Ontex H1 results: Strong execution results in continued improvement of margin and leverage, leading to full year outlook raise to high end of guidance

• 15% LFL revenue growth, driven by pricing and mix;
• Adj. EBITDA more than doubling driven by structural cost savings and mix;
  Pricing offset Inflation and forex headwinds;
  Adj. EBITDA margin for Core Markets at 9.4% in H1, improving sequentially for four consecutive quarters to 9.7% in Q2;
• Net financial debt reduced by 24%, with Mexican divestment proceeds;
  Leverage ratio reduced by close to 2 points to 4.5 times, benefitting from adjusted EBITDA increase;
• Adjusted EBITDA outlook for Core Markets expected in high end of the 8-10% range for full year,
  and leverage below 3.75x by year end.

H1 2023 results

• Revenue ^[1] was €892 million, a 15% like for like improvement year on year, driven by double digit price increases across all categories. While volumes were solidly stable in a softer market, with growth in  Europe offsetting customer destocking in North America, the mix improved with growth in selected categories. Including adverse forex, revenue was up 14% year on year.
• Adjusted EBITDA ^[1] was €84 million, 2.1 times the EBITDA of H1 2022, uplifted by the mix improvement and continuous structural cost savings that reduced the operating cost base by 5%. Pricing offset the additional input cost inflation and adverse forex headwinds, but has not been sufficient to cover the total cumulative cost inflation incurred since 2021.
  Adjusted EBITDA margin rose to 9.4%, up 4.3pp year on year.
  Operating profit was €36 million, compared to a loss of €(84) million a year ago, including €(11) million restructuring costs.
• Profit for the period stood at a €(19) million loss, compared to €(171) million in H1 2022. The €2 million positive contribution from continuing operations was offset by the €(21) million loss in discontinued operations. While these generated a significantly improved adjusted EBITDA of €23 million, 2.3 times better year on year, they also incurred €(26) million of divestment-related costs and impairments.
• Free cash flow was €4 million, compared to €(59) million in H1 2022, with EBITDA growth financing investments in the growing business, i.e. capex of €44 million, as well as restructuring efforts and inflation-driven working capital needs.
• Net financial debt reduced by 24% over the period to €658 million, including the proceeds from the Mexican divestment. The adjusted EBITDA improvement brought the leverage ratio further down to 4.5 times, from 6.4 times at the start of the year.

Q2 2023 results

• Revenue ^[1] was €446 million, up 15% like for like versus Q2 2022, driven by double digit price increases, including additional sequential pricing in the quarter. Volumes were up primarily in selected product categories. Including adverse forex, revenue was up 13% year on year.
• Adjusted EBITDA ^[1] was €43 million, up 129% year on year. Pricing offset the additional input cost inflation in the quarter versus a year ago and the adverse forex. Operating cost reduction measures delivered strong results, reducing the operational cost base by close to 6%.
  Adjusted EBITDA margin rose to 9.7%, up 4.9pp year on year and 0.6pp quarter on quarter.
  Operating profit was €19 million, compared to €(85) million a year ago, including restructuring costs.

2023 Outlook

While the macro-economic environment remains uncertain, Ontex delivered strong results in the first half of the year and thereby raises its full year 2023 outlook within its previously provided guidance range, expecting:

• Revenue of Core Markets, to grow by high single-digit, consolidating the improvement realized in 2022 and further balancing the portfolio;
• Adjusted EBITDA margin for Core Markets in the high end of its previously iterated range of 8% to 10%;
• Discontinued operations (Emerging Markets) to further contribute positively to adjusted EBITDA and free cash flow;
• Leverage to reduce by year end to less than 3.75x, with improving profitability and cash flow discipline remaining a focus.

CEO quote

Gustavo Calvo Paz, Ontex’s CEO, said: "Four quarters of sequential EBITDA recovery, driven by relentless delivery of cost reduction measures and disciplined pricing to recover cost inflation, is pleasing and highlights the potential of our business. On strategy and balance sheet, progress on the portfolio refocus resulted in reduced debt, and the EBITDA increase in improved leverage. Combined with the extension of bank financing maturities, it results in a healthier balance sheet. I would like to recognize Ontex’s employees for embracing the accelerated execution of our strategic plans, and other stakeholders for their support and belief in Ontex’s turnaround. These early successes are a great inspiration to all of us to continue this journey to bring Ontex back to a leading position as preferred partner in retail and healthcare personal care.”

^{[1]  Reported P&L figures, represent continuing operations, i.e. Core Markets, only. As from 2022, Emerging Markets, representing about 30% of revenue, are reported as assets held for sale and discontinued operations, following the strategic decision to divest these businesses.}

^{Unless otherwise indicated, all comments in this document on changes are on a year-on-year basis and for revenue specifically on a like-for-like (LFL) basis (at constant currencies and scope and excluding hyperinflation effects). Definitions of Alternative Performance Measures (APMs) can be found further in the document.}

KEY Q2 & H1 2023 FINANCIALS

Key indicators

^{[1]  Emerging Markets and Total Group year-on-year comparison is affected by the divestment of the Mexican business activities as of May. The LFL comparison is corrected for the scope reduction.}

^{[2]  Balance sheet data are compared to start of the period, i.e. June 2023 versus December 2022.}

Core Markets (continuing operations) year-on-year evolution

H1 2023 BUSINESS REVIEW OF CONTINUING OPERATIONS

Revenue of Core Markets

Revenue was €892 million, up 15% like for like versus the first half of 2022, driven by double digit price increases across all businesses. In baby care revenue grew 12% like for like compared to last year, driven by continued volume growth of baby pants in Europe. In adult care revenue growth was 19% like for like, with strong growth especially in the healthcare channel. Feminine care revenue grew 17% like for like. Including adverse forex, total revenue growth was up 14% year on year.

Volume and mix changes were positive, adding 1%. Except in adult care, the overall demand in Europe is down, but retailer brands gain share, however, resulting in an overall flat evolution. Ontex outperformed in all categories in Europe. Ontex’s volumes in North America were lower year on year. Destocking by certain lifestyle customers impacted volumes and mix, especially in the first quarter.

Prices were up 14% on average versus last year, with double digit price increases in all categories and major regions. Following the huge increase in raw material and other input costs, Ontex steadily rolled out price increases over the course of 2022 to mitigate the impact. While the majority of the year-on-year price increase is the effect of this, Ontex continued to execute additional pricing in the year to recover cumulative cost inflation.

Forex fluctuations had a negative impact of -1%. The year-on-year depreciation of the British pound and Australian Dollar offset the appreciation of the US dollar.

Adjusted EBITDA of Core Markets

Adjusted EBITDA was €84 million, up 111% year on year and entirely driven by the relentless cost reduction efforts and the volume and mix improvement. Pricing offset the additional input cost inflation and adverse forex headwinds. The adjusted EBITDA margin rose to 9.4%, up 4.3pp year on year.

While the volume and mix effect on revenue was limited, the operating leverage and improvement of the product mix, had a €7 million positive impact on the EBITDA.

Operating cost reduction measures represented €35 million in savings, a reduction of the operational cost base by some 5%. Procurement initiatives and operational efficiency were the main drivers behind the improvement. SG&A costs were kept at 9% of sales, despite additional inflation.

Cost inflation weighed heavily on the year-on-year comparison, with a negative impact of €70 million from raw materials, especially fluff and super-absorbent-polymers, and €24 million from other operating costs, including wage inflation. Although the year-on-year increase is slowing, the total cost base went up by close to 15% versus the first half of 2022, following the further increase in the second half and certain contract renewals at the start of this year.

The strong pricing contributed €109 million year on year. While this more than offset the additional input cost inflation versus the previous year, it is not sufficient to compensate the cumulative cost increase incurred since the start of the inflation wave in 2021. Thereby continued adjustments including selective pricing are required.

Forex fluctuations had a €(12) million net negative impact as the adverse impact on revenue was exacerbated by the year-on-year US dollar appreciation effect on input costs.

Q2 BUSINESS REVIEW OF CONTINUING OPERATIONS

Revenue of Core Markets

Revenue was €446 million, up 15% like for like versus the second quarter of 2022, driven by pricing across categories. In baby care revenue grew 15% like for like compared to last year, supported by baby pants and better sales in open diapers in Europe. In adult care revenue growth was 16% like for like, based on solid demand across product groups, both in healthcare and in retail channels. Feminine care revenue grew 18% like for like, with volume growth in tampons. Including adverse forex, the total revenue growth was up 13% year on year, and in line with the first quarter.

Volume and mix had a 2% positive net impact. In Europe overall market is declining, except in adult care. Retailer brands continued to gain share, resulting in a stable performance, and Ontex outperformed in all categories in Europe. Ontex’s volumes in North America were lower in the quarter, due to continued destocking at certain lifestyle customers, but the effect is less pronounced than in the first quarter.

Prices were up 13% on average versus last year, with double digit price increases in all categories and major regions, following the huge increase in raw material and other input costs. While the majority of the pricing in the quarter is the effect of the pricing implemented in the previous quarters, Ontex continued to execute additional sequential pricing to recover cumulative cost inflation in the quarter. The year on year price increase is less pronounced than in the first quarter as the roll-out in 2022 was gradual throughout the year, and thereby includes already higher prices in the second quarter of 2022.

Forex fluctuations had a negative impact of -2%, as the British pound, the Australian dollar and especially the Russian ruble depreciated year on year in the period.

Adjusted EBITDA of Core Markets

Adjusted EBITDA was €43 million, up 129% year on year, driven by volume growth and especially strong delivery of cost reduction measures. Pricing offset the additional input cost inflation and the adverse forex. Compared to the first quarter the adjusted EBITDA was up 6%. The adjusted EBITDA margin rose to 9.7%, by 4.9pp year on year and 0.6pp quarter on quarter.

The volume and mix effect on EBITDA was €2 million and largely volume-driven.

Operating cost reduction measures represented €20 million in savings, a reduction of the operational cost base by close to 6%. Procurement initiatives, operational efficiency and scrap rate reductions were the main drivers behind the improvement. SG&A costs over sales were kept at 9% as in the first quarter.

Cost inflation weighed heavily on the year-on-year comparison, and increased with a negative impact of €31 million from raw materials, namely fluff and super-absorbent-polymers, and €7 million from other operating costs, including wage inflation. While, the year-on-year increase is slowing since the fourth quarter of 2022, the total cost base still increased by more than 10% year on year, and remained stable versus the first quarter.

The continued pricing efforts contributed €51 million year on year. While this more than offset the additional input cost inflation versus the previous year, it does not cover the cumulative cost increase incurred since the start of the inflation wave in 2021 in all markets and categories. Thereby continued adjustments including selective pricing are required.

Forex fluctuations had a €(11) million net negative impact due to the net negative effect on revenue, and the net exposure to the US dollar remained negative.

H1 2023 FINANCIAL REVIEW

P&L

Depreciation was up 4% at €(36) million, reflecting the continued investments in growth.

EBITDA adjustments were made for €(13) million. These adjust primarily for €(11) million restructuring costs to further optimize the European cost structure. This compares to EBITDA adjustments made for of €(90) million in the first half of 2022, when significant non-cash impairments were taken on the Russian assets.

The net finance cost was €(25) million, €(3) million higher than in the first half of 2022, reflecting higher interest rates for the floating rate portion of the debt, which were partly offset by favorable currency effects.

The income tax was €(9) million, compared to a positive €7 million a year ago, when the earnings before taxes were negative. The deducted tax rate is relatively high as the geographical mix of earnings does not allow to recognize all local losses.

Discontinued operations generated a €(21) million loss for the period, compared to €(72) million a year ago. The adjusted EBITDA was €23 million, an improvement of 135%, with the Mexican business representing the majority in the four months it contributed prior to the finalization of its divestment. While the contribution from the remaining activities in Brazil and the Middle East was relatively lower, it represents a significant improvement from the losses incurred in 2022. Volumes were slightly down, compensated by mix improvement. EBITDA adjustments were made for €(26) million, adjusting mainly of a non-cash impairment of €(13) million on the Middle Eastern assets and €(11) million costs related to the divestment of the Mexican assets. Financial charges were €(8) million, slightly up year on year, due to higher interest rates, while taxes were €(10) million, doubling versus the year before, in line with higher profitability. Hyperinflation in Turkey impacted the results negatively by €(7) million.

The adjusted profit from continuing operations was €12 million, compared to a €(11) million loss in 2022, reflecting the adjusted EBITDA recovery, more than offsetting the higher financial and tax charges. Including restructuring costs and the contribution of discontinued operations, the loss for the period for the Total Group was €(19) million, compared to €(171) million a year before, when the profitability was lower and significant non-cash impairments were taken in continuing and discontinued operations. Adjusted earnings per share of continuing operations were €0.15 compared to €(0.14) in 2022. Basic earnings per share of the Total Group were €(0.24), compared to €(2.12) in 2022.

Cash

Capital expenditure was €(44) million, representing 3.6% of the Total Group revenue, compared to 2.3% in the first half of 2022. Some 2/3^rd of the investments relate to expansion in Europe and North America, as well as innovation and cost reduction measures across the Total Group. Whilst a strict capital management policy continues to be applied, a further increase in capex is anticipated in order to support Ontex’s transformation plans. The increase in investment pace approaches the 4% normalized rate for Ontex.

Free cash flow was €4 million, compared to €(59) million in the first half of 2022. Cash generation from the strongly improved  adjusted EBITDA, after deduction of  €(12) million cash taxes, funded the increase in capex, as well as €(21) million working capital needs and €(14) million cash-out for restructuring and one-off legal costs.

Balance sheet

Working capital for the Total Group at the end of the period was €125 million, a €51 million decrease versus the end of 2022, largely linked to the exit of the Mexican business. Working capital needs in the remaining operations increased due to the impact of higher raw materials and finished good prices, and a slight increase in days of outstanding inventory. The working capital includes monetization of accounts receivables through factoring for €188 million, versus €192 million at the end of 2022.

Net financial debt of the Total Group was €658 million at the end of the period including lease liabilities of €129 million. The decrease from €867 million at the start of the year is entirely attributable to the divestment of the Mexican business activities early May, when €237 million proceeds were received from the acquirer, net of already paid transaction costs. The deferred proceeds of €40 million, which is still due within the next five years, were booked as non-current receivables. Cash-out for financing was €(33) million, consisting of €(26) million for net interest payments and €(7) million other financial costs. The latter include hedging costs as well as transaction costs related to the renegotiated revolving credit facility and the early repayment of the €220 million term loan.

The leverage ratio of the Total Group at the end of the period was 4.5 times the adjusted EBITDA of the last twelve months, which now excludes the Mexican business contribution. The improvement compared to 6.4 times at the year start, is based on the significant increase of the adjusted EBITDA.

The gross financial debt of the Total Group came down from €1,076 million to €835 million. The  €220 million term loan was repaid with the Mexican business divestment proceeds. Leases were €129 million, slightly lower than the €138 million at the start of the year. The Revolving credit facility utilization remained largely unchanged at €116 million. This mainly covers temporary mismatches in the geographical cash distribution of the €177 million cash position. The facility was extended to December 2025 with a ceiling of €269 million until June 2024 and €242 million until maturity. The facility’s maintenance covenants were reviewed and require a.o. that  the leverage ratio does not exceed 4.25 times by year end. Besides this, the principal component for the gross financial debt consists of the €580 million bond maturing in July 2026 with a fixed 3.5% interest rate.

As from 2022, the Emerging Markets activities are reported as assets held for sale. The net value of these (assets minus related liabilities), came down from €404 million at the year start to €129 million at the end of the period, reflecting the Mexican business divestment and some smaller asset sales.

Disclaimer

This report may include forward-looking statements. Forward-looking statements are statements regarding or based upon our management’s current intentions, beliefs or expectations relating to, among other things, Ontex’s future results of operations, financial condition, liquidity, prospects, growth, strategies or developments in the industry in which we operate. By their nature, forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results or future events to differ materially from those expressed or implied thereby. These risks, uncertainties and assumptions could adversely affect the outcome and financial effects of the plans and events described herein.

Forward-looking statements contained in this report regarding trends or current activities should not be taken as a report that such trends or activities will continue in the future. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should not place undue reliance on any such forward-looking statements, which speak only as of the date of this report.

The information contained in this report is subject to change without notice. No re-report or warranty, express or implied, is made as to the fairness, accuracy, reasonableness or completeness of the information contained herein and no reliance should be placed on it.

In most of the tables of this report, amounts are shown in € million for reasons of transparency. This may give rise to rounding differences in the tables presented in the report.

Corporate information

The above press release and related financial information of Ontex Group NV for the six months ended June 30, 2023 was authorized for issue in accordance with a resolution of the Board on July 27.

Audio webcast

Management will host an audio webcast for investors and analysts on July 28, 2023 at 12:00 CEST / 11:00 BST. A copy of the presentation slides will be available on ontex.com.

Click on the link below to attend the presentation from your laptop, tablet or mobile device. Audio will stream through your selected device, so be sure to have headphones or your volume turned up.

https://channel.royalcast.com/landingpage/ontexgroup/20230728_1

A full replay of the presentation will be available at the same link shortly after the conclusion of the live presentation.

Financial calendar

• October 27, 2023      Q3 2023 results
• February 8, 2024      Q4 & FY 2023 results
• May 8, 2024              Annual general meeting

Enquiries

• Investors              Geoffroy Raskin          +32 53 33 37 30        investor.relations@ontexglobal.com
• Media                    Alexandra Shaw          +44 1536 272293      corporate.communications@ontexglobal.com

About Ontex

Ontex is a leading international developer and producer of hygienic products and solutions for retailers and healthcare, with expertise in baby care, feminine care and adult care. Ontex’s innovative products are distributed in around 100 countries through leading retailer brands, lifestyle brands and Ontex brands. Employing some 7,500 people all over the world, Ontex has a presence in 20 countries, with its headquarters in Aalst, Belgium. Ontex is listed on Euronext Brussels and is part of the Bel Mid®. To keep up with the latest news, visit ontex.com or follow Ontex on LinkedIn, Facebook, Instagram and YouTube.

ONTEX GROUP NV             
Korte Keppestraat 21 – 9320 Erembodegem (Aalst) – Belgium  
0550.880.915 RPR Ghent – Division Dendermonde

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