Eastern Europe – evidence that Duni's market investments in these regions are yielding results.

Sales within the Retail business area fell by 11.2%, corresponding to a reduction of 7.0% at fixed exchange rates. This was due to the phasing out during the year of a major private label customer. Growth was very limited on most markets, but Duni maintained its market shares within the grocery retail trade.

Sales within the Tissue business area fell by 14.1%. 2011 was characterized by weaker demand within the hygiene products sector, due to inventory reductions at customers.

Income

The underlying operating income was SEK 404 (435) m. At unchanged exchange rates from the preceding year, operating income would have been SEK 13 m higher for the year. The operating margin was somewhat lower than last year, namely 10.6% (10.9%). The year was characterized by marketing investments to achieve growth, resulting in somewhat higher selling costs and, consequently, a somewhat lower operating margin.

Financial items amounted to SEK -30 (-18) m. The interest rate level were slightly higher than in the preceding year, but financial items during the year were also affected by negative realized exchange rate results. Income before tax was SEK 358 (418) m.  

A tax expense of SEK 98 (112) m is reported for the financial year. During the year, the deferred tax asset relating to loss carry-forwards was reduced by SEK 41 (37) m.

Net income for the year was SEK 261 (306) m. 

Investments

The Group's net investments amounted to SEK 377 (236) m.

On December 31, Duni bought back the property in Bramsche, Germany which had previously been leased. The investment included a factory, warehouse and offices valued at approximately SEK 160 m.

Other investments relate primarily to the Group's major production plants in Poland, Germany and Sweden. Depreciation and write-downs amounted to SEK 107 (102) m.

Cash flow and financial position

The Group's operating cash flow was SEK 362 (296) m. During the year, the insurance matter was settled relating to the fire in a machine at one of Duni's production plants in Skåpafors. Duni received an additional SEK 51 m in compensation during 2011.

The Group's total assets as per December 31 amounted to SEK 3,681 (3,487) m.

The Group's interest-bearing net debt was SEK 745 m. On December 31, 2010, the interest-bearing net debt was SEK 582 m. The repurchase of the property in Bramsche has affected net debt by approximately SEK 160 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 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.

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.

As per December 31, 2011, Duni had short-term financing due to the fact that the financing facility from November 2007 expires in November 2012. Duni has commenced a procedure to secure a new credit facility and intends to complete the procedure in due time before the current financing expires. See also Note 3 regarding risk management.  

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 per annual in Dals Långed and 14,154 tonnes per annual in Skåpafors.

The Board’s work

During the year, the Board of Directors comprised five members. At the Annual General Meeting held on May 5, 2011, Sanna Suvanto-Harsaae declined re-election and Tina Andersson was elected as a new director. The Board also has two employee representatives and one alternate employee representative. During the year, the Board held nine meetings at which minutes were taken. For further information regarding the work of the Board, see the Corporate Governance Report.

Employees

Good working conditions, clear goals and structures combined with regular support to employees constitute the foundations for creating growth and profit. Human Resources (HR) has the task of supporting management, supervisors and employees in order to stimulate employee development, increase involvement, and drive and coordinate work regarding change. HR also assists in the work of ensuring a sound work environment for all employees.

Duni operates based on four core values which provide guidance in the day-to-day work and clarify how things are done "the Duni way". The core values – Ownership, Added value, Open mind, and Will to win – find concrete expression in a number of operational principles which, taken together, are aimed at creating profitable growth, organizational efficiency, and increased customer satisfaction.

On December 31, 2011, there were 1,888 employees. On December 31, 2010, there were 1,914 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, 2011

In order to create a more market-driven and efficient organization with an increased focus on growth, a new organization will be established within Duni on April 1, 2012. The Professional business area will be divided into two separate organizations with profit responsibilities – one for products for the set table (Product Category Table Top) and one for a range of products for take-away and catering events (Product Category Meal Service). The two product categories will have a common sales force organized under one Director.

In addition, in order to create further focus on geographic expansion, a new department will be established at Group level with responsibility for development of new markets. Furthermore the responsibility for external sales within the Tissue business area will be handled by this department.

In the new organizational structure, all product supply operations (paper mills, converting, logistics) will be brought together under a joint area of responsibility – Production & Supply Chain.

The current Retail business area will change its name to Consumer, in order to better describe the business area's mission. The business area will retain its current structure.

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