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.

The Professional business area offers Duni 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 71% 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 who 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 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 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 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.

Designs for Duni^®

In order to strengthen the Duni brand as an innovative player, 2013 saw the creation of "Designs for Duni^®", a unique concept whereby Duni develops products in cooperation with well-known European designers and design houses. The concept positions Duni as the leading design partner at the retailers. It creates an opportunity for higher margin contracts, while at the same time strengthening drawing power and a higher degree of innovation in the product range. Among other things, a successful launching with the design house Melli Mello was carried out in Germany in 2013.

Amuse-bouche is another premium product, with the bit-portion sized holders for finger food being frequently used in catering and at events. Duniform^®  – a comprehensive solution comprising sealing equipment, trays and sealing film – is yet another interesting concept. Increased focus will be placed on both of these product concepts going forward.

Continuous innovation

Products in the Duni ecoecho™ premium range are manufactured in innovative materials with a clearly improved environmental profile compared with the standard product range. Focus is placed on aspects such as resource efficiency, renewability, compostability, and responsible forest management.

Examples of new, innovative products include a large range of products made from bagasse, a waste product from sugarcane manufacturing. 2013 saw the introduction of a series of salad bowls made of this material. A round pizza carton is yet another product made from the material; this represents double innovation, in terms of both material and design.

Duni has a number of materials that replace linen. Evolin®, an entirely new tablecovering material which combines the look and feel of textile and linen tablecoverings with the advantages of the single-use product, was launched at the end of 2011. Evolin is aimed at those restaurants and catering firms that currently use linen. The product constitutes one of the cornerstones for future growth by converting customers currently using linen. The roll-out of Evolin has continued in 2013.

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 demand for single-use products. Most European markets continued to display sluggish GNP growth in 2013. 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 consumption patterns. 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 stagnating economic growth, consumers on the mature European markets are seeking greater value and HoReCa companies are competing harder in order to gain even larger shares of total meal experiences. On the customer side we are witnessing continued structural changes within the restaurant industry, with the restaurant chains operating under a common brand growing more quickly than the market in general. This development benefits Duni’s sales of customized concepts.

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 distribution base in new channels, such as garden centers, home furnishing stores and DIY stores. On selected markets, these are also retailer categories on which Duni is  increasingly focusing its sales efforts.

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, including 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 accessibility and convenience connected with meals is continuing, and thus the take-away alternative is continuing to grow. This trend is reinforced by the increase in the number of single households and the fact that urbanization is continuing. The launch of Evolin also opens up a new, potential market for Duni among a larger part of the traditional linen market.

From a macroeconomic perspective, there is continued uncertainty as regards 2014, but a degree of growth is anticipated.

Reporting

The annual report covers the 2013 financial year. ‘Preceding year’ means the 2012 financial year. The reported operating income includes the following non-recurring items: restructuring costs and unrealized valuation effects of currency derivatives.

The restructuring costs amount to SEK -17 (-113) m. SEK 11 m of the restructuring costs for the year comprise personnel termination costs in connection with the division of the Professional business area's sales and marketing department into Table Top and Meal Service. In addition, SEK 6 m relates to efficiency improvement measures within the logistics operations. SEK 83 m of the restructuring costs in 2012 related to write downs of fixed assets and inventory relating to the plant closure in the hygiene products unit within Tissue.

For more information about restructuring costs, see Note 9.              

The unrealized valuation effect of currency derivatives which is reported in the operating income amounts to SEK 0 (0) m.

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 3,803 (3,669) m, an increase in sales of 3.7%  At unchanged exchange rates from the preceding year, net sales were SEK 173 m higher than the outcome for 2012, equal to an increase in sales of 4.7%. At fixed exchange rates, organic growth was 3.3%.

Sales within the Professional business area increased by 0.7% in 2013, equal to 1.8% at fixed exchange rates. The catering, fast food and take-away segment experienced positive growth. The sales growth is primarily attributable to the acquisition of Song Seng in Singapore.

Sales within the Consumer business area increased by 9.4%. At fixed exchange rates, this corresponds to an increase of 11.1%. The strong sales for the year were influenced by the positive effects from new contracts gained in 2012 and 2013.

Sales within the Tissue business area increased by 14.2%. The higher sales are a temporary consequence of the decision to close down the hygiene products business.  Closure of the unit was scheduled for April 2014, but during the fourth quarter of 2013 Duni announced that the closure would be postponed until the first quarter of 2015.

Income

Underlying operating income amounted to SEK 385 (342) m. At unchanged exchange rates from the preceding year, operating income for the year would be SEK 6 m higher. The operating margin strengthened from 9.3 % to 10.1%. All business areas reported an  improvement in income compared with the preceding year. Although growth within Professional was slow, Consumer contributed to improved capacity utilization.

Financial items amounted to SEK -19 (-25) m.  Income before tax was SEK 350 (204) m.  

A tax expense of SEK 83 (79) m is reported for the year. The effective tax rate is 23.7%(38.9%). The tax expense in the previous year was negatively affected by a write down SEK 30 m in the deferred tax asset, which is a consequenceof the Swedish corporate income tax rate being reduced from 26.3% to 22%, as of January 1, 2013.

During the year, the deferred tax asset relating to loss carryforwards was reduced by SEK 40 (12) m. 

Net income for the year was SEK 267 (126) m.  

Investments

The Group’s net investments amounted to SEK 82 (113) m. Depreciation and amortization amounted to SEK 117 (112) m. Following a number of years characterized by launchings of new materials as well as environment improvement investments, 2013 has seen a lower level of investments. Investments made related primarily to the Group’s production plants in Poland, Germany and Sweden.

Cash flow and financial position

The Group's operating cash flow was SEK 463 (429) m. Duni's strong cash flow is a result of improved earnings as well as sound control over accounts receivable and accounts payable.  During the autumn, Duni experienced certain delivery problems in connection with the implementation of a new stock management system. These disruptions in delivery had only a marginal impact on the Group's working capital.

The Group’s total assets as per December 31 amounted to SEK 3,695 (3,531) m.

The Group’s interest-bearing net debt was SEK 491 m. The interest-bearing net debt on December 31, 2012 was SEK 638 m.

Operating 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. 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. 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 comprises 2,318 tonnes for Dals Långed in 2013 and 19,840 tonnes for Skåpafors in 2013. The total number of emission rights will decline each year up to 2020, when Dals Långed will be granted emission rights equivalent to 2,027 tonnes per year and Skåpafors 17,349 tonnes per year.

The Board's work

Until August 2013, the Board comprised five members. Alex Myers was elected as a new director at the annual general meeting held on May 2, 2013.  He replaced Thomas Gustafsson, who became Duni's President and CEO in December 2012. On September 1, Tina Andersson was recruited as Duni's Corporate Marketing and Communications Director. Tina resigned from Duni's Board at her own request, following which the Board comprises four members until the 2014 annual general meeting. During the year, the Board held ten 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, 2013, there were 1,902 employees. On December 31, 2012, there were 1,875 employees.

Remuneration for the CEO and senior executives 

Principles regarding the CEO and senior executives, as proposed to the 2014 annual general meeting, to be applicable in 2014, correspond in all essential respects to the established principles which were adopted by the 2013 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 and in Singapore.  

Important events since  December 31, 2013

No important events have occurred since December 31, 2013.

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