Ontex Group N.V.

Good morning, everyone, and thank you for joining us today. I'm Geoff Raskin from IR.

I'm pleased to have with us Gustavo, our CEO; and Geert, our CFO, to discuss the first half results. We will limit this to a Q&A session.

But first, I will ask Gustavo to say a few words.

Thank you, Geoff, and thank you very much for those attending this limited call in which I will not be presenting, as usual, but let me make some remarks. Our audited full half year results are in line with our pre-announcement.

Quarter 2 and H1 results were disappointing, with weak volume caused by low customer demand and some supply chain inefficiencies. We have revised the outlook accordingly 2 weeks ago, and it is unchanged.

While we are working hard to return back to our growth plan in H2 by restoring revenue to last year levels, bringing adjusted EBITDA back to growth year-on-year and generate positive free cash flow, we remain highly committed to our strategic transformation. Our balance sheet is now healthy, thanks to refinancing and to divestments.

We have significantly improved our innovation pipeline in the last 3 years. We're in the middle of a major step-up in terms of operational efficiency, improving our footprint and our portfolio.

We continue growing fast in North America and our company culture is shifting towards being a leaner, more performance-driven organization. At the same time, we are taking actions where needed, accelerate targeted execution of plans and by aligning cost structure to changing reality.

So thank you.

So as just discussed, we'd like to open it up for questions. So I'll give it over to the operator to instruct you how to do that.

Yes. I have actually one question.

And if I look at the miss in the second quarter, it's not a small miss, but I think it's huge. And if you then look at your -- I think last year, we did have a miss or 2 years ago on, let's say, more cost in the third quarter and some hiccups in the step-up in your production in the U.S.

Now we have the miss and I think it's due to a lot of different things. What kind of visibility do you actually have because -- in that respect.

That's actually my question.

Fernand, you are talking about what kind of flexibility -- feasibility.

No, visibility, because yes, it's -- also here, I think you warned on July 15. But I think if you look at the significant of the miss than this must have already been known much earlier than.

So I think that also here, the warning could have been lower because it's on the cost side. It's on the volume side, it's on the cost side.

Everything is different than what we should expect. So my question here is actually where does your confidence, and I think it was also asked in the previous conference call, but I'm really sort of amazed about the miss -- and, yes.

Yes. Yes.

All right. So I will try and then you tell me if you feel comfortable with my answer.

We explained in 2 weeks ago in the conference call, we explained the reasons why we significantly missed quarter 2 versus our expectations. And it was -- as you said, now it was a combination of factors, right?

It was not just one thing driving this. And at the same time, when we were explaining about what we are expecting now for quarter 3 and quarter 4, second half of the year, we were explaining each of these drivers of -- negative drivers on the Q2, how we are expecting those in these following quarters.

I'm going to try to do again the same thing. So regarding the market trends, which has been one of our big driver, the lower demand and we continue expecting that same level of low demand.

We are not making assumptions that the demand will increase in our projections. Another significant driver for the low quarter 2 was based on that lower demand, there were adjustments on inventories from -- done by the customers, and we are assuming now in the second half of the year that those adjustments in inventories are done.

So we will not face again adjustments. In some cases, those inventors, they have been reduced to a minimum level.

Therefore, we are not expecting more adjustments in inventories affecting the volume. Another consequence of this lower demand has been a heavy activity from some A-level brands in an attempt to reach higher volumes and through promotional activities, more than significant versus other years at the same period of time.

We are not counting on a reduction of the A brands' activities, but we are assuming that they -- that it will be at the level of competitiveness for the private label as customers, retailers they don't want to go down, right, in market share as they are not going down in market share. In our projections for the -- also some of the reasons, and as I explain even now, it was caused by our -- some supply chain challenges that we had in the quarter 2.

Some of them totally unexpected, some others as a consequence of our transformational journey that we are going through. All those, the unexpected, of course, and the journey, they have been solved.

So we should -- we put in place severe actions to improve our customer service, our supply chain and not to have these inefficiencies. That is already in action.

Another topic was the cost -- higher cost that it has impacted in our EBITDA, not just in -- not the top line as I was referring before, but in the EBITDA was the cost of raw materials and increased cost in raw materials. And that's mainly driven by the RISI fluff index which today, we are already seeing that index change, and that it will have a positive impact in our cost, in our EBITDA, the result of that, towards the fourth quarter.

And then a big important factor for the top line and creating volume is all these new contracts that we have. New contracts that we have in North America and new contracts that we have in Europe.

And I can tell you that all of them, they are on track. And we already kicked off some of them.

Right now, we are finishing July. So we are already living our second half of the year and they have already kicked off.

So that is a big portion of our -- in top line improvement. That would be almost my answer to you, Fernand.

I don't know if there is something else that I haven't answered, please let me know, Fernand.

I understand you cannot predict exactly how volumes in the market operate, et cetera. But then for me, it is -- if I look at step-up in other operating costs, if you look, I think, in the first quarter that was minus around EUR 5 million or EUR 7 million and then EUR 22 million for the full year -- for the first half.

There is a big delta. If I look at the cost of goods sold, minus EUR 3 million in the first quarter, minus EUR 19 million in the second -- first half, so minus EUR 16 million in the second quarter.

So I assume this is a step-up of, let's say, EUR 20 million, EUR 25 million. And I think that when you are at the end of Q1 or the beginning of Q2 and we do have the conference calls, I think there you should already have flagged on that part that there would be such a step-up in cost.

And the sales I don't -- yes, I can understand that the visibility, yes, you cannot exactly know every quarter what retailers are going to bring in and sell themselves, and how much has to be replenished. But on the cost side, I'm so amazed that there is such a huge step-up, and you didn't flag that more properly to us.

Perhaps, Fernand, I will add some comments to what Gustavo said because now you're referring to Q1. First of all, our Q1 was also on the low end.

We explained that at that moment. There were some of the impacts already there, like, for example, the soft markets and then if you look to the second quarter and there, if you take the different elements that Gustavo mentioned, for us the water issue we had in Segovia, for example, was a very important one, and we only knew the impact of it became clear more in the months of May, June because these are impacts on rebuilding inventory, delivering to customers.

So it only became clear at the end of quarter 2. Another element, which was absolutely not clear.

If you look structurally to our markets, what happens now, the soft markets and as Gustavo said, we assume that it stays until the end of the year but it's very exceptional what happens. Typically, it's a period of a couple of months, and then you can assume that it comes back.

So we were in the belief that this was a temporary impact, although we said at that moment already that second quarter achieving the guidance would more be back-end loaded because the second quarter would be also more weak as compared to the other quarters, and that's, in fact, what's happening. I think if you look structurally to our business, everything you hear about supply chain, about markets, about our cost transformation plan on gaining contracts, structurally, everything is green for us because we believe if we look at a period of 1, 2 years, we are very confident that all the figures we're aiming for, we're able to achieve.

But you see, indeed, there's quite some volatility in the markets, like, for example, what happens with the fluff prices, they suddenly went up. Currently, they're coming down again.

And there is indeed some quarterly volatility that we see in our results that we have to manage, which is intrinsic in this business. Structurally, if you take more a view on 1, 2, 3 years, there we see that structurally, we have, yes, all the trends that we have foreseen are for us quite visible and quite in line with our expectations.

Could you quantify the additional costs for the Segovia water flood?

Yes. It's not something we disclose individually.

But if you look at it because you're talking about high numbers of costs. And first of all, what you need to know is lower volume for us in our plants.

We have quite some fixed costs, and definitely on a short term, short- term changes in volumes creates quite some impact because we cannot short-term flex our fixed costs. That means that we have -- there are some cost impact, which we believe we will have a much better absorption in the second half of the year.

And then it's on top because a lot of things that's happening is the complexity of different elements coming together. The fact that Segovia came on top, it's very difficult to quantify individually, but definitely, there are elements like intercompany transports we had to do.

And then you're talking about a couple of million euro, at least that is hitting the cost, but at the same time, we also have the impact on the sales because also we missed some sales because of that. And on the missed sales, we have the margin impact.

So perhaps, Fernand, I will say that 75% of the gap between our expectation for the first half and the reality, 75% of that is volume related. And the impact that, that volume, as Geert was mentioning in our EBITDA, is big due to sudden volume changes in the market, you cannot flex the overheads so quickly, right?

So 75% is volume related and probably 25% is other inefficiencies, and it's a combination of other inefficiencies. What you are saying is mostly right in terms of that at the beginning of quarter 2, we knew already about the cost of the raw material increase.

Yes, we did. So it's not that.

We deliver -- we normally -- we deliver on our objectives and our expectations in terms of cost transformation, therefore, those were -- they were at hand to offset that extra cost and some of the inefficiency that we suffer, but we are not able to offset the lower volume. So I would say that 25% that is on the gap as a result of some inefficiencies.

Most of those inefficiencies are already gone. The 70% of the gap due to volume, I was trying to explain what we're expecting in the volume before and how to recover that volume.

I do want to just come back and it's sort of following on that last question or certainly answer it to the end of it was when I look at the raw materials line, so you've got minus EUR 16 million in the quarter, minus EUR 19 million in the half, I'm looking at the table on Page 3 of the press release, just to be clear, impact on your EBITDA. And yet, sales price seem obviously down, and I get there's a lag between -- can you just remind us how the contract structures were at your customers?

Because surely, everybody is going to be benefiting, and certainly we've seen this on the branded side move more quicker pricing to react to some -- what has been a volatile period for particularly pulp markets, but I guess fluff pulp for you. How does it work?

And how quickly can you, in reality, offset those higher costs from raw materials because looking at those numbers, it would suggest that you may even be doing some contracts that are barely profitable at this point. So if you could just sort of remind us how that works?

And then just a second one, probably maybe a bit more upbeat. You obviously said the contracts are coming through.

Do you sort of sit here today more confident on your delivery of the full year guide? Because look, you've undoubtedly changed a lot of things for the better during your time with Ontex, Gustavo, but really, obviously, the guidance cut has come in unfortunate time.

But do you sort of sit here and you feel very comfortable that there is not another guidance cut to come even if the market softens slightly further in Europe?

So the price -- on the price side also has -- it's aligned with our expectations because it's a carryover from last year. So it's quite simple to estimate it, and it was forecasted.

So it's not out of our expectations. It's a carryover from price -- competitive price adjustment that we have done last year based on the raw materials because remember that you're comparing quarter versus a year ago, right, and -- or half year versus a year ago, and it is when we started to do some price adjustment based on the '23 raw materials reduction.

So that is going -- is phasing out at the moment, and we are not expecting anything else than potentially any type of based on some mix or -- geographic mix or differences in channels potentially. The pricing could be something like that, but we are not doing any price adjustment at the moment with any customer.

You asked the question about the contract, how does it work on the contracts. There is no -- in some -- in the healthcare channel, it might be some contracts that it includes some indices, but not in the retail environment.

And also, we have to take into consideration, and I'm sure that you will remember because in the February analyst call, we already talked about the fluff indices expectation increase. And we -- I referred to that as a not structural increase.

I referred to that, that it was more mainly due to supply, not from demand, and when it is from supply, the fluff increase, right, indices, and clearly understanding what type of supply -- the fluff suppliers, they are facing, we know that it's momentarily. And the level of the increase also would never justify going into a market price increase.

And even less, I have to say and be cautious in the environment that we are playing today with a market contraction in consumer demand where the competitiveness increase. So it's not the right environment to any pricing by any company.

And we knew that those cost increases, they were momentarily cost increases. As I said, when a company has a structurally good cost transformation program that -- as the one that we have started to implement 3 years ago, I would say that those needs to be absorbed by that definitely, those cycles -- normal cycles on pricing based on supply-demand.

But when there is something more structurally in terms of the cost of raw materials, more profound, that could be by a big change in the supply or by a big change in the demand, and therefore, the adjustment on the supply will take time, and you know that, that will persist, then there's a different conversation with customers definitely. But it's not protected by any contract.

This is open on the strategic discussion with the customers. So that is the answer for the first question.

And before I go to the second question, I want to ask you if it was clear, the first one.

Yes, it was. I appreciate that.

Just a very quick follow-up. How long is the average commitment at a price level with your retail customers?

Are you locked in for 3 months or is it 12 months?

Yes, the price is set by the contract. So if you win a tender, the tender has a period of time, sometimes goes by 1 year, sometimes 2 years, it's for the period of time of the tender.

And that's absolutely reasonable. Again, if there is a major change in the market, you can -- you are justified to go and renegotiate the price if there is a major change in the market.

And that is what we have done -- successfully done in the year 2023. So starting in -- I think that in the last quarter of '22, going through '23, we increased the prices based on the increased cost, a major increased cost that the market was suffering.

So we were in the middle of tenders, right? So we were in the middle of the contracts and we were able to increase the prices.

So it's not that it's not able. Nothing tells you that is automatic.

Nothing tells you that you cannot come with a change in the price if there is a major change.

I guess, I don't want to take you too much time, but just what is your average tender length, like what is an average contract, 6 months?

Well, it depends on the customer. There's some customers, as I tried to say -- in healthcare, you mean?

No, no, I get how healthcare works. I'm talking on the retail side, yes.

In the retail. In the retail, I'm saying it could be 1 year to 3 years.

But honestly, even though if you have a tender of 2 years with a customer and the customer decided to anticipate the next tender, they have the right to do it. And they will tender.

Again, it's more a strategic relationship with a customer, the one -- when I'm -- you have heard from me, Charles, several times, to emphasize, and I just did that at the beginning of this call. To emphasize on the importance and the significant importance that has -- to have a strong innovation pipeline.

Innovation quality, service level are key pillars for a retailer, not just pricing. So the more -- the strength that you get there, it's way, way important as to defend or to sustain a pricing in a customer.

It's not just pricing. So that's why my emphasis there, and perhaps it's not just I'm trying to bring color or different topics to the meeting.

But when I'm saying that this company has been changing, structurally changing in the last year is because we are making the changes in these things that will secure a better future for the company and valuation for the shareholders. The second question is about my comfort about on delivery in the new contracts?

No, sorry, can you remind me?

Yes, just I guess you took the guidance down. There was obviously -- it needed the contribution from these new contracts.

It sounds like they've started.

Yes, yes, yes. So in terms of the -- I can assure you that today, we are going in timing with the production and delivery on the new contracts with the customers that, as you are saying rightly, it is essential for us to deliver on the second half of the year.

So there is no indications for us today, and that something will not be in the timing and in the amounts that we are expecting. So these new contracts are going well at the moment, very well actually at the moment.

When I'm saying very well is because it's very highly exciting to see plants working at full speed and machines working at full speed. That does very good, very comfort.

One question on my end as well. Now that we have seen the result of both P&G and Essity, much better than what you have delivered on the like-for-like growth I just wanted to check a bit with you on a comment that P&G has made flagging that private labels for pricing very aggressively right now.

Obviously, if we look at the pricing impact you had in Q2 compared to theirs, it shows -- well, it reflects that story. Just wanted to check with you, how do you feel about this comment?

How do you see this evolving in the second half of the year?

Yes. Maxime, first of all, I would not comment on what the competitor has said in their remarks, but I can tell you that shelf pricing of the private label of the A brands are decided, in the case of the A brands are decided entirely by the retailer, not by us, shelf or consumer pricing.

And the level of A levels of promotion and specifically by the leader that you have mentioned in Europe as an A label has been increased perhaps by threefold versus the same period of time of last year. So you can deduct and make your insight on that, right?

Because that is what happened in the market. But I cannot talk about what the competitors say or may not say in their analyst calls.

Just to follow up on this, clearly understand and I appreciate the comment on aggressive promotion and so on. But still, if you compare the pricing impact of the two, we see a clear disconnect there.

So I just wanted to make sure we understand everything correctly. So basically, if I look at baby care, for instance, you have underperformed Essity quite materially.

Can you maybe a bit elaborate on what the difference you see in terms of pricing compared to Essity in Q2, for instance?

Well, in pricing, again, it depends on what the competitor is talking about. We focus entirely in private label, while the competitor is a hybrid company, and they have branded business and private label.

And when you read that competitor information, you have a mix of that. At the same time, every company, and I can assure that every company does their accounting in some things in a different way.

So it's very difficult for any of you to read exactly and do comparable numbers in terms of baby care pricing. So difficult to answer your question in a way that you would be able to read because I can't read that.

I have two questions actually, and it's around Turkish asset sales and leverage. So I think in discontinued operation, you still show net cash from your Turkish activities, maybe you can confirm if that is all Turkish cash.

And when I look only at the core group, net leverage was at 3x at end June. So in fiscal year end '25, assuming the Turkish asset sales will be finalized, completed during H2, there won't be any discontinued operations, I think, and you derive then at net leverage of about 2.5x as guided.

Can you disclose what's the net proceeds will be from the asset sales in H2? And I have a little bit of a hurdle to derive from the 3x at the core group to the 2.5x by year-end.

Maybe you can explain that bridge a little bit. I think EBITDA recovery as just explained will play a role, but maybe some net proceeds.

So maybe you can provide these pieces a little bit. And a subsequent question would be where do you see the RCF drawn at fiscal year end '25?

It was at EUR 185 million right now, a much higher figure than what I expected actually. So maybe you can explain where you see the RCF at year-end.

Okay, Markus. I will take that one.

A lot of questions, so I will try to give answers, but tell me if I missed something. First of all, you're right in the discontinued operations, but you can find that in our reporting, we still have some significant cash that's indeed in the Turkish legal entities.

So the purpose is to recover it in the purchase price. You know that we disclosed, if I remember well, some net proceeds last year.

So if you ask about all the proceeds of Turkey, it's around EUR 20 million, EUR 25 million, something like that. If you derive it back from what we got from Brazil, but it's without the cash.

So that means that we recover also the cash, and that cash is coming back to us. And if you take that then and you take out, of course, a limited EBITDA contribution we have in Turkey because it's positive, but it's limited and you take then the proceeds that you will be at the guidance that we put for the end of the year, around 2.5x.

That's our guidance. But of course, it includes also the positive free cash flow that we foresee in the second half of the year in the core business.

And you know that our guidance is that we will be around zero and that our free cash flow in the first half of the year was minus EUR 40 million. So that means that we expect about EUR 40 million positive in the second half of the year.

And then if you link that to the RCF, you can say that at EUR 40 million at the end of the year, if we generate that EUR 40 million, then the RCF will decrease more or less with that amount. And for us, we are looking at cash and RCF, we're always a bit careful.

It's -- for us, it's a bit communicating vessels. But of course, all the cash that we have in Turkey, we cannot repay on the RCF.

Once we can unlock that cash because for us, it's a cash -- it's a tax-efficient way to get the cash repaid based on the sale of the business instead of paying dividends, then we can probably also -- we will also probably use part of that cash also to decrease the RCF. So RCF, in a nutshell, it will go down then with EUR 40 million on the free cash flow of the core.

And partially, we can use also the cash in Turkey once recovered in order also to repay the RCF. Is that clear, Markus?

That is clear. I mean the bits and pieces at the end we will see, I mean, as effects on working capital, whatsoever, will play a role too, I think.

But I see the potential. That's good.

Secondly, maybe just a question on the, let's say, price competition in that market on which you just elaborated. I mean do you see actually that a form of price war is coming back to the sector after the period where you had the chance to overcompensate raw material pressure by price increases quite nicely over the last 2 years.

Is that for you, given the difficulty of the overall market, coming to an end? And you have not set, let's say, freedom to raise prices if you want to compensate raw material pressure.

Is that the new normal in that sense?

Well, in -- I'm going to take that one, Markus. In -- perhaps the first thing that I would say is there is -- no we don't see pricing cost -- raw material cost price increases, right?

So we don't see a need of price increases due to raw material, but to your question about the potential price war coming back, price war, right, due to the competition, well, I would not deny that the market dynamics at the moment in terms of consumer demand, the depressed consumer demand in some sectors like in the baby care, it will put pressure on the pricing because companies, they will try to defend their positions in their customers or with their consumers, right? So yes, that would probably be a reality.

And in other sectors, not in our categories, there are other categories that in a growth mode and supply of the right product, the supply of the right quality is essential for the customers. Then retailers are growing, and they need product that the capacity needs to be in place.

So it's not the same for every single category that -- it's not for every category. In terms of the intensity of that competitiveness in the price front, I want to say that, that's exactly why we -- yes, it's part of the game.

And why this -- the team in Ontex has been working so hard and in terms of structurally changed our operational efficiencies, because we need to generate enough cost savings to overcome these moments. Those are cycles all the time.

And we are getting more and more ready to face those type of things, to face some raw material changes or to face some competitive pricing. We said from the beginning in the plan that our cost transformation gains, which are significant year-on-year our -- due to the efficiencies that we are looking after in our operations are to serve two major objectives.

One, to improve our bottom line margins and one, to improve our competitiveness in the market, the other one. So that is what we are doing.

It's not that I'm trying to simplify the answer of your question, but it is part of the game. I hope that I answer you.

Yes. Thank you.

Yes, look, I really -- we really appreciate the opportunity to have this call. And I know that we had one 2 weeks ago and now -- so I appreciate the time that you are investing in -- on our company and to understand what's going on.

And for us, it's always super important to be able to express what's going on and trying to be as much as transparent as possible. As a closing remark, I just want to say, please do not forget where we were 3 years ago.

This company today, yes, it's true, we have a very disappointed second quarter, disappointed first half of the year, we -- but don't forget how much we have been progress in the last 3 years in this company, making structural changes. Our balance sheet today is a healthy balance sheet, and that is key for any company to continue operations.

And that has enabled us, at the same time, to invest in the company with the cash that we are generating, investments that are transforming the operations in this company, having more technology to be able to produce the innovation that our R&D teams are developing and then we bring it through the operations into the market. So these structural changes are here to stay for the long run.

Yet we have plenty of more things to do. And that's why we are saying very emphatic that our focus today is to accelerate the implementation of this plan because this transformation journey is not yet done.

And maybe we are 50% there, we are 60% there, but we have plenty of things to do, and that will secure this shareholder value for the future. So that would be my last message.

Let's remind all the things that we have done in the last years. Thank you very much.

I appreciate it.

Thanks a lot. Bye-bye.