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's strong position has been achieved thanks to a combination of high quality products, a well-reputed brand, established customer relations, as well as a strong local presence on most European markets. Operations are conducted within three business areas: Professional, Consumer and Tissue.

In the Professional business area, Duni offers concepts and products primarily to hotels, restaurants and catering companies. Professional comprises two product categories: Table Top and Meal Service. Table Top primarily markets napkins, tablecoverings and candles, combined in matching concepts for the set table. Duni is a market leader within the premium segment in Europe. Meal Service markets more functional concepts for meal packaging and serving products, for example to-go, take-away 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 Consumer business area, Duni offers consumer products primarily to the retail trade. The range includes napkins, tablecoverings, candles, glasses and cutlery. The products are marketed primarily under the Duni brand. 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 15% 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 12% of Duni’s sales. For mor information regarding business area Tissue, see session "Important events since December 31, 2012".

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.

2011 saw the launch 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. 

One advantage with Evolin is that Duni is entering a market segment which is significantly larger than Duni's current addressable market. Evolin was launched in 2012 in a limited number of colors and tablecovering designs. The rollout is continuing in 2013, with more colors and sizes. This is 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

Global economic prospects are a main indicator as regards the state of health of the HoReCa market. Broad economic growth is positive for the HoReCa industry since it stimulates consumption within HoReCa and, in doing so, also demand for single-use products. However, almost all European markets witnessed a slowdown in GNP growth in 2012, compared with 2011. The long-term trend continues, though, to point to more restaurant visits and an increase in the number of hotel nights spent, primarily driven by changing patterns of consumption and economic growth. New restaurant concepts, as well as ready prepared food in grocery stores, take-aways and quick service restaurants, are increasing in number and these concepts are gaining ever larger market shares. After a number of years of sluggish economic growth, the mature European markets are seeking greater value and HoReCa companies are competing harder in order to gain an even larger share of total meal experiences. On the customer side we are witnessing continued structural changes within the restaurant industry, with those restaurant chains operating under a common brand growing more quickly than the market in general. This development benefits Duni’s sales of customized concepts and, during the year, resulted in the initiation of cooperation projects with a number of new customers within the sector.

Duni’s product categories in the retail sector demonstrate a low to flat rate of growth (AC Nielsen), with a major focus on cut-price products and private labels. Parts of the categories have also obtained an expanded sales base in other channels, such as garden centers, home furnishing stores and DIY stores. Duni is also focusing sales efforts on these channels to an ever increasing degree on certain markets. Despite tough competition and a weak start to the year, a number of new contracts were signed during the second half of 2012, the full impact of which will be felt commencing 2013.

Prospects

The HoReCa industry is greatly influenced by lifestyle changes and trends. Long-term demand is being driven primarily by greater purchasing power combined with changed habits, which involve an increased proportion of meals being eaten outside the home. In addition, demand for Duni's products benefits from the fact that more restaurants are choosing to replace linen with premium quality single-use solutions. Furthermore, the trend towards increased speed and convenience connected with meals is continuing, and thus the take-away alternative is continuing to grow. This trend is reinforced by the continued increase in the number of single households and continued urbanization. The launch of Evolin also opens up a new, potential market for Duni.

From a macroeconomic perspective, a degree of recovery is expected in 2013, since several of the European countries are expected to return to growth.

Reporting  

The annual report covers the 2012 financial year. ‘Preceding year’ means the 2011 financial year. The reported operating income includes two non-recurring items: restructuring costs and unrealized valuation effects of electricity and currency derivatives.

The restructuring costs amount to SEK 113 (6) m. SEK 83 m of these costs relate to write downs of fixed assets and inventory relating to the planned closure of the hygiene products unit within Tissue. SEK 12 m relate to the restructuring program initiated in 2011. In addition, costs of SEK 18 m were booked during the year with respect to the change in CEO, restructuring on certain export markets, and write down of other fixed assets. For more information regarding restructuring costs, see Note 9.

The unrealized valuation effect of electricity and currency derivatives has, in principle, ceased since trading in electricity derivatives ceased during the year.

The operating income is commented on in the text, exclusive of these non-recurring items.               

Non-recurring items

Sales

Duni’s net sales amounted to SEK 3,669 (3,807) m. Sales for the year fell by 3.6%. At unchanged exchange rates from the preceding year, net sales for the year were down SEK 63 m compared with the results for 2011; this represents a decline in sales of 1.6%. Professional demonstrated stability, while Consumer experienced an extremely weak start to the year.

Sales within the Professional business area fell by 3.0% in 2012. At fixed exchange rates, this corresponds to a fall in sales of 0.8%. The fast-food and take-away segment experienced positive growth. A large part of the decline in sales is attributable to the UK, where Duni phased out large standard napkin contracts.

Sales within the Consumer business area fell by 10.0%. At fixed exchange rates, this corresponds to a fall of 8.1%. Following a very weak start to the year, the business area succeeded in securing several large customer contracts; phasing in of these contracts began in the autumn and the impact on sales will be felt in 2013.

Sales within the Tissue business area increased by 2.0%. Demand within the hygiene products sector is stable over a business cycle, but it is an extremely demanding area in which to operate. Strenuous demands are imposed for regular efficiency improvements and active participation in materials development. This part of Duni's business has not been sufficiently profitable and the assessment has been made that acceptable profitability also cannot be achieved in the foreseeable future. Consequently, in February 2013 Duni’s Board of Directors decided to commence negotiations with the unions regarding closure of the production unit which manufactures and sells material to the hygiene products sector. Sales from this production unit primarily comprise external sales for the Tissue business area. The reduction in sales is not expected to have any negative impact on Duni's operating income. It is estimated that the unit will be fully closed down during the first quarter of 2014.

Income

Underlying operating income amounted to SEK 340 (404) m. At unchanged exchange rates for the preceding year, operating income would be SEK 52 m lower for the year. At 9.3%, the operating margin was somewhat lower than in the preceding year (10.6%). The year has been characterized by a low level of capacity utilization at the converting plants and within tissue production. High inventory levels combined with the weak economic climate led to a need to regularly reduce inventory levels during the year, in contrast to the inventory build-up which has taken place in recent years.

Financial items amounted to SEK -25 (-30) m. The difference compared with the preceding year is attributable to lower interest costs, as well as certain higher interest revenues. Income before tax was SEK 202 (358) m.

A tax expense of SEK 79 (98) m is reported for the year. The effective tax rate is high, 38.9% (27.3%), due primarily to the SEK 30 m reassessment of the deferred tax asset since the Swedish corporate income tax rate was reduced from 26.3% to 22% on January 1, 2013.

During the year, the deferred tax asset relating to loss carryforwards was reduced by SEK 12 (41) m due to non-recurring items.

Net income for the year was SEK 124 (261) m. 

Investments

The Group’s net investments amounted to SEK 113 (377) m. Depreciation and amortization amounted to SEK 112 (107) m. The investment level for the year was significantly lower than in the preceding year, due primarily to the fact that no structural projects were carried out, such as investments in real estate, additional construction or product rollouts. Investments made related primarily to the Group’s production plants in Poland, Germany and Sweden.

Impairment of fixed assets for the year amounted to SEK 83 m, with SEK 73 m being related to machinery and buildings in connection with the planned closure within the Tissue business area. The remaining SEK 10 m relates to other impairment of fixed assets.

Cash flow and financial position  

The Group’s operating cash flow was SEK 429 (362) m. Cash flow is strong thanks to a significant reduction in inventory and a lower investment level than in previous years.

The Group’s total assets as per December 31 amounted to SEK 3,514 (3,681) m.

The Group’s interest-bearing net debt was SEK 555 m. The interest-bearing net debt on December 31, 2011 was SEK 745 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.

Commencing July 5, 2012, Duni has a new financing agreement in place which extends for 3 years. The borrowing is thus once again reported as long term. 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. See also Note 35, Pledged assets and contingent liabilities.

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 65,000 tonnes of wet laid tissue per year and 52,000 tonnes of airlaid tissue per year at the mill in Skåpafors and 10,000 tonnes of airlaid tissue in Dals Långed. The mills hold permits 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 year in Dals Långed and 14,154 tonnes per year in Skåpafors up to and including 2012, with a new allocation being published in March 2013.

The Board's work

During the year, the Board comprised five members, all of whom were re-elected at the annual general meeting held on May 3, 2012. The Board also includes two employee representatives and two alternate employee representatives. 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, 2012, there were 1,875 employees. On December 31, 2011, there were 1,888 employees.

Remuneration for the CEO and senior executives

Principles regarding the CEO and senior executives, as proposed to the 2013 annual general meeting, to be applicable in 2013, correspond in all essential respects to the established principles which were adopted by the 2012 annual general meeting. For 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, 2012

In a press release dated February 12, 2013, Duni announced that it had decided to commence negotiations with the unions concerning the closure of the part of the business of the subsidiary, Rexcell Tissue Airlaid AB, which is involved in external sales, primarily to the hygiene products sector.

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