Ontex Group NV (ONTEX) Earnings Call Transcript

Good afternoon, everyone, and thank you for joining us today. This is Geoff Raskin from IR. I'm pleased to have today with us Gustavo, our CEO; and Geert Peeters, our CFO, to present the third quarter results. Before that, let me remind you of the safe harbor regarding forward-looking statements. I will not read them out loud, but I will assume you will have duly noted it. You're well aware that since 2022, our P&L is based on continuing operations, which consists of our core market activities only, while the emerging markets are reported as discontinued operations. We have already divested or are in the process of divesting most of these. But meanwhile, these activities continue to contribute to our results. Please note that since the start of the year, we have changed the definition of free cash flow to reflect free cash flow after financing and the operating savings in our EBITDA bridge, we have readjusted to a net figure after subtraction of implementation costs. We have now also adapted the presentation of the year-on-year bridges for adjusted EBITDA, isolating only the translation impact of foreign exchange fluctuations, both for Q3 and for year-to-date figures. With that cleared up, Gustavo, over to you.

Thanks, Geoff. I'm proud of the Ontex teams with a solid delivery in quarter 3 as summarized on Slide 3. First, we continue to grow volumes by 4%, with double-digit growth in adult care and double-digit volume growth in North America baby care, 2 of our focus areas supported by a strong sustainable innovation pipeline. Sales prices were lower, reflecting past raw material price decreases, leading to a revenue growth of 2% like-for-like versus quarter 3 last year, and 3% more sequentially compared to quarter 2 this year, showing continued growth in the year and making quarter 3 the highest revenue generated in core markets since 2021. Second, the adjusted EBITDA margin rose to 12%, 2.4 percentage points higher a year ago, and adjusted EBITDA rose 29%, driven by volume growth and continued strong delivery on the cost transformation program. Third, with lower debt and increased EBITDA, we brought our leverage down further to 2.4x, strengthening our balance sheet. These solid results are the outcome of the laser-focused execution of our strategy through the defined 3 value creation drivers. On next slide now, and before digging into this, let me highlight the agreement we reached to sell our Brazilian business to Softys. We expect the deal to be closed during the first half of 2025, by which we will receive net proceeds of about EUR 82 million. This transaction will thereby not only allow us to focus even more on retail brands and healthcare in Europe and North America, but also give us additional means to transform the company further, building on the 3 value creation drivers that you see described on this slide. Next, starting first with competitive and sustainable innovation. This first quarter, we launched -- this quarter, sorry, we launched our next generation of baby pants, Dreamshield 360 with our unique and patented pee & poo barriers and a 360 fit for all around protection and comfort. We anticipate a strong uptake from this product as we already see with our latest baby diaper innovation launched in quarter 2 with integrated and patented Stop&Lock Anti-Leak technology. In feminine care, we introduced SatinSense tampons, improving comfort with its silky coating, ensuring smoother insertion and removal. And in adult care, we are deploying our channel X-CORE technology, a new core design that meets the top 3 needs of adult consumers, protection, comfort and discretion. These innovations also are environmental benefits, reducing plastic consumption. On that topic, I would like to congratulate the Ontex collaborators and the sustainability team, in particular, for the EcoVadis Gold rating for ESG transparency awarded recently. They are doing a terrific work in that field. This innovation pipeline is the fuel for our business expansion ambitions shown in the next slide. We recorded double-digit volume growth again in adult care category with our strong position in Europe, supported by consumer trends. We also continue to grow baby care volumes by high double-digit with retailers in North America, with new contracts having started in the last quarters and continue onboarding of new customers, 2 in the first half of the year and now 2 more in quarter 3. The combined effect of a strong innovation pipeline and our commercial initiatives are helping us to build solid long-term partnership with our customers. And third driver is best-in-class operations, where we reduced our operating cost again by 4%, gaining competitiveness by a relentless implementation of our cost transformation program. A key milestone to pursue this effort in the -- is the conclusion last week of the social plan regarding our Belgium footprint transformation. We will close Eeklo plant by year-end, and we will transform Buggenhout over the next 1.5 years into a center of excellence for research, development and production of medium and heavy incontinence products. While these are very difficult decisions to take -- to make, they aim to strengthen our operational cost efficiency across Europe, enabling us to improve our competitiveness further. That being said, I leave you over to Geert for the details of the financials.

Thank you, Gustavo. So we are now on Slide 7, with the revenue bridge for Q3 versus last year, showing like-for-like the growth of 1.7%. As Gustavo already mentioned, out of this 1.7%, volume and mix grew 4.4%. The main contribution came again from adult care with volumes growing double digits as it did in the first 2 quarters. Adult care is now the largest category in our portfolio. We have a very strong position in Europe, especially in the institutional channel, where we gained this year new contracts. Also in the retail channel, we noticed further growth, supported by societal trends with a growing and more active aging population. Volumes were up in baby care as well. In Europe, they were stable thus we outperformed the market. Overall market demand continues to reduce slightly in line with the lower birth rate. And at the same time, this quarter, retail brands are not gaining share due to continued intensified promotional activity by branded players. Then in North America, however, baby care volumes were up double digits with a steep ramp-up in production. This is supported by several new contract gains this year with 2 large new retail contracts that started up in Q3. While retail is growing fast, we are more selective in contract manufacturing, where we mainly focus on a limited number of lifestyle customers. We've also been more selective, keeping focus in feminine care, which explains the lower sales volumes in that category in the quarter. Sales prices were 2.6% lower year-on-year, reflecting the drop of raw material prices in the past periods. The sales prices thereby normalized after the huge increase in '22 and '23. Compared to Q2 this year, our sales prices have stabilized as did raw material prices. Sale prices remain, of course, an instrument to strengthen our competitive position, combined with innovation, reliability, quality and, of course, excellent added value services. So we will further engage in limited price investments, but this will be more than compensated by higher efficiency. This brings me to Slide 8 with the adjusted EBITDA bridge. The adjusted EBITDA grew 29% to reach EUR 56 million in Q3. Let me go through the different building blocks. The strong volume and mix, as explained on the previous slide, contributed EUR 8 million. Our cost transformation program continues delivering significant savings this quarter amounting to EUR 14 million net of implementation costs. And as before, this comes from multiple improvement initiatives in purchasing, manufacturing, logistics and product innovation. These reduced our operating cost base year-on-year by 4%. Next, you see the EUR 12 million impact from lower sales prices. But as I explained before, this is more than covered by decreased raw material prices. The indices driving these prices have been normalizing gradually after the peak in '22. And currently, raw material prices are stabilizing. If we look at the impact year-on-year, this is still a significantly positive. Other operating costs were up EUR 10 million. This is explained by continued inflation of wages, energy and logistic costs, but also in this quarter, more than before by inefficiencies in our supply chain due to production ramp-up and asset transformation. These are of a temporary nature, and we expect these to bring important savings in the future. Finally, SG&A costs were also slightly up with inflation and ForEx translation effects had a limited negative impact. All in all, the adjusted EBITDA margin further strengthened, growing from 9.5% in Q3 last year to 12% this year. And finally, we can see further strengthening of the balance sheet on Slide 9. Net debt, which is presented in green here, landed at EUR 579 million at the end of September, which is EUR 9 million better than in June and even EUR 86 million improvement compared to the start of the year, thanks to strong adjusted EBITDA generation and the disposal of Algeria and Pakistan. This lower debt drives down our financing costs, thanks to a minimum use of the revolving credit line and a lower margin, which is based on the leverage grid. The adjusted EBITDA for the total group generated in the last 12 months and adjusted for scope changes further rose to EUR 241 million, which is shown in blue. And then in orange, the leverage ratio dropped further to 2.4x, improving compared to 2.5x in June and 3.3x at the start of the year. This brings us in an even stronger position to realize a successful refinancing, which we are actively preparing. I hand you back over to Gustavo for the outlook.

Thank you, Geert. I'm pleased about the further progress we are making on our transformation journey. We confirm our 2024 outlook, which we revised upward in July for our adjusted EBITDA margin at about 12%. For free cash flow with more than EUR 20 million, including payout of about half of the Belgian social cost and for leverage ratio to remain below 2.5x. On revenue growth, we were probably a bit over enthusiastic raising the outlook in July. The onboarding of new customers in North America, combined with the ramp-up of additional capacities resulted in the phasing of our orders and deliveries. This led us to review our revenue growth guidance now expecting it between 2% to 3%. We are in the middle of our transformation journey, and I feel more comfortable now to say that Ontex is back and maybe stronger than ever before. We compete in a very attractive market. We have a best-in-class experienced team. We have successfully executed 2 major milestones this quarter, all while consistently delivering improved financial performance. And with this, Geert and I are ready to answer your questions.

Before handing over to the operator, could I ask you to state your name and firm and limit your questions to 2. If time allows, we'll do a second round for additional questions. And if not, feel free to contact IR afterwards. Operator, over to you for the practical details.

Thank you, Mr. Raskin. [Operator Instructions] Our first question today will be coming from Wim Hoste of KBCS.

I have a couple of questions around the U.S. business. Can you maybe elaborate a little bit more about, yes, a couple of things. First, how many contracts are there still to ramp up? And yes, what kind of ambition do you have for Q4 and beyond? Is that still strong double-digit growth also for Q4 and then continuing in '25? If you can elaborate a little bit around that? And then also, yes, in light of the ramp-up efforts and the capacity expansions, how is the profits evolving in the U.S. business? So those were the questions.

All right. Thank you, Wim, for the question. In U.S., the onboarding of the new customers is as we were expecting since the beginning of the year. At the beginning of this year, I mentioned that we -- at the end of '23, we were doing very good meetings with new customers, and we were expecting this onboarding customers sequentially in -- throughout the quarters of this year. So there are 2 effects here. One is the onboarding of new customers is happening exactly in the way that we were expecting and also the orders in the way that we were expecting and our ramp-up in terms of capacities and deliveries is what we are spreading throughout the quarters. So what we can expect towards the fourth quarter is us definitely continue growing because we are ramping up all those sales quarter-by-quarter. And fourth quarter will continue to be a strong growth in baby care in North America. And as you can imagine, that is also continue now in 2025 and also 2026 because our relationship with the customers are long-term relationship there. So this onboarding of new customers, the existing ones which were exactly aligned as we were expecting for this year has happened, and we are wrapping up on that deliveries to them. And once we are in 2025, we will compare with 2024, and we are going to have much more increased top line sales in 2025 versus 2024 because we are increasing deliveries to customers quarter-by-quarter. That is in terms of the revenue, in terms of the top line. In the profit side, yes, Geert?

Yes. On the profits, Wim, I can briefly comment. First of all, we always said that U.S. was still very dilutive for the overall profit, which is, of course, still the case because we're ramping up. The driver is, of course, the important economies of scale that we will realize in the coming months step by step. And on top, currently, with the ramp-up, it comes, of course, with a lot of inefficiency costs at this moment. So we will have a double impact next year. Those, of course, very profitable contracts, they will bring us economies of scale and there will be less inefficiencies, and we also will go more and more in that cost transformation program we have in Europe. We also will have the U.S. So the purpose is that, that dilution will not be dilutive anymore in the future.

Okay. And is that the case in '25 already that you should reach similar margins? Or is that a general statement more towards the medium term that you just made?

Yes. I think the steps will go very fast by quarter-by-quarter, but reaching the levels in Europe, there we will definitely need more time. It's not a question of quarters. That's a question of a longer period.

And if I can add to that here, it also -- one of the points that Geert mentioned was the inefficiencies is because we are increasing capacity in U.S., so meaning that we are starting up machines and while we are growing, we will continue increasing capacity. We will continue start-up machines. So it's not yet fully reaching, and it all depends on how much we are going to keep growing the business. But definitely, the scale that the business in U.S. is already reaching, it will start being a big driver in our profitability on that business. So the growth is on in terms of not just top line, but in terms of profitability, it is going to be impactful.

Okay. And last question, are you willing to share a kind of revenue target or ambition for '24 and '25 in the U.S. business?

Not yet.

Okay.

Not yet, unfortunately, sorry. But we cannot give guidance today for '25. But as I was mentioning, I'm trying to be very clear. So imagine, I'm going to be as much as transparent as possible. We have added in Q3 and Q4 -- actually in Q3 and Q4, we are adding new deliveries to new customers that they were not existing before. So -- and those customers are starting, right? And imagine that they are going to be fully in during starting in Q1, Q2, Q3, and then you're going to compare versus the previous year where those customers were not there. And I can tell you that the size of the customers that I'm talking about are sizable customers in U.S.

We'll now move to Fernand de Boer of Degroof Petercam.

It's Fernand de Boer from Degroof Petercam. I'd like to come back because, Gustavo, you said that the onboarding of these new customers is going according to what you were expecting. Where is then the delay? And if you then have to warn for the sales growth for the full year, is this then due to lower volumes? Or is there also a price component which is -- negative price component, which is stronger than you expected? And also, maybe this is all related to the same question. What about Europe? Is that still according to your expectations? Or do you have the feeling that because of the efforts of the branded companies that you are having less growth than expected? So that's actually my first question. And then the second one is on the price outlook because it was now minus 2.6%. Any comments on that one for the coming quarters? And then maybe last question, you mentioned in your presentation, the refocus of fem care, which also had quite some negative growth in the quarter. Could you elaborate a little bit on what you exactly are doing there and what we could expect in the coming quarters for that one?

Yes. Fernand, thanks. So I'm going to go in the order of the questions, perhaps on mixing a little bit. But -- so your first question is about if the onboarding customers are growing as expected and why the deliveries is a consequence of less volume or it is a different type of consequence, why we are changing the guidance that we raised in July. And there is not because we have lost any type of customers or nothing about that. It's -- on the contrary, we keep -- we did all the onboardings of the customers as expected. All the expected also contracts and long-term relationship with the customers are going very, very well. And when I'm saying very, very well is because we have a true partnership with them. We are working with them. And through that partnership also, we realized in combined way that spreading the volume through the quarters, it was better than facing altogether. So that is -- as it is so big, the volume growth in U.S. is impacting on our total expected volume growth. And -- but it's still significant volume growth. So it's more about spreading this growth through the third quarter, fourth quarter and first quarter next year more than -- not more. It's only that instead of that we have any particular problem with not boarding any of the expected customers in U.S. So all that front is going well. We are delivering the right quality. We are delivering the right timing. So I'm saying that I'm very, very happy in the way that we are ramping up this growth -- significant growth in U.S. But of course, that perhaps there is always some bumps in the road. In terms of the pricing, no, has no pricing impact in U.S. The pricing is not the impact. We are delivering the pricing that we -- there is no pricing problem there. And then you asked the question about Europe. In Europe, we are delivering on -- based on our outlook in terms of volume growth, in terms of -- even I know that in our presentation, it was said that baby care in Europe is steady, while the market trend perhaps is not. So we are regaining something there back in terms of share, but it's steady positively, not steady negatively. So I'm very happy as well how our innovation pipeline is helping us to keep growing this relationship with the existing customers in Europe and also how this innovation pipeline in baby care and in adult and feminine we are having these meetings in Europe. The prospects there are very, very good. In terms of pricing that you were asking also, I guess, that you're referring by the lowering the pricing, 2.6% lower pricing. That is because it's carryover from the pricing because this is compared third quarter of '24 versus third quarter '23, which I would say that was almost the peak of the highest price that we have had. Starting in fourth quarter '23, I don't know if you remember or not, but we already started to saying that we were adjusting the prices based on the new material price decreases. So then when we compare this quarter, quarter 3 versus the previous year quarter, then it shows the biggest gap. But when we compare quarter 3 this year versus quarter 2 this year, that pricing is stable. So we are not facing lowering prices anymore. Although that -- I just want to say that all of our cost transformation program is helping us to deal with the ups and downs potentially on the cost front or the ups and down on our competitiveness. That's why it is so important to continue with this cost transformation program. In terms of feminine care, we -- several times, I was talking about selective categories that we focus on selective categories like baby pants, like adult care pants to push forward strong growth, and we are delivering those, not just because there are trend in the markets, consumer trends indicate that, but also we have good competitive advantages in terms of those lines. So our focus is there. In feminine care, we do have also focus on tampons. We have focus on certain lines of feminine care. But the consequence of our decomplexification program that I have been also referring in the past, which gave us the opportunities for big cost transformation savings. This decomplexification came, as you can imagine, in feminine care, there is huge amount of SKUs, huge amount of portfolio spread. And in this process, of course, that we -- all under our criteria and initiatives in this process, we know that we were going to lose and adjust some volumes in the feminine care. But we are prioritizing in those that we want to make a difference. So it's a matter of stabilizing that business, but we are stronger now than before in how we compete there and the margins that we are getting in those business. I hope that I was answering you, otherwise let me know.

Yes. No, very clear.

We'll now move to Patrick Folan calling from Barclays.

How should we think about the baby care like-for-like development in 2025 when stripping out these phasing impacts, I guess? And what I'm kind of asking is the headwind we saw here in Q3, the uplift we should expect to reverse next year? And is that kind of the bridge basically between your new guide and the previous guide? Is that like a good way to view it? And just my second question, just on adult care, can you just give a little bit of color on the share gains in the institutional channel and the supportive retail market you saw in Europe?

Okay. So in terms of the baby care, I guess that your question was referring to U.S. Is that right, Patrick?