Ontex Group NV (ONTEX.BR), a leading international provider of personal hygiene solutions, has reported a robust start to the year with a 4% like-for-like revenue growth in the first quarter. This performance is primarily attributed to increased volumes in North America and select European categories. The company's adjusted EBITDA margin also saw a rise to 11.5%, bolstered by a successful cost transformation program.
Ontex has reduced its net financial debt, resulting in an improved leverage ratio of 2.8 times. The company is committed to being a dependable partner for retail and healthcare customers, focusing on innovation, expansion, and operational excellence. Ontex is targeting a low single-digit revenue growth in its core markets for 2024 and an adjusted EBITDA margin between 11-12%, with the aim to reduce the leverage ratio below 3 times by the end of the year.
Key Takeaways
- Ontex achieved a 4% like-for-like revenue growth in Q1, driven by strong volumes in North America and selected European categories.
- The adjusted EBITDA margin increased to 11.5%, thanks to the company's cost transformation efforts.
- Net financial debt has been reduced, and the leverage ratio improved to 2.8x.
- Ontex is focused on being a trusted partner through competitive innovation, business expansion, and operational excellence.
- The company forecasts low single-digit revenue growth and an 11-12% adjusted EBITDA margin for 2024.
- Leverage ratio is expected to drop below 3x by year-end.
- Ontex has begun delivering to new customers in North America and is managing a competitive European market.
- The divestment of Algeria is complete, with Pakistan close to finalization, and strategic options for Brazil and Turkey are under consideration.
- Ontex is confident in its ability to refinance before the RCF and high-yield bonds expire.
Company Outlook
- Ontex anticipates low single-digit revenue growth in core markets for 2024.
- The company targets an adjusted EBITDA margin of 11-12% for the same period.
- A decrease in leverage ratio to below 3x by the end of the year is expected.
Bearish Highlights
- The European market is highly competitive with increased offerings and promotions from A-labels.
- Margins in the U.S. are currently lower than in Europe due to lower economies of scale.
Bullish Highlights
- Ontex has started delivering to new customers in North America.
- The company is confident in its strategic journey and its ability to build scale and profitability in the U.S. market.
Misses
- There was an increase in OpEx due to remuneration, which was a one-off event related to the previous year's provisions and payouts.
Q&A Highlights
- Ontex addressed questions about its performance in North America and the competitive European market.
- The impact of the U.S. dollar is limited, with hedging in place to mitigate potential impacts.
- Confidence was expressed in the company's refinancing capabilities for the RCF and high-yield bonds.
Ontex's first-quarter results reflect a strong start to the year, with significant like-for-like revenue growth and an improved adjusted EBITDA margin. The company's efforts in reducing financial debt and improving the leverage ratio demonstrate a solid financial position. Ontex's strategic focus on innovation and operational excellence, coupled with a positive outlook for the coming year, positions it well in the competitive hygiene products market.
Despite challenges in the European market and the U.S. margins, Ontex's management shows confidence in their strategic journey and the ability to achieve their financial targets. The successful divestment of its Algeria operations and progress with other strategic options underscore the company's commitment to optimizing its portfolio. With a clear path to refinancing its obligations, Ontex is poised to continue its journey toward sustainable growth and profitability.
Full transcript - Ontex (ONTEX) Q1 2024:
Geoff Raskin: Good afternoon, everyone and thank you for joining us today. I am Geoff Raskin from Investor Relations. And I’m pleased to have Gustavo, our CEO; and Geert Peeters, our CFO, with us today to present the first 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 are well aware that since 2022, our P&L is based on continuing operations, which consists of our core markets activities only. The emerging markets are reported as discontinued operations and while in the process of being gradually divested, these do still contribute to total debt and cash flow figures. Please note that we have slightly adjusted the definition of savings in our EBITDA bridge as to better reflect net savings, netting them with the implementation cost, whereas we previously reported gross savings. With that cleared up, Gustavo, over to you.
Gustavo Paz: Thanks, Geoff, and hello, everyone. It is definitely good to start the year delivering a strong quarter one. This gives us confidence in the outlook we provided to you in February and bring us further on our transformation path. Our results are summarized on slide, next Slide 4. We’ll continue expanding our business, 4% like-for-like revenue growth in the quarter. While last year, our growth was largely price-driven, now it is based on volumes, especially in North America, being our main source of growth. And in Europe, we continue growing in selected categories such as adult care and baby pants, leveraging our competitive advantages. Adjusted EBITDA margin rose to 11.5%, 2.4 points higher than a year ago and 1.1% higher than the previous quarter. Again, strong delivery of the cost transformation program was at the base, while we are managing prices in function of input costs and market dynamics. The strong EBITDA delivery in the quarter allowed to further reduce the net financial debt and increased the last 12 months adjusted EBITDA, which brought our leverage ratio to drop to 2.8x. This is already below the 3x we guided to be reached by year-end. Our financial position is thereby continuously strengthening. Our delivery in quarter 1 is largely the effect of our strategic road map that we are implementing starting 2023 and enabling value creation. Moving to next Slide 5 now, as we have expressed multiple times, our vision is to be the number one trusted partner for our retail and healthcare customers. Our leadership position in Europe is well established in baby, feminine and other care categories and we know it is not a given. So we need to work every day to nurturing that. In North America, we are rapidly building this position, focusing first in Baby Care. To create value equity, we have identified three main drivers. And each of these, we have made further progress this quarter. First, by competitive and sustainable innovation, bringing value to our portfolio, we have rolled out new products like our new line of swing pants and SatinSense tampons among others. It feels good to also receive recognition to our efforts with the carbon disclosure project awarding us as an A minus rating for leadership in climate change and B for forest disclosure and thereby also listing us on their supplier engagement leader board. Also on innovation, we’ll remain a leader and have now been listed for the second year in a row among top 10 applicants in Belgium. Second value driver, business expansion, with the biggest opportunity being North America, where we envisioned a strong double-digit growth this year and beyond. The growth will come from existing and new customers already delivering a strong quarter one. This will contribute more in the coming quarters as we are preparing for new launches in quarter two and quarter three of this year. And third, best-in-class operations with further implementation of our cost transformation programs, innovation, manufacturing, supply chain and procurement gradually transforming our European operations into a best-in-class. The operating cost base reduced by 5% as we did in the last 2 years enabling us to regain competitiveness. And finally, let’s not forget that we have further progress on the portfolio of refocusing with the finalization of the Algerian divestment early April. With that, I hand over to Geert for a more detailed analysis on our financial results.
Geert Peeters: Thanks a lot, Gustavo, and also from my side, hello to everyone. Let me go into more detail in the elements that drove our results. Revenue grew 4% like-for-like in the first quarter of 2024, mostly driven by volume growth. Volumes grew strong double-digits in North America, which currently focuses on Baby Care products. And as Gustavo explained, growth came from additional contracts secured in the second half of last year and new contracts have kicked in this quarter and are ramping up. In Europe, Adult Care grew by 10% with retail brands gaining market share and Ontex strengthening its position. As for Baby Care, we noticed stronger competition from the A brands trying to recover market share with promotional activities. We, however, managed to compensate decline in diapers with double-digit growth in the selected category of baby pants. Pricing and that in line with expectations, ended slightly lower than a year ago. Prices have been coming down since the second half of last year, subsequent to the raw material price decreases. As to ForEx, we continue to have a slight adverse impact, bringing the total growth to 3%. Let’s move to EBITDA on the next slide. We managed to increase adjusted EBITDA by 30% year-on-year. Let’s explain step by step. First, there’s a slight positive impact from volume and mix, as I explained on the previous slides with the revenues. The most important driver, however, remains our structural cost transformation program, which continues to deliver important structural net savings, yet again, 5% of operational costs. And as explained in the revenue bridge, prices were slightly lower, reflecting the positive evolution of raw material indices. They came down sequentially last year with year-on-year impact turning positive in the last quarter of ‘23. We do not expect further raw material price improvements in the coming months. Operating costs continued to be impacted by inflation, but at a lower pace than last year. This includes energy costs and salaries primarily. The latter also mainly explains why SG&A costs are up. On top of this SG&A includes the actualization on variable remuneration at the start of the year, which is actually more a one-off in one quarter. And it’s based on the solid performance of ‘23. Finally, the ForEx impact on EBITDA turned positive for the first time since a while. This is largely the effect of the U.S. dollar, which weakened in Q1, impacting positively our U.S. dollar costs and this more than offsets the adverse revenue impact. And as Gustavo already explained, the strong growth of the adjusted EBITDA led to a further margin increase to reach 11.5%. If you then take Slide 9, you can see the quarter-on-quarter evolution of the adjusted EBITDA. It has been improving since mid-’22. And this quarter, it’s already the seventh consecutive sequential increase. That EBITDA improvement has also been the main driver supporting the leverage reduction as we can see on the next slide. The leverage ratio on this slide is presented as the bold orange line. And this has been continually coming down since September ‘22 and now drops below 3 to 2.8. The drivers of this balance sheet strengthening are as well the decreasing net debt as a increasing last 12 months EBITDA evolution. Presented as the blue line, the LTM adjusted EBITDA is growing significantly, already up to €229 million this quarter. On one hand, as explained before, this is driven by the strong adjusted EBITDA delivered by the continuing operations. But on the other hand, the emerging markets also contribute this quarter another €12 million. Therefore, the total group EBITDA in Q1 amounted to €65 million, taking into account also a minimum of non-recurring items. Presented as the green line, the net financial debt came down in the first quarter to €646 million. As to cash flow generation this quarter, working capital was slightly up with growth of the business. But capital expenditure spending was lower than expected due to phasing. We, however, still expect our investment levels to reach 6% of the core markets revenue for the whole year. Looking back on the graph to the mid ‘23 and again at the green line, please be reminded that this was impacted by the proceeds of the Mexican divestments, which pushed down the net debt. Moreover, the adjusted EBITDA was taken out from the scope of the LTM EBITDA. Since then, net financial debt has been relatively stable as we temporarily reinvest the cash flow in the transformation of the group to drive midterm value creation. I will hand over back to Gustavo for the outlook.
Gustavo Paz: Thank you, Geert. What I’m pleased about the further progress, we all have it very clear that much is still to be done. And the Ontex team is determined to do it. The delivery so far continues giving us confidence in reaching the outlook we gave earlier this year as we confirm on the next Slide 12. We expect core markets to grow revenue by low single-digit like-for-like in 2024. Adjusted EBITDA margin of our core markets is anticipated to step up from 10% in ‘23 to in between 11% and 12% this year, driven mostly by continuous delivery on our cost transformation program. Looking at the total group, we expect free cash flow to improve year-on-year and this while stepping up investments to more than 6% of our core markets revenue. And finally, we expect our leverage ratio to drop from 3.3x at the start of the year to below 3x by end of year. With 2.8x end of March already, we anticipate to do even better by year-end. And with this, Geert and I are ready to answer your questions.
Operator: Thank you, sir. [Operator Instructions] We will now take our first question from Wim Hoste from KBC-S. Please go ahead.
Wim Hoste: Yes. Good morning. And I have then two questions, please. First one would be on North America and the outlook there. Can you offer some clarity on how much of the new contracts you’ve recently signed have already contributed in the first quarter? And how much more is to come in the second and the third quarter? Also, how much clients you have, if you can talk a little bit around that? That’s the first question. And the second one would be on the competitive environment in Europe. You mentioned to see increased promotional activity from the A labels. Is that continuing also in Q2? Can you maybe also comment a bit on that? And so those were the questions. Thank you.
Gustavo Paz: Alright, very good. Thank you. And yes, so in North America, this quarter, first quarter ‘24 compares with the first quarter ‘23. There is a change in the mix of customers in our portfolio. And that is due that we have started to deliver to new customers that we didn’t have last year and continuing delivery to the existing customers of last year. You ask about the proportions there. Majority is still in the existing customers that were existing before. But we just started to deliver on the first quarter on new customers. What I can say is that as the year progress, we will continue delivering on those new customers of the first quarter. We are going to add new customers delivering in the second quarter. And we’re going to keep adding in the third quarter. So as much as we’re progressing on increasing our capacity for supplying customers, that is what we are facing in our sales as well. So the outlook is promising. That’s regarding the first question. The second question which is quite good, yes, it is very clear that the market in Europe has been highly competitive coming from the A labels increasing their offering, promotions starting from, I would say, November, December last year, very clear and continued throughout the first quarter. And that, of course, that brings more competitive to the retailers’ brands of our customers. But I would love to emphasize that we are side-by-side with our customers, working with them on bringing value to the retailers brand and improve their competitiveness of their brand through our performance, for our innovation. And yes, what we are expecting for the second quarter, don’t know really. But we are expecting retailers brand to be highly more competitive in the marketplace.
Wim Hoste: Okay, understood. Thank you.
Operator: We will now take our next question from Charles Eden from UBS. Please go ahead.
Charles Eden: Thanks for taking my questions. Again, two. First one, with the Q1 core markets EBITDA margin, I guess, already at the midpoint of the 11% to 12% range for the full year cost savings to progress through the year, should we not be seeing the top end of the guidance range is pretty much the base case here? And I guess if that’s the case, is it a bit of prudent for not raising the guidance given we’re still only 3 months through the year? Second question and I appreciate this may be a little bit premature, but with leverage now below 3x for the first time in quite a while, have you given any consideration to what level you’d want to see this drop to before you’d consider reintroducing an ordinary dividend? Or do you think that the sort of organic investment CapEx accepted to fund the North American expansion really is the priority over reinstating the ordinary dividend? Those are my two. Thank you.
Gustavo Paz: Thanks, Charles. I will take the first question. So we are very, very pleased with the results on the first quarter. But we have to understand that this is a first quarter, so it’s very early in the year. And although it could sound prudent, our guidance, we want to confirm those. And when we are saying between 11% to 12% being in the first quarter, in the middle of that range is very encouraging. So I would say let’s be encouraged by the results. And we have to continue working very, very hard and that is what we’re going to do. We are not at this time of the year, we are not changing any of our guidance.
Geert Peeters: Hi, Charles. I’ll take the second question on the leverage. I hope you’re also encouraged by our leverage coming down. And so we are at 2.8x. And definitely, we go on. The purpose is to go definitely further down and even down below the 2.5x. Currently, you know that we are fully focused on our journey, the 3-year transformation plan we’re executing with a lot of investments this year, but also next year. So there, we have the focus there we look at. And, of course, purpose is to have value creation and to come to a much higher cash flow also in the coming years. So that’s our focus now as a management in 1 or 2 years. We can then see what this means as other opportunities and also dividends might be proposed at that moment, but it’s not the focus we have at this moment.
Charles Eden: Thank you, guy. And congrats on a strong quarter.
Gustavo Paz: Thank you.
Operator: Our next question comes from William Dennis from Bank of America. Please go ahead.
William Dennis: Thank you for taking my questions. I have two. Firstly, could you provide more detail on the status of the RCF, if you can? And then probably you’ve mentioned it already, but any clarification on your material cost expectations for the year? That will be all for me. Thank you.
Geert Peeters: Can you – I will take the question on the RCF, of course, William. But what exactly is your question on the RCF?
William Dennis: You provide the drawn status as of now, as of the end of the quarter. Thank you.
Geert Peeters: How much we took the consumption of the RCF. Yes, you can see the cash levels in our press release. So, we are gradually repaying the RCF. We were slightly higher in cash, but it was mainly cut off. So, that means that RCF, if you take our free cash flow, that gradually it will come down quarter-to-quarter with the repayments we are doing with the free cash flow. I don’t have the exact figure of the RCF now that we took, it would be about €120 million, something like that.
William Dennis: Thank you.
Gustavo Paz: On the raw materials, what we are expecting for the outlook, I can say that raw materials, there are – some part of the raw materials that they are having a slight increase in the marketplace and some others are stable. But what we are seeing is that finally, we are approaching a time where raw materials are following more supply-demand curve than an inflation type of curve that it was experienced in a couple of years ago, that was very, very challenging. So, now it’s – raw materials are – when we are saying that they are stable, there are variances, depends on the supply-demand. Some of them could go a little bit up. Some of others could go down. The important also matter is how we see our cost transformation program in which we work significantly with our procurement teams and R&D teams and to continue improving our position on the average prices of those raw materials.
William Dennis: Okay. That’s very clear. Thank you.
Geert Peeters: You’re welcome.
Operator: And we will now take our last question from Markus Schmitt from Oddo. Please go ahead.
Markus Schmitt: Yes. Thanks for taking the question. I have two. Firstly, could you please provide an update on your divestment process? And if you think something could be announced in the next months, any update there would be helpful. And secondly, are there any plans to call or refinance the 2026 bond already? There should be some time, but your performance is quite sound now and maybe an advantage when you would come to the bond market and present your current credit story, so maybe any plans on that side? Thank you.
Gustavo Paz: Alright. I will take the first question on the divestment process. So, as I mentioned before, we already finished the divestment of Algeria. We are close and yes, very close to finish Pakistan, although it’s very, very small. And we continue working on our strategic options for Brazil and Turkey as they are in our – in that process. And of course, that we will communicate as soon as we have any progress on those, we will communicate. At this point, we are working on those strategic options.
Geert Peeters: Then Markus, I will take the second question on the refinancing. As you know, the RCF expires at the end of ‘25, the high-yield bonds mid-‘26. So, we feel still that we have plenty of time, just 1.5 years before the RCF expiring. In the meantime, we are strengthening the results. We are strengthening the balance sheet. You have seen also that Standard & Poor’s said the first step to take the negative outlook away. So, we only hope that the rating agencies further acknowledge the improvements and can also reflect that in upgrades of the ratings. We also see the yields on our bonds, which is becoming better and better. So, that’s the journey we are in. And we are, of course exploring the options towards doing the refinancing in time. And we are very confident it will be successful.
Markus Schmitt: Okay. Thank you very much.
Operator: Thank you. And we have a question from Fernand de Boer from Degroof Petercam. Please go ahead.
Fernand de Boer: Yes. Good morning. Thank you for taking my questions. One question I have is on the operational leverage. You had very strong volume growth for your mix. But your EBITDA contribution of this mix as of volume was only up €1 million. So, that’s my first question. And the second question, we have seen recently a fairly strong dollar, where in the EBITDA bridge, actually the dollar impact of the ForEx impact was positive. So, with your current hedging what could we expect in the remainder of the year? Those are my two main questions.
Gustavo Paz: Alright. I will take the first question on the volume mix impact on the EBITDA of €1 million. It is regarding our mixing – the portfolio mixing as a total. We have in our – while we are growing significantly in volumes in North America, we are bringing our scale up in that business and improving our margins in, while we are building the scale, but it is an investment period of time. And therefore, that mix of geographic mix is what you see that is a lower impact in the EBITDA. But as we don’t mean giving you any different guidance, what I am saying is that while we are building that scale in U.S., at the same time, we are making it more profitable that business, as you can imagine. So, it is highly promising for the following quarters.
Geert Peeters: Okay. And then I will take…
Fernand de Boer: I am sorry, I still paused on that because you have a higher EBITDA contribution in the U.S. So – but the volume decline in Europe is then causing that it is only – the balance is only €1 million. That’s the way I have to look at it because it’s our absolute figures. It’s not to do with margins.
Geert Peeters: Okay. I can try to explain it in my words. It’s – of course, the margins, as you know, in the U.S., are currently lower than in Europe because of our economies of scale. We did not scale up sufficiently. So, that means it’s still coming. You heard Gustavo on new contracts ramping up in Q2, Q3. Also the existing ones are not at full speed. So, that gives us, of course, a country mix impact currently, so that we have only a limited impact. But throughout the coming months and quarters, that margin will come up by building the economies of scale.
Fernand de Boer: Okay.
Geert Peeters: And then your second question on the ForEx impact of U.S. dollar. We checked again in the end if we look to the U.S. dollar in quarter one, the movement was limited. Also it became a bit stronger last month, but yes, it’s very limited. We are – yes, currently, with all the forecasts, we are always updating to see where we are. And we see with the hedgings we have the impact towards the end of the year with the current rates is not meaningful.
Fernand de Boer: Okay. And maybe one follow-up question, if I may. You mentioned also that the cost – OpEx went up because of the remuneration, where you now have to account for, you have quite some shares for the long-term incentive plan. Does it mean that with every year our share price, we have to take into account around €4 million cost increase on that side? How does that mechanism work?
Geert Peeters: No, there is no impact. So, I think you are referring, Fernand, to the SG&A, which was higher.
Fernand de Boer: Yes. And where you actually also account for…
Geert Peeters: That’s really a one-off related to the provisions we had on the ‘23 bonuses and the actual payouts because it was a great year last year and that’s the main impact. So, it’s a short-term impact you will not have any more in Q2, Q3. Thank you, Fernand.
Fernand de Boer: Okay. Thank you.
Operator: Thank you. And there are currently no further questions at this time. With this, I would like to hand the call back over to our speakers for any closing remarks.
Gustavo Paz: Okay. So, we delivered a strong start of the year. We finalized Algerian divestments allowing us to focus more on our core markets. We rolled out new products and grew volumes by strong double-digit growth in North America. And our cost transformation program has delivered structural savings yet again. Our achievements so far and the dedication of the Ontex teams give me confidence to make further weigh on our strategic journey to be the number one trusted partner of our retail and healthcare customers. So, thank you very much for your participation and have a great weekend.
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