Ontex Group NV (ONTEX) Earnings Call Transcript
October 27, 2023
Earnings Call Speaker Segments
Good afternoon, everyone, and thank you for joining us today. I'm Geoff Raskin from Investor Relations, and I'm pleased to have with us Gustavo, our CEO, to present the third quarter results. Before that, let me remind you of the safe harbor regarding forward-looking statements, which I will not read out loud, but which I assume you will have duly noted. Gustavo, over to you.
Thank you, Geoff. Good afternoon, everyone. I'm here on my own, but I'm relieved that next time I will be accompanied by our new CFO, Geert Peeters, who will join us in December, as you most likely have read in yesterday's press release. Meanwhile, I'm very pleased to report our quarter 3 figures, demonstrating continued improvement in our operations and confirming the turnaround of the company's performance and improved financial structure. Moving now to Slide 4 is a summary of our main achievements. In our core markets, we delivered 10% like-for-like revenue growth, delivering an adjusted EBITDA margin of 9.5%, a 4 percentage points increase compared to the third quarter of 2022, strengthening the year-to-date performance of 9.4%, driven by sustained prices and operational efficiencies where our cost transformation program continues delivering cost savings. The strong EBITDA generation, including also a strong contribution from our discontinued Emerging Markets drove our Group leverage down to 3.6x, less than half the peak of 7.7x we recorded exactly a year ago. Moving now to Slide 5, providing details of the revenue of our core markets evolution from quarter 3 last year to this year. Volumes grew by 3% this quarter in both business units, Europe and North America. In Europe, retail brands continue to gain share. The main driver this time was adult care where we see more market demand for retail brands. Ontex sales benefited from this trend by continuing to grow volumes in priority categories where we can differentiate more from the competition. The growth was most pronounced in adult care and baby pants. In North America, which constitutes our biggest growth opportunity, we are reconnecting with double-digit growth again. The destocking of lifestyle brands customers in the first half is over. And more importantly, our new leadership team's initiatives are starting to deliver in new business for Ontex North America, seeing the result of new retail brand contract wins. Price were up 8% overall. While these are largely based on the pricing gradually implemented throughout last year, we're managing them closely, resulting in sustaining the price level of the first half of the year. Finally, we recorded a 5% adverse ForEx impact. Now on Slide 6, we are comparing our quarter 3 core adjusted EBITDA versus last year with a strong increase of 81%, reaching EUR 44 million, driven by volume growth and continued cost transformation program, contributing with EUR 20 million and our pricing momentum supported by our goal to provide our customers with value through product innovation. Cost inflation continues to have a negative impact by EUR 12 million, but it has reduced significantly compared to the impact on the previous quarters. Raw material prices decreased versus the start of the year as indices came down. Year-on-year, however, the raw material cost is still higher by EUR 5 million. The impact of index changes takes some time to feed through the P&L. And these indices are only a part of the price equation being also subject to other cost factors as is the case for our own operating costs, which were up by EUR 7 million, reflecting wage inflation and energy costs among others. ForEx had a highly negative impact of EUR 21 million on the result. Even though these external elements were significant, similar to last quarter, they are almost fully offset by pricing, contributing EUR 33 million. But as you know, these do not cover the full inflation we observed since the beginning of the inflation spike starting in 2021. On Slide 7, you can see the evolution of our core adjusted EBITDA by quarters since 2022. Since mid-2022 now, for 5 consecutive quarters, we have been growing our core adjusted EBITDA, recovering gradually, but steadily from the cost inflation spike. Our delivery so far this year is double that of the last year. This is also reflected by the margin, which has doubled compared to the first half of 2022 to more than 9% consistently this year and in line with the high end of our initial guidance. The margin came down slightly in quarter 3 compared to quarter 2, and this is mainly due to some exceptional one-off energy costs in North America following the carving of the Tijuana operations. These costs are temporary and will have ended by 2024. Moving now on Slide 8. Our cost transformation program is an important driver of -- for the EBITDA improvement and critical pillar of our value creation model. The program was initiated towards the end of 2021. And in 2022, we delivered operating efficiencies in our core operations of close to 5%. And now in 2023, it's reaching levels above 5%. This is the result of the acceleration of our strategy execution with continuous improvement in all fronts, procurement, supply chain, manufacturing efficiencies like OE as well as from R&D on its new innovation program. On Slide 9, you can see the evolution of the net debt and leverage of the whole Group, including the contribution of our Emerging Markets division, which has been very strong in the quarter. We have meaningfully reduced our net debt in the year so far, mostly with the divestment proceeds from the sale of the Mexican business received in quarter 2, which combined with a strong EBITDA from both our Core and Emerging Markets have significantly reduced our leverage ratio to 3.6x at the end of September. This is less than half of the 7.7x peak we recorded exactly a year ago and the best level achieved since 2020 and we have the [indiscernible] ambition to bring this further down. Our working capital needs stabilized in the quarter despite the still growing sales. We successfully managed to improve our cash conversion cycle efficiency, especially through inventory management. This created room for our capital investment program now at a level above 4% of revenue in the quarter, increasing then consistently since quarter 1. Our capital investment program is the enabler to our value creation plan by strengthening our innovation pipeline, gradually expanding the capacity in North America to support our high growth ambitions as we continue to increase our market penetration and transforming our European operations to become the most efficient in Europe, boosting our competitiveness. The initial benefits are already visible in our results. And this gives me high confidence to continue to improve our EBITDA margin in line with our ambitions. Now moving to Slide 10. We confirm our outlook for 2023. Revenue of Core Markets is still expected to grow high-single-digit like-for-like. The adjusted EBITDA margin of our Core Markets is expected at the high end of our initial 8% to 10% range. And quarter 4 is to deliver the strongest margin in the year, around 10%. Emerging Markets are expected to continue to contribute positively to our Group EBITDA and free cash flow. We have already beaten our initial leverage outlook of 4x set at the start of the year as well as the new one of 3.75x set in July. We now intend it to improve further from the 3.6x we realized in September. At the same time, we ensure our continuous investment level of close to 5% of revenue, which will allow us to continue to improve our margins as per our plans to create shareholder value. This to support our innovation program, new business development in North America and more efficient operations through our cost transformation program. On the Slide 11, to sum up, our Q3 results and 2023 delivery so far have been very, very encouraging. They show that the turnaround strategy at Ontex is delivering in all fronts, growing revenues, improving margins and overall profitability and rebuilding our financial structure with significant reduced leverage. We continue the momentum on refocusing the portfolio after the divestment of the Mexican business. We reached agreements on the smaller Algeria and Pakistan business and the profitability recovery in Brazil and Turkey is promising triggered to relaunch their divestment process. The acceleration of our strategy is well underway. And the positive momentum motivates us all to continue with this journey as we still have much more to do. Finally, I would like to thank all Ontex employees for embracing the accelerated execution of our strategic plans. I would also like to thank all other stakeholders for their support and confidence they have shown in non-taxability to deliver its turnaround. I'm now available to answer your questions.
Now before we move to Q&A, can I ask all participants to clearly state their name and company and also try to limit yourself to 2 questions to keep it manageable. Thanks a lot. Operator, over to you.
[Operator Instructions] The first question from the phone line today comes from Markus Schmitt of ODDO BHF.
Yes, it's Markus Schmitt from ODDO BHF and Credit Research. I have just 2 questions. The first one is on the cash flow in the quarter. I think you paid cash interest on the bond of EUR 10.1 million in the quarter, but you had a use of cash of EUR 16 million in the Core group. Could you maybe [ reconcile ] the cash flow from the adjusted EBITDA level and then also explain at what point you will produce a positive levered free cash flow? And where do you see this figure on an annual basis going forward? And the second question is if you could please tell where do you see the net debt at the end '23? And what net proceeds do you expect from the Algeria and Pakistan divestments until year end?
Thank you, Markus, for your question. I have to say that I need to understand better your first question, please.
No, no, sure. Happy to help. So I recognize that cash from June to September declined by about EUR 16 million in the Core group, yes. And since you do not provide a cash flow statement, I just want to understand how you get to that use of cash? I mean, you had adjusted EBITDA of EUR 44 million in the quarter. I know you had EUR 10 million of -- to pay the coupon on the bond I think in July. And I think you mentioned also CapEx was about 4% when I'm not wrong on revenue in the period. But I try to understand the moving parts, how you get from EUR 44 million adjusted EBITDA to a use of cash of EUR 16 million in the quarter. That is my question. It can also be maybe taken offline later when it's better. I mean, it doesn't have -- it's not -- I'm just curious, not in a hurry here.
So our -- I understand that we don't provide the cash flow right now. But our working capital has been flat throughout the quarter. The EBITDA has increased. Our CapEx also has increased. And yes, we still have a positive net.
Okay. Maybe we can take that offline later on. I'm not 100% sure if I understand that bridge really, but maybe more later. Maybe you can do the second question. So on the net debt at year end and the net proceeds from Algeria, Pakistan. Maybe you can give some guidance there that would be helpful.
Yes. Our net debt is EUR 652 million, EUR 650 million is flat, and that's for the -- we ended in the quarter. And the proceeds from Algeria and Pakistan are not relevant to consider for reducing the debt; a very, very marginal.
Okay. So net debt as of now, likely...
EUR 652 million, yes.
It will likely be the same at year end then obviously. Is that...
Yes, exactly.
The next question is from Wim Hoste of KBCS.
Yes. I also have 2 questions, please. The first one is on the Emerging Markets business. Can you elaborate a little bit on the performance? I think it was a very nice margin jump. How sustainable can that be? And also what is -- is this margin improvement mainly Brazil-related, as I understood? What does that mean for the disposal ambition you have? Can you maybe elaborate also on the timing of that disposal process? How far are you? In what kind of stage are you? So those were the questions, please.
Okay. Very good. So regarding the actual business performance in the Emerging Markets and the sustainability of that, we certainly believe on that because it's through strong cost savings that we -- and refocusing during this year in our portfolio and working on the cost savings there. And also, we have made strong market gains -- market share gains in certain categories where we have put the focus. So we certainly have the total confidence that are sustainable and we can keep always improving. So that's on the answer on how sustainable they are. Yes, there are structural changes in the way that we are doing the business in the Emerging Markets. And especially in Brazil, with a strong recovery, making -- expanding the business in certain categories where we put the focus, launching new products. And yes, all that combined and a strong team that we have in place, good financial performance, good cash flow, it gives us confidence also in the selling process that we are restarting. So how -- when do we see that? We are starting the selling -- the relaunch of the selling process at this moment for Brazil and for Turkey. And we are progressing -- we'll start progressing during this year -- the rest of this year. And yes, we have expectations for closing those prospects by '24, beginning '24. So we'll see how it evolves. But we are confident based on the results and the interest shown so far.
Our next question is from Charles Eden of UBS.
I guess, just one from me, please, on the guidance for high-single-digit sales growth for '23 in the Core Markets. Am I right in saying that is on a like-for-like basis, I think it is? And then if so, that would imply flattish or even a like-for-like sales decline in Q4 in the Core Markets. So given you should still see some positive year-over-year pricing benefit, is there an expectation for a volume decline we should be aware of in Q4 or is this just a degree of prudence in the guidance on that metric?
No, no. So we are not seeing volume decline. Thank you, Charles, for your question. We are not seeing volume decline. We are confident in our volume to continue to keep growing. And as I was mentioning before in the presentation, we have a strong new business development in North America. And also, we are doing good progress and volume growth in our specific focus categories in Europe. So certainly, we are not seeing volume decline. And yes, we are expecting the high end of this growth on the top-line.
Great. If I could just ask a quick follow-up. I'm just looking at the first 9 months Core Markets like 13%. So I'm just sort of saying like, is that just -- you're just trying to be cautious with a view to not over-promising and under-delivering, which may be Ontex has done in the past. Is that really what you're trying to say, not that we should be aware of any material impact on something in Q4?
Yes. You are reading me very well. Yes, I've been trying to be prudent the whole year. I'll keep behaving in that way. We are not seeing -- and I would not like you to think that we are seeing something coming in the wrong direction for us. No, we're expecting -- continue to be strong in the revenue growth.
Our next question is from Fernand de Boer of Degroof Petercam.
Yes. It's also 2 questions. One, I think you mentioned that you had kind of one-off in energy cost in the U.S. Is it possible to quantify that? And then -- but not entirely clear to me that you said we expect that to end by '24. Do you mean that it still runs until the end of next year or that it ends this year? That's the first question. And then you had, let's say, volume mix component of 3% this quarter, while the additional EBITDA of this sales was only EUR 1 million, which looks very low to me. So what explains this low operational leverage on these additional sales?
Okay. So on the energy cost, yes, it was specifically in our Tijuana plant that is located in Mexico. And as a result of our carve-in in the month of last May and in April, we did have -- we started to have an increase in the energy cost because of the new entity, due to the new entity. And yes, it was impacting in a significant accumulated way from May all together to the third quarter. And then we're going to have another portion on the fourth quarter of that energy increase, but we know we are all set to not have any more in '24. So it's not that it will continue in '24. We are all set to not have it. When I'm saying we are all set is we have our contract in place, everything set and the pricing for the 2024, which is different and have not that surplus. That is for Tijuana or energy cost impacting. Regarding volume mix, 3% on the quarter and EUR 1 million additional in the EBITDA, we have also the ForEx exchange rate impact. And that has been significantly playing a role there to, let's say, to not -- I don't want to say minimize, but reduce the impact of that sales into the EBITDA.
Can I then come back on this ForEx impact because it was minus EUR 22 million I think in Q3? What could we expect in Q4? Because I'm always positive about this number because then one hand you say we are hedged. And on the other hand, we say we cannot at today currencies. But you know now what the ForEx is at the moment and you also know how you are headed on this. So I still don't understand how you arrive at EUR 22 million for this quarter. And then going forward, what does it mean for Q4 and maybe even in the first half of '24?
Yes. So we had a significant impact in Q3 coming from -- one impact was the ruble, our Russian operations significant. And then also the fluctuations between the dollar and the euro. That's another consequence. But in Q4, we are assuming our September actuals going into Q4. That's our expectation. Of course, that is still a forecast. And yes, we can also follow-up with you then, Geoff can follow-up in terms of the -- explain a little bit because you said it's hard for you to understand the EUR 21 million impact. And there's pretty much detail on that that I'm sure that Geoff can follow-up with you individually.
Okay. One last question because coming back on the purchase question on the guidance. If you look now, we had 8% price in Q3. Normally speaking, what should that be in Q4 because that has to go close to zero or is that a wrong assumption?
So price increase, it will decrease in Q4. I don't want to give an exact number to you at the moment. We don't disclose that. But yes, you should expect that it will decrease.
Our next question is from James Cawthorpe of Barclays Bank PLC.
It's actually Karine from Barclays. You may have touched a little bit on that before, but I just wanted to spend a bit more time on the pricing environment. Obviously, as raw material prices are coming off, do you see any pressure to reduce prices or is it -- is the direction of travel being a bit different depending on the various different raw material prices, that will be helpful?
Can you repeat, please? Because honestly, the voice was a little bit -- the connection was a little bit hard to understand you.
Okay, sure. Apologies about that. This is Karine from Barclays. I just wanted to get a little bit more color from you on the pricing environment. I mean, overall, my thoughts with raw material prices are coming off, but it seems that this is not necessarily a linear decline. Are you seeing any pressure from retailers to reduce prices? How should we think about the pricing environment?
Yes. Thank you for repeating. And answering you, yes, it's not about pressure, but I think that, yes, some -- with some indices going down, now they are stabilized, but they went down. So yes, we have conversations with retailers in terms of that. And we should -- the environment it is the retailers that are looking after price reductions. Let me add to that that our retailers' conversation has been very positive so far in terms of that we are trying to build a different relationship instead of building being just a trade type of conversation with them. We are building a relationship where we talk about the strategy, we talk about product innovation, how to give value to the retailer brand and the products that they are selling. So the conversations are not just in a trading way. So we feel very positive in terms of that. Retailers are open to those type of discussions. We understand the needs of the retailers. And of course, that yes, but I would say that in the market, there is a discussion on pricing differently.
And maybe just a quick product question as well. I mean, you've been very cautious and you have delivered and over-delivered on your results throughout. So core margins are definitely getting to that sort of like 10%. What do you think realistically obviously is where core margins would end up shaking? Is the mid-teens still achievable I think in your opinion? I'm not trying to put a timeline on that, but what do you think is the underlying real margins for the core business?
So that's a very -- you can imagine with your question, it's very difficult for me to be fully transparent with you. I wish I can do it publicly in terms of what are my aspirations and my belief and what we are after, because we are working very hard. Our commitment is very clear in terms of creating value for the shareholders and the financial performance is critical here. Reducing our debt is critical. Growth of our business is critical and reducing our costs. Those 2 things, our growth, new businesses and reducing the cost will deliver more EBIT or more margin into the business. We aspire to keep growing. So I cannot give you a number, but I can tell you that definitely we aspire to keep growing throughout 2024.
Our next question is from Patrick Folan of Barclays.
I just have one and I'm just looking at the vol mix of 3% and you talked about North America, volumes are back up double-digits. I'm assuming most of that is due to the kind of customer destocking elements are reversing in the second half. And I just kind of want to quantify what percentage of that was the destocking versus the customer gains. But then also, thinking of the Core Markets business and that 3%, I imagine North America was the majority of that kind of 3% vol mix number.
Yes, Patrick. So the U.S., there is the -- destocking has finished. So we are back into track. But year-to-date, I will say that definitely compared with last year, it's below in terms of the lifestyle. So the growth that we are getting in the U.S. is, I would say, totally related to the new businesses that we are developing there. I can tell you that the -- it's very encouraging to see the new leadership team that is there, how they are approaching this new business, developing this with plenty of initiatives. And of course, that we are investing a big portion of our capital expenditure is because we're investing in adding capacity into the U.S. market to respond to that. Many of these new businesses has started somehow this year and will continue throughout the quarter 4. But definitely, majority of that impact we're going to see during 2024. So the growth -- double-digit growth that we're experiencing in the U.S. is very healthy and we are developing that new businesses in the retail brand. What do I see in Europe? I see that although the total volume in Europe perhaps is not a significant volume mix increase, but in certain categories, in our specific categories where we want to compete, where we know that we have a competitive advantage and also they are very value-added for the customers, we are growing market share. So meaning that we are growing faster than the market. And categories like adult care pants and baby pants are also high end single-digit or double-digit growth.
Okay. Sorry, just to clarify on the -- Europe was still a positive volume mix, right?
Yes. Certainly, yes.
Our next question is from Salome Charamelet of ABN AMRO ODDO BHF.
I have 2. The first one, I would like to come back on the price implementation. So you mentioned that you still had an impact from the price implementation you did last year. For Q3, shall we consider it as fully passed on or shall it still have an impact on revenue? So this was my first one.
Yes. Sorry, we -- can you say it again, the impact that we had -- still impact from '22 pricing, yes, because we started the pricing increase in 2022 and most of the pricing was in Q3, Q4 and Q1 2023. So that is most of the pricing implementation. So in Q3, we still -- this year, we are starting to compare with already Q3 higher price of last year. So towards quarter 4, it's going to be even more. So the gap between quarter 4 of this year, of quarter 4 last year, it will be reduced. So just due to the compression. So yes, I don't know if I'm answering it. Was that what was you were asking?
Yes, it's pretty fair. And then my second one is on the Middle East situation. Do you see or do you expect any direct or indirect impact from that?
Well, I think that the impact there it could be in the oil price as we are seeing. So oil price going up. And that oil full price, it will help our -- of course, in the cost of the logistics and also in all raw materials that derivate from the oil. So we are -- in this moment, the question is very good, because in this moment, we are assessing a new outlook of those raw material costs versus what we have done in August for instance. But that it will be for us and for all the peers. So that is something that we need to assess. And that's why we try to be prudent also in all discussions in terms of the cost because it's a moment where we are doing the right -- a new assessment on the forecast of that.
And the next question comes from Karel Zoete of Kepler.
I have 2 questions. A follow-up one on Brazil because you've been doing well. I think most of the companies we look at report positive momentum in the market. Can you be a bit more specific in which segments you've emphasized and got good growth in return? And the other question is on the North American market, because on an earlier question, you said that the retailer conversations are better, not only about price, but also on a more strategic level. I presume this is also very much true for the U.S. business, probably more than for Europe. What have you kind of changed in the U.S. business over the last 3 to 6 months that now gives this momentum and confidence?
Okay. Good question, Simon. In terms of Brazil, you asked about which segments. So our -- first of all, our business model in Brazil, it's a very unique business model in terms of we are a multi-tier multi-brand model and we have a very, very significant distribution across the country. So where we put the focus is in baby care and adult care. Those 2 segments are our focus there. And in both, we are gaining market share. And also specifically within those 2 categories, also we emphasize this in some specific segments within the category. So that -- I know if that -- I hope that answers your first question in Brazil. Specifically now in North America that you ask, yes, you're absolutely right, very good conversations with customers and big retailers there, big, big retailers. You know that retail brand in the U.S. is not as much as developed as in Europe. And we have been analyzing that. And also based on my experience in the past, knowing that market in the way that some of the retailers and big retailers were -- some of them, they were treating retail brand in one way and some others in another one, of course, but there is a lot of room for -- and our discussion is how we collaborate each other to improve the retail brand performance within the retailer. And those conversations are going very well with already -- and some of them with very positive outcome on those conversations. But believe me that it will continue being like that. We have a very solid position in U.S., in particular, competitive position that give us opportunities to expand and create new business with retailers because also our footprint there where we have our West Coast and an East Coast production is a big advantage. We would -- we are the unique retailer suppliers with that footprint, and that gives us an advantage versus competitors. And also, we are the #1 global retailer supplier. So our global knowledge in terms of this, I think that help us also to have constructive discussions with the customers. I hope that I have answered your question.
Very clear. And just a quick follow-up on the U.S. With the footprint you currently have, do you require much investment to grow that business substantially or is the current footprint sufficient to add a couple of thousands, millions extra in revenues?
What it will require is capital because we need to add capacity. We are talking here on a significant growth. And yes, it will require CapEx to add more capacity, more machines and we are balancing that of course within the entire business, but that is what will require and strengthening the team. We start doing that with the team. We are following with the capacity. And yes, we are ready to supply our customers. And they are seeing that and that's something that you need to ensure them that you're going to have the right supply, the right quality, and yes, it's a new born business for us.
Our next question is from William Dennis of Bank of America.
It seems most people have answered already. You've answered my questions, most of them. So I have 2 more on liquidity. I didn't see anything in the release on the RCF, the new RCF and how much was drawn this quarter. Please, could you expand and give more detail, if possible? And lastly, on the market share gains, earlier this year, you mentioned you have gained some market share going towards the end of this year. Do you see this continuing? Do you see -- and also on volumes, is this mostly as a result of just overall new business wins or it's basically more demand from customers already of these customers?
Yes. So on the first one, William, I only can say that the liquidity is good. We are in a good position. But unfortunately, we don't disclose exactly now these numbers. But we are good, we are okay. And then on your second question regarding market share gains, what we are expecting to continue. Yes, overall, in the Core Markets, we are expecting, as I was mentioning, with good new businesses that we are developing in U.S. and then specifically gain market share, gain market share in specific categories where we are focusing in Europe. And then you asked -- you said, are you growing the volume due to the market growth? So yes, more sales in the same customer or we are gaining new businesses in Europe as well. Yes, in some categories where we are putting in focus, yes, we are gaining new business and sustaining the existing ones and gaining new business in our focus categories. So my answer is, yes, we expect to keep sustaining, growing market share in those specific categories where we are focusing on.
And there are no further questions at this time.
All right. Very good. So that concludes then the Q&A. And now before closing the call, I would like to emphasize that we have now consistently delivered on expectations for more than a year, that these results confirm our recovery momentum further and that we are making solid progress on the portfolio refocusing and that we thereby are on track with the acceleration of the strategy execution. I want to thank you. Thank you very much. And hear you in February or before hopefully. We're expecting with the hit, our new CFO in place already. So thank you very much. Have a good day and good weekend. Bye.
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