Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Ontex Group's Q1 2021 Trading Update. Today's call will be hosted by Esther Berrozpe, Chief Executive Officer. For your information, today's call is being recorded. [Operator Instructions] Today's earnings release and presentation are available on www.ontexglobal.com. I would now like to hand the call over to Philip Ludwig, Head of Investor Relations. Please go ahead, sir.

Thank you, Saskia, and good morning, and welcome, everybody. I'm Philip Ludwig, Investor Relations at Ontex. We'd like to welcome you to this investor and analyst call to discuss Ontex Group's Q1 2021 trading results published earlier today. Before we start the call, just a few housekeeping issues, please. I would like to remind everyone that the safe harbor statements apply to this presentation and to our subsequent remarks and the Q&A session. Second, comments we make today about revenue are on a like-for-like basis, unless otherwise noted. And finally, definitions of the alternative performance measures can be found in our documents. With that, I'm happy to hand the call over to Ontex's CEO, Esther Berrozpe. Esther, the floor is yours.

Thank you, Philip, and good morning, everyone. Thank you for joining our call today. At the end of February, I laid out my strategic priorities to restore profitable growth at Ontex. These involve in-depth changes spanning across every aspect of the group, from our leadership and organization to the portfolio and to the way we operate. It is a complete change in culture. And the work has already begun. We have accelerated the rigorous analysis to finalize the new strategy for the group. We are well advanced in identifying all the opportunities and areas of potential upside. We are now preparing to move into full implementation mode. Having the leadership team in place is essential to deliver the turnaround, so I am delighted to announce the arrival of a new CFO and a Chief Supply Chain Officer. These means we now have strong leadership in the roles critical to accelerating the implementation of our new strategy. My team and I will finalize the action plan and the road map for execution in the coming weeks. We will then share with you the new strategy and our objectives on June 21. Moving to Slide 4. We have recently taken some important steps to put Ontex on the road to restoring profitable growth. First, Peter Vanneste joins us as CFO next week. His role will be key to setting the right management system with detailed KPIs and dashboards to track our progress. He will also place immediate focus on capital allocation and cash generation. Next, I have created a new role of Chief Supply Chain Officer. Vincent Crepy's role covers all the supply chain operations, bringing together procurement, engineering, manufacturing, logistics, product quality and customer service. In this way, we can deliver best-in-class quality and service level and, at the same time, achieve end-to-end operational efficiencies. I appointed Laurent Nielly as President for Europe in February. This division has performed well below its potential over the past few years and is the main source of group revenue decline. This business requires new leadership with an [ intense ] focus on establishing close partnerships with our customers and restoring growth. Last but not least, since the beginning of April, a new VP Communications has been on board, Caroline De Wolf. With the group facing such extensive change, it will be critical to ensure effective communication with Ontex Group stakeholders. Most important at this time is internal communications because we must preserve a strong sense of belonging, restore trust in the group's leadership with transparent communication and leverage of our excellent knowhow. And we need all our employees fully engaged in this turnaround. Looking at the way we work, decision-making must become more agile with appropriate spans of control and accountability cascaded downwards. With regards to accountability, we have designed a new pay-for-performance remuneration policy, which has been proposed to shareholders for approval at the next general assembly. This new policy is much better aligned with shareholder value creation. It includes clear short-term metrics, organic sales growth, operating margin and free cash flow after reported currencies and no longer excluding changes in currency as in the past. It also includes local criteria of relative total shareholder returns, adjusted EPS and ESG metrics. Moving into customer centricity. This is a critical building block, and actions have been taken by the commercial teams to rebuild and restore relationships with customers as well as to bring new focus to the innovation pipeline. These actions are already bringing benefits as we have secured new contracts that will help drive sales growth later in the year. Key to improving the commercial performance is being able to achieve a best cost position. As I said, this is the key focus of our new Chief Supply Chain Officer and his team. Ontex must leverage the strength of its manufacturing know-how, its footprint and its scale to optimize capacity utilization and deliver products at a competitive cost. We have the leadership position, notably in Europe, to achieve this. In the short term, we are taking actions to mitigate raw material cost increases. With regard to the portfolio, the review and analysis of the business and product portfolio is close to completion. The objective is to ensure that the portfolio can maximize synergies and operational excellence. Change has started. We will keep you posted on further progress as and when things are delivered. Now on Slide 6. We can see in the sales bridge that the drop in Q1 revenue is largely driven by volume, compared to a strong Q1 last year when there was 5% volume growth and currency headwinds. With lower market demand, especially in baby, there has been pressure on pricing, making it even more important that we move to a best cost position as soon as possible. And as anticipated, we have a strong currency headwind with all main foreign currencies down versus the euro. When we look at revenue in the different categories on Slide 7. Babycare and Feminine Care revenue were both down significantly as they have high comparables and were most impacted by the contract losses in Europe. We have continued to innovate with new Babycare products launched in the U.S. and the Brazilian markets in Q1. In Femcare, we continue to focus on capturing attractive growth opportunities in lifestyle brands. The ongoing growth trend in Adult Inco stands out with increased revenues in Q1 on top of growth in prior year. Retail channel sales were up 6%, with both retailer brands in Europe and Ontex brands growing in Brazil, Mexico and Turkey. This was partially offset by lower sales in the care home sector due to lower occupancy rates. Adult Pants delivered another quarter of solid growth. Looking ahead, this sector will continue to be our major growth driver as population ages. Following now to the sales review by division on Slide 8. The European decline is explained by previous contract losses and comparison against the pre-pandemic Q1 last year. However, there are still bright spots with strong growth in Russia and Central Europe. New contracts have also been one, which will support sales late in the year and into 2022. AMEAA region was down 4.2% against tough comparables in Q1 last year. The Brazilian business performed well, with a good commercial momentum and solid growth in baby brands. Baby and adult care brands continued to outperform in Mexico, where we have gained market share, and in Turkey with our market-leading Canped brand. Healthcare was driven by good performance in e-commerce, self-pay channels and new businesses, but this was offset by the impact of lower occupancy rate in care homes. We are now seeing an increase in occupancy rates in care homes, which should help support growth as the year progresses. And I would like to highlight the first commercialization of our new smart adult diaper that is showing very promising start, driven by the efficiency benefit it brings to caregivers. On Slide 9, you will note that we have changed the EBITDA bridge to focus on reported results and on net cost savings. In Q1, the decrease in EBITDA is largely explained by the drop-through of lower sales and negative currency. Whilst margins are down in the period, we have delivered a good momentum of cost savings, which totaled EUR 11 million. Raw material costs were lower as we continue to manufacture using inventory purchase prior to the price increases. The increases in the raw material prices will start to have a significant impact from Q2. Ongoing production efficiency programs generated net operating cost savings of EUR 4 million, and restructuring actions started late last year and at the beginning of this year, delivered EUR 7 million savings in SG&A. Currency continues to weigh heavily, but this will start to level off from Q2. A few words now on the financial structure. On Slide 10, you can see that the net debt level remains under control. The pressure on the leverage ratio comes from the decline in EBITDA. In my view, the financial priorities for the group are clear. One, we must rebuild EBITDA. Two, we must improve the rate of cash conversion. In terms of our actions, we maintain tight management of working capital. The decision was taken not to pay a dividend on the 2020 results. And in the first quarter, we have frozen all but essential CapEx. We have repaid much of the revolving credit facility, which was fully drawn at the start of the pandemic, and now have more than EUR 200 million of headroom. You all know that we have major maturities in the second half of 2022, and we have initiated the refinancing process, and we are currently exploring a range of debt instruments. I will now turn to the market trends and our outlook for 2021. We see the market trends on Slide 11. Three main trends: first, soft demand in Europe; second, a continuous shift to e-commerce; and third, a positive adult care demand on an annualized basis. On the left chart, you see the lower trend for the last 12 months for Babycare and Feminine Care products in Europe. The accelerated decline in the first 2 months of the year are a combination of the soft demand and a spike in pre-COVID sales in prior year. The underlying trend for adult care remains very favorable. On the right, you see that the consumer shift to e-commerce has accelerated in 2020 due to mobility restrictions and new shopping behaviors. Since 2015, sales have more than doubled globally to EUR 13 billion or 17% of the total market in 2020. This is highest in Asia Pacific. But in our main regions, e-commerce is estimated to be at around 8%. Now turning to Slide 12. When we look at consumer purchasing power in Europe, the pandemic has placed significant pressure on consumer budgets. Pre-COVID, 17% of the population said they had budgetary constraints. This percentage has now climbed to over 60%. When we ask families where their priorities lie, a high number of them indicate their intention to seek better value, both in terms of where they shop and which products they buy. And as you see on the right, they are ready to switch to retail brands. These trends represent an important opportunity for Ontex to work with retail chains to grow their private label business offering, whether through their shops or through their online shops. While it is encouraging to see actions to combat the pandemic starting to take effect, there are still many uncertainties as to the pace of countries reopening their economies as well as how input cost inflation will evolve. In this context, the group expects like-for-like stable revenue in 2021 with growth starting from Q2. For us, the priority in 2021 will be to launch major actions to drive the turnaround of the company. The new management team look forward to presenting Ontex's strategic plan and financial objectives in June 21. Thank you so much for your time, and we will be now pleased to answer your questions.

[Operator Instructions] Our first question today comes from Charles Eden from UBS.

I've got a couple, if that's okay. The first one is just on your financial leverage. Really appreciate the color and the confirmation of the EUR 200 million headroom at the current levels. But I guess, at least early today, with the share price reaction, there is the concern in the market about the possibility of an equity raise. So can you just confirm is your intention to avoid that outcome? If that is the case, will you give us some color on that? That would be helpful. And then my second question is just on the full year guidance. If I'm correct, you appear to be endorsing the current consensus for like-for-like sales with consensus expecting a decline of 0.2%, which is encouraging. But there's no mention, of course, on the margin this year. I appreciate it's difficult with the raw material trends currently. But you mentioned it is a priority to rebuild EBITDA margins. So can we see this as an indication that the 11%, give or take, EBITDA margin Ontex has reported over the last couple of years is a tough level in your view?

Charles, thank you for your questions. To your first question on financial leverage, we have just started the work. As you probably know, we have maturities coming up in September 2022. The team is looking at different instruments that influence, but I can confirm that we are not planning to have an equity raise. On the second question on the 2-year guidance, I am confident that we are at -- Q1 was the low point in terms of revenue decline for different reasons. As I said, on the one hand, we had a very high comparable last year because in March there was a very high spike of sales driven by the preload as countries were ready to start closing for the pandemic, but also because is that the quarter with highest impact on the contract losses that we had last year. In February, I said the last 3 quarters last year, we had a significant impact in our divisional contract losses. This will continue throughout Q3 this year, but the highest impact in Q1. My expectation and the plans that we have in place is that we will see growth starting from Q2. And we would be able to recover the loss that we had in Q1 and close the year with flat revenues. In terms of margins, at this point, I'm not in a position to give you an answer. There is still too much uncertainty and volatility in the marketplace. And there are 2 main factors. The first one is the evolution of the pandemic. We are far from being out of it. We continue to see in certain places of the world big spikes. And this -- it's difficult to predict how this is going to impact our sales. On the one hand is the postponement of birth rates that we are seeing and the consequent impact on the Babycare products. At the same time, we continue to see low operational rates. We see some signs of improvement in many countries, but yet far below what they were before the pandemic. And last, but not least, we have raw material indexes at all-time highs, and it is at this point difficult to predict when this trend will start to reverse. What I can assure you is that I am not happy with EBITDA margins that we reported last year and in Q1 this year and that we are taking short-term actions to mitigate the impact of all the headwinds that we are seeing. But most importantly, finalizing our strategy to make sure that we take the medium- and long-term actions, the necessary actions to position the company for future growth and future margin expansion.

That's great. I look forward to hearing your plans from yourself and the team in the coming months or on 21st of June.

We now move on to our next question from Sanath Sudarsan from Morgan Stanley.

A couple of questions from me, please. First up, just trying to understand the fundamental moving parts here. Look, your demand for the category is challenged post COVID. Competitive intensity looks quite high right now. But at the same time, you're guiding towards lower contract losses and maybe also winning some more contracts going forward. But how do you manage the equation of profitability and raising prices to offset input cost pressure on FX headwinds whilst you're trying to regain lost grounds, so to speak? And I'm particularly interested to understand on the U.S. market where you're trying to develop the category there. You're partnering with new people. You're putting a lot of CapEx. How do you have the -- I mean, do you have the flexibility rather to pass on strong pricing? Or would you have to absorb the impact in the near term? So that's my first question. And then secondly, going back to today's announcement, you've said that CapEx will be essentially kept at a very bare minimum level. I wonder if that kind of repositions the company to focus away from growth and more into profitability? In a sense, is your profitable growth agenda just a margin agenda and not a top line agenda?

Okay. Thank you, Sanath, for your questions. So to your first question on the moving parts, of course, we have -- at the moment, the market is challenging because the demand is soft. And of course, this brings competitive intensity. And this, coupled with the raw material prices going up, is a challenging environment. At the same time, it is trying to find the right balance between driving growth and having the right profitability. So I think we have the plans. We are taking the necessary actions on costs, typically, and we've seen the progress that we've done in Q1 to make sure that we have the best cost position and we leverage our sales to make sure that we can continue expanding our margins while driving growth and recovering as part of that growth lost contracts in the marketplace. So for me, what I can assure you is that there is a very strong focus on the cost and this is operational efficiencies and SG&A costs. But at the same time, we are assessing the commercial actions needed to drive the growth that we are planning starting from Q2 at the right margin. In terms of the CapEx minimum level, the fact that we are very tightly managing our CapEx doesn't mean that we are focusing away from growth. But in my view, we need to have a much healthier position in our P&L to ensure that we drive profitable growth. There is no point of driving growth if we cannot expand the margins. So for me, this is not like an exact science, but we need to position, we need to drive the cost actions to drive, to expand margins so that then we can drive profitable growth. Now this is not exactly a sequence because we will see growth starting from Q2, but for me the main priority at this point is to expand margins so that we can have the headroom to drive the necessary growth and to accelerate that growth.

But can I just press on one further question, please? Just in terms of your pricing policy, what's the lead time you take when you renegotiate contracts with customers? And how long does it take for pricing to come through generally?

So I'm not in a position to disclose what the nature of our contracts are. Of course, I mean, there is a different time line if I look at the branded business versus the retail branded business. So on the branded business, which is basically our AMEAA division, our pricing actions can be more immediate because, basically, we assess the size and then implement in the marketplace. In the retailer branded business and institutional business in Healthcare, it is a much slower mechanism because there is different clauses and policies in the different contracts. So this is not like a one solution fits all. It varies very much by customer and by country. But I can say that, in fact, the time lag between implementing actions and seeing them flowing through the P&L is lower than compared to the [ branded ] business.

We now move on to Alan Vandenberghe from KBC Securities for our next question.

The first one is regarding the raw material impact. You already mentioned that raw materials are at an all-time high or at least a very recent high. I was wondering, because we saw that some of your brand competitors have been or at least announced that they would be increasing prices going forward, I was just curious to hear your view on that and how that could impact Ontex. Second question is regarding a statement that you made in the -- during the presentation, the lower baby demand. I was just also hear -- curious to hear a bit more your view on that and receive a bit more granularity on how we should understand. Is it structural element? Or is it induced by COVID? And then the last question is just out of curiosity. I was wondering if you could provide a bit more detail on what we should or could expect at your strategic update in June?

Okay. So thank you, Alan, for your questions. So maybe I'll start with the second question with -- on the baby demand. I don't see it as structural. So the demand has been soft in the past year. In the chart that I showed before, this was the last 12 months ending in February. And especially, January and February was even softer. We don't see this as a structural. We see families postponing the decisions to have babies, and I -- we do believe that -- we don't have yet visibility for when that will restart. But of course, as we see this as a postponement, at a certain point, we will see a spike. Now the question is when is this going to happen, and I think it's going to be very much dependent on how fast the vaccination campaign is implemented in the countries and the aid programs that different countries are going to put in place for the economy recovery. Because this is a question of families are postponing birth because of safety question first based on [ families ]. And second is just uncertainty on the economic impact that the family is going to have. But I don't see this as structural. And I think we need to be ready with a very strong innovation pipeline to capture and to maximize the value structure when the recovery will come back. As I was saying also in my slide, I truly believe that there will be growth in retailer brands. Because the truth of the matter is that there will be budget constraints as people exit from the pandemic, and we expect a shift of demand in terms of the type of retailers -- the type of stores where consumers shop and the type of brands. And I think private labels especially can benefit from that. On the third question on the strategic update, what you can expect. So there are a lot of moving pieces here. So we are looking at every single area of the business. So what you can expect at the end of June is that we'll have a comprehensive view of what is the content of these strategic priorities that I highlighted in February. I do recognize that, when I talked to you in February, I talked about the strategic priorities that were at a very high level. And so what you will see is what is behind that. It is exactly the things that we want to do and the plans that we have behind each of the priorities. You will also see our aspirations and goals and our financials for the next 3 to 5 years. So you will see how we see the top line, the margin and the cash expanding. And I think that, very important, you will see my team in action. So this is not going to be only me, but it's going to be my team sharing with you their plans and their objectives and their -- for the future. There will be specific actions that we might not be ready to share at that point. Of course, there are specific actions that basically follow a different time line, but I think you will have a comprehensive view of the goals, the financials and what is the plan behind those financials. The last question of raw material impact and the price increases. Okay, this is not a secret that we have seen a spike on the raw material indexes, very fast increase of the prices. They will start to flow through our P&L in Q2. Because in Q1, we had mostly produced with the material that were purchased prior to the price increases and also benefiting from some hedging activities. So something from in Q2, we see now some signs of the start -- the turning points in the U.S., nothing in Europe. So still not clear when this trend is going to reverse. And of course, what I can tell you is that I can tell you that we are taking on the necessary actions to make sure that we offset this impact on the cost and on the commercial execution. At this point, I am not in a position to communicate any price increases, but I can tell you that we are working on the actions necessary to offset this impact, and we will communicate as appropriate and as when we're ready.

We now move on to Iain Simpson from Barclays for our next question.

A couple of questions from me, if I could. Firstly, just to come back to the raw materials point. So you flagged that it was about 120 basis point headwind to you in Q1. But one of your peers had raw materials as a tailwind to the gross margin in their personal care business in Q1, and they flagged a decline in superabsorbent polymer. So any color you can give on the sort of moving parts within the input cost bill? And in particular, if raw materials hold at current spot levels, any indication as to what that would be in terms of year-on-year increase for the year as a whole or the balance of the year would be very helpful. Secondly, just a quick one. Can you just remind us what the debt level is if we include factoring? And clearly, there's recently been some high-profile events involving supply chain finance companies. Can you just confirm that there's no risk to Ontex from that? And then lastly, your annual report makes reference to pure-play e-commerce, and you talked about how you're doing private label for the world's largest technology company. I'm assuming this is Amazon. Are you able to give any color as to which geographies that might be in?

So starting from your last question on private label for pure players. We are -- yes, we are the leader on private labels, especially in Europe. And we are partnering with many different pure players in the different geographies for 2021. I think, in the U.S. and Europe especially, there are series of online pure players who are developing, who are seeing the opportunity to develop their own private label. And as they sign this opportunity and they develop, we are partnering with many of them. So I would say, this is still a very small market because the e-commerce pure players have developed or are developing this category as we speak. I'm also trying to understand the size of the opportunity. But what I can tell you is that, as we have started this activity, it is growing very fast. And I think we are, with our know-how about how to serve private labels and our scale in the different regions and logistic footprint, I think we are very well positioned to capture this opportunity. But in my view, we have exponential growth in the near future. In the second -- on the second question on the debt level, whether it includes factoring or not, I can tell you that factoring at this point is EUR 145 million, which is EUR 11 million lower than 2020. So we have decreased the level of factoring. And it includes -- the debt level includes -- it does not include the factoring. And for the first question on raw materials, I don't know if I understood this correctly. I'm going to maybe comment on what it is for us. So in Q1, raw materials had a slight positive impact in our margins. Because first, we produce with materials that we already purchased the prior year. And second, the indexes started to spike at the end of the quarter. So in reality, in Q1, it has not been a headwind, it has been a slight tailwind. The headwind will start in Q2 and will go and will continue all the way down to Q4, but with the biggest or the biggest impact in Q2. And we are taking action to offset this impact, both on the commercial action and on margins. The challenge is that we had -- when we started the year, we had foreseen raw material spikes, but we have not foreseen the indexes getting to this level. So we need to make sure that we accelerate and implement all the necessary actions starting from this month.

We now take a question from Reg Watson from ING.

Esther, I appreciate it's early days, but I'd like -- I wonder if you could please expand with more detail on what your expectations are for Vincent's role as Chief Supply Chain Officer. You mentioned improving the cost, leveraging your scale. But do you have a view on the size of that benefit that he can deliver for you?

Okay. Thank you, Reg, for your question. Vincent is going to have a very key role in our transformation. We talked about -- we need to drive growth, and this is about all the commercial execution, but there is -- we need to expand margins and a big portion of the margin expansion will come from cost reduction. And when you look at the cost, Vincent is going to own the biggest portion of the cost, which is in manufacturing and supply chain. Of course, in addition to that, we are looking at our SG&A. I think I said in February our SG&A has increased to, in my view, unsustainable level and we are working on reducing it. But going back to the Vincent's portion of the cost, which in operations on Vincent's role, I think there is an opportunity to drive significant improvement in every area of operations, especially manufacturing and supply chain and logistics. And he will work on -- with other plans that we need to implement to do that. It starts, as an example, in manufacturing to make sure that we increase the capacity utilization and that we drive efficiencies in the factories that we have. We are working on how can we further specialize each of the factories and making sure that -- and reduce complexity in each of the factories, how can we have a better operation. So there is an opportunity first to improve cost by increasing the capacity implementation; second, by being much more efficient in each of the factories in which we operate. And then we have also supply chain. I think there is an opportunity as we redesign our footprint [ itself ], to also redesign our logistics. And I think there is also an opportunity also as we see commercial sales evolving by geography. We are talking about the shift from in-store to e-commerce. This has a very big impact on the logistics operations, and then we need to make sure that this is an opportunity for us to expand margins, and it doesn't represent a headwind. And then last but not least, I think there is an opportunity to integrate all these functions in a better way so that we can maximize as we make our investments on the industrial setup that we will maximize the value extraction from this investment, looking at it on an end-to-end basis and not as it is today or it was in the past, very much working in silos.

Okay. And for my second question, I'd like to touch on the slides you presented showing the shift to e-commerce. And it feels like Ontex has suffered during lockdown because of the shift to e-commerce and your own customers have not been particularly present in that channel. If and when we emerge from full lockdowns, do you expect that channel shift to reverse? Or is that e-commerce now here to stay? And how you address -- how you're actively trying to address that if your own retail brand customers are not able to access that market?

To be honest with you, not having the magic ball, I don't think this trend will reverse because the pandemic has only accelerated something that was already happening. So we saw -- if you look at the slide, we saw that every year, I mean, the e-commerce was getting 1 point, 1.5 point. And then, of course, with the pandemic, it accelerated. So I guess, post pandemic, I believe that the shopping habits will normalize, so we could see a short-term reversal or stabilization, but it doesn't mean that the trend will not continue. It's just like the pandemic accelerated and potentially it might normalize a little bit, but I expect this to continue to grow. And regarding what we are doing about it, because it is true that retailers are locating -- our current retailers are not getting the fair share in private labels, in this context, are not getting their fair share, we are -- this is an integral part of our strategy, and I look forward to sharing more in our June with you.

Okay. And then fair enough that you'll share that with us later, could you give us an indication then of how long it will be before -- as we start to see the results of your actions in this regard?

Excuse me, I didn't -- can you repeat, please?

Yes. I appreciate at this stage you don't want to share the exact details and you'll tell us later, but could you give us an indication of how long it will be before we start to see some concrete evidence that your new strategy in this area is working, when it will flow through to the numbers?

You are -- do you mean on e-commerce or...

Yes. Yes, on the e-commerce, yes.

Okay, okay, okay. On the one hand, even if it's still small, I think we are well positioned to capture the growth of pure players and lifestyle brands. Lifestyle brands, this is still a small segment, growing very rapidly in the U.S. And we are the main partner of these lifestyle brands. Basically, they are full e-commerce. And then as I said before, we see a rising trend of basically pure-players developing their own brand or potentially even partnering with other retailer brands to basically sell through to the marketplace. And I can say that we are -- we have a strong position on that. And as this growth accelerates, I think we will capture a big portion of that Now still, this business is still small, but growing exponentially, double-digit since many years. Now I think a little bit more structural and challenging is how to reverse the trend of private labels in the context of consumer shifting from in-store purchase to e-commerce. And this is something that we need to do in partnership with our retailers. I think we have already some very good success stories in Central and East Europe and over China. We saw some very strong growth in this region in Q1, but more needs to be done in West Europe with some of the main retailers. And this is going to be part of, as I'm working on the new organization, that we will be able to share with you in late June, this is going to be a fundamental change on how we can organize, not only in the structure of the organization, but the resource allocation between just traditional sales and e-commerce to make sure that we have appropriate resources to help and work with our retailers to ensure that we capture this trend.

Our next question comes from Karel Zoete from Kepler.

I ask a couple of follow-up questions. But the first one would be on the outlook for the Latin American market, in Brazil in particular, because things are still difficult there, but you showed pretty decent growth. Was it all price-driven? Was that volume-driven? And what's the -- what are your expectations going forward now price increases probably need to lend in that market? The second question is on -- you have a follow-up question again on e-commerce. Can you speak a bit about the resources you find within Ontex when it comes to the digitalization agenda? Where do you stand? How are you organized? Because that's ultimately going to be a relevant area of investment for you probably. And then the final question would be on the CapEx needs for the business. Because you -- this year will be a year where you're going to be strict on CapEx and improve cash conversion. But at the same time, you need to invest in better customer service, et cetera, and particularly in Europe. So if you think about the needs for the business in CapEx, where do we stand?

Thank you, Karel, for your question. So first of all, I think the first question was on Brazil. We see a positive market, and we have a very strong position, strong brand. We had good innovation launch in the Brazilian market. We launched baby pants, which is a category that is -- has a very strong growth trend as it has happened in Europe in the past. We see this trend migrating from Europe to the Americas. And we have the platforms. And of course, we have transferred the product platforms to Brazil, and this was a big source of the growth. So basically, I would say that product innovation was driving most of the growth. I think we are achieving very good momentum. This is a business that, in any case, has been growing very nicely in the past years. And I would say that in Q1 we are accelerating that momentum. On the second question on the e-commerce capabilities that I point on Ontex, I need to say that, actually, I was very positively surprised because we have very good capabilities in the company but extremely fragmented. So we have a lot of bright spots. We have developed a brand-new B2C business, which is all digital that they started in France and it is being deployed in different geographies. We have some good capabilities in the Healthcare distribution, where we do a significant amount of sales on that to consumer. We have very strong [indiscernible] capabilities. So very good -- I think, good capabilities. You can never say very good because this is a very -- the speed with which this is evolving, it's difficult to follow. But for me, my aim is how do we create a critical mass to make a difference. And as I will share with you our new organization, this will be a big change. So how can we concentrate these efforts into one team that serves the different needs that we have in different channels and the different divisions, so this will be a significant change. And I think we will be able to leverage what we have in-house. And of course, always looking to upgrade and to enhance and strengthen this area. On the last point on the CapEx, I think that this was already a question before. Listen, of course, I know that we will need CapEx to fuel future growth. And when I talk about -- we are reducing tight management on CapEx and reducing to the bare minimum. Of course, I mean this is taking care of current needs, but also making sure that we don't remain behind in our innovation pipeline. I mean, innovation, in my view, we are talking a lot about pricing. But innovation is, in my opinion, it's going to be the key element that is going to fuel growth. So before I was talking about, first, we need to get to the right margin. And then in the meantime, we need to make sure that we work on the innovation pipeline so that at the time that we are well positioned for the growth, we have the innovation cadence that will fuel that. And I think there was a question before on the capability to increase prices with private labels. In my view, the way to create value, I mean, pricing is one element, but there is much more. There is product mix driven by innovation. And we have seen and we continue to see very nice growth on baby pants, adult pants. So these are segments that are price premium and we will continue focusing on that.

We now move on to a question from Eric Wilmer from ABN ODDO.

Esther, in the earnings release, there is no specific mentioning of a strategic or geographical portfolio review. I'd say, on the contrary, you mentioned an objective to maximize synergies within the organization. Can we read from this that asset disposals, as the probably most obvious Latin American business, are off the table despite this potential significant impact on leverage and its different type of nature, mainly local brands versus retailer brands?

Thank you, Eric, for your question. So we are completing the portfolio analysis. And I am -- as you can imagine, I am not in a position to answer that question. I think it is important to bring that answer in a holistic view because I think we need to make sure that we have the holistic answer, and then we can come back with both at this. So my plan is to share that with you in June. Of course, as we look at the portfolio, we look at what is the portfolio that build on the scale and synergies that we can take advantage to optimize and maximize our cost position. But also, we are looking at many other things like the potential market growth, our current position in the market that are necessary to continue driving growth and improving our position. So I think it's a combination of elements that are playing a role there. And it needs to be looked in a holistic way. So I know that there are lots of questions. There are a lot of questions have been raised on our Latin American business. And we are looking at everything, and we will come back to you, hopefully, in June with a clear view of what we are trying to do.

Okay. That's clear. Because indeed, you just mentioned that some tracks may go beyond the June 21 update. What did you specifically mean by that?

Can you repeat, please?

Yes. During a previous answer during the Q&A, you mentioned that some tracks -- I believe that you said that some tracks may go beyond the update on the 21st of June. So you're coming with an update. But some elements will go beyond. Is this -- could -- yes, I was just wondering if you could clarify.

Okay. So I think, in June, you will see all the elements of the strategy. Now in some elements, we will be very specific with the actions that are planning to be taken. And in some others, we will need to wait until decisions are made and we are ready for communication. So you will have a holistic picture of what the strategy is and what the plans are, but some specific actions might need to be decided at a later date, and we will communicate as soon as decisions are made.

And we take our next question from John Ennis from Goldman Sachs.

My first question is going back to the contract developments in Europe. I guess you highlighted that you're starting to win more contracts now. So I just wondered if you could help in quantifying what you think the full year impact from contract losses will be for that business. And then thinking back to an earlier question, in relation to what degree you're taking pricing in these new contracts to offset raw materials, what is the bigger issue? Is it taking pricing to make sure you offset raw materials? Or is it actually making sure you've got enough volume such that you don't have a capacity utilization issue? Is that a bigger factor now in terms of supporting margin? That's my first question, which I appreciate has a few parts. And then my second is on the refinancing you mentioned. Can you give us the magnitude of what you're planning to refinance in your raws and your current average cost here? And then obviously, if you can give any kind of steer on what you're expecting to do with the refinancing, that would be helpful. But I appreciate the second part that's maybe a bit more challenging.

Thank you, John. So on the contract development, I can tell you that we measure, as you probably know, there is a time lag between when we win or lose a contract and the impact on sales. Sometimes, this timing can be between 3 to 6 months to even potentially a year, depending on the different customers and different geographies. So what I can tell you is that, starting from beginning of the year, the team has been working on making sure that we secure future contracts. And we I expect to have a negative impact on what we call gain and losses because, okay, you cannot gain our contracts, so you have gains and you have losses. And then there is a net based on -- with the revenue expectations from each of the contracts. So I expect that this net gain and losses to be negative still through Q3, with a low point in Q1 year-over-year, and then start to be positive in Q4. And this is driven by the fact that the main activity, the main net gains were happening late last year and beginning of this year and it takes time before they flow through the P&L, which means that if you think about my guidance on, I expect, growth starting from Q2, with a negative impact on gain and losses, this means that we are expecting good growth, especially on the Healthcare businesses and AMEAA. So even with the negative impact of gain and losses, we expect growth starting from Q2. Then I think you had a question on the pricing. I mean, of course, capacity utilization, and you mentioned maybe what is the right balance, capacity utilization is a key indicator to have good cost. So we look at our capacity utilization. But of course, our main priority is to make sure that we have good margins. And if we have margin headwinds, we need to take the actions to compensate. So I don't think there is kind of a clean answer on it is one or the other. It is both, and you need to make sure that you balance your activity to ensure that you have good utilization and at the same time you maintain and continue to drive margins. And as I said, we continue to focus on pricing, but I think there are other elements that play a role. I think the product mix is a key element and continue to drive innovation, especially with the pants, baby and adult, is going to be critical to make sure that we are continuing to improve margins. On the refinancing, the work has just started. And this is going to be, of course, key priority for the new CFO. We are working on the details and really sure we're ready. You ask about the cost of the refinancing. We expect to be slightly higher than the current, but I would like to go back -- to get back to you when we are ready with an answer.

That's great. Absolutely. I guess the only other part of the refinancing was just the magnitude. Can you give a sort of indication in terms of the EUR million that you're trying to refinance?

So to the magnitude of the refinancing. So we are -- holistically, we are looking at refinancing EUR 1 billion. So that's in totality here. And we are looking at different debt instruments. But as I said before, the aim is not to raise capital.

That's all the time we have for Q&A today. So I would now like to hand the call back over to Esther Berrozpe for any additional or closing remarks.

Thank you so much. So again, thank you all for your questions. I know that it is early days still. We haven't started to put the wheels of change in motion. I am very confident in the potential upside for Ontex. And I really look forward to giving our new vision and goals for the group in late June. Thank you again for your time and talk to you soon.

This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.