Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Good morning, good afternoon. Thank you so much for being with us today. I am joined by our CFO, Peter Vanneste, who arrived at Ontex in May. Our intention today is to share where we are and the progress we have made so far. We will share our financial ambitions based on the actions underway, which is a first step in returning Ontex to value creation. So where are we today? First of all, we are starting from solid market fundamentals. We have strong positions and good growth potential in most of our markets. These markets present a number of promising opportunities for Ontex. Last February, I shared with you 6 immediate priorities to turn around our company. Since then, I've worked to define the direction of travel and to get organized to execute by appointing a new management team. With this team in place, we have accelerated significantly and momentum is growing on action plans to improve performance and generate cost savings. Cost reduction initiatives are already delivering and are vital to mitigate raw material cost inflation. Putting aside the external pressures, the urgency is to remove the financial constraints that weigh on the group today as they limit our room for maneuver. As our confidence will grow, we will start on looking at the longer term. First, a few words about the group for those of you who are new to Ontex. Ontex generates revenues of a little over EUR 2 billion, of which over 50% are generated in the baby care sector, supplying mostly diapers and pants; 1/3 of our business sits in the adult care sector, focused on incontinence products; and the remaining 10% is in Feminine Care products. We have close to 10,000 employees, and we distribute our products in 110 countries around the world from our 19 production sites. Our categories present some valuable growth opportunities. First of all, we are in a sector that is growing overall. In the countries where we operate, the market growth rate was 2.8% over the past 5 years. We expect the environment to remain favorable as people will continue to expand their families and the population will continue to grow older. There are some interesting shifts in consumer trends that increase demand for premium products and convenient products. We see this especially with lifestyle brands, where consumers are looking for differentiating and eco-friendly products, especially for baby and Femcare. We have a good opportunity to develop our products and services, especially in the adult category with more and more people being cared for at their homes. Without a doubt, scale is a key asset for our group. Our scale has 2 pillars from which we can leverage. The first is our commercial position. Being a clear leader in European retailer brands across all 3 personal hygiene categories is a huge strength for the group, a strength that has not been sufficiently leveraged. In Europe, we are nearly 2.5x bigger than our nearest competitor with clear leadership in all 3 categories. In the emerging markets, we have a #1 or #2 brand position in 7 of the 9 most important country category combinations where we are present. The second pillar is our manufacturing footprint from which we need to leverage. There is some optimization to be captured. However, it offers a unique competitive advantage, allowing proximity to all our customers and to better serve our international retailers. To get the group back on track, we are rolling out action plans to fix 3 areas. First, simplify the operation to make it more efficient and more agile; second, reduce cost; and third, it is an absolute priority to put our customers first again in everything we do. Let me remind you of the 6 strategic priorities we set earlier in the year. These priorities that you see in the slide have been translated into a focused agenda and a set of concrete actions, many of which are now underway. These actions will mainly support the rollout of a new organization and performance culture, the turnaround of Europe, outperform the market in North America, continue to grow our business in our emerging market positions, accelerate adult care globally, deliver the necessary flexibility at the best cost, maximize value through innovation and generate new value streams through sustainability. During the past 6 months, we have not lost any time. I have put in place the new leadership team. Our new organization is being deployed. A new remuneration policy has been implemented. Cost-out actions are in progress and the refinancing is underway, and Peter will say more about this later. In Europe, we have started to reverse the sales trend. In the U.S., a new manufacturing plant is being built as we speak to support our growth. In emerging markets, we have sharpened focus on profitable growth. Our innovation efforts have been redirected to support our growth priorities and sustainability goals and initiatives are being deployed. My new leadership team is now in place. Our newest members are: Peter, of course, our new CFO, who arrived in early May, and he will introduce himself in a minute; Vincent, who also arrived in early May, bringing a wealth of experience in supply chain optimization; and Laurent, who leads our very important European business to get it back on a growth path. The new streamlined organization breaks down the silos around the group and is built on clear accountability and ownership. The group's previous 3 divisions have been reduced to 2. Healthcare has been merged into the European business. So we have now 2 commercial divisions, and we will report on this basis going forward. The commercial organization has been delayered to bring agility and speed up decision-making. One whole layer of management has been removed. Product development and innovation has been centralized to drive standardization and to leverage synergies. Ontex' whole supply chain has been merged into one end-to-end operation from procurement to customer service. And the benefits of this change is that we will have a single point of accountability to optimize the total delivered cost, quality and service. And all these changes will also reduce our overhead cost by EUR 20 million. We have one single operating model because there is no fundamental difference between whether we supply retailer brands or our own local brands. Everything starts with consumer needs, understanding their needs and using our expertise to create tailored solutions, and this is what proximity stands for. Our expertise ensures fast follow innovation. To deliver this successfully and on time, we must be reactive and have the flexibility to meet customer differentiation needs, all from our common product platforms, and this is what flexibility means. By leveraging off our scale, we can drive costs lower to deliver a best value offering with the required quality and service to make sure that our products are available to everyone, and this is affordability. Putting all this together will enable us to propose winning solutions to customers and consumers. The new remuneration policy has been implemented earlier this year to drive a performance culture that will reward success and delivery on commitments. A few key highlights I would like to focus on. First of all, there is a clear separation of targets for the short and the long-term incentives and both are 100% now performance-based. The sales objectives are set on a like-for-like basis, of course, but there are no longer adjustments to profit and cash to correct for external factors, so they are as reported. With this new policy, also management have share ownership requirements. Turning to Europe now. As I said earlier, no time is being lost, and we are accelerating 3 cost reduction programs, and they are already delivering in operations, in capacity utilization and in overhead savings. And Peter will come back in more detail to this in a minute. Now let me go to Europe. The situation in Europe has started to improve, and the contract trends are heading sequentially into positive territory, as you can see in this chart. There remains a lot of work to be done. The newly combined operation will restore customer centricity across the entire organization. We have already built a clear road map to enhance competitiveness, innovation cadence, service and quality to continue with this positive momentum. Like everyone, also Ontex experiences the shift to e-commerce at a very accelerated pace. So while we estimate that more than 15% of the total baby category sales are now online in Europe, the situation differs widely by market and by customer, some being very present with their own brands and some not having embraced yet the potential of the channel. So of course, our approach needs to reflect this reality and we believe we can help. Part of our value proposition is to support our customers as they build their presence with the brands. To build more relevance, we are working on selling more through pure player marketplaces as well as leveraging our direct-to-consumer platforms in baby and adult care, so for us to learn and inspire our customers to do more and better. Let's now look at our North American business. The U.S. represent a significant growth opportunity for the group. It is the second largest disposable hygiene market in the world, growing about 2% to 3% every year. The main category driving the growth is adult care, which is growing about 6% to 7% every year. We are leading the development of lifestyle Feminine Care products and supplying the most strategic retailers with baby and Femcare retail branded products. Retailer brands, in addition, still represent a relatively small part of the market compared to Europe, and therefore, we have a lot of room to grow. And we are developing new adult care products relevant for the U.S. market, which will also be a key area of growth for the future. In addition, in the first half of 2022, we will be ramping up our new production facility in North Carolina. Once on stream, we will be the only retail brand supplier with East and West Coast production capability, which we believe or I believe will give us a competitive edge. The development of this facility will be modular, which will allow us to add the lines as we grow and develop our business. Let me turn to emerging markets. The focus in emerging markets is now on profitable growth and returns. We are leveraging our growth potential in Mexico, for example, by accelerating the move to adult and baby pants and increasing capacity by moving production lines from Europe. Many positions provide good growth opportunities with solid brands and growing retailer penetration. We all know that Brazil has been a big challenge for the group. A lot of work has been done, and the business has generated 10 consecutive quarters of positive growth. As you see in this chart, we standardize our products and brand platforms so that we maximize synergies in the majority of our countries and work with a common approach. For example, across all the Middle East and Africa, we use exactly the same product and brand platforms. This allow us to take up growth opportunities very rapidly and without creating additional complexity for the group. Even if we are talking about the turnaround, we cannot ignore consumer trends and the group's need to provide innovative products. Innovation has been refocused, as I said before, on our growth opportunities. To give you an idea of what I mean, one important area of growth is adult care. We have developed a connected diaper, which brings us an opportunity to generate additional revenue through services. This new solution has multiple advantages for both the user and the caregivers. We are already testing a prototype in several hospitals, and there is considerable interest for this offering. It is very clear that it improves the level of care that this brings to patients, but also the efficiency gained for nursing staff. Let me turn to sustainability for a moment. We have defined 4 pillars: circular solutions, sustainable supply chain, climate action and building transparency. For example, on the first one, we are deploying 2 commercial initiatives, one on recycling and one on composting. And as part of the long-term incentives of the management, we have set concrete targets for CO2 emissions reduction and for improving safety for our employees by reducing the accident rate. So to conclude, there are many differences in our current approach for the future. What we are changing is to refocus on getting the basics right with a simplified organization and a healthier financial structure. With one single platform, we will serve our retailers and our own local brands across the world. We have a stronger focus on cost productivity and cash, leveraging the newly created supply organization and the financial discipline that Peter will talk about in a moment. We are progressing with a critical review of our geographical and supply footprint. Of course, this is not something that can be done overnight, but the fundamental principles of generating financial returns are in place. I am very pleased with the progress we have achieved so far, and this gives me the confidence on our ability to turn around the group. As we know, 2021 remains a challenging year with still a significant amount of uncertainty. Regarding revenues, we expect to see steady improvement over the next 6 months, thanks to the contract wins, both in Europe and in North America. Q2 will be better than last year. But after the poor Q1, H1 still will remain negative. In this context, we expect stable like-for-like revenues for 2021 in the full year. As we all know, raw materials inflation with a huge spike in cost is going to put a lot of pressure on margins this year. Nevertheless, we believe that it is our cost efforts ramp up, they will go some way to mitigating part of the impact. So looking forward, as you have already seen with what I told you a moment ago, the implementation of the turnaround is well underway. In this context, we expect to incur nonrecurring charges of EUR 55 million this year. I hope this gives you a feeling of the profound changes that we are rolling out. Based on the decisions already taken and the actions planned, we are confident that we can put Ontex back on a sound financial footing by 2023 as a first step and achieve 2 to 3 percentage annual like-for-like revenue growth, generate an adjusted EBITDA margin in the range of 12.5% to 13.5% and reduce the leverage of the group to below 3. Up until now, my main focus has been on the very short term: fix the basics, to reverse the decline in top line and improve the financial structure of the company. Now that I have my new team in place, I can switch some of my focus to working on the longer term. I look forward to presenting our long-term strategic plan to unleash Ontex' full potential at year-end. Thank you so much for your time, and I will now hand over to Peter, who will present you our financials more in details.

Thank you, Esther, and good morning and good afternoon, everybody. I'm Peter Vanneste. I joined Ontex as CFO last month. My background is 25 years of fast-moving consumer goods, first with Procter & Gamble, then a few years as a consultant in consumer goods, and I spent the last 15 years in coffee with Jacobs Douwe Egberts in the last years there as Group CFO. My onboarding at Ontex has obviously been a deep dive in the financial performance of Ontex and in-depth review of the quality and the maturity of the financial and nonfinancial processes and the actions in progress on the strategic priorities of the company. I've been busy because the financial focus and priorities of Ontex in the short term are very clear. We have a turnaround to deliver, a challenging year to be managed and a refinancing to be done in the very near term. My plan is to take you through some of that in the next 20 minutes. This financial road map I will go through will be sharpened and deepened further over the next months, also for me, obviously. And I will come back with further updates as we move forward. Now what's very clear is that the immediate financial focus for Ontex has to be to deleverage and to deliver a turnaround with a short-term focus on execution. All major decisions are to be taken and implemented with first results already in '21, delivering a step-up in '22 and completing the turnaround by 2023. Keeping it also measurable and simple to those priorities that make a difference, fishing where the fish are. And that's why starting by implementing 3 very significant and very concrete cost-out programs that are designed to increase EBITDA, but also to give some headroom to invest back into those areas of the business where we have good returns. We will be very intentional in our investments. We are already investing in selective pricing to fix Europe. And in Esther's overview, you've seen that we started to turn the corner there. It's certainly not just about pricing in Europe, but there is a level of price competitiveness that we need to restore and with obviously the right focus on the right customers, the right margin customers, the right margin products. Secondly, we are strongly reprioritizing our resources to the growth pools that we identified and defined in the strategic priorities, where we have a sustainable margin potential and a clear right to win: adult care, North America, value-added products and services. All of this with investment discipline as a major attention point. I will come back on it when I talk about CapEx, but it equally counts in our commercial investments, of course. Finally, I'll take you through 2 streams to step up cash conversion. First, there is a clear opportunity to step up capital allocation discipline to levels that our business can structurally sustain. And second, I will be implementing a company-wide cash-is-king working capital program that reaches out across the entire organization. Now starting with cost. Starting with cost is essential because not only there's a clear opportunity, but also because it is an enabler. There has been an increase of Ontex costs over the last year with insufficient return. It is clear that there are some immediate saving potential, and we also need to give some oxygen to our business. So therefore, we have defined and drive 3 sizable and focused cost-out programs. The first one is in manufacturing and supply chain, where we organize to deliver an annual drumbeat of at least 2% productivity on our costs every year. There's been previous initiatives on this that have been making a good step, as you can see in our trading updates, but the level of ambition and certainly the repetition over time needs to be stepped up. The end-to-end ownership that we established that Esther talked about with our Chief Supply Chain Officer is certainly going to be a key enabler here as that covers from procurement to customer service. So that's one. Second, we defined a specific program to increase capacity utilization, where we want to step up by 10 points. Our capacity utilization today is at a level that is not sufficiently giving us a cost advantage considering the scale that we have. For example, we have already announced recently to be moving 8 lines from our plants in Eeklo and we have been moving lines from our German factory recently to Mexico. It's just an example of ensuring that we have the capacity sitting where we need it. Third stream, overheads savings. As Esther said, we have announced -- we announced last week an organization redesign and cost saving program. And we have the objective to bring overhead costs back to the levels of 2016, so before they started increasing faster than our top line. The combination of these 3 programs will, by 2023, deliver EUR 120 million savings to offset the raw material impact we see in 2021 with the peaking commodities, to partly reinvest into growth and, of course, to drive margin expansion. The nonrecurring charges related to this will be EUR 60 million, about 1/3 in the overheads saving program and the rest in the operations and capacity programs. As said, keeping us on track on these 3 concrete cost pillars is mission critical, not only for margin restoration and deleverage, but also to enable investments in our business. Now let me comment on a bit on the building blocks of this EUR 120 million net cost savings over the next years. You can see an overview on this chart and not all ideas in this chart are new in itself. Some have been part of previous initiatives, as you know, but we have been accelerating them and especially translating them into a more recurring year-on-year program. which is common practice across many -- across multiple industries and companies. Now these costs are already delivering this year, and that actually demonstrates that these savings can be real if there is sufficient focus on it. And the changes that we have implemented recently will enable more in this area because fundamentally managing our business as 1 platform rather than 2 provides important opportunities in simplicity, optimizing our capacity as well and organizing our end-to-end, as we said already, from procurement to customer service allows to optimize across the entire chain. Now procurement will be the largest contributor to the EUR 120 million. This is mostly enabled by the standardization of raw materials, which is enabled by product, platform simplification and handling this business, as I said, as one platform. So by consolidating our fragmented raw material complexity, we can consolidate our supply base, and we will be able to leverage the scale. On manufacturing, that will be driven by progressing on the path to improve operational efficiency by 10 points by 2023 and scrap rate by 1 point. Again, here, the delivery in 2021 gives us confidence on the continued implementation of these better manufacturing practices. Logistics, as an example, further localization of our production. For instance, with the new lines arriving in Mexico and U.S.A., they will be driving significant savings in terms of freight costs. An example on the design to value. We are going to leverage new equipment to optimize product design, the [ chassis ] of baby diapers in Mexico, to drive savings on the bill of materials. And finally, the EUR 20 million will be delivered from overheads with interventions we already mentioned, bringing us back to the levels before 2016. Now this recurring productivity drumbeat is only one of the critical levers that we have to mitigate and to soften the impact of ForEx and commodity. The exposure that Ontex has on ForEx and commodity has been well demonstrated over the last years with, as you can see in the chart to the left, with a consistently negative ForEx impact in our results from emerging markets. And on the certain commodity swings, certainly have their strong impact on our industry and on Ontex. You can see in the chart, we saw tailwind on commodity in 2020. In 2021, on the other hand, our industry is facing a very strong headwind and with still high volatility in the indexes. We do need to become more stable throughout this cycle and somewhat reduce our dependency on these potentially large swings. So the annual drumbeat on productivity I talked about is certainly critical, but it's not the only lever. There is no one single magic bullet here. We therefore need to be working on multiple levels. We are intentionally reviewing our geographical footprint. Within that context, for example, our growth plans in U.S. will give us an important natural hedge. We will be stepping up our pricing and mix discipline, again, in combination with other measures as a possible pricing response is not equal across markets, and there is generally a phasing impact, but the potential here is not fully leveraged yet. We will be exploring to further extent, whether returns are appropriate, also causes related to commodity costs and supplier contracts, customer contracts. We'll be working on working capital. We do see a clear opportunity in improving inventory levels and working on our payables to manage that cash impact of increasing inventories. And finally, the Annual General Meeting last May has approved our new incentive system that rewards profit and cash as a reported results, not a like-for-like result, so including that ForEx effect. Again, no miracle solution on this one in 1 day, but multiple levers of intervention that we will be working on in parallel. Now the second focus of our financial road map is disciplined investment of the returns of these programs to gain back growth. Stabilizing sales in 2021 is the first step. But of course, our ambition is to generate top line growth and to target 2% to 3% growth in '22 and '23. We will be very disciplined in how we source that growth and both divisions will contribute that in different ways -- to that in different ways. Europe is about returning to growth, coming out of difficult years, evolving to low single-digit growth. As said, we are and will be investing in our price competitiveness. And as you've seen with Esther's overview, the contract gains and losses, we start to reverse the trend. The catch-up on baby and adult pants share will drive the biggest part of this growth in Europe. The second part will come from new adult service solutions and accelerating our online and the balance will be driven by a reinnovation in Femcare and the expected return to more normal levels of occupancy in the institutional channel. Moving to AMEAA. We expect to grow mid-single digits. This is consistent with our recent history. The largest part of the growth will come from future expansion in North America, a key growth engine, with a push in adult and Femcare and in lifestyle and retailer brands, obviously helped by the new assets that we're putting on the ground. We'll continue also to benefit from accretive growth where we play in Middle East, Africa and Asia. And the rest is expected from capturing the market growth in Latin America in a profitable way where we continue to close the gap in baby and adult pants. Now to convert this improved EBITDA into cash, we will drive 2 programs I want to shortly touch on. CapEx as a percentage of net sales has been approaching 5%, which is too high, especially as it has not generated additional sales or deliver the returns we needed. We have already taken number of steps to be tightening it and seeing how we manage those capital expenditures, ranging from ensuring that CapEx is approved within a 3-year road map, which mirrors our [ commercial ] and our cost agenda; to enforcing more diligent return discipline, approval flows, post tracking, the right KPIs, so have a step-up on the CapEx management side. On working capital, I'm pleased to see that in the company -- that working capital is already well understood inside the company and we've made some good steps over the past years. But also here, I think we can do more. We will be installing cash-is-king program to generate improvements year after year. I have seen firsthand, in my personal history, the power of driving this group wide, from awareness creation to accountability in KPIs to making sure the sales and the procurement guys really have payment terms in the back of their heads when they're closing the final loop in inventories -- sorry, when they close the final loop in the contracts with their counterpart. This is certainly a key opportunity. And in inventories, there's a big one, I think, certainly, in the context of our end-to-end supply chain with one person responsible for managing inventories. In order to do this, we are putting in place the necessary processes and capabilities. Now putting this all together will lead to a significant step up in cash conversion, which will take leverage below 3 by 2023 at the latest. We are -- in parallel to this, we are refinancing, and most of you know that. We are refinancing our total debt of EUR 1.1 billion as we speak to first extend the maturities of our debt, which are largely maturing end of next year; to diversify the sources of funding; and to improve our financial headroom. What I can already say today on that is that we do have bank confirmation of EUR 470 million with strong support from our core banks. And that we are considering a senior unsecured debt instrument to refinance the remaining amount over the coming weeks so that we have the financial liquidity and stability to execute our turnaround plan. We'd also finally like to reiterate that Ontex is not considering an equity raise as part of the refinancing plan. Now all of this is part of a turnaround plan that needs to be concluded in 2 to 3 years maximum. At the same time, accelerating these initiatives in 2021 is imperative considering the sharp increase of raw materials that this industry is facing. In 2021, we are going to see that all the initiatives of turnarounds are defined and initiated. And in that context, EUR 55 million total nonrecurring costs will be recognized this year versus the EUR 38 million that we had last year. And just to be clear, this EUR 55 million includes EUR 40 million of the EUR 60 million total nonrecurring costs I talked about earlier with the cost-out programs. We will be stabilizing revenue for the year, and we will return to growth as of Q2, with a Q2 that is stronger than Q1 and further improvement in half year 2. The selective investment in pricing in Europe and stabilization of the contract gains and losses is -- since the beginning of the year is starting to show. At the same time, our industry is facing and we are facing severe commodity increases, as you can see on the chart on the left on this table how they are peaking versus beginning of 2020. And next to that, there's still an adverse ForEx on some of our currencies like the real, which is putting significant pressure on our margins. This volatility on the commodities is still very high. We saw first signs of stabilization over a few months ago, especially in U.S., but then a recent increase again. So we are and we will be partly offsetting this with and thanks to the strong impact of our cost programs. These cost programs will be delivering almost EUR 60 million benefit in 2021. And as said before, it's actually demonstrating that with the right focus, we can realize this structural significant benefits. But despite these savings, there will be pressure on our margins as of Q2. Now because of that, of course, we are further looking at pricing and cost initiatives in depth in light of the further evolutions, and we're looking at every opportunity across the P&L line to maximally find the mitigations. We are pricing across different geographies. In some geographies in half year 1 and in half year 2, we have accelerated the implementation of design-to-value initiatives, discretionary spend cuts, hiring freezes. And we're working on the cash side on CapEx and inventory levels. Now given the still high volatility of commodities and the impact of some of our pricing, it is early days to be very specific on the extent of the margin pressure, but we will come back to you on that shortly. Now the traction that we see on the actions that we have implemented, the cost-out programs delivering, sales stabilizing and growing top line as of Q2, do give us despite the severe short-term commodity confidence on our 2023 ambitions that Esther has been going through. And this is the first step in laying out our long-term road map on which we will come back more in more detail later. But it is first about execution and delivery. So our role and my role, for sure, it will be to install a strong financial discipline with a clear and simple agenda across the organization and with a strong focus on delivery and execution. And on that note, I'd like to turn back to Esther.

Thank you, Peter. Thank you very much. I am really pleased that in such a short space of time and despite the challenge of lockdowns and travel restrictions and commodities, we have really put in place important building blocks for the turnaround of our company and that execution is well underway. We have identified a number of growth opportunities in our existing footprint which we must capture. And we have set a clear road map to restoring a sound financial structure for the company. I am firmly convinced that longer term, Ontex can create additional value. I am going to work with my team to identify further opportunities to drive revenue growth and to improve operating profitability and free cash flow. Now Peter and I are now happy to take any questions.

Thank you, Esther and Peter. This is Philip Ludwig from the IR team. Ladies and gentlemen, we will now start the Q&A session. [Operator Instructions] And now the first question comes from Karel Zoete of Kepler Cheuvreux.

I have two questions. The first one is on the refinancing. You already partly spoke on it. Can you -- what should we expect in terms of costs going forward? Is it likely that the cost of your financial debt will rise or will remain stable? Yes, any feedback on that would be valuable. And the other question I had is more strategically on your emerging market businesses. If you think 2, 3 years from now, do you expect that you still will be in the same markets where you are today with the bigger North American business? Or is it likely that you've exited some markets where over the medium to longer term, it's going to be difficult for Ontex to prosper?

Thank you, Karel, for your questions. I'm going to start taking your first question, and then I'm going to hand over to Peter to answer your question on the refinancing. Relating to the emerging markets, we have a very solid base with scale. And the emerging markets in a way with this idea of serving them as a one platform, so with the same product platforms, the same brands across the board. They give us scale. And of course, we can enjoy from the higher growth that these markets typically have, especially across Latin America, Middle East and Africa. We have a strong position because in the markets that we serve, we have typically #1 or #2 position in most of the categories and the countries that we serve. And leveraging the resources of the group and the common platforms, but adjusting to the local needs, it's a good way to have a profitable business there. So the answer is, will we have the same positions in the future. As far as these markets, so we have a strong right to win. So typically having a #1 or 2 position. As far as they give us an opportunity to leverage the scale because we can serve these markets with the same product platforms and the same brands. And as far as they are not margin dilutive, so they create good margins and convert -- and we are able to convert those margins into cash, they will remain part of our portfolio. So our focus at this point is in the current position. So we are not focusing on expanding at this point, at least in the short, medium term. Some -- most of our emerging markets at this point, have a good level of margins, pretty much in line with the company average, some of them even higher. There are a couple of markets that yet remain a challenge and Brazil is one of them. Brazil has been a challenge since we acquired this business. And even if we have put a lot of efforts behind this business, and in fact, we have reported 10 consecutive quarters of like-for-like growth, it remains still a challenge from the profitability perspective. So we are doing everything we can, working on pricing actions and mix, cost reductions to further improve the profitability of that business. But we will continue monitoring and we will continue and are looking at every opportunity to drive value creation with that business. So Peter, maybe on the refinancing.

Yes. Thanks for the question, Karel. As you know, we are in the middle of the process of refinancing. And I already said, we've been able to secure EUR 470 million of bank commitments. We are working on the headroom. We're working on, of course, to get the best possible conditions. But we are in the middle of the process, so I prefer to communicate that when I have something concrete to say. And once the refinancing is complete, we will obviously provide you with more information at that time.

Okay. Thank you very much. Our next question then is coming from Fernand de Boer of Degroof Petercam.

I actually have also a couple of questions. First of all, on the refinancing, you mentioned not to say to go for an equity issue, but that still means that short term, you will be heavily leveraged in my view. So then I have the question on the nonrecurring cost. You mentioned 2 figures, EUR 60 million and EUR 55 million. Is the EUR 55 million part of the EUR 60 million? So next year, we will only have EUR 5 million. But you also said that, of this EUR 60 million, EUR 40 million was already in 2021. So I'm not clear about that. And could you say is it all a cash out? Or is this also impairments? And of this cost, the savings you say, it's on overhead, it's 1/3, I thought you said. Does that also mean that your marketing expense is going down? And then I still have the question. When we were at the full year presentation, we had -- at least I had [ this idea ] that you were looking for disposals. Today, no wording on disposals or even the press release. Does this mean, coming back on Karel's question, that all the activities will be still there? Or do you still look at Brazil [ rates ] to be divested?

Okay. Thank you, Fernand, for your 2 questions. I'm going to get the first one, which is on the disposals. I can tell you that we are currently looking at our geographical footprint, and we will continue to working on it, and as I said, with a very clear criteria of growth and return on investments. So we will continue monitoring our businesses. And if we reach the conclusion that one business will not be able to generate the necessary returns, we will look for alternative options. And we are in the process of doing that as we speak. I'm going to turn it to Peter for...

Yes. On the -- there were several sub-questions. So I'll try to answer them one by one. You're wondering about the different numbers. So let me try to rephrase it. I did talk about, if the total cost program is -- has a benefit of return of EUR 120 million and a EUR 60 million nonrecurring cost against it. That's the total program over the years. And this benefit is net of manufacturing and supply inflation. If I go to the nonrecurring cost of EUR 60 million, overall, there's a payback of about 3 years. 2/3 of that EUR 60 million is going to be recorded in 2021, which is that EUR 40 million that you remembered well. And the other EUR 15 million is a baseline that we have for 2021, which is already in the plans. This is about head count reduction, capital, infrastructure investments and some asset write-offs. The benefit is again spread over the different years. It's not all cash out, when we look at that number in 2021, which was also part of your question. There's about EUR 30 million, which is noncash but will be booked in P&L this year. And finally, on overheads, yes, we are very, very diligent on reducing overhead, and that's what these programs are all about. Your question was, does that mean that we're also looking at marketing expense? I mean it's not part of this definition. This is really overheads, but it does not mean that we're not looking at marketing expense. We continuously need to look at marketing expense. And it's, of course, much more a question of return on investment certainly there to make sure that the spend is in the right boxes and delivers the right returns. So certainly, this year, we're looking at it, given the pressure that we have, and then that's going to be part of the results end of the year.

Okay. Thank you, Peter. The next question we have is from Alan Vandenberghe of KBC. [Operator Instructions]

I have two. My first question is regarding the guidance that you're giving or the ambition that you're giving for 2023. So you're implying -- starting from the adjusted EBITDA margin of 2020, which was 11.3%, you're implying or you're guiding for an increase by 2023 of 120 to 220 basis points. I was just wondering if you could provide there may be the main components of this EBITDA margin improvement, starting with gross margin, OpEx, operating leverage, just to have an idea of the moving parts. And maybe also a clarification, I suppose that this guidance includes currency fluctuations. So that's my first question. And then the second question is also regarding the medium-term guidance. So you are targeting 2% to 3% like-for-like growth by 2023. Peter, you seem to imply that you're also aiming for that type of growth number in 2022 as well. But I was just wondering how that would compare, so this 2% or 3% like-for-like growth, with the underlying market. So would you be gaining or outperforming the market if you would achieve these numbers?

Okay. Thank you, Alan, for your questions. Maybe Peter, you want to take the first one, and then I'll take the second one?

Yes. Your first one, Alan, was about the bridge and to the guidance on the EBITDA, 12.5% to 13.5%. I will not be able to provide you with the exact -- all levers of the bridge, but I've mentioned a number of elements already. I have talked about the contribution of the cost there, the cost saving programs, the EUR 120 million. That's, of course, a very big lever, which also gives me some confidence there because that's very much in our control. Of course, there will be a contribution from the top line as we move into growth, the 2%, 3% as a guidance as of next year, that will contribute. We will be reinvesting part of that benefit to fuel the business, again, some pricing investments in Europe and certainly then investing against the growth priorities we laid out. And then to your question about the assumptions, I mean, we've made this plan assuming the stable commodities as from current level. Same thing with ForEx, stable ForEx. And we've assumed a standard inflation on the cost. But again, I've told you that the cost programs are net of inflation. So that would be my response to that question.

Thank you, Peter. So on the second question on the medium-term guidance, our ambition in terms of like-for-like growth, we have given us the ambition to grow 2% to 3%. Before during my presentation, I said that we see 2021 pretty much flat like-for-like with a very poor or very strong decline in Q1, driven by the contract losses that we had in end of '19 and 2020. But then growth is starting from Q2, still H1 will be slightly negative and then we expect H2 to be positive. So we are going to exit 2021 with positive momentum, and we believe that we can continue to drive this momentum in '22 and '23 with this 2% to 3% growth. Your question on whether we will outperform the market, difficult to say. I can only say that the market in the perimeter, what we call our perimeter, so the markets where we operate, has grown 2.8% in the past 5 years. I truly believe that the market -- we will continue to see some positive momentum in the market. But of course, the pandemic has changed a little bit the situation. So a very strong shift of demand to e-commerce. So from in-store to online channels. And we need to recognize it's still very early to say, especially in the baby category. That for us is very important because it makes up 50% of our revenues, approximately. Right now, we see pretty much a flat, slightly negative market because we believe that this is temporary that because of the pandemic and the decision to postpone birth to the future. Again, I don't believe that this is going to be structural. So to answer to your question, our focus will be mainly on the continue to grow aggressively in the U.S.A., where we have been growing double-digit for the past years. Very strong focus on the adult category across the board in every region because this is a category that is growing in average 6% to 7%, both in the U.S. and in Europe as the population ages and we want to capture. So we have been growing, but not at the pace of the market. We want to go and grow at the pace of the market. And then for us, it's a big driver of growth because it's a very important component of our business is Europe and turning around this business. And I believe that we will exit the year in the positive territory. But today and throughout the end of the year, we will continue to see losses in Europe, driven by the past. At the same time, when I look at the future, and this slide that I showed with the net contract gains and losses, we can project what is going to happen, and we see positive news. So I think -- I believe that this target is -- it makes a big difference versus where the group has been in the last 2 years, but I believe it's doable. And of course, if we see further opportunities, we will go for them. So we don't stop here.

The next question is coming from John Ennis of Goldman Sachs.

My first is on the EUR 120 million saving program. Am I right in thinking that half of that program is going to be delivered in 2021 because you cited EUR 60 million? And then is the remainder going to be, say, spread over the next 2 years? Just a clarification quickly on that. And related to the cost-saving plan, I think you said the procurement savings are the biggest contributor. But to what degree are procurement savings high currently because raw materials are high and therefore, is there a risk that productivity benefits will unwind as raw materials unwind in the future? So that's the first question. And then my second question is, can you maybe detail how your remuneration changes, which you talked about at the start of the presentation, how do they reflect your 2023 guidance? And if I can cheekily sneak in one clarification as a third question. Can I just confirm in answer to a previous question, did you say EUR 30 million of the EUR 60 million restructuring charges are noncash? I wasn't sure. So I just want a confirmation there.

So thank you, John, for your questions. Maybe I take the second one, but could you clarify the remuneration -- your question on remuneration changes and how they impact on 2023? Could you clarify what information you are looking for?

I just wondered, do the remuneration changes capture explicitly the 2023 guidance, i.e., are they linked to delivering a margin of around 13%?

Okay. So we -- so I start with that, Peter, and then you take the other 2, which are in a way linked. So we have, as I said, a new remuneration policy with a clear differentiation between the KPIs and the targets that we look for the short term and the long term, which was not the case in the past. There were overlaps on the KPIs. So for the -- all of it is 100% performance-based, which was not the case in the past. And simply the long-term incentive in the past was only 33% performance based and the rest was basically a given. In terms of the targets, the short-term incentive, which is basically the yearly incentives, they are always linked to the yearly plan. So in the case of '22, we will define our plan at the end of this year. And of course, it's going to be in line with this road map or making sure that its ambitious enough to at a minimum deliver this plan, and it will be strongly correlated and the same for '23. But as you say, on the long-term incentive, instead, we have 3-year cycles. So in '21, at the beginning of '21, we launched a 3-year cycle that includes '21 to '23. And then the same will happen in '22 and so on. And of course, the targets, so the numeric targets, will depend on the projections that we have at each year at the time. And as I said before, I have a new management team. I have a new Board or a very different Board today than a month ago. And I count on working together with my team on further opportunities to improve. And as things evolve, of course, our incentives will evolve, and we'll adjust to the plans that we have at a given time.

And take -- to take your other 2 -- actually, I counted to 3, John, but the other 3 points. EUR 60 million of the EUR 120 million benefit indeed already coming in 2021, EUR 20 million overhead, EUR 40 million in operations, because we have been accelerating and pushing to compensate as much as we can of the raw material spikes that we are seeing very dramatically. So -- and it's normal that the first steps we do in OE and waste will be more impactful than the latter steps. And certainly, on the restructuring, we have announced a big restructuring right now, and that's, of course, delivering immediately and then that benefit the structural delivering for the next 3 years. Clearly, we'll continue to look for opportunities as we always do. That's our job. But that's why that phasing is like that. On your question on the procurement side, raw materials is the largest part of our cost base, and it will continue to drive most of the savings. And you really have to see it here in the frame of -- and that's what's different, I think, in the frame of the end-to-end manufacturing. Optimizing in a certain bucket has disadvantage. If you optimize procurement within procurement, you have the risk of changing suppliers quite often, which is not always the optimal, sometimes it is, but not always, the optimal to do for steps further down the supply chain in manufacturing or logistics. So the fact that we moved to an end-to-end will certainly add additional opportunities in that area. And again, it's a big bucket, it's the biggest cost bucket we have. So proportionately, it's not more savings than it is than the others. So that's on that question. Within that, of course, the portfolio -- simplified portfolio, we simplify the raw material that we need to apply, which means that we can have more strategic discussions and relations and contracts with suppliers. And then the last point you really asked was on the noncash. There is EUR 13 million, which is noncash. And there was a piece which is -- well, which is cash, but it's going to be realized later, but that doesn't matter. It's a EUR 13 million impairment.

The next question is coming from Eric Wilmer of ABN AMRO ODDO.

Can you hear me?

Yes.

Two questions. In your presentation, you dedicated some time to your online plan. What is your approach to the various internet platforms that actually do not offer private label products, and as such, where only the A brands benefit. And secondly, you mentioned to target CapEx below D&A in the medium to long term. In the past, Ontex has had several years of underinvestments, which were one of the reasons behind the current challenges. I was wondering, how the lower CapEx ties into your stronger focus on innovations and how this can support your long-term top line ambitions.

Thank you, Eric, for your questions. Great questions. Do you want to -- Peter, you can take the second one.

Yes. I will -- let's start with the CapEx. We -- of course, we've been building this guidance of 4% run rate not out of thin air, but we've been making our plan bottom-up, looking at what we need in terms of cost out and in terms of revenue. And that's why we are comfortable about that. Now we've been at different levels. Recently, we've been at reporting 5% CapEx. Now there's a few things to say about that, first -- or two things. One is we were making a bit of a catch-up. There has been a lot of investment in adult lines that we hadn't done before. And secondly, we do see some opportunities in being more efficient in those spends. So those are two arguments why we believe the 4% run rate and also based on the plans that we made is the correct one. It's a run rate, which doesn't mean that we're not going to be varying around it in an occasional year. But again, in most of the years in our plan, we do get below that 4%. It's just in a ramp-up phase, we might get slightly higher, but not to 5%.

Thank you, Peter. So Eric, on your question on online plans I mean this is for us a very important pillar of our strategy. As I said before, around 15% of the total sales are already online, and they are growing at around 1 percentage point a year with an acceleration, especially last year with the pandemic. There are 4 channels in a way online. First one is the typical supermarkets who have, typically most of them, their online platforms. The second one is the marketplaces, Amazon being one but others, marketplaces that could have or not have retailer brands. The third one is more what I mentioned before, lifestyle brands that are mostly sold online. These are niche brands that focus on specific products and purpose, like especially on the environmental friendly and natural products. These are brands that are growing very rapidly and mostly sell online. And then as I said, more direct-to-consumer. And actually, we are playing on all these channels. We are working with our retailers to help them develop their retailer brands online because typically, they don't have the same amount of market share online than offline. And this is typically because they don't have developed their marketing capabilities to manage the online. And that's one of the reasons why we decided to merge Europe into one division to really create a critical mass internally to build the capabilities to work with our retailers to make sure that we capture our fair share together of retailer brands online because I think you need to consider retailer brands are growing faster than the A brands at this point. And I believe that this will continue post-pandemic as consumers are more budget conscious. But the growth rate is not -- is different if you do online versus off-line. And we need to work with them to make sure that we enjoy the same amount of growth online. Lifestyle brands, we are the #1 provider, supplier for these type of brands. These are -- these brands are getting very big in the U.S., but step-by-step also this type of trend coming to Europe. As I said, we are already in some marketplaces. We are already with Amazon. And of course, we will continue to develop that channel as it is possible. And then we have a small B2C business. It is small. It is very fast growing. For us, at this point, it's not a big contributor on our P&L, but it is very important for us because it allows us to learn and to build capabilities, to have direct contact with consumers, to have very rapid feedback. This is a channel that we used to launch our innovations and learn before we deploy to our bigger retailers. And we will continue to build capabilities also through that channel.

The next questions are coming from Charles Eden of UBS.

Just one question for me, actually, and then one clarification. Esther, you mentioned the profitability challenges in Brazil. I wondered if you could help us understand where the profitability is of that business today because it was something Ontex previously shared, but then stopped doing so. I guess I'm trying to understand the degree of dilution this business has on the group margin today. And then my second question, it was more of a clarification, but you mentioned that you expect to present a longer-term plan at the year-end. But I wonder whether that meant before the calendar year end or will you report that with your full year results in early 2022.

Thank you, Charles, for your questions. So on Brazil, I'm not in a position to disclose the profitability of Brazil. We don't disclose profitability by country. But I can tell you that it is far below the group average, that we have done a lot of work over the past years to address it. But most of it has been kind of neutralized or washed out by the input cost increases and by the currency devaluation of the Brazilian real. So we continue to have a very difficult business there. We have -- I do believe that we have good plans. Actually, as I said, I mean, we have delivered very good growth, in many quarters, outperforming the market. However, it is not sufficient, and we are currently looking at alternative solutions to make sure that we can generate the necessary value with this business. And this is the maximum that I can tell you today. And of course, as decisions will be made, we will come back to you and communicate. On the longer-term plan, very good questions. Yes, the objective -- listen, directionally, I would like to come back by year-end, calendar year-end. But I would like to have certain flexibility because I have a new team, I have a new Board. And I want to make sure that I can have not only Peter, who has been here for 5 weeks, 6 weeks, but the rest of the new team, really making sure that they get completely up to speed, also the new Board members completely up to speed. So that we can -- I don't want to repeat this exercise again and again and again. I think we have a chance to get it right. And my current objective is to come back by the year-end calendar year.

The next questions are coming from Sanath Sudarsan from Morgan Stanley.

Two questions from my end. The first one, hearing your comments today, it seems that you're doubling down on the Ontex legacy of being a low-cost operator and benefiting from scale economies, cost, infrastructure, et cetera. I take the point on existing strong market share and natural growth in EMs. But what gives you the confidence that Ontex can be a good branded player with margins and pricing ability and premiumization, especially in emerging markets? And secondly, Esther, now that you've been in the seat for some time, can you give us, please, your take on why the past cost savings at Ontex have been relatively unsuccessful and where your plans will be different? Why do you think you can offset FX and raw material headwinds structurally? I mean -- and I'm thinking beyond the announced cost savings period. So why structurally Ontex should be a much better business going forward?

So thank you, Sanath, for your questions. So I'm going to start with the second one, the past cost savings at Ontex and why I believe that we can do better. There are 2 things here. So first of all, I truly believe that this one end-to-end industrial operations is going to allow us to accelerate and maximize cost productivity. As Peter mentioned before, the company has been operating in silos. And actually, I think in certain areas, a decent job has been made. I do believe that there is opportunity to optimize each single area because I don't think that the targets that have been defined in the past were aggressive enough. So that's one. Second is more this end-to-end approach, making sure that we maximize the total. So not only we are integrating the organization, but we are going to have one cost goal, total cost productivity, and this is a new concept. Making sure that we optimize the full chain rather than trying to optimize every single piece. And this is not only on the cost reduction, but it's also how we make the investments and making sure -- and I do believe that we will improve our capability to reduce cost, and we will accelerate it. And also, maybe we are going to be a more efficient in the way we invest resources, capital and expenses. So that's -- and then the third element, which, in my opinion, is very important is that to eliminate this idea of a onetime approach. That's how Ontex operated. So when raw materials -- when we have raw material tailwinds in the past, there was no focus on costs. When there were headwinds, there was focus on cost. So it was a very one-off type of approach in and out. And I want to install this kind of continuous improvement mindset. So it's acceleration and continuous improvement. And I do believe that there is an opportunity to continuously deliver year-over-year productivity across the value chain, and we will get there. So independent, but of course, looking at the raw materials and FX, but I think we need to do it anyway because this is not about mitigating or compensating raw material and currencies, but it's also about making sure that we have cost competitiveness to fuel growth. And I think this is going to be very important everywhere, but especially in our core market, which is Europe, that remains highly competitive, and we need to make sure that we have the best cost, that we leverage our scale so that we can -- there is not only the cost because then there is the service, the quality, innovation. But it starts with the cost, and we need to make sure that we are competitive on cost. On the first question on emerging markets, what makes me believe, listen, I don't think I have the final answer, to be honest. I do know that we have done a really good job in some markets. We have managed to grow very strong brands with #1, #2 position and generate good returns. This is not the case in other markets. So I don't think that there is a one answer. So what I'm focused on is wherever we have done a really good job and we are successful and we have strong brands and really good profitability, we will continue doing that. Wherever that's not the case, we are going to look at it and really understand whether we can fix those businesses or not. And based on that, we will make the decisions that are needed. But the objective in the emerging markets, I do believe that we need the businesses in emerging markets because the growth pace of these markets is higher than in the mature markets. But there must be -- the principle must be -- there is markets that are underserved, where we can have a strong position and where we can generate good margins and convert those margins into cash. And if that's not the case, we will exit.

Okay. Thank you very much, Esther and Peter. That's all the questions we have today. So I will hand the floor back to Esther for short concluding remarks.

So thank you so much for your participation today. I do believe that now the transformation is in motion. There is still a long way to go and a lot of work to be done. There are a lot of moving pieces. But if I look at what we have managed to do in the past months and all the initiatives and activities that we have started to implement, all that, that gives me a very high level of confidence that we can turn around this company. As I said, the work has just started. I do believe that I have a very strong team. This company deserve to be in a different place. Many activities are -- have already started. So we are not promising what we are going to do in the future, but many of it is already happening. And I think an example of this is what we are doing with the cost. I mean, 50% of our cost targets are going to be delivered, and we have a high level of confidence this year. We will continue to inform you. I do recognize that we are not giving all the answers. You also need to recognize that all this needs time. We need -- we have a company to turn around. As I said before, my focus has been in the short term to reverse the very negative top line trend and it's happening in Q2, to look for ways to expand our margins despite the very volatile raw material situation in the future, and of course, to improve the financial structure of the company because the reality is that we are currently very constrained. We will continue to inform you as we make concrete steps forward, and our next scheduled appointment is at the end of July with our H1 2021 results. Thank you very much, and goodbye.