Ontex Group Nv Ord

Good afternoon, everyone, and thank you for joining us today. I'm Jeff Raskin from IR. Unfortunately, Gustavo, our CEO, could not make it today. He is recovering from a medical procedure and is expected back soon. Peter, our CFO, will take the whole presentation this time. Before that, let me remind you of the safe harbor regarding a forward-looking statement. It will not read out loud, but I assume you will have duly noted them. Also, as you may know by now, we are in the process of divesting our emerging market division, so these have been accounted for as asset held for sale and discontinued operations since 2022. When presenting continued operations, this consists solely of core markets. When we refer to total group, this also includes the discontinued emerging market division. So, Peter, with that, over to you.

Thank you, Joff. And good afternoon, everyone. Gustavo passes you his greetings. He regrets he can't join us to share the strong progress that we're making. And to kick off first, we are delighted to have announced the closure of the Mexican divestment on Tuesday. The regulatory process has been long, but €225 million of cash is now in the bank, giving us an immediate 25% reduction on our net debt. This allows us to pay back the €220 million term loan without delay. The total net receipts of the divestments is about €265 million, including the deferred payment of approximately €40 million, which we will receive within the next five years. Important to note, this is not an earn-out. It's linked to a receivable that Softies will have to collect for us and transfer once received. If not collected and transferred fully or partly within the next five years, the remaining amount will have to be paid by them. On the operational side, as you know, we have retained the Tijuana plant and the North America partner brand business, which form part of our core business and are key to our coast-to-coast manufacturing footprint that we now have in the US. While this is only one step in our portfolio transformation process, it's an important one. As this business represents half of the emerging markets scope, we are set to divest. We continue to make progress with the remaining emerging markets divestments, and we expect to tell you more in the coming updates. Turning now to the Q1 results on slide four. First, at the total group level, including the discontinued emerging markets division and so also Mexico, we have delivered a significant increase in our results in quarter 1-23, despite continued cost inflation. Revenue is 652 million, up 16% like for like compared to last year, driven by the impact of the positive pricing actions we took in 22 and continue to take in quarter one, together with overall stable volumes, which saw little more of a seasonal impact than quarter one last year. Total group EBITDA recovery was even stronger, more than doubling versus last year, and the margin at 8.5%, nearly doubled as well, growing by four percentage points year on year and one percentage point versus Q4. It is worth noting that the recovery of emerging markets was also important in this, with margin up more than five percentage points year on year to 7.3%. Net debt was largely stable at the end of the quarter prior to proceeds from the Mexican assets. The leverage ratio improved significantly, coming down from 6.4 times at the start of the quarter to 5.3 times at the end, thanks to the significant recovery of the adjusted EBITDA. Focusing on our continued core markets, revenue is up a similar 15% like-for-like to $446 million, and the adjusted EBITDA margin stepped up strongly to 9.1%. This represents an increase of close to four percentage points versus Q1 last year and 0.4 percentage point versus Q4, demonstrating the strong momentum on Texas recovery. More detail on this in the following slides. On slide five, let's now look at the year-on-year revenue bridge for core operations in quarter one. The 15% like-for-like revenue increase I was talking about was mainly driven by the impact of pricing. As we said before, with the massive increase in raw material and other input costs, pricing was and is an absolute necessity to rebuild profitability and our balance sheets. And this could never have been achieved just through cost savings. So here we see in the quarter the full impact of continued pricing actions. Around one quarter of the impact has been generated from the most recent pricing, taking effect in quarter one and three quarters of it over the course of the pricing we took over the course of last year. On the volume mix front, we are comparing to a strong quarter last year that was helped by forward buying in baby and femcare and anticipation of higher prices. This year's quarter one volume mix has been positively driven by continued strong growth in baby pants and in adult care, where we see an acceleration to 22% growth in the quarter. This was upset by a slightly slower U.S. market with inventory reduction in the lifestyle segments. The underlying trends remain favorable for our growth drivers, including in the U.S., where we are continuing to build our operations following the car route of Tijuana and the ramp up of the new plants in North Carolina. We also benefited from a small positive impact from Forex of 1%, mainly 3%. to the year-on-year appreciation of the US dollar and the Russian ruble, which offsets UK sterling. On slide six, the year-on-year bridge of adjusted EBITDA of our core markets shows how we nearly doubled adjusted EBITDA to 41 million euro, thanks to the following. First, improved focus on driving growth in products and channels that create better value, which has generated a 5 million mixed benefit. Second, operating cost reduction measures that continue to deliver consistent additional savings. The 60 million euro savings brings operating costs down by more than 4% year on year, as in 2022, with delivery across procurement, design to value, and manufacturing efficiency initiatives. Third, our pricing actions. In quarter one, pricing has delivered 58 million euro to adjusted EBITDA. This offsets the continuous increase in input cost inflation, notably €38 million of higher raw material prices and €17 million of higher operating costs, especially driven by fluff, energy and wage inflation, both in our operations and at our suppliers. The increasing year-on-year cost reflects the cost inflation we saw throughout last year, but also a further increase versus Q4, more specifically on certain raw materials, energy, and wages. Importantly, this is the first quarter where the benefits from pricing have offset the impact of inflation on a year-on-year basis. However, while we are making good progress against cost inflation, pricing has not offset the full hike of inflation that started in 2021. You can see that in the table on the right-hand side of the slide. The net impact of pricing and cost inflation since 2021 remains in negative territory, so we're not there yet. SG&A costs were up slightly with inflation, but remained firmly below 10% of sales. The Forex impact was negative as the positive impact on revenue was more than offset by the US dollar impact on raw materials. So turning to the momentum of the EBITDA turnaround on slide seven. On this slide, you see in the blue bars the evolution of adjusted EBITDA with core markets in dark blue and the emerging markets in the light blue above that. As of the second half of last year, you can see the steady recovery in adjusted EBITDA since the low point in the first half that was hit hard by the unprecedented cost inflation. The adjusted EBITDA progress in quarter 1.23 confirms the recovery process we set in motion, both for core and emerging markets. On the margins, that's the orange lines, you can see core markets on top at 9.1%, steadily improving quarter over quarter since Q2 last year. In light orange at the bottom, you can see emerging markets where cost inflation hit earlier, but also where price implementation could be implemented faster. The margin has been steadily improving here since the start of 2022. So across divisions, we have been recovering over the last three quarters as we continue to generate cost savings to drive our margins up and caught up on the additional inflation with gradual pricing. But we're not yet at our historic margin levels, and we strongly believe we can do better. And this picture also illustrates that further potential. So turning now to our financial structure on slide eight. This slide illustrates the net debt and leverage ratio evolution of the total group. The strong increase in EBITDA in the last quarters has been the driving factor in the reduction of the leverage. That's the orange line. From its peak at the end of September of 7.7 times down to 5.3 times end March. And we are on track to meet covenant tests in June. At the same time, net debt has been remaining largely stable at €880 million, as shown in the green bars on the charts, on the following moving parts, starting from a strong EBITDA, including €10 million restructuring costs, of which half is cash. And our Q1 CAPEX was slightly above 3% of revenue, going up, as we indicated before, ensuring we capture future growth and make our manufacturing operations more efficient. Working capital in Q1 increased slightly, impacted by higher input costs versus the end of 2022. And we paid slightly higher interest rates on the floating part of our debts. And remember that the semi-annual bond coupon for about 10 million Euro falls in quarter one and quarter three, so not Q2 and Q4. So this brings me to the positive impact of the Mexican divestment on our overall debt profile. On the next slide, nine. The proceeds from the Mexican divestment will obviously reduce net financial debt immediately by about €225 million and €265 million over time, as I said earlier. The positive impact on the leverage ratio will be more limited, as the divestment also includes an EBITDA reduction. As I said earlier, the proceeds from the divestment will be used to pay back the €220 million term loan. That means that pro forma, the majority of our gross debt, about 75%, excluding the leases, will now be in the bonds we issued back in 2021 with a fixed rate coupon of 3.5%. A very sound situation to be in, given the current volatility in financial markets and interest rates. The remainder consists of the utilized portion of our revolving credit facility and some local debt. And only that revolving credit facility will be carrying leveraged governance going forward. So to conclude, a key important step forward in our financial profile. And important to note, of course, that further deleveraging remains a core priority for Antec Centrally. So turning now to our outlook on the next page. With still a volatile macroeconomic environment and Strengthened by a good start of 2023, we confirm our outlook with revenue of our core markets to grow high single digits like for like. Adjusted EBITDA margin of the core to improve from 6.2% in 22 to around 9% in 23, with a higher cost base to be offset by cost reduction measures and pricing as seen in the first quarter. Note that the cost base might still increase further in Q2 as we still partly benefited in Q1 of inventory from before. While there could be potential for less tension on selected raw material prices in the rest of the year, be aware that this would only impact P&L with up to two quarters lack. On emerging markets, excluding the Mexican business as of now, we expect these to continue to contribute positively to EBITDA and free cash flow while we continue to work on their divestments. Including these elements, we expect the leverage ratio of the total group to come down by year end to below four times. So, in closing my presentation on these encouraging set of first quarter results, we are very pleased to report that the recovery of OMTEX is firmly underway. We've also passed an important milestone with the closing of the Mexican divestment, improving the balance sheets, and we continue with the other defined emerging market divestments. In short, the EBITDA recovery and reduced net debt gives us more space and allows more focus on accelerating our turnaround strategy, drive cost transformation to a drastic reduction in complexity, driving growth, profitability, and strong cash generation. I am now available to answer your questions you might have.

Now, before going over to Q&A, can I ask you for practical reasons to limit yourself to two questions only, please, and come back at the end of the queue if there is need for more. Operator, over to you.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question from the queue, it's star two. But again, please press star one to ask a question over the phone. We will take the first question from Charles Eden from UBS. Please go ahead.

Hi, thanks for taking my questions. I'll keep to two as asked. So my first one is just, you mentioned the de-stocking impact in North America. Are you able to quantify the impact this had on volumes in Q1? And then whether you expect to continue dragging Q2 from this destocking, or have you seen this largely played out by now? And then my second question is on your four-year guidance. You've obviously left the 8% to 10% EBITDA margin guidance range unchanged for core markets. But with 9% achieved in Q1, I can't help but see the 8% as extremely prudent. Why did you decide not to raise this guidance to 9% to 10% or even 9% to 11% EBITDA margin guide for the year? Thank you.

All right. Thank you, Charles. On the destocking, your first part of the question, the destocking in the US, yes, there's been a mainly temporary impact on quarter one in the destocking of especially the lifestyle segment that we've seen high sales and some stocking up at the end of the quarter last year. most of that should have been factored out. You know, U.S. remains for us a very important strategic X on which we are projecting, you know, double-digit growth in the years and quarters going forward. So this should be mainly an impact we've seen in quarter one. On your second question on the outlook, it's obvious, of course, that as it does with you, that the quarter one provides confidence in the momentum and the turnaround that Ontex is delivering. You know, we might be a bit prudent. I acknowledge that, but it's still early days, first of all. And secondly, there are still quite a number of uncertainties in the context around us. Q1 has been indeed right in the middle of that margin guidance. and I'm certainly not happy with the 9%, so we'll continue to push very hard to grow that in the next quarters and years. Some of the reflections behind it is that, first of all, inflation is factually not over. We had a Q1 that is higher than before for the reasons I've been quoting, and many of those input costs are still at or around record high levels. Q1 has partly been benefiting also from some inventory levels we still had at the Q4 pricing level. So we might see a bit of an impact on that in the second quarter. If you look at the different components, there's ups and downs in some commodity costs. We are planning on what we have in April today, so we're not banking before anything happens. There could be potential environmental decreases, but we're basing on what we see today. And that's why we have confirmed the guidance of 8% to 10%.

That's great. Thank you. And then just one quick follow-up on the destocking. Obviously, flattish volumes in core markets reported for Q1. Maybe you could ask, what would it have been without the destocking, plus one, plus two, just to try to get a scale of that, the magnitude of that destocking impact in North America?

Thank you. Yeah, Charles, that is a good question. It is not that easy to answer it straightforwardly because there's different elements playing into that. When you look at it on our net sales level, volume mix is indeed flat. Now, it's important to realize that when we were comparing flat versus Q1 last year, which had a lot of forward buying, we had a very strong month of March with forward buying on Baby and Femcare, anticipating price increases that followed after. We have a bit more, we talked about it in your first question, some higher seasonality, not just in the US, but the seasonality in emerging marketplace as well within that between Q4 and Q1. An important additional element to note or two maybe, one is we do see in Q1 a continued momentum on private labels, retailer brands across most categories in Europe and several categories in US. So that's something that is securing and strengthening our volumes. And next to that, we are focusing on improving our portfolio mix and stopping some dilutive contracts rather than just looking at purely volume expansion. Certainly also in emerging markets, we do that, which is part of the reason why these margins go up so strongly also there. And that effect you can see in two ways. First of all, in the strong growth that we continue to post in our priority categories, baby pants and adults. And secondly, also in the fact that this neutral volume mix on the net sales line becomes a positive on the EBITDA line.

Very clear. Thank you.

The next question comes from Marcus Schmidt from Odor BHS.

Thanks for taking the questions. I have just two. First, could you comment please how Q2 has started so far and if you see similar price and inflation trends as in Q1 or if inflation headwinds are coming down? Already what you just said obviously implies there will be some assumed headwinds. But if you're able to expand the margin further because price and inflation amounts were almost equal in Q1, so how will these two positions evolve in Q2 and in the remaining year? And then I have a second question.

Okay. So I'll start by answering the first one then. You know, it's obviously... the intent and the projection that we continue our momentum that we've been showing over the last quarters. I'm not going to give very specific guidance by quarter. We have done that for the full year, but what I can say is some of the moving parts is we will, what I just explained to Charles about the underlying drivers on the volume, we will continue to see, we believe that the traction coming from consumers shifting into private label and hard discount and discounter segments. And we will continue to be focusing on our optimizing, improving our portfolio mix as well. So that's something we'll continue to see in the second quarter. On the cost level, we'll see a number of things. I already talked about some of the increases that will come rather in Q2 rather than Q1 because we were sourcing still from some inventories in Q4. So that will be an upside. Roughly, honestly, cost levels will, I believe, are going to be fairly much close in Q2 as we've seen in Q1. And, you know, I think we just, we will be focusing on making sure that we continue the momentum. We had a reasonable start in April and we hope to see that in the months going forward.

Okay. And the second question is on the free cash flow. I mean, I saw that the gross debt went up and then cash on hand increased also. So maybe you could break down free cash flow generation a bit. I know you spoke of capex and working capital movements and the cash interest on the bond was paid by on-tax. So maybe you could bring that a little bit together, how sources and uses were.

Yeah. Yeah, right. I mean, you recapped the major components already, but maybe a little bit more light in that the adjusted, starting, of course, from the adjusted EBITDA, we've seen the step-up that you know we have posted. We had about 10 million of non-recurring investments in the quarter, which is mainly on some restructuring to secure that we align our SG&A investments below the 10% and we keep it below the 10% as we divest our emerging markets business. So about half of that non-recurring was based on that and the rest has been on projects. We have been gradually increasing our capex from 2.6 to 2.8 in the last quarters of 2022 to 3.1 this quarter. 70% of that being in growth and saving generating initiatives so that's the second driver working capital as i mentioned after improving it in q4 we had to use a bit more we increased it a bit again in quarter one mechanical impact of inflation as one driver second driver we have we are still being a bit more defensive than a normal run rate on inventory levels to secure the service level so that's a That's something that has been playing on the working capital. And I've commented on the higher financing costs already with the bond coupon and then the minority of the floating partner financing that led to a bit of an increase. So that's what's been driving that.

And that was financed by the increase of other debts, which went up a little bit. So you draw on the RCFs then in the quarter or...

Yeah, we continue to draw on the RCF, slightly higher than what we had at the end of 2022. But we have it to manage our working capital, and that's what we use it for.

Okay, great. Thank you very much. Thank you.

We'll now take the next question from Karin Elias from Barclays.

Hi, thanks for the presentation and thanks for taking my question as well. I just had two broader questions. One was really on the drawings on the RCF currently as of the first quarter. Then my second question was more on the pricing. Obviously, some of the raw material prices are coming off. I'm not sure whether you were hedged on the fluff, but how should we think about pricing going forward? Do you have any pressure basically to reduce pricing as raw material prices are coming off?

Yeah. All right. I think on the RCF in quarter one, I've largely answered. So I think that hopefully is covered. On your question on the raw material prices and any pressure on that. Yes. I mean, if I look back a little bit at last year, I mean, the whole industry has been pricing. So at the end of the day, our customers have clearly understood the need for pricing, which does not mean that there's no negotiation and there's no pushback to some point, but at this level of increases, obviously the whole industry, including ourselves, have been pricing. Today, there's probably a bit more pushback because the inflation is not decreasing, but it's going up less fast than it was in the second half of last year. So from that perspective, that slowdown of the increase is generating a bit more pushback. Now, It's very difficult to answer your question in an average way, because we have customers on the one hand side that essentially that we were able to price pretty fast and full. And on the other hand, as customers, sometimes more in the healthcare side of the business with longer contracts, with more legal restrictions where we have not been able to price and in some cases even wait the extension or the renewal of the contract to do so. So there's no average answer I can give to the pricing that to be done going forward. There will be more pricing selectively, but obviously it's also fair to say that a very significant part of the margin growth going forward is going to come from cost transformation as a very big contributor. And secondly, also the optimization of our portfolio by focusing on the most profitable part of our mix.

That's very helpful. Thank you.

We will now take the next question from Patrick Folin from Barclays. Please go ahead.

Hey, good morning. Thanks for taking my questions. Can you talk about the benefit or quantify maybe what you saw from inventories for raw materials from a cost perspective in Q1 and maybe how that will look going into Q2? And then on the North American business related to volume mix, in the previous question, you said you were projecting double-digit growth in the coming quarters. What is the split between pricing volume there? And then within that North American question, looking at slide six for the EBITDA bridge, there was a $5 million mix impact in the quarter. What was embedded in your 2023 guidance for that number and how should we think about that moving forward over the course of this year? Thank you.

All right, just give me a second to recap your questions. Okay, if I start from... Question one, your question is about inventory evolution in Q1 to Q2. Obviously, there's been an increase in inventories because of the further inflation that we have been seeing in Q1 versus Q4 and the year before. So that's obvious. Now, as I mentioned before already in one of the previous questions, we expect more of a stabilization of that increase on the COX. So COX-wise, there should be a big difference in inventory costs now We have been holding more safety margin on the inventories in view of some service levels concerns, quite selective ones, specific ones in Europe, which we believe to phase out by this month actually. So therefore I do see a positive evolution on inventory in our working capital for Q2. That was your first question.

Just on the volume mix for the double-digit growth you were talking about in North America.

Yeah. Well, I think we're going to be having short-term still some – the pricing is rather similar to the core, and we are still going to have some further pricing kicking in for the U.S. in the second quarter. So that's clearly going to be a contributor. And overall, again, as in the rest of our business, There will be some selective pricing going forward, but then here also the volume and the fact that in the US, we have an opportunity, which is very clear. We have a private label segment that is half of what we have today in Europe. So there's a lot of opportunity that sits in that. And within the US itself, our market size is still fairly small. And so we do have... a lot of opportunities going forward. And that's going to be the main driver of the volume mix and the double-digit as I talked about in the future.

And just on the EBITDA bridge impacts in terms of volume, the mix impact $5 million in Q1, I mean, what was embedded, I guess, in your guidance for this year for that number?

Yeah. Yeah, I don't, to be honest, I cannot answer immediately what was embedded specifically in quarter one in the plan on our outlook. It's obviously, it was embedded in our strategy that we focus on the volume mix on the value side of it. And so, yes, from that angle, it is. But again, there's so many moving parts, it's hard to answer specifically on quarter one assumption that we took at the time.

Okay. Thank you very much.

Thank you.

The next question comes from Ferdinand De Boer from De Groot Peter Kahn, please go ahead.

Yes, good morning. Thank you for taking my question. First question is, could you split out, let's say, the contribution of Mexico to your first quarter results? That's the first one. And then the second one, coming back on the pricing question, you said that 75% is not done, 25%. do you still need to take prices up or in, in Europe or is it all done now and only selected prices? Yeah. Could you elaborate on that?

Yeah. Okay. Um, on the, um, on your first part, uh, Mexico in the quarter one results, um, you know, the, the, I think I've said it before, well, I know I've said it before in previous, uh, quarterly calls, and it's still the case that a very large portion of the EBITDA that is generated in the emerging markets, it's linked to Mexico, which is also why I said that the leverage impact of the divestment of Mexico is going to be positive, but slightly positive. Now, the important notes to make next to that is that actually the growth in EBITDA over the last quarters has mainly come from other regions in emerging markets, so not Mexico. with a strong improvement in both cash and EBITDA, which is obviously great that it is not a drain on our profit and cash situation, and also and especially that it should only help to get more proceeds out of the divestments that we're still obviously doing on those other areas than the core. Do you still need to take prices up in Europe? Yeah, I think I partly answered to it in a previous question, but it's obviously a good one. First of all, there is no average answer to that, as I've mentioned. I've talked about the two extremes on customers, some that we've priced full fast, other ones we are clearly behind. If you look at our margins, we still have some work to do. So essentially there will be some more pricing, but it's obviously not going to look like what we've been doing in the last year. And as I mentioned, the contribution of the profit growth on the other elements will be proportionally picking up versus the pricing part. But there's still some work to be done, but more selectively.

Maybe follow up on the Mexico of the divestments. Any update on the divestments of the other activities?

Yeah. Well, obviously, the biggest update is that we have divested Mexico, which is obviously a very important one. Um, and, uh, you know, we are, uh, and, and it's, you know, Mexico has been the first one to be recovering from, uh, the very big impact we had across every side of our business. Um, in, um, in, uh, with the inflation hitting last year. So Mexico was the first country to, to recovery, emerging markets, other areas like Turkey with the hyperinflation or Brazil with the complex economical environment and energy costs took more time to get, uh, to get back on track. So. I've talked about the great news that these countries are now also at the level that they start contributing, be it still at margins that can be improved. So those turbulences in these markets have not made it easier since the start of the announcements, since we announced end of 2021 to divest, but we are progressing on all of them. We do continue to have strong discussions and interested parties. It is fair to say that... Algeria and Pakistan are probably closest to a next milestone. But, you know, in the meantime, we're focusing on continuing to improve that business and we will inform you when there is more to report on that.

Okay, thank you very much.

The next question comes from Prajeet Singhal from Palmerston Capital Management. Please go ahead.

Hey, good morning. Thanks for taking my questions and also first, Congrats on a very strong set of numbers. I had a question which was really a follow-up to Karine's in terms of the fluff pricing. My understanding was that you have entered into a one-year contract, fixed-price contract for fluff. And this year, the price was fixed, I think, late last year or this year, which is much higher than the current spot price. First of all, is that correct?

What we have is that we will have fluctuating fluff prices going forward that are linked to the VC index. So if there is relief on that VC index, and you need to make sure that you look at the right VC index, the one that we use for our products, there will be up and downs following that industry. So it is now variable to that.

Understood. Understood. Okay. Understood. That answers that question. Second question was on Russia. You keep, even in Q4 and Q1 numbers, talk about the FX impact because of the ruble. So clearly ruble earnings are not insignificant. Can you give us a sense of what these numbers are, EBITDA revenue from Russia?

Yeah. So, you know, revenues for Russia that we reported earlier, in the full year was also in December and we're along the same lines, was 6% of the total revenue and 9% of the total revenue of core markets. And as you say, the ruble has been helping, inflated ruble has been helping a lot to bring those numbers up in the second half of last year. Q1, Russia is still contributing well, still to a large extent helped by the ruble, as we have seen in the end of 2022. We do expect some softening on that in the next quarters, because with a tougher forex comparable, and honestly also a little bit on the volume, because if you look at our core business, the growth in our core business on volume is actually stronger outside Russia than it is within Russia. which is also obviously partly a consequence of the fact that we dialed back all the investments. We stopped investing in that business. So for those reasons, we expect some softer contribution on that in the next quarters.

Have you disclosed the EBITDA margin from Russia? Is it something broadly in 9-10%?

No, we're not disclosing a margin on a country-specific level.

Understood. Thank you very much. I'm done.

Thank you.

As a reminder, to ask a question, please press star 1. If there are no further questions, I'll hand the call back over to your host.

All right. Thanks, everybody, for attending. I'm happy to have been able to share the strong quarter one results. And we're not there yet, but there is a strong recovery, at least, that we started showing. And on top of that, having a very important milestone in our portfolio strategy. I'm confident on the route forward. And thank you for attending. And we'll be talking soon.