Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Good day, and welcome to the Ontex Q1 quarterly results call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Philip Ludwig. Please go ahead, sir.

Thank you, Emma, and good morning, ladies and gentlemen. Welcome to our Q1 2020 call. Today's call will be hosted by Charles Bouaziz, our Chief Executive Officer; and Charles Desmartis, Chief Financial Officer. We'll also be joined by Thierry Navarre, Chief Transformation Officer, for the Q&A. Before handing over to Charles Bouaziz, a few housekeeping issues. First of all, I would like to remind everyone that the safe harbor statements apply to this presentation and our subsequent remarks and the Q&A session. Second, comments we make today about revenue are on a like-for-like basis, or in other words, at constant currencies except if otherwise indicated. And thirdly, please note that in our 2019 revenue for AMEAA and Healthcare have been adjusted due to a shift of customer responsibility between these 2 divisions effective January 1 of this year 2020. This has no impact on Ontex total revenue, of course. And the details are available in the annex of the press release published this morning. With that, let me hand over the call to Ontex' CEO, Charles Bouaziz.

Well, thank you, Philip, and good morning to all of you. Thank you for being with us this morning on this call. Before anything else, I hope you're all safe and well in these unusual times we are going through. Today, I will provide some brief remarks on Ontex performance in Q1 2020, which was, of course, something of an atypical quarter. I will then hand over to Charles Desmartis, who will detail our financials. I will wrap up then with our current prospects for Q2. We will conclude the call answering your questions. Our Chief Transformation Office, Thierry Navarre, is also with us, as Philip said, for the Q&A. Before looking at our results, I wanted to start the presentation by making some comments on how we as a company have quickly pivoted to the new reality we are in. Just a few days after we reported our full year 2019 results, this was early March, we organized ourselves to tackle the challenges of entering the first phase of the COVID-19 pandemic, namely the lockdown of most personal and professional activities in most countries. Overnight, we established a crisis management team and set up a governance with the full support of our Board and daily with them, which has allowed us to perform very well while balancing multiple new priorities in a fast-changing environment. I'd like to say that I'm very proud of the entire organization, from our shop floor workers up to the management team. Indeed, while operating in disrupted environments, they have maintained their focus on our commercial and operational objectives. This allows us to be in a better position as we move to Phase 2 of the pandemic, namely the economic consequences we are starting to see. Now turning to Slide #5, explaining how Ontex took a series of swift and decisive actions to answer the many challenges we had to face in the COVID-19 pandemic environment. These actions had 2 simultaneous aims: first and foremost, safeguard the health and safety of all our employees across our operations; but also, of course, ensure business continuity as Ontex is a provider of essential personal hygiene products. Our #1 priority is and will always be to ensure our employees' health and safety. We have taken a wide array of measures detailed in our communication of April 9 to provide a safe workplace while ensuring business continuity at a time where our products are vital to so many. Since the spread of the COVID-19 virus to countries where we have operations, we have followed all the guidelines provided by the relevant authorities. Where remote working is not possible, we are taking additional steps beyond the guidelines to provide a safe working environment for employees, such as ensuring social distancing, providing face masks to employees, disinfecting plans and adapting working conditions when necessary. Our second priority is to serve our consumers and customers who rely on an uninterrupted supply of critical daily-use personal hygiene products. All our production and supply chain operations are functioning, thanks to constantly updated business continuity plans, which include working tirelessly with governments, customers and suppliers whose support has been critical. And I'd like to thank them for that. We are also key parts of the communities in which we live and work and have supported them by donating our products, ranging from baby diapers to feminine care, and of course, adult incontinence products. And also in-demand safety equipment such as safety gloves to hospitals, nursing homes and social support organizations, whether it be in Mexico, Ethiopia, Poland, the U.S. or many other European markets. In March, when the pandemic hit European countries, we observed an important surge in customer demand for our products. Thanks to outstanding execution by our teams as well as proactive supply chain management, we were able to deliver an uninterrupted flow of essential personal hygiene products while maintaining a high service level, as recognized by several of our key customers. I want to take the opportunity to thank everyone at Ontex. The teams have shown incredible commitment and have helped maintained focus on mid- to long-term value creation opportunities while navigating current turbulences. This is a tribute to the DNA of the company. Let's have a first look at the headline numbers of our Q1 performance on Slide #6. Both in terms of revenue generation and profitability, we posted a strong performance this past quarter, recording 6.8% like-for-like revenue growth and 48% improvement in adjusted EBITDA at constant currencies. There is undoubtedly a COVID-19 effect as people stockpile our products, resulting in important volume growth in our 3 product categories, especially during the month of March. But these numbers also again reflects the positive effect from our T2G transformation plan, which continues to deliver results and remains on track to deliver its operational and commercial benefits. As we said before, T2G is a value-creation plan and not a cost-cutting exercise. Throughout the period, we have tightly managed costs, working capital and capital expenditure. This helped us maintain a strong liquidity position with no near-term maturities, and funding of operations strengthened. At the end of the first quarter, our net debt stood at EUR 871 million. Of course, all these figures were impacted by currency fluctuations as of mid-February, and as Charles Desmartis will detail later. I'm now handing over to him for a closer look at our financial performance.

Thank you, Charles. And good morning, everybody. Thank you for being with us today. So let's go to Page 8 for a quick review of our financial highlights in Q1. So group revenue stood at EUR 574 million, as Charles just said, up 6.8% on a like-for-like basis, reflecting mainly strong volume growth across our 3 categories in retail channels and a positive price/mix in all categories. Reported revenue was up 5.1%. Adjusted EBITDA reached EUR 78 million at constant currencies, up 48% year-on-year, resulting in an adjusted EBIT margin of 13.4% at constant currencies, up 370 basis points compared with the same quarter last year. As Charles just said, this strong increase reflects T2G-driven improvements, lower raw material indexes and strong top line growth. We experienced strong currency headwinds as from mid-February, so that reported adjusted EBITDA was EUR 66 million, EUR 12 million lower than the figure at constant currencies, for reported EBITDA margin of 11.5%. Net debt remained under strict control and stood at EUR 871 million at the end of the first quarter or EUR 730 million excluding IFRS leases. Leverage also remained under control and stood at 3.37x. This is to be compared with 3.74x at the end of Q1 last year and 3.51x at the end of December 2019. And finally, I will conclude these highlights review page mentioning our strong liquidity position. No principal repayments are due on our 2 term loans totaling EUR 850 million, of which EUR 750 (sic) [ EUR 730 ] million is currently drawn, until these 2 loans fall due in November 2022 and November 2024. Also, as announced on April 9, we've decided to fully draw down our EUR 300 million syndicated revolving credit facility as a matter of caution, to provide financial flexibility, if necessary. So we have ample liquidity to operate in the uncertain environments ahead. So please turn now to Page 9 to review our consolidated revenue. We're reporting like-for-like revenue of EUR 583 million in Q1 2020, up 6.8% like-for-like compared with last year. This revenue growth was boosted by volume surge in March, notably in Europe and the Americas as customers stockpiled our products ahead of lockdown measures. Volumes were up 5% in Q1. Price/mix was positive in all categories for 1.8% impact on total revenue. As expected, this volume surge has now receded, and we have already noticed a marked decrease in demand in April across our Europe and AMEAA divisions as stockpiling ends and economic uncertainties start to weigh on consumption and purchasing power. The expansion of the pandemic to a worldwide scale fueled sudden currency volatility as from mid-February, and some of the key currencies in which we operate outside the Eurozone were strongly impacted. This resulted in a EUR 9 million negative currency impact on our Q1 sales, leading to our reported revenue figure for the period of EUR 574 million. Therefore, on a reported basis, revenue increased by 5.1%. Let's move now to the category review on Page 10. We posted strong growth across all 3 product categories. In Babycare, which represented 57% of our sales, revenue was up 7.3% like-for-like. Sales of retailer brands in Europe and the U.S. as well as our own Ontex portfolio of local brands in AMEAA were well up versus the same period last year. Demand for both baby diapers and baby pants was strong in March as consumers stockpiled to ensure availability of daily essentials. In the adult category, which made up 31% of our sales in the quarter, like-for-like revenue was up 3.4%. We posted sales growth in the main product lines, including a solid increase in adult pants. Adult Incontinence revenue in retail channels was 11% higher, thanks to higher sales of Ontex brands in AMEAA and retail brands in Europe. As expected, sales in institutional channels were slightly lower due to temporary suspension of a supply contract from October 2019 until March 2020, as we've already reported to you. And this contract resumes fully in April. In the Femcare category, which made up 11% of our sales, like-for-like revenue was up 14.7%. Higher sales are posted both in Europe, where the majority of our revenue is generated, as well as in AMEAA, which reported stronger sales, mainly driven by organic cotton tampons. Let's move now to the review of our 3 divisions, starting with Europe on Page 11. Like-for-like revenue was up 7.7% to EUR 252 million, reflecting the outstanding commercial and operational execution of the Ontex teams to serve the surge in demand in March in the context of COVID-19. All 3 product categories posted higher sales versus the same period last year with broad-based geographical growth. Our Babycare category posted very strong growth in diapers and pants. This performance underlines our team's ability to adapt rapidly to changes in demand patterns, both in volume and mix, and despite the many disruptions caused by the pandemic, which again reflects the high adaptation skills of our commercial, manufacturing and supply chain teams as well as the dedication of employees, as highlighted by Charles earlier. Finally, currencies had a limited and favorable impact on the division sales overall in Q1. So our reported revenue for Europe was EUR 250 million in the quarter, down EUR 2 million compared with the like-for-like figures. So revenue on a reported basis was up 7% versus Q1 2019. Moving now to the Americas, Middle East, Africa and Asia divisions on Page 12. These divisions, which represented 37% of the group revenue in Q1, started the year strongly with like-for-like revenue up 10.7% in Q1 2020 to EUR 221 million. So continuing sales growth in these divisions validate our strategy of driving local brands in developing markets and capturing attractive opportunities in North America, leveraging our deep experience with these sort of brands in Europe and supplying fast-growing lifestyle brands. Of course, as in Europe, we benefited from a strong COVID-19 related surge of demand in this unprecedented period. Overall, our Americas revenue benefited from higher volumes and positive price mix. Both Brazil and the U.S. were well ahead, boosted by consumer stockpiling ahead of lockdown measures, and Mexico also posted a solid performance. Q2 sales growth is expected to decelerate markedly, as we said earlier, reflecting lower demand as precautionary purchasing eases and the economic downturn caused by the pandemic is spreading across most geographies in the division. Our revenue in MEAA, the Middle East, Africa, Asia countries, grew slightly despite difficult conditions, such as limited customer liquidity and retail shop closures, showing the resilience of our business in the region as well as in the rest of the group as well as the agility of our teams to adapt rapidly to market conditions. This COVID-19 related headwinds on demand to persist in Q2. Unfavorable currency evolutions from mid-April -- or mid-February, sorry, had a EUR 7 million impact on the first quarter sales so that the reported revenue for the division was EUR 213 million in Q1, but still up 7% versus 2019. Let's turn now to Healthcare on Page 13. Healthcare like-for-like revenue decreased 2.1% to EUR 111 million, largely due to a high comparable base on the one hand; on the other hand, to the temporary suspension of the large contract from Q4 2019 to Q1 2020, as disclosed earlier. And as I said just before, deliveries for this contract resumed at the start of April. As I mentioned on previous occasions, our Healthcare division generates a good part of its revenue from the institutional market in Europe, which is slightly decreasing in value. But as in the other divisions, our sales were driven by a pickup in revenue in March as well as ongoing growth in health-based e-commerce activities. Currency had no impact overall on the first quarter sales of our Healthcare division, so reported revenue also decreased by 2.1% compared with the same period last year. So please turn now to Page 14 to review our adjusted EBITDA performance. So in Q1, adjusted EBITDA came in at EUR 78 million at constant currency which -- with margin of 13.4%, and as I said earlier, an increase of 370 basis points compared with the first quarter of last year. This meaningful improvement, our operating profitability reflects strong volumes and price/mix, leading raw material indexes and the increasing benefits from our T2G program. So the adjusted EBITDA bridge for Q1 presented on this page, bridging from Q1 last year to Q1 this year, shows the building blocks of our performance improvement. Volume and price/mix actions had a 102 basis points positive impact on margin. Raw material indexes and other variations related to raw materials of smaller magnitude contributed altogether for 121 basis point improvement in operating margin. Net savings in operations, procurement and R&D, which mostly reflect the progress of our T2G program, also had a positive impact of 303 basis points net of inflation in expenses of our operations and supply chains. And over the quarter, we continue to invest selectively in sales and marketing to drive future growth, which had an unfavorable impact of 150 basis points on our adjusted EBITDA margin. In Q1 2020 foreign exchange variation, for impact in Europe, EUR 12 million, had a negative impact on the margin of 195 basis points, mainly attributable to the Mexican peso, the Brazilian real and the Turkish lira. As a result, Q1 reported adjusted EBITDA was EUR 66 million, and reported margin was 11.5%. We have highlighted in the course of this presentation so far the significant and favorable impact on our reported performance of currency volatility since mid-February. As an indication on the basis of the parities, as of the end of April, we estimate the unfavorable impact of currencies on our Q2 sales to range between EUR 30 million and EUR 35 million compared with prior year. And on the same basis, the impact on our adjusted EBITDA for Q2 is currently estimated at EUR 22 million to EUR 25 million, again, compared with Q2 2019. So with this, I will now hand over to Charles Bouaziz for his concluding remarks. Thank you.

Thank you, Charles. Before I conclude today's presentation on the outlook, I wanted to come back on our prospects for Q2 2020. We believe we are well positioned to withstand the tougher environment ahead. While visibility is low on the future impacts of COVID-19, we currently observe the following: First, in terms of demand, following the strong March surge in demand in Europe and various areas of AMEAA, as highlighted by Charles, demand is showing a market decrease in April, as expected. We are closely monitoring the economic impact of the pandemic and how it is affecting demand for our products, distribution channels and consumer behavior. Visibility on structural evolutions remains limited at this stage. In terms of supply chain, all production facilities remain open. With no material disruptions to date. We are focused on meeting more volatile demand patterns by leveraging our large number of flexible production sites, and agile supply chains. In terms of raw materials, the strong network of suppliers we have developed in the past years has allowed us to ensure availability of key inputs since the beginning of the pandemic. Current raw material indices indicate recent sequential increases in fluff pulp in U.S. dollars, which will have limited impact on our purchasing prices this year, and conversely, downward trends for oil-based derivatives. Finally, in terms of foreign exchange, we observe strong unfavorable currency fluctuations, especially in the AMEAA regions, with depreciation of several functional currencies against the euro, starting in February and intensifying in March. We expect to feel the full effect of ForEx effects in Q2. Of course, we will share an updated outlook for the year when the environment stabilizes and when visibility improves, and we will provide at that time, an update on our progress towards our 2021 performance improvement targets. This concludes our presentation. I'd like to thank you all very much for your attention. And I'm now opening the floor for the Q&A session. Thank you.

[Operator Instructions] We will now take our first question from Sanath Sudarsan from Morgan Stanley.

I hope you're all well. Can I just ask 2 questions, please? First one, can you give us a sense about your overall EM exposure as it stands with respect to how you see the margins and pricing recovery in these markets going forward? And can you share some anecdotes of how you've managed emerging market issues historically? And secondly, can I also ask about the amount of operating leverage that you've seen in the first quarter? Or maybe perhaps you can give a split of fixed and variable cost that you have in the business and how has T2G efficiency kind of help evolved that much better for you?

Okay. Thank you for your comments and questions. So I will pick up the first one, and I will invite Charles to debate on the second one. Well, in the regions where, as we said, we have our brands, which is mainly, as you rightly said, is the AMEAA region. But it's also true by the way, in Healthcare. It's also true in -- when we have retailer brands. The way we reacted to the currencies is very simple. The team, first of all, manage their P&L in local currencies, so they are mainly affected by the negative impact on the raw material. When they translate and when they buy the raw material, this has a negative impact on their P&L. And then consequently, what they do is they play on pure pricing, managing the mix of the products. So try to influence and sell more products that are at a higher gross margin. Then the influence and they play on the channel mix as well. They favor, of course, the channel where the product has higher margin than another channel. And this is done across all the countries where we have our hands on our brands. You asked to share some, in the past, anecdotal things. I can tell you that -- I think it was 2 years ago, the Russian ruble went up to RBL 100 to EUR 1. So right now, I think we are around 75, but -- or 80. And in fact, it used to be like for 4, 6 -- no, 8 weeks ago, it was below 70. So it's a bit of a crazy. And it's not the craziest swing in terms of currency. It's mainly in Mexican peso and Turkish lira and Brazilian real. But to give you the example, we took 2 sets of price increase in Russia at that time, whereas competition took after the second one, we took a first one. So the speed of reaction is extremely fast. And of course, the team has an objective to deliver our overall targets in euro terms, even though sometimes it's very challenging, as you can imagine, because when you translate it, you get the second effect of the currency devaluation. So that's the way we operate for, I would say, the part that is mainly AMEAA. If you look in Healthcare, we always said that a part of the business, that is the tender business, we have fixed price during the duration of the contract. Even though the team is doing a fantastic job to try to influence those fixed price and try to take benefits of it, right now, as the Healthcare business is mainly euro-denominated, it's not only an area of stability, but consequently, the fact that we have fixed price and we get better T2G -- the program is delivering with T2G improvement in gross margin. That helps a lot to facilitate at least the gains in terms of profitability. And the issue is less on the pricing, but more on the supply and make sure that we are able to deliver all the products, which is sometimes a bit of a challenge. We had 1 plant in Italy which has never closed. So we had a higher rate of absenteeism at a point in time during the outbreak of the pandemic. But the team has done a fantastic job protecting their lives, but also making sure that the plant was running and delivering. Of course, the throughput of the plant was lower, so that creates some tensions on this one. And in Europe, if you remember, when we -- last year, we told you our objective in Europe is to regain momentum and gain share. So it's rather a share gain. So it's -- we are more aggressive. We told you in past calls that our ambition was to win customers that we had partially lost on one category or one product type. And this is exactly what we are doing. So consequently, we are focusing more on volume and revenue gains through the volume and the share gains than the pricing activity. Keeping in mind that a lot of the activity is euro-denominated, so we don't have this impact in terms of the euro term. So that's where the focus is, rebuilding and growing the business. So that's for the first part of your question. I talked a lot about pricing because I know it's a sensitive topic about the pricing power. Of course, on the margin part, we are permanently -- and that's part of Transform2Grow program, reengineering some products, making evolution on some products in terms of spec, in terms of cost of goods of the products sold by adjusting the technicality and the specificity of that product. This is a work that is done by R&D as well as manufacturing operations, and of course, with commercial, because then they have to go to the retailers and explain that there is a benefit to adjust the spec of the products. And we try to make it, of course, win-win and share the benefits between the retailers and ourself, our partners. So that's mainly for the first part of the question. The second part was about the operating leverage, and if I recall well, is how T2G efficiency translate into the improvements on our P&L. So I don't know if you, Charles, you want to, or I can take it. It's up to you.

Charles, I can answer on the operating leverage, and maybe I'll let Thierry talk about the gains from T2G in that area. Of course, we have -- if you're familiar with the structure of P&L and if we take the reported P&L for 2019, so these are full year numbers, we have a low base of operating expenses. And therefore, for us, the name of the game, if you want to continue to invest in sales and marketing, is we need to continue to improve our gross margin. And this is, of course, what we managed to do very well in Q1. And the main drivers -- because all the drivers for improvement of the performance in our EBITDA bridge, almost all of them improved gross margin, which allows us to continue to invest in sales and marketing to support both our retail brands but also mainly our own brands. So therefore, I will not provide you with a breakdown between our fixed and variable expenses, but our fixed expenses below the line and below gross margin are fairly low. Therefore, this is why when the favorable factors on gross profit, and these are, of course, raw material indexes but also all the good things we're doing procurement in the framework of T2G, all the efficiencies in operation and supply chain, the gain there have a huge impact and leverage on operating profitability. Thierry, you may want to further elaborate on the benefit of T2G in that respect.

Yes. Yes, indeed. Thank you, Charles, and good morning, everyone. So the T2G programs, even in the context of the pandemic that we are facing right now is still ongoing and is on track. Obviously, it is facing a few challenges operationally as we needed to focus a lot of the times and the resources lately on protecting our people and focusing on supply on the short term. So we had to re-sequence some of the initiatives, also re-sequence, by the way, some of the investment required for those initiatives. But more or less, we are still delivering and continuing the momentum of the program. We've maintained the very strict governance so far so that we can continue to push the different initiatives to execution, and I'm sure, the smooth and swift deliveries of the financials behind. And as both Charles were mentioning, it's clear that a big part of our cost is on the variable when you look at your cost of goods, and a huge focus is being put on that, certainly, when we are facing these big headwinds. And we've been reviewing, for example, on our procurement. We've been reviewing in detail some of our key contracts and to readapt them and rescreening, leveraging the techniques that we have developed and trained the people on through the program, and let's say, rescreening all the suppliers accordingly. If you look at the -- on this sourcing as well, and this is linked to what Charles was saying, for example, the experience we had in Russia a couple of years ago, some of the reactions linked to that, apart from the pricing on the commercial side, was also to accelerate the local sourcing of the raw materials and making sure that we validate very quickly, and we have reviewed all the process to do that so that we can validate in short period of time, materials which are closer to production plants, and then more economically efficient than when we source from other countries. So we continue as well to -- you remember that we are implementing a new operating model in our plants. We mentioned at the full year results that we're having rolled out this in 4 of our plants. Now after Q1, there are an additional 4 where we have started. And we see already a little impact in Q1, the result of the first 4 from the previous wave. So as you see, we really, despite COVID, continue to push, this is on track. There are daily trade-off and some of the initiatives are postponed, but some other are pushed through. The one which are postponed is because we cannot have access to machines because they are fully loaded or the people are not available or the suppliers cannot come, they cannot travel. So very, very pragmatic challenges that we are facing, but this does not prevent us to adapt our strategy accordingly.

[Operator Instructions] We will now take our next question from Celine Pannuti from JP Morgan.

Yes. My first question is on the run rate of growth. Is it possible to have a feel for March, the extent of acceleration in March and then how you're tracking in April? I'm trying to understand how do you think -- I mean, do you think that by April, you are done in terms of destocking? Or that will linger further? My second question on the bridge, thank you so much for that. The raw material benefit that we see, is that, you think, the kind of levels can recur in current quarter and future quarter or even increase? And also on the savings that you have just mentioned, from what you just said, should I expect that the savings benefit will increase in Q2 given that you have more plants now under your T2G plan? And as well on the savings, did you anywhere have extra costs in the first quarter because of logistic cost due to COVID? And then finally, last question is really -- I would like to come back to what you said on emerging market pricing. So from what you said, should we expect you to raise prices already in Q2 in Latin America and Turkey?

Thank you, Celine. So let's start with the first one. So the first one was -- in fact, there's 4, but that's okay. The first one is the run rate of growth and how do we see it for March and going forward. So as we said, March was atypical. And in fact, the acceleration was even on 3 weeks or 2 weeks of March with a stockpile up from retailers that we're anticipating the lockdown and the consumers arriving in stores and taking all the products. This has unwinded or unfolded into April. So I think when we look at this, we try to draw a line over the course of the 4 quarters to see how it evolves. And this is what we tried to explain is, in fact, we should look at Q1 plus Q2 aggregated. I will not look at 1 month against the other. Because in all fairness, it varies customer by customer. Some customers were adding more stocks than -- more inventories than others. And by the way, this is mainly an analysis for the retail part of it. It's also different in Healthcare because the level of inventory is totally different in Healthcare. And it's different between tenders where you deliver consumers at home or whether it's in the self-pay where you deliver through wholesalers or different channels. So I would say, in my view, if you look at the cumulative 2 quarters, we should be -- rather, we should have an unfolding, so a decrease on Q2 versus Q1 that makes the first half and like-for-like more or less flattish. That's my view. Now frankly, very hard to tell you because things are changing every week. So it's an exercise that is extremely hard to make right at the time we speak. The second -- so you had a question on the extra cost of -- due to COVID. And it's clear that we are incurring extra cost by definition. And frankly, we first look at the safety, so we don't look at the cost first. But I tell you that we have bought close to 400,000 masks for our operations. We are buying sanitization gel. We are sanitizing, with external supplier, our plants on a regular basis. We have extra cost sometimes on supply chain with transportation because we are missing truckers or drivers. Nobody is talking about them, but they do a fantastic job, and they are long on the road and it's very challenging. So all of this is creating, indeed, an extra cost that is baked into the Q1 figures. It will continue, for sure, in Q2. And frankly, depending on the evolution of the pandemic, that could continue until the balance of the year. But there is, indeed so, extra cost on that one. You were asking -- the second one was the bridge on raw material benefit, how recurring it is. So I would say there's 2 components, as you know, there is the indices, and they are what we call the savings or our proprietary negotiations on the raw material. So the indices, we benefit from indices as the oil industry on the crude oil. They're derivative products. And of course, the collapse of the crude oil is translating into some indices that are going down. Unfortunately, Celine, it goes down at a lower pace than the crude oil drops. It's true when you go to fill your car, that is the same here. The second element is the fluff pulp indices is going up back up since 2 periods. So -- but of course, what we said in terms of the overall T2G program that translate into a significant improvement in raw material is across the 4 quarters. And it's, in fact, disregarding of the COVID-19, in our view. One other impact is, of course, the currency on what we buy. And as Thierry said, if we buy in local currency, it helps the local P&L. When you buy in dollar, like the fluff pulp, as you know, by definition, it has an impact for the countries. Do the saving benefits will increase? I would not comment on that one. But what I can tell you is that the team is daily in discussion with all our suppliers to try to get support by country, specific support on currencies on different markets where we win customers to get support as well. So I think it's a permanent discussion. But as a consequence, it's more on the safe side, I would say, for the year than on anything negative on this one. The last question was about pricing in AMEAA in Q2. And so in fact, as I gave the example just on the previous question, we are looking at pricing everywhere. We can take pricing as fast as possible. So the team are looking at it. Now the challenge is to balance the pricing versus the demand. And I would say, naturally, the fact that we are not premium position on premium -- we are in the core range or we are on retail brands should help us, provided we don't take too much pricing. So we are balancing the pricing activity versus the volume leverage. And as it was highlighted by Charles D., the leverage -- the volume leverage is significant because our fixed cost base is lower. So it's very important to make sure that we have the volume leverage. On the other side, and that's the whole complexity of it, we have to balance the volume leverage versus the capacity that we have in plants because they are all running, but we still face some absenteeism. So the throughput of some of the plants is lower than we had prior to the COVID-19 crisis.

We will now take our next question from Richard Withagen from Kepler.

Yes. I have 3 questions, please. First of all, you're unfortunately postponing the update on T2G. But can you give some more background to the changes on the implementation execution of the program, especially on the commercial side of T2G? I think Thierry, you already made some comments on the -- especially on the production side, but how about the commercial side? Second question is on the revolving credit facility. What have been the considerations to draw down the RCF completely in early April? And the last question, is there any change in behavior from the branded personal hygiene competitors since COVID-19 started impacting markets?

Charles, maybe I can take the second question on the RCF?

Yes. We can go for coms. Go for the second. I will take the third. And as invited, Thierry will take the first that is on the T2G. So why did we draw down the RCF, Charles?

Richard, the consideration is nothing more sophisticated than precaution, as we said. You've seen our leverage, our level of debt at the end of Q1. Our management of working capital was very good and continued to be very good. We're already capitalizing on all we've done over the last 9 months on this. This money was available and elevated our syndication bank in the very beginning of the pandemic on the running our activities. And this drawing was done after a call we had with them to provide we're planning to do that, because -- not surprised, by the way, to them, because they were expecting we would do that, not because they had any fear in relation to our performance because we have been updating them on the fact that demand for products was strong and even stronger in the beginning of the pandemic. But we thought -- of course, the crisis we undergo is not the same as in 2008. The banks are much stronger. But over the long run, we don't know what could happen, including with the most solid banks. This morning, we could draw and reinvest so that the net cost for us, of course, is significant. But we believe that the safety it gives us overweighs the additional cost, but we have no immediate needs, to be mainly clear, nor a shortfall of liquidity, at least with the visibility we have, which at this moment is limited, as you know. So these are -- these were the only considerations that drove our decision. And of course, we were fully supported by the Board, even though this remains within the prerogatives of management.

So thank you, Charles. On the change of behaviors on the consumers versus branded products. Of course, it's very early, but what we noticed, and even lots of analysts and data that is showing it is that more and more consumers are getting to retail brands in countries where you have retail brands. Why? Because we are on products that are recurring in terms of purchase. And of course, there is a cost associated in the basket that is rather important. And as the quality is at parity or sometimes better or at least there's not a noticeable difference, consumers are shifting. That's one element. On countries where we have our branded business, again, we perceive that, over time, the consumer, and it's more long-term trends, are also shifting to medium-tier products. And that translates by share losses at the international large brands, in Europe, against retail brands, and outside of Europe, against regional brands. The last trend that is very -- there's 2 trends arising, and one, we are very happy is the fact that more and more people buy on Internet. And there is an acceleration of subscription in digital with delivery at home. And we'll talk probably later, not now, but on LBC, our Little Big Change products, where we see an acceleration in the number of subscribers. And the last part will be probably, but that's very early and very prospective, is the emergence of everything about environment, circular economy and the request for protecting or getting better for the planet, especially as everybody has noticed that the environment is getting better with the low level of production that we incurred worldwide. Now to get to the first question. And again, you were asking about T2G on the commercial front. We already answered, I think, Thierry, as you said, on the rest. And I will leave the floor to Thierry on the commercial part.

So on the commercial parts, like on operations, we are also ongoing on implementations despite the COVID. It has also an impact because we are less in contact with our customers, so in some area, much more than the others. For example, in Healthcare, where we need to have nurses on the grounds go and visit the elderly homes and the hospitals, this is holding back a bit -- held back a bit during a couple of weeks. But when we look globally, you remember that we have totally rebuilt our accounts and brand plans and of last -- over the course of last year, and we have also rolled out the training programs with our -- for our sales force and the commercial organization, which are supporting the sales force. And this has allowed us rebuild the relationship with our key customers with joint business plans, which has been commonly built up with our customers. And the comments that Charles D. was mentioning a bit earlier, where we had some very positive momentum being rebuilt and also positive feedback from our customers lately is demonstrating the positive impact of all the work which has been done. During that period, where we have a bit of lockdown on all of us, we are intensifying the training for our employees on different subjects like revenue management or category management and so on, via our e-learning platform, which we have developed through the programs as well.

So it's both qualitative, as you can see. But quantitatively, we said in the full year results call that we were planning to be more aggressive commercially to regain and win share among customers. So we gain new customers in countries like Australia. In the U.K., we are strengthening with some customers, our partnership. In Continental Europe as well, it's the same also in Healthcare. We are working a lot to make sure that the wins, we are able to deliver. So if you remember, we say we are increasing significantly in the U.S. or in Turkey with big account gains, we are -- and T2G contributes to that. But we work on the implementation, making sure that we are able to serve the customer. So that planning, that's arriving as of mainly Q2, Q3, Q4. This was not on the Q1 results.

And then lastly, Charles, do you plan to update the market then on the progress with the half year results statement?

On which progress? Because...

On the performance improvement, on T2G?

Well, I think we will update, yes, which doesn't mean that we will share proprietary information. I'm still -- and I know it's frustrating and you don't like it, but I'm reluctant to share customer information. Why? Because it's very interesting, not for you, but for our competitors. So my biggest concern is if I'm telling you where we win, because we know in advance sometimes, I'm telling mainly all our competitors. But yes, we'll try to make as much as we can to make sure that you can input whatever you want or you need in your model.

We will now take our next question from Faham Baig from Cr?dit Suisse.

A couple of follow-ups from myself, please. It's on the EBITDA bridge. I was quite impressed with the savings that you saw. It's probably the highest level you've seen in a very long time. To what extent are these savings benefiting from operating leverage? Because clearly, you had much higher volumes in the quarter, and you were able to amortize the cost base. And to what extent is then the underlying savings within that, that we can think about carrying forward? And then secondly, on the investments in sales and marketing, which was another big number, a positive surprise. But in a quarter where most of your peers have spoken about reduced marketing spend given the need for it and increased promotional -- and reduced promotional activity given reduced needs for that as products were flying off the shelf. Could you help us understand where that money is going? And when you expect the payback?

Okay. So on the first question about procurement and the savings, I would say it's a mix of the 2. There is, of course, operating leverage. But when we said that the year was a year where we were working with T2G to maximize our procurement and the benefits behind the raw material, and we were saying, clearly, it was disconnected from indices. It's indices plus, really, the T2G program. This is not assuming a significant increase in volume because we have to be always conservative on this when we negotiate and we discuss with our partner suppliers. The leverage, as Charles alluded to, is our cost base is low. So the volume is important, but the volume is important in the transformation cost leverage rather than the raw material leverage. So I think it's -- the leverage part is different whether you talk about buying the raw material and making the products in -- as a finished product. That's mainly for -- so the consequence in your question is, is it in a way recurring or not? I would say the definition of recurring is, like -- of course, the negotiation, everything we do with our suppliers is a combination of different ways of discussing with them, and that's the benefit of T2G. And there are elements where also we're -- of course, if we stick to what we have, we can go to 2 years' negotiation. And our logic right now is to start engaging into 2021 or 2022, which will, of course, answer your question of is it something that will remain. Now the indices when they go on the wrong way, as it happens in the last 3 years, have a significant downside impact on the P&L. And frankly speaking, in '18 and '19, all the industry suffered extremely from the indices skyrocketing. So right now, that's why we push a lot on the pure negotiation to counterbalance sometimes the negative impact of indices. On your second question, that was really on the investment in sales and marketing. There's 2 elements. First, it's the bridge. It's a comparison versus a year ago. So it's always relative in life. So I would be cautious because if the first quarter of last year was lower, by definition, by being a normalized quarter becomes higher in terms of investment in comparison would be the first element. The second one is, of course, is when you start gaining and winning and you want to be on the offensive, by definition, you have to fuel your growth. So if you do nothing, it's a bit of expecting to gain without investing, I think, doesn't exist in life. So the combination of this was to say, yes, we are not looking at a quarter specifically. We are looking at the year and even multiyear commitments. A good example is on digital. We said, even though sometimes we were struggling in terms of financial results and disappointing the market, we decided to continue to invest on digital and subscription because we consider that, over time, it's a very strong investment. And we have not slowed down on the Q1, it's more the opposite. We have a level of subscribers that has significantly stepped up already before the outbreak of the pandemic, so before mid-March, but accelerated after mid-March. So that's a combination of those. There is a bit of commercial investment as well. When we say we are winning with customers, it's also there, and we will see it over time in the coming quarters.

We will now take our next question from Reg Watson from ING Bank.

I'd like to come back to the COVID impact that you've seen in March and the decline, the significant decline in volumes in April. Charles, you said earlier that it varies by customer to customer. I think what I, and perhaps a lot of my colleagues, have been trying to understand on this call is what was the margin impact of that additional volume in March? And how much of a margin impact are you going to see in the other direction in April? So I appreciate that when this is all done and dusted and we look back in a year's time, it will all get washed out in the Q1 and Q2. But it will be helpful if you could give us some indication of what it looks like one quarter to the next.

So I'm -- so when you say margin, it gets back again, if I understand correctly, to the leverage...

Yes. Is there...

If the acceleration of the quarter translate into an unusual gain in terms of margin, I would say the short answer is no. Frankly, the biggest driver right now of what will come in the coming quarters, the worry of the question we have is mainly the currency -- the foreign exchange that we are not controlling. But if you look at constant currency, the acceleration, when we said -- when we closed the full year and we give the guidance at that time where there was no pandemic, we were extremely strong because we were foreseeing a strong -- and if you remember, you can look at the transcript, I say, one of the gains is gross margin improvement, that it will be significant, and I can confirm that in like-for-like, it's the case. But it's true that the biggest concern or worry that we have to track and monitor is the impact of the currency. So I would not -- I think it should be reassuring, I don't know if it's the case, but it's not the acceleration in volume that translates into a significant jump shift of the gross margin in Q1, if it's your question.

Okay. That is my question. And then in which case, can I segue into a slightly less direct question, which is to ask about the volumes you're tracking in April? Although you said they've come down significantly from March, which is to be expected, are they still tracking above where you would expect it to be in April? Or are we actually below where you would have expected to be in April due to destocking?

They are below what we expected as March was above what we expected. So the paradox -- and in all fairness, it's -- we have to have a lot of humility. It's unpredictable. And the way it occurred, in all fairness, I think if somebody can tell me he was aware and he was -- I'd like to meet the person, because in 30 years in consumer goods, I've never seen that before. So it is true that it was higher in March. What is amazing is, and I tried to allude to it, is the team has done, at Ontex, a fantastic job because you just need to realize that in the crisis period, we were struggling to get trucks, to get raw material, everything. People were scared at the beginning to go to the plants. So it was very hectic and amazing. And so it -- and so that is the same difference was in March and April, just to make a short answer.

Okay. And then obviously, now in April, with some relief here then in terms of volumes, how can you manage the business to ensure that you actually get enough fixed cost recovery, that you're saving where you can in order to preserve the operating leverage on the downside, if that makes sense?

See, that -- I'm not sure I got the full question. I'm sorry, if you can -- because you say -- what do you mean...

Yes. Obviously, with lower volumes in April, you obviously have less fixed cost recovery. So what else can you do to manage the business during a period of unusually low?

Okay. I understand. Sorry, it's clear. In all fairness, I think what you don't see is the level of inventory. We were running flat out with no inventory at all. We were scared at that point in time. If you -- if you're producing less than the demand, by definition, which happens, by the way, your inventory collapse. So we have to rebuild it to make sure that we ensure service level. And in all fairness, we get congratulations from retailers because the service level at that time, we put a lot of focus on it and we delivered despite the spikes and the unexpected demands from retailers. So we succeeded to deliver. And so we are rebuilding as well. So you should not worry about this because, in fact, it's a balance between the different months. And right now, it's more like a relief in a way to make sure that we can rebuild a bit of inventory.

Maybe one last comment. I think we touched on, Reg, is that during this very busy period of March, the machines were not exactly available for trying some innovations or qualifying new products. So believe me, we have -- we will have plenty of uses for those production lines.

We will now take our question from Anubhav Malhotra from Liberum Brokers.

I just have a couple of questions. Firstly, a clarification on your comment earlier in the call on expectations of a like-for-like at 1H. I was just wondering if that's a group level comment or was it just for the European business. And secondly, a question around Brazil and Mexico. So I know Ontex has not owned these businesses for a lot of years, but the businesses themselves have been existent for many years. So maybe if you could share with us any experience of what happened to growth, to consumer behavior and to your performance in the product categories during the financial crisis in the 2008 and 2009? And if you could please remind us if you are over or underindexed in the lower-priced tiers in these markets. So if you are suited to meet any potential consumer downtrading or not.

So the first question, the short answer was yes, it was for the group and not only Europe. The second question on [ acquisition ]. Well, Brazil and Mexico business, what I can tell you is -- what you don't see because it's in the total of AMEAA is the fact that when we bought the Mexican business, which, by the way, is Mexico was the segue to North America, that strategically is a very important role for the quarters and the years to go. That's where we have a new opportunity to grow, and we started and engaged, and we continue. And Central America and exports, the Mexican peso was at MXN 18 to EUR 1. It's right now in the range of MXN 25, MXN 26. So to your question, if I look at local currency performance, there is a significant step-up in the business case of what we did in terms of profitability improvement in those regions and in terms of the way we are strengthening our business. We gained share on incontinence. We are entering into Femcare, as we said, in Mexico. So it's fully in line with our plan, and it's reflecting, in fact, the strength of the business. Now on the currency in Mexico, we don't control the currency. So it is -- now the question is, when will be the bounce-back of the Mexican peso? Because there was a drop of almost 20% in 4 weeks. So the question is, if it takes 4 weeks to drop by 20%, is it taking 4 weeks to go up later? I have no clue. I don't know. But at least, it is clear that we look at the 2 elements, the local currency performance and how we performed versus the past; and then, of course, the euro-denominated performance. As far as Brazil is concerned, the pattern is slightly different. We are -- of course, as we didn't hide it, but we are in a legal discussion because of the -- what we bought was not -- and what we due diligence is not what we get. So this will get an out -- and the answer to this process will be on the first half of 2021, so in a year from now, more or less. Depending on the outcome, we'll know better. Of course, if we were right or wrong, I personally believe that we were right, but we'll see. Now Brazil is a very complex market. Perhaps Charles, who has been living there, could get a few words on Brazil. But frankly, we -- well, the financial crisis of 2008, it's 12 years from now. I'm not sure that would help us to see the future, especially because right now, we have a different situation that is linked to something totally unprecedented. It's pandemic and the virus that is affecting all countries that never happened in the past. So predicting the future on this, I'm not sure that would work. But perhaps, Charles, you have a point of view on that one? A short one because we are running out of time, I think.

No. I think on Brazil, the country, at the start of pandemic, was in a very different situation from where it was in 2008, even though I was not there at that time. And the pandemic is coming -- is occurring in Brazil. The country has not fully recovered from 3 years of economic recession over 2015, '16 and '17. The growth rates over the last 2 years have been very weak. So therefore, the whole -- and the level of unemployment in Brazil, which almost doubled in 18 months between late 2014 and mid-2016, had just started to decrease. So we expect, of course, not comparing to 2008, but we expect the pandemic to have an impact on demand for -- just because consumers are losing either the job or part of their revenue. However, in our categories, we don't expect an overall big drop in demand because Brazil can take great care themselves, and the product we sell them and we produce for them are considered as essential. We are -- with our brand in Brazil, which are positioned in the mid-range of -- in the branded business, we believe we are well positioned versus the other brands because of our pricing positioning. So if there is any downtrading in Brazil, we should take a benefit of it. That's all I can say.

Thank you, Charles.

Thank you. That concludes today's question-and-answer session. I would now like to turn the conference back to Mr. Charles Bouaziz for any additional or closing remarks.

Well, thank you for your time today. First and foremost, I sincerely hope that you are healthy and will remain so in the face of the pandemic. Secondly, while current visibility is very low, we keep in mind that we supply essential personal hygiene categories, which are critical in people's daily lives. They are counting on us and enjoy structural growth drivers in the coming years. Future is unknown, and we need to accept it with humility. However, we have some trends that are solid and anchored: increasing penetration of leading retailer brands in developed markets as consumers seek the best value for their personal hygiene needs, especially in tougher economic environments; growing use of personal hygiene products in developing markets; higher need for adult incontinence products due to demographic trends; and not to forget, I alluded to this, the ongoing shift towards new digital channel, where we see a clear acceleration. Finally, I would like to say that we have an amazing team of less than 10,000 employees, passionate and dedicated and dedicating a lot of efforts every day to think, make, sell and deliver our products. Our teams are focused on continuing to meet consumer and customer needs while delivering our T2G program to make Ontex a stronger company. So I hope we will have a different Q2 session in terms of environments. In the meantime, take care. Thank you very much, and have a great balance of the week. Thank you.

Ladies and gentlemen, that will conclude today's conference, and you may now all disconnect.