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 let Gustavo 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 two and H1 results were disappointing, with weak volume caused by low customer demand and some supply chain inefficiencies. We have revised the outlook accordingly two 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's 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 three 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're taking actions where needed to accelerate targeted execution plans and by aligning cost structure to changing reality. Thank you.
As Geoffroy discussed, we'd like to open it up for questions. I'll give it over to the operator to instruct you how to do that.
Ladies and gentlemen, if you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The first question comes from your line is open. Please go ahead.
Sorry. Ladies and gentlemen, if you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The first question comes from Fernand de Boer from Degroof Petercam. Your line is now open. Please go ahead.
Yes. Good morning. Good afternoon. I have actually one question. If I look at the miss in the second quarter, it's not a small miss, I think it's huge. If you then look at your, I think last year we did have a miss or two years ago on, let's say, more cost in the third quarter and some hiccups in the step up in the 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 feasibility do you actually have? Because, yeah, in that respect, that's actually my question.
Sorry, and you are talking about what kind of flexibility?
Feasibility.
Feasibility.
No, feasibility because, yeah, it's also here, I think you want on July 15. I think if you look at the significance of the miss, then this must have already been known much earlier than then. 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. My question here is actually where does your confidence? I think it was also asked in the previous conference call, but I'm really both amazed about the miss and, yeah.
Yeah. Yeah. All right. I will try, and then you tell me if you feel comfortable with my answer. We explained two weeks ago in the conference call, we explained the reasons why we significantly missed quarter two versus our expectations. It was, as you said, now it was a combination of factors, right? It was not just one thing driving this. At the same time, when we were explaining about what we expected now for quarter three and quarter four, second half of the year, we were explaining each of these drivers of negative drivers on the Q2, how we are expecting those in the following, in these following quarters. I'm going to try to do again the same thing. Regarding the market trends, which has been one of our big drivers, 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 two was based on that lower demand. There were adjustments on inventories done by the customers. We are assuming now in the second half of the year that those adjustments in inventories are done. We will not face again adjustments. In some cases, those inventories, 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 brand's activities, but we are assuming 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're not going down in market share. In our projections for the also some of the reasons, and as I explained even now, it was caused by some supply chain challenges that we had in the quarter two. Some of them totally unexpected, some others as a consequence of our transformational journey that we are going through. All those, all those, the unexpected, of course, and the journey that have been solved. We said 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 the top line as it was referring before, but in the EBITDA was the cost of raw materials, an increased cost in raw materials. That mainly driven by the fluff pulp 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. 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. 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. That is a big portion of our 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, etc. For me, 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, -EUR 3 million in the first quarter, -EUR 19 million in the second of the first half, so -EUR 16 million in the second quarter. I assume this is a step up of, let's say, EUR 20 million, EUR 25 million, EUR 25 million.
I think that when you are at the end of Q1 or in 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. The sales, I don't, I can understand that the feasibility, you cannot exactly know every quarter what the retailers are going to bring in and sell the sale and how much has to be replenished. 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, some of the impacts were already there, like, for example, the soft markets. If you look to the second quarter, and 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. 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. It only became clear at the end of quarter two.
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. It is very exceptional what happens. Typically, it's a period of a couple of months, and you can assume that it comes back. 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 backend loaded because the second quarter would be also, yeah, more weak as compared to the other quarters. That's, in fact, what's happening.
I think if you look structurally to our business, everything you hear about supply chain, about market, about our cost transformation plan on gaining contracts, structurally, everything is green for us because we believe if we look at a period of one, two years, we're very confident that all the figures we're aiming for, we're able to achieve. 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. There's indeed some quarterly volatility that we see in our results that we have to manage, and which is intrinsic in this business. Structurally, if you take more a view on one, two, three years, there we see that structurally, we have, yeah, all the trends that we have foreseen are for us quite visible and quite in line with our expectations.
Okay. Could you quantify the additional cost for the Segovia water flood?
Yeah, it's not something we disclose individually, but if you look at it because you're talking about high numbers of costs. First of all, what you need to know is lower volume for us. In our plans, we have quite some fixed costs definitely on a short term. Short-term changes in volumes create quite some impact because we cannot short-term flex our fixed costs. That means that we have some cost impacts which we believe we will have a much better absorption in the second half of the year. If on top, because a lot of things that are 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 have to do. You're talking about a couple of million euros, at least, that is hitting the cost.
At the same time, we also have the impact on the sales because also we missed some sales because of that. On the missed sales, we have the margin impact.
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. 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? 75% is volume-related. Probably 25% is other inefficiencies, and it's a combination of other inefficiencies. What you're saying is mostly right in terms of that at the beginning of quarter two, we knew already about the cost of the raw material increase. Yes, we did. It's not that. We deliver, we normally deliver, we deliver on our objectives and our expectations in terms of cost transformation. Therefore, those were at hand to offset that extra cost and some of the inefficiencies that we suffer, but we're not able to offset the lower volume.
I would say that 25% that is on the gap as a result of some inefficiencies, most of those inefficiencies are already gone. The 75% of the gap due to volume, I was trying to explain what we are expecting in the volume before and how to recover that volume. All right.
Okay. Clear.
Thank you, Fernand.
Thank you.
Thank you.
Our next question comes from Charles Eden from UBS. Your line is now open. Please go ahead.
Hi. Good afternoon. Thanks for the question. Thanks again for taking the time to do this. Appreciate you're busy. I do want to just come back, and it's sort of following on from that last question. I'll certainly answer it to the end of it. When I look at the raw materials line, you've got -1 6 in the quarter, -1 9 in the half. I'm looking at the table on page three of the press release, just to be clear, impact on your EBITDA. Yet sales pricing obviously down, and I get there's a lag between. Can you just remind us how the contract structures work with your customers? Surely everybody's going to be benefiting, and certainly we've seen this on the branded side try and move more quicker pricing to react to what has been a volatile period, particularly bulk markets like a stock bulk for you.
How does it work, and how quickly can you, in reality, offset those higher costs from raw materials? Looking at those numbers, it would suggest that you may even be doing some contracts that are barely profitable at this point. If you could just sort of remind us how that works. The second one, probably maybe a bit more upbeat. You obviously said the contract situation is, but do you sort of sit here today more confident on your delivery of the four-year guide? 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 at an unfortunate time. Do you sort of sit here and you feel very comfortable that there is not another guidance cut to come, even if the market is softening slightly further in Europe? Thank you.
Okay. The price on the price side also has its alignment with our expectations because it's a carryover from last year. It's quite simple to estimate it, and it was forecasted. It's not out of our expectations. It's a carryover from 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? Or half year versus a year ago. It is when we started to do some price adjustment based on the 2023 raw materials reduction. That is fading out at the moment. We are not expecting anything else than potentially any type of, based on some mix, you know, 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 include that, some indices, but not in the retail environment. 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. I referred to that as not a structural increase. I referred to that, that it was more mainly due to supply, not from demand. When it is from supply, the fluff increase, right, indices. Clearly understanding what type of supply the fluff suppliers they're facing, we know that it's momentarily. The level of the increase also would never justify going into a market price increase.
Even less, I have to say, and be cautious, you know, in the environment that we are playing today with a market contraction in consumer demand where the competitiveness increases. It's not the right environment to do any pricing by any company. We knew that those cost increases, they were momentarily cost increases. As I said, when a company has a structurally good cost information program that, as the one that we have started to implement three years ago, I would say that those need to be absorbed by that, definitely. Those cycles, normal cycles on pricing based on supply, demand.
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. It's not protected by any contract. This is open on the strategic discussion with the customers. That is the answer for the first question. Before I go to the second question, I want to ask you if it was clear, the first one.
Yeah, it was. I appreciate that. Just very quick follow-up. How long is the average commitment of the price level with your retail customers? Are you locked in?
It is by the contract. Yeah, the price is signed by the contract. If you win a tender, the tender has a period of time, sometimes goes by one year, sometimes two years, is for the period of time of the tender. That's absolutely reasonable. Yeah, if 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. That is what we have done, successfully done, in the year 2023. Starting in, I think that in the last quarter of 2022, going through 2023, we increased the prices based on the increased cost, a major increased cost that the market was suffering. We were in the middle of tenders, right? We were in the middle of the contracts, and we were able to increase the prices.
It's not that it's not able to, nothing tells you that it's automatic. Nothing tells you that you cannot come with a change in the price if there is a major change.
I guess we have, I don't want to take up too much time, but just what is your average tender length? What is an average contract? Six months?
It depends on the customer. There are some customers, as I tried to say, in healthcare, you mean?
No, no. I mean, healthcare works. I'm talking on the retail side, yeah.
In the retail, I'm saying it could be one year to three years. Honestly, even though if you have a tender of two years with a customer and the customer decides to anticipate the next tender, they have the right to do it. They will tender again. It's more a strategic relationship with a customer. You have heard from me, Charles, several times to emphasize, and I just did that at the beginning of this call, to emphasize the importance, the significant importance that has to have a strong innovation pipeline. Innovation, quality, service level are key pillars for a retailer, not just pricing. 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. That's why my emphasis there.
Perhaps it's not just that 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 years, it's because we are making the changes in these things that will secure a better future for the company and valuation for the shareholders.
Got it.
The second question is about my comfort about delivery in the new contracts.
Yeah, just like I said, you reminded me you took the guidance down. You took the guidance down. There was obviously, it needed a contribution from these new contracts.
yes, yes.
That started.
Yeah. 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. As you are saying rightly, it is essential for us to deliver on the second half of the year. There is no indication for us today that something will not be in the timing and in the amounts that we are expecting. These new contracts are going well at the moment, very well, actually, at the moment. When I'm saying very well, it's because it's exciting. It's very highly exciting to see plants working at full speed and machines working at full speed. That's very good, very comforting.
That's good to hear. Thanks.
You're welcome.
Our next question comes from Maxime Stranart from ING Bank. Your line is now open. Please go ahead.
Hi. Good afternoon. Hope you can hear me well. One question on my end as well. Now that we have seen the result of P&G and SCT 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 are pricing very aggressively right now. Obviously, if we look at the pricing impact you had in Q2 compared to theirs, it shows, it reflects that story. Just wanted to check with you, how do you feel about these comments? How do you see this evolving in the second half of the year? That would be all for me. Thank you.
Yeah. Maxime, first of all, I would not comment on what the competitor has said in their remarks. I can tell you that shelf pricing of the price level 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 level, has been increased perhaps by threefold versus the same period of time of last year. You can deduct and make your insight on that, right? That is what happened in the market. 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 appreciate the comments on aggressive promotion and so on. If you compare the pricing impact of the two, we see a clear disconnect there. I just wanted to make sure we understand everything correctly. Basically, if I look at baby care, for instance, you haven't performed SCT quite materially. Can you maybe elaborate a bit on what the difference you see in terms of pricing compared to SCT in Q2, for instance?
In pricing, again, it depends on what the competitor is talking about. We focus entirely on private label while the competitor is a hybrid company and they have branded business and private label. 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. It's very difficult for any of you to read exactly and do comparable numbers in terms of baby care pricing. It's difficult to answer your question in a way that you would be able to read it because I cannot read that.
Okay, clear. Thank you for the answers.
You're welcome.
Our next question comes from Markus Schmitt from ODDO BHF. Your line is now open. Please go ahead.
Yes. Hello. Thanks for taking the questions. I have two questions, actually, and it's around Turkish asset sale and leverage. I think in discontinued operations, you still show net cash from your Turkish activities. Maybe you can confirm if that is all Turkish cash. When I look only at the core group, net leverage was at 3x at the end of June. In fiscal year-end 2025, assuming the Turkish asset sales will be finalized, completed during H2, there won't be any discontinued operations, I think, in UBS. It's a net leverage of about 2.5x as guided. Can you disclose what the net proceeds will be from the asset sales in H2? I have a little bit of a hurdle to derive from the 3x in 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. Maybe some net proceeds. Maybe you can provide these pieces a little bit. A subsequent question would be, where do you see the RCF drawn at fiscal year-end 2025? It was at EUR 185 million right now, a much higher figure than what I expected, actually. Maybe you can explain where you see the RCF at year-end. Thank you very much.
Okay, Markus, I will take that one. A lot of questions. I will try to give answers, but tell me if I missed something.
Thank you.
First of all, you're right there in the discontinued operations, but you can find that in our reporting. We still have some significant cash that's indeed in a Turkish legal entity. The purpose is to recover it in the purchase price. You know that we disclosed, if I remember well, some net proceeds last year. If you ask about 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. It's without the cash. That means that we recover also the cash, and that that cash is coming back to us.
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, you will be at the guidance that we put for the end of the year around 2.5. That's our guidance. Of course, it includes also the positive free cash flow that we foresee in the second half of the year in the core business. 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. That means that we expect about +EUR 40 million in the second half of the year.
If you link that to the RCF, you can say that at EUR 40 million at the end of the year, if we generate at EUR 40 million, then the RCF will decrease more or less with that amount. For us, looking at cash and RCF, we're always a bit careful. For us, it's a bit communicating vessels. 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 tax-efficient way to get the cash repaid based on the sale of the business instead of paying dividends, we can probably also, and we will also probably use part of that cash also to decrease the RCF. RCF, in a nutshell, it will go down then with the EUR 40 million on the free cash flow of the core.
Partially, we can use also the cash in Turkey once recovered in order also to repay the RCF.
Okay.
Is that clear, Markus?
That is clear. The bits and pieces at the end, we will see. Other effects on working capital whatsoever will play a role too, I think. I see the potential. That's good. Secondly, maybe just a question on that, let's say, price competition in that market on which you just elaborated. 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 two 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 as you want to compensate raw material pressure? Is that the new normal in that sense?
I'm going to take that one, Markus.
Sure.
Perhaps the first thing that I would say is there is no, we don't see a cost, raw material cost price increases, right? We don't see a need of price increases due to raw material. To your question about the potential price war coming back, price war, right, due to the competition, I will 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? That will probably be a reality.
In other sectors, not in all categories, there are other categories that in a growth mode, and the supply and the supply of the right product, the supply of the right quality is essential for the customers and retailers are growing, and they need products that the capacity needs to be in place. It's not the same for every single category, that is 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, yeah, it's part of the game. That is why the team in Ontex has been working so hard in terms of a structural change that our operational efficiencies because we need to generate enough cost savings to overcome these moments. Those are cycles all the time.
We are getting more and more ready to face those types of things, to face some raw material changes or to face some competitive pricing. We say from the beginning in the plan that our cost information gains, which are significant year on year, due to deficiencies 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, and the other one. 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 answered you.
No, no, that's very clear. Yeah, thank you very much.
You're welcome.
There are no more questions at this time. I will hand over the conference back to the speakers for any closing remarks.
Yeah, thank you. Look, we really appreciate the opportunity to have this call. I know that we had one two weeks ago and now. I appreciate the time that you are investing in our company and to understand what's going on. 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 three years ago. This company today, yes, it's true. We have a very disappointed second quarter, a disappointed first half of the year. Don't forget how much we have been progressing in the last three years in this company, making structural changes. Our balance sheet today is a healthy balance sheet. That is key for any company to continue operations.
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. These structural changes are here to stay for the long run. Yet, we have plenty of more things to do. 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. 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. 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.
Thank you for joining today's call. You may now disconnect.