Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Hello, and welcome to the Ontex Group Q3 2021 Trading Update. My name is Courtney, and I'll be your coordinator for today's event. Please note that this call is being recorded. [Operator Instructions] And I will now hand you over to your host, Philip Ludwig, to begin today's conference. Thank you.

Thank you very much, Courtney. Good morning, everyone, and thank you for joining our Q3 trading update. I'm joined today by our CEO, Esther Berrozpe; and our CFO, Peter Vanneste. We have a lot to get through today, also including your Q&A. So I'll hand the floor now over to Esther.

Thank you, Philip, and good morning, everyone. Thank you for attending Ontex's Q3 results call. We start on Slide 5 with the Q3 highlights. The Q3 numbers we posted this morning reflects the gravity of the supply chain crisis hit in many industries. In this context, we have maintained a sharp focus on delivering our strategic priorities. This is crucial in an operating environment that continues to bring new challenges. At the beginning of the year, we set 2 short-term objectives. The first one is to stop the sales decline in Europe, and the second one was to reduce our costs. The corner has now been turned with sequential sales in Europe, up 3.5% between Q3 and Q2. Our group revenues have also improved sequentially overall. Q3 was up from Q2 by 2.3%. On the cost side, we started cost-cutting actions early in the year with net efficiencies of EUR 42 million year-to-date. These cost savings are structural, thus the vast majority will stick. However, as you are all aware, commodity price headwinds have intensified during the year, resulting in a EUR 28 million year-on-year impact on EBITDA in this period. Thanks to our cost efforts, we were partially able to offset this with EUR 15 million of net costs savings in this period. I will update you later in more detail on the execution of our strategic priorities. Now let's turn to the Q3 results. Revenues for the quarter totaled EUR 512 million, plus 1% on a reported basis and stable versus 2020 on a like-for-like basis. Sales growth was held back by the shortage of raw materials, which impacted our production and resulted in [ least ] sales in Europe and in the U.S. From a product growth driver perspective, both Adult Care and baby pants continued to increase sales in the period. We have expected a weak EBITDA margin in Q3, given the high commodity indices impacting the period. In addition to this, we faced inflation in other operating costs such as transport and energy, which were more than offset by our cost-saving programs. The major disruption and shortages in the supply chain impacted our ability to serve our customers. We have been making every effort to meet customer demand, finding alternative sources of raw materials at higher prices, which have incurred increased operating costs. As a direct result, we posted an EBITDA of EUR 40 million, giving a margin of 7.8%. Net debt is largely unchanged from the end of June. This does not take into account the EUR 81 million arbitration settlement received on October 1. When deducted, leverage is below 4x. A brief look at the market trends now. Now on Slide 7, looking at our core markets. Over the past 3 months, there was an increased consumption of personal hygiene products, with growth recorded in all 3 of our categories. Adult Care was up low double digits across markets and baby pants also increased. As pandemic measures are reduced, this allows more activity outside the home, such as travel, restaurants and so on. And we also see shoppers returning to stores, which is favorable for retailer brands. In Europe, retailer brands are growing their share in our strategic priority areas of adult and baby pants. And finally, there is a lot of discussion about the need to take pricing in the current environment, and recent data confirms that is coming through. So to summarize, trends are favorable, and we are working very hard on capturing the benefit. I will now hand over to Peter to take you through Q3 in more detail.

Thank you, Esther, and welcome to all joining this call. Moving to Slide 9. I will take you through some of our Q3 trading results in more detail, starting with the sales bridge Q3, which illustrates that we are turning -- starting to turn the corner around in the sales decline. Reported sales were plus 0.9% with EUR 4.5 million currency impact, which is positive for the first time this year, thanks to a stronger Mexican peso. The like-for-like sales were stable versus last year despite EUR 13 million orders not met due to supply chain disruptions, including availability of packaging, and this has been impacting our year-on-year volume evolution. Pricing mix is positive with first pricing coming through in AMEAA markets. Mix is also positive with Adult Care and baby pants growing mid-single digits and gaining traction in both divisions. When you look at sequential basis, Q3 sales were up 2% despite the disruptions after Q2 had already grown 4% versus Q1. So that confirms the trend break after the sales decline that we recorded up to Q1 this year, and it shows also that in Europe, sales, we are turning the corner. We expect the net sales gain/loss balances of contracts to be in positive territory in Europe as of Q4. So let me move now to the category and division views next as of Page 10. The underlying demand trends across our categories are more and more positive, back to sequential growth quarter-after-quarter, and there was particularly good momentum in our 2 growth drivers, adult and baby pants, which is encouraging. Baby Care remains our largest category, and Q3 demonstrates that we are stabilizing with sequential growth for the second quarter in a row. This is thanks to solid growth in baby pants, which were up mid-single digits in both Europe and AMEAA, and we continue to see significant potential to drive this trend in the coming years across all geographies as more consumers are choosing baby pants instead of baby diapers. Diapers were lower overall due to a decline in Europe, partly offset by growth in AMEAA. Adult Care, as you know, is a strategic priority, and we continue to show growth in this category year-on-year and sequentially. And similar to Baby Care, the trend is towards pants, and this was an important driver of our category with strong double-digit growth in AMEAA and solid mid-single digits in Europe. We saw also increased purchases through our retail channels in the quarter on adults with our retail business up 14% in Q3. Institutional channels were still slightly down, as this channel continues to recover slowly from lower occupancy rates in care homes. In Fem Care, finally, we faced significant shortages in packaging that impacted our sales in Europe. Without the resulting -- without these resulting lost sales, the category would have been increasing low single digits. At the same time, we are working to improve the product mix by streamlining our portfolio. In AMEAA, we also faced some transportation issues in U.S., and revenue was slightly down as a result. On Slide 11, on Europe, as we're turning around and stabilizing the top line in Europe, it will have, given the size of Europe, an important effect on the group sales towards our ambition to grow. Europe was up 3.5% sequentially in Q3 versus Q2 but still declined 3% like-for-like versus last year. There is still an effect of historical contract losses, but bear in mind that this also includes EUR 8 million of unfulfilled orders. We are working intensely with our suppliers and customers to resolve the supply chain challenges and material shortages. As mentioned in the previous slide, our strategic priorities of growing Adult Care and baby pants with our customers are key in turning around this division. We expect, as said, Q3 to be the first -- Q4 to be the first quarter with a positive balance of contract gain/losses, which is another important step, of course, for Europe. Pricing takes more time in this division. However, we have implemented first actions where we can and are in discussions with customers on pricing given the unprecedented input cost environment. In AMEAA, we posted mid-single-digit growth, including some positive pricing in Q3, and more pricing actions are going to be implemented in Q4. Mexico was up high single digits in Baby and Adult Care. In the U.S., we have won new business, which starts to ship in Q4, and we are managing through some supply disruption there as well. Brazil is up double digits, including the launch of Turma da Mônica baby diaper. And in AMEAA, AMEAA overall was slightly down with a varied performance by markets. Sales in Maghreb and Pakistan were down. Ethiopia grew and Turkey grew strong double digits in Baby and Adult Care. Now looking at the Slide 12, the EBITDA bridge. As Esther said, Q3 EBITDA margin were significantly impacted by the sharp increases in raw materials, other supply costs like transportation and energy and shortages that led to missed orders. The impact of increasing raw materials is very high at EUR 28 million inflation versus Q3 last year. Importantly, since the start of 2021, we have consistently driven out costs through company-wide saving measures and through making SG&A leaner. And in Q3, as you can see, we have generated a further EUR 15 million of net savings in operating expenses and SG&A. The level of these cost savings have been made possible by accelerating actions to offset the increases in input costs. Other input costs like transportation and energy, for example, incurred EUR 3 million additional costs in the quarter. Year-to-date, we've been successfully generating EUR 42 million of net savings despite these input cost increases month-after-month. Net volume price/mix was down, with the decline and the mix of volumes outweighing the impact of pricing. And as you can see, the currency effects on Q3 were minimal. In the current environment, we are taking all possible measures to serve our customers despite shortages, transport disruptions and high input costs. This puts additional pressure on margins, which underlines even more the importance of the programs we shared with you in June on productivity, on capacity optimization, on overhead savings. We are sharpening these efforts to mitigate these market conditions to the maximum extent possible. Now commenting on net debt and leverage on Slide 13. Net debt on September 30 was slightly below end June and end of last year's level. We are maintaining a firm grip on CapEx this year to be -- and to be arriving well below 4% of sales. Working capital remains well controlled. Of course, we see some effects of the higher material prices. And also importantly, we received EUR 81 million following an arbitration settlement for the Brazil acquisition, which has been used to promptly pay back -- pay down debt, as you can see from the pro forma impact on the last bar on the chart here. We will continue our strong focus on managing cost and cash expenditures to decrease our leverage going forward. So thank you for your attention, and I'm moving back to -- the call to Esther now.

Thank you, Peter. Over the past few months, it has been absolutely vital to maintain our focus on turning around Ontex's business for the long term as well as tackling the short-term supply chain prices. In my view, the company has many great opportunities and really good assets from which to leverage to improve future performance. We defined 6 strategic priorities at the beginning of the year, as you will remember. These continue to be the backbone of our actions in this challenging environment. We are being highly disciplined in maintaining the momentum and accelerating, where possible, our action plans. And we have made good progress. Even if the raw material prices and supply chain issues overshadow the benefit, the building blocks to improving Ontex's medium- to long-term performance are being put in place. We have set clear targets for 2023, and this remains unchanged. Given the current environment, we are sharpening our cost programs, pricing actions and portfolio optimization. So let's see what we have done so far this year. On Page 16, we see the 3 objectives that we set at the beginning of the year: first, simplify our organization and change its culture to drive performance; second, review our geography and category portfolio to define our key areas of focus for the future; lastly, reduce our costs, not just to offset short-term raw material issues, but to be lean and have a structurally more efficient cost organization. More detail on what we have done, turning into Page 17. We have been working very hard to simplify the organization and to make our people more responsible and accountable. We now have a new organization in place to rebuild the performance of the group. The first important change has been the integration of the retail and health care businesses. This allows us to better capture the opportunities that we have in the adult category, creating better capabilities and defining a strategy tailored for each of the distribution channels. The second change is the end-to-end supply chain organization, and this has already proved vital to ensuring a coordinated approach to face the current crisis. We also reviewed our innovation strategy and changed the organization to global platforms. The new approach maximizes synergies while still offering the flexibility to serve all our customers around the world. As an example, we recently announced that our site in Mayen, Germany would become the excellence center for global process engineering and global platform innovation. Since the beginning of this year, we have had a very strong focus on increasing productivity. With a massive headwinds in the entire supply chain and in order to be able to accelerate execution, we have now set up a project team whose primary objective will be to drive productivity across the entire company. And linked to this, we have rolled out a new pay-for-performance policy. So moving to the business portfolio. The immediate priority in 2021 has been to bring overall focus to 2 things: first of all, turn around the European retailer brands business; and second, accelerate the growth in the more profitable categories. In Europe, sales have turned the corner with sequential growth Q2 to Q3. And as Peter said before, we expect net gain/losses to turn positive from Q4 after about 3 years of negative balance. We have accelerated our focus on Adult Care to deliver double-digit growth year-to-date, and mid-single-digit growth was recorded for the second big priority, which is baby pants. In the U.S., retail demand for quality products is very favorable, and we have won a number of new contracts. The construction of our new plant in the U.S. is ongoing, and we expect to start up in January 2022. We had good growth in the quarter in emerging markets, as Peter explained, with market share gains in Adult Care supported by several new product launches. But here, the challenge is about return on invested capital, and we are working in the various scenarios for these businesses. On Page 19, the actions to reduce our structural costs continued. We have taken decisions that will lead to 10% headcount reduction worldwide. The industrial footprint is being reviewed in Europe. In September, we announced the phaseout of our production site in Mayen, Germany, and this is an important step to increase capacity utilization by about 10%. Year-to-date SG&A is down to 11.3% of sales. This is a reduction of 100 basis points. And as Peter mentioned before, we have now achieved EUR 42 million of savings since the beginning of the year, and we continue to work towards the target of EUR 60 million for the full year. All the actions I mentioned are changing the structure of our company. And while the savings generated only partially offset impact of the raw material crisis, these are long-term initiatives, and they will remain. When the raw material crisis will be behind us, our margins will benefit from the improvements and efficiency gains. Turning now to the outlook. Since the beginning of the year, Ontex has been generating significant net operating and SG&A cost savings, which have been very important given the unprecedented rise in commodity prices as the year progressed. More recently, the group has faced additional cost increases in energy as well as higher cost and availability issues in transportation and other raw materials. So in this context, Ontex now expects for the full year 2021 like-for-like revenues of around minus 1% and adjusted EBITDA margin of around 9%, and we continue with our strict cash control and planned capital expenditure held to 3.5% of revenue. So in conclusion, our focus to turn around the top line performance and enhance efficiency is making good progress. We are stabilizing sales, and we'll continue to see sequential sales growth quarter-after-quarter. The structural cost savings target for the full year is within reach, and progress to date is very encouraging. Now before we move to Q&A, I'd like to take the opportunity to invite you to our next investor update on December 15. In June, Peter and I gave you headline numbers. Our objective this time is to go deeper on the key drivers and to introduce you to the team that will lead execution. Thank you for listening. Peter and I will now take any questions that you have.

[Operator Instructions] And our first question comes in from the line of Karel Zoete calling from Kepler Cheuvreux.

Yes. I have a few. The first one is to really understand the shortage of packaging you saw in your European business. What actually happened? Because I think everybody seems stressed in the supply chain but a few called out an effect like this. And then also, is this still an issue going into the fourth quarter? And what's been very specific at Ontex, I think, to call it out? The second thing is on price increases initially with regards to that matter. In Europe private label, you highlighted that the priority is to recover volume share, and that seems to be well underway, but cost inflation continues to pick up. So how do you look at pricing in Europe going forward? And then the third question is on the debt level that remains high despite of the cash-in based on the settlement. And at the same time, we know that the margin outlook for the coming quarters is difficult. So how do you look at the leverage at this point? Does it impact your ability to invest in the things needed for the longer-term turnaround, for example?

Karel, thank you for your questions. I'm going to take the first 2 questions, and then we'll ask Peter to take the last one. On your first question on the shortage of packaging in the European business and whether this is a specific to Ontex and will continue to affect Q4, I don't believe this is a specific to Ontex. I mean, the truth of the matter is that there is shortages of carton boxes, especially around the world. And the reality is that we use a lot of this material to move our products. So we've been doing different -- and I do believe that the disruption might continue in Q4. However, we have been looking at different things to mitigate this challenge: on the one hand is looking for new suppliers and qualifying new suppliers so that we can have a more diversified supplier base and manage that disruption; and second of all, alternative ways to package our products to transport them. We are already using different materials in other regions. So we are looking at using some of those materials in Europe. And we've been working very fast and very hard to address this situation. But truth of the matter is that, especially in the last part of the quarter, it had a big impact especially in Europe and especially on the Fem Care category. On the second question on the prices -- price increases in Europe, as Peter said, we start to see good pricing in outside Europe in all or most of the AMEAA countries, and we will continue doing so. And we will continue to drive pricing as raw material inflation continues. In Europe, it is a little bit more challenging, and one solution does not fit all. We have different channels, and we have retailer brands and our own brands. And of course, we are focusing. We are having pricing discussions as we speak with all our customers because the truth of the matter is that we need to pass the inflation to the customers. Of course, in Europe, it takes a little longer, especially in the retailer branded business, where we have a pretty rigid contracts with some of the customers and it requires longer work and discussions with them. But I can assure you that we are looking at the pricing in Europe. For the third question...

Yes. Thanks for the question, Karel. Yes, our leverage, as you've seen is at 4.3 at the end of the quarter. It -- you've also seen a pro forma positive impact of the Brazilian settlement of EUR 81 million, which is, of course, helping to progress in the right direction. It is true that it is being impacted and remains high because of the softer margins that we will also see in Q4. Now we have agreed within the new refinancing on the bank loans that we have covenants that allow us to execute that turnaround, and we are working as we have been talking about midyear as well to deleverage this company to a level below 3 by pushing on the different levers. And that also means accelerating some as the margin context is more challenging.

The next question comes in from the line of John Ennis calling from Goldman Sachs.

My first is on the medium-term margin target. I guess in light of ending the year with around a 9% margin, how should we be thinking about the medium-term guidance for around a 13% margin by 2023? Are you confident that 2022 margins will be up versus this year to get us back on track for this guidance delivery? That's my first question. My second question is on CapEx. You're spending CapEx about 1 percentage point below the depreciation charge as a percentage of sales. Do you think this is sustainable medium term? And if so, can you help explain why there is this gap? And then my third question is on the supply disruptions again in Europe and the U.S. There was a sort of, I guess, EUR 13 million drag in the quarter. Are these lost sales? Or will some of this now fall into 4Q? I'm just trying to understand the full year impact of the disruptions.

Thank you, John, for your questions. I'm going to start with the first one, which is the medium-term target that we gave and communicated in June. And in June, we communicated that we saw 2023 between 12.5% and 13.5% EBITDA margin, and this is our target, and we continue to confirm that target. It is true that we are ending the year in 2021 slightly below what we had planned at the time. And this will require that we define more actions and accelerate some of the actions that we were planning. So we are looking at acceleration and enhancing -- enhancement of our cost actions. We continue to work on the top line because this is going to be a very important driver of the improvement, and we see good progress. And we continue to look at pricing. Especially if the raw material situation does not ease up, we will continue to drive pricing, and not only pricing but look for the mix opportunities that we have. And we've been talking a lot about the growth and the significant growth in adult and in baby pants, which are margin-accretive categories. So we will continue to look at mix as a key driver of margin improvement, not only category mix, but also geographic mix. So it is a combination of many things. Of course, the current challenging environment and the deterioration of the margin will require that we do more and faster, and this is what we are planning for. The second question on the CapEx, I would like to ask Peter.

Yes. On CapEx, we actually are -- our outlook for the year, as Esther said, is 3.5%. On CapEx, we're doing 2 things. I mean, first of all, we are critically reviewing the processes, optimizing the processes, as I have been talking about in our investor update, making sure that we use the right levers and the right KPIs to not only decide but also track. So that's one thing that's happening. Second thing is that considering the -- what's happening outside in terms of commodity and disruption, we are, of course, being very vigilant on phasing and on making sure that we are critical on what we do, which is why we get to the levels of 3.5% this year. This is not a sustainable level. We believe that this business needs 4% as a run rate in terms of CapEx, which is where we will go back to. And again, the 4% does not mean that we will be exactly on 4% every year. We will be circling around the 4% as we move forward. But as a run rate, this business needs 4%, and this is including all the initiatives and the growth investments that we require. About 70% of that amount is always and certainly today is on the growth initiatives. We are not dropping any option in securing growth. So we invest against the CapEx, all of that, that is of strategic importance to us in adults, in pants, in U.S., in Europe, and that is still happening.

So for the last question on the sales, on the EUR 13 million loss on sales, Peter mentioned EUR 8 million is Europe and the EUR 5 million is the U.S. The question on whether we can recover these sales in Q4, the answer, unfortunately, is not. We sell essential products, and typically, if you cannot supply the customers, then you try to get the supply from somebody else. So unfortunately, they are lost. But we will grow in Q4. We are planning to grow, and we are taking actions to improve our service levels. Just to give you a sense, typically, our level of service needs to be at around 97%, 98%. This is our target, which basically means that we can fulfill almost every order. And in the last couple of months, the level of service went down to 10 points, and this has been very painful. And seeing -- not being able to fulfill orders has been painful. So we are doing many different things because I do not expect that the situation will dramatically improve in Q4. My expectation is that step-by-step, it improves throughout 2022. But we are taking different actions like qualifying, as I said before, new suppliers and qualifying also new materials so that we have more flexibility, as disruption can be seen, to continue to fulfill our customers. And as I said before, unfortunately, this type of situation and the need of finding alternative solutions in the short term create additional costs, and that has been a challenge during Q3. I think we've been good at offsetting and finding new cost-saving opportunities to really offset those additional costs that were not expected and still deliver our net cost-saving target. But the situation is pretty challenging, as we speak.

That's really helpful. Can I just double-check, Esther, at the end there, your service levels this quarter were in the sort of high 80% level. Is that what you mean? You said down 10 percentage points. Is that for the quarter?

Yes, yes, yes.

The next question comes in from the line of Wim Hoste calling from KBC Securities.

Yes. I have a couple of questions as well. First one is on raw materials outlook. There was in Q3 EUR 28 million negative impact. Can you give us kind of a feel whether for Q4, the impact might be higher, lower or equal to Q3 to that EUR 28 million? Then second question is you are having discussions with your customers on prices obviously. But are you also thinking about changing the contract structures, your durations or putting in more clauses that allow you to automatically pass through raw material volatility, to have your thoughts on that? And then thirdly, a question on the new U.S. production facility that will come onstream early next year. Can you give us a bit of a feel on the time you need to ramp that up? Also, how long will it take to bring margin performance at group standards? A bit more clarity on that would also be helpful.

Okay. Thank you, Wim, for your questions. I'm going to ask Peter to answer the first question on the raw material outlook for Q4.

Yes. Thanks, Wim. Yes, on raw materials for Q4, we are going to see an increase versus the EUR 28 million that we posted in Q3. And then it's been honestly like that over the year. We've been -- Q3 has been significantly up versus what we've seen in the first half, and Q4 will be further up on that, which is also readable for many of the indexes that you see on the main raw materials that we are covering. That means as well, of course, that within Q4, we will have important results on our cost-saving programs, and we are looking forward to a further consecutive growth on Q4 versus Q3, which should be offsetting those raw materials to some extent.

On the second question on pricing with customers, especially on the retailer branded business, can we change the contracts? It is true that most -- our contracts are pretty rigid. And typically, you have a commitment for a certain period of time and a commitment for a certain price. The unprecedented situation on the raw material front forces us to rediscuss the contracts. And in fact, I would like to bring more flexibility to the contract that we have with customers in both directions. So we have the flexibility to increase prices as raw materials go up, but of course, to pass the benefit of raw materials going down and potentially -- partially of the efficiencies that we are getting. So yes, we are in the process of doing so. It is a process that cannot be done in a few weeks, but that's one of the levers that we are looking at, especially in the new contracts, but also on existing contracts to really look at allowing more flexibility. Another thing that we are doing with customers, I mean, pricing is not the only thing. It's working on what opportunities we have to commonly create and improve the margins in this kind of situation, how can we accelerate the growth of retailer brands in the more profitable categories, adult and baby pants. We know that the population is aging so we have more consumers getting into that category, and we have more consumers shifting from the traditional diapers to baby pants. And historically, when these shifts happen, the A brands will take a bigger share at the beginning, and I think that there is an opportunity for retailer brands to accelerate that transition and to gain market share. So that's something that we are doing with customers. And we are also working on what we call design to value. It's how can we change the design of our products to use less raw material but still deliver the same level of quality and performance. And of course, we do this together with our customers because they need to align with that. And this is something that is happening as we speak in the industry, trying to use less materials and deliver still the same performance. On the new U.S.A. plant in next year, so the objective is to start production in January, so very early next year. And it usually takes in our industry around 6 months to ramp up a line. We are planning to install initially 2 lines and then step-by-step bring new lines into the factory. So we will do kind of a progressive ramp-up. We will start with 2, and then we will bring new ones. So I would expect that the new lines will be fully up to speed by mid next year. But this doesn't mean that we are not going to be capable to serve our customers. We still can leverage our factory in Mexico in Tijuana. This is a factory that has been serving and almost fully dedicated to the U.S.A., and we will continue leveraging that plant. The reason why we are building a new plant is because we have a very ambitious expansion plans, and this new plant is going to support those -- that growth. We will start in the -- start up the plan, supplying some of the new customers that we've gained and step-by-step migrating more customers into the U.S.A. plant.

The next question comes in from the line of Faham Baig calling from Crédit Suisse.

I'll continue with the trend of 3 questions. My first question is around really your debt levels. I appreciate at your last call, you dismissed the potential of asking your shareholders to contribute in the turnaround plan. Could you confirm that would still be your view today given the further increase in raw material inflation that you're seeing in the P&L as well as the struggles you have outlined? And should I, I guess, related to this, see the recent news flow suggesting that you might be looking at more rigorous portfolio transformation? I'm particularly referring to the article with regards to you potentially disposing the Brazilian business as a potential lever to try and reduce your debt levels. My second question is coming back to raw material inflation. Based on current spot rates as well as your forward cover, are you able to help us with the potential inflation the business is likely to see in FY '22? And my third question is really around savings versus investment. And I just want to understand the potential risk of cutting into muscle rather than fat. And the reason why I'm a bit concerned is because consolidating supplier base was one of the ways Ontex historically managed to reduce cost. And today, we're talking about potentially diversifying the supplier base again. So what is the risk that some of the sharp cost reduction actions you're taking today and you're suggesting will likely accelerate into '22, 2 years down the line, that there is a potential to a further need to put those investments back into the business?

Okay. So we'll -- maybe we'll start from the last question, which is the cost savings, are we cutting muscle or fat? And then I think you had another question which is the strategy of concentrating or diversifying suppliers, which is 2 questions into 1. So I'll start with the first one. I do believe that we do have still a lot of ways in the system. So what we've done first is reorganized. So in the past, we've been cutting headcount. But I think there was a need to basically change the organization structure to simplify it, and as a consequence, of course, reduced cost. But the main objective was simplification of the organization to become leaner and gain speed to market. And precisely, the biggest changes that I mentioned were the 2. The first one is the integration of the 2 divisions, retail and health care, globally because we do see that the adult category and consumers move from one channel to another, and we were not fully capturing those shifts, and this new organization is integrated -- fully integrated organization is going to be capable to better capture these consumer behavior changes. And the second piece is on integrating the different functions in the supply chain that has proven to be really important in this type of pricing situation. So basically putting together procurement, manufacturing, engineering and supply chain and making sure that they work in a more integrated way. So that, in my view, it was needed just for simplification and gaining efficiencies and be more effective. For the rest -- and that's done. Still, I do believe that there is lots of ways in our system. When I look at our manufacturing and industrial key performance indicators, there is a long way to go, and we will continue to work very diligently to really get to a best-in-class in every single level, and that will come with significant cost reductions. I mentioned before, as an example, our capacity utilization in Europe is 65% today. So we are already using 65% of the capacity. With the actions announced, we are going to improve 10 points. We are going to get to 75%, and this is not yet at the optimal level, and we will continue to work to get there. And of course, as we go back to growth and continue to grow our volume, that will also take care of part of it. But that's just one example, and there are many different areas that there's a significant opportunity for improving. The second question on -- the second part of the question on suppliers, our objective is to simplify everything, including the supply base. So the long term -- medium, long-term strategy is to rationalize -- to continue to rationalize our supply base and to establish more strategic partnerships with suppliers that will allow us to better cope with challenging situations like this one. Now when I mentioned that we are diversifying, this is a short-term action, and I would call it like a patch to really make sure that we can continue to serve the customers. But to be honest, we realized out of this crisis that we went probably too far in the rationalization of suppliers. And we had many different materials with a single source, which I don't think it's a good way to be. So on the one hand, it's like we need to make sure that we have -- that we go out from single sourcing on any component but at the same time continue to rationalize the situations that are too complex. On the debt level, maybe I'm going to ask Peter to talk about that a little bit.

Yes. Our debt has been stable and slightly declining versus last year and will have a positive boost because of the arbitration settlement in Brazil, as we have shown following that settlement. Our aim is -- with Ontex is to rebuild the margins with structural interventions as we've been talking about a few times already now. And we have no plans. We have all confidence in that, and we have no plans to have a rights issue going forward.

And then linked to the second part of the question which is does -- the current situation, does it require to be more rigorous with the portfolio? And you mentioned -- and you asked about some of the press articles that we saw in the past couple of weeks about Brazil. I cannot comment any further at this stage. We have delivered very good growth in the past quarters, outperforming the market in Brazil. However, it is not sufficient, and we are currently looking at alternative solutions to make sure that we can generate the necessary value in this business. At this time, this is the maximum that I can tell today. And of course, acquisitions will be made, and we will come back to you and communicate.

And maybe to come back on your second question, I think, on inflation. We are, like everybody else, is still in the midst of an unprecedented storm. It's high volatility, but we do expect cost pricing the first half of next year, for sure, to be at the high levels, which is why we are stepping up as of Q4, further our pricing and saving programs and mix efforts. But we do expect this inflation still to be happening in the first half of next year.

The next question comes in from the line of Fernand de Boer calling from Petercam.

The first one is indeed also coming back on, let's say, the cost and the disruptions. And you mentioned that you have so far abandoned 540 people. I think there is another 350 to go with Mayen. In a time that you have to do a lot with the organization, the raw materials, you had disruptions, you need to increase prices. Is this all doable for the organization? Because it looks like that it is going to be too stretched for you. That's the first question. Then coming back on the price increases, what do you see at competition? Because I have the impression that the competition, also Procter & Gamble, et cetera, in Europe, so far, they are hardly moving anything on price, but maybe a little bit less promotions, but not really taking price -- share prices up. So what do you see there? And how do you look at that going forward? And then, Peter, to come back on the debt level, did you say on the question of Karel that you have a confidence of 3x that you want to go back to that one? And if that's so, is that already next year? And then the last question, maybe also in light of Brazil, this [ policy ] as you know, I also noticed that a number of times, you called baby and adult inco core. Fem Care, the performance is very mixed if you look in the past few years. Can we read from that, that actually Fem Care could also be for [ sale ]?

Thank you for, Fernand,, for your questions. I'm going to start with the first one, and I'm going to take the second one also. I will ask Peter to take the third. On the -- is it all the things that we need to do and coping -- driving our medium- to long-term agenda and coping with the short-term volatility, which is doable for an organization that is being reduced by 10%? I cannot deny that there is -- there has been a lot of stretch in the organization because we are very focused on driving our priorities for the medium and long term. But at the same time, we need to cope with a very volatile situation that keeps changing every day. I think the only way to do that is to focus, and I think it has been very important. And this is we did at the beginning of the year to define our key priorities and to have -- to line up all our organization to those priorities that implies to stop doing many of the things that we were doing in the past. So the answer is yes, but it requires being very disciplined and focused on deciding what we are going to do and what we are not going to do because you are right, it is not possible to do everything with an organization that is being reduced. The second question on pricing, actually, you're right. I think we see more pricing happening outside Europe, when I look at the U.S. and AMEAA. I would say that these are markets that, even looking at the past, are faster on pricing for input cost inflation. Europe always is slower also because it's complex and probably also, the competitive intensity is greater. But we do see pricing happening in Europe. When I look at the market in the last 3 months, volume is slightly up and value is up -- greater than volume. So pricing is happening. And it is a combination of, as you said, less promotional intensity, but that's pricing. It is also mix because mix continues to improve, but there is also pricing happening. We see -- we start seeing prices changing in the shelves, as you say, slower than in other regions. On the third question...

On the third question, yes, Fernand, thank you for asking that question because it makes me realize that maybe in my enthusiasm to Karel, I mentioned the word covenant rather than leverage. When I mentioned 3, I meant that we -- our target is to go to leverage of 3x, which is for 2023, which is the public targets that we've also been expressing in the midyear. As far as it goes to covenants, this is not public information. You know that part of our financing is in bonds where we don't have any covenants. And on the bank part of it, as I said before, we have defined covenants that allow to execute our turnaround plans. And with that, we are comfortable and confident that we'll be working towards that leverage of 3 in 2023.

So to your last question on the Fem Care category, it is true that the performance of category has been more volatile maybe than the other categories. Specifically this year, we have lost sales in Fem care, especially in Q3. On the one hand, we are working to simplify the portfolio. So -- or let me back up this. I consider this category strategic. I think it is a competitive advantage to be able to offer the 3 categories to our customers. And for many customers, this is an asset that we have compared to some of our competitors. So yes, it is smaller because we've been very trustful on what are the subsegments where we want to play and the ones where we don't want to play. But it is a strategic category. What we have been doing is rationalizing and simplifying the portfolio. This is a very complex category. And we did have a very, very complex portfolio for relatively low revenues, and that complexity translated into cost and as a consequence, low margins. So we've been looking at eliminating the low-margin categories in different ways. And it is also the category that had the biggest impact on the packaging crisis in Q3 because it is a category that uses more cartons than others. But it is still a strategic category. We'll continue to work, and we are taking actions in every front. So we are simplifying the portfolio. We are also simplifying our industrial setup. Before, in June, we announced the simplification of the Mayen -- or the Eeklo factory with the phaseout of 8 lines, and all those lines were Fem Care lines. So we've been doing different things on this category to simplify and to bring the category to the level of margins that we have at the company because today, this category is margin dilutive.

Maybe one last question, if I may. Peter, did you say on the return on invested capital of the adult inco that, that was actually an issue, or that low return on invested capital for the entire group business? Or did you specifically mention that for the adult inco?

No, I think it was me mentioning return on invested capital during the call related to the AMEAA market, so the emerging markets, that we are seeing very good growth in those markets. And we are driving market share gains in adult category especially in all markets and in baby in some key markets. So from the top line perspective, those markets really contribute to the company growth. However, in some of these markets and categories, the return on invested capital is not as good as we would like it to be, and we are looking into this.

The next question comes in from the line of Martin Deboo calling from Jefferies.

Yes. It's Martin Deboo at Jefferies. I want to come back to Faham's question about whether you need an equity raise, and it goes to the interaction between the medium-term targets. I presume that the 13% medium-term EBITDA target drives the 3x leverage target. But relative to that, you're downgrading expectations for FY '21. You're obviously not be keen to give FY '22 margin guidance, but it feels to me that FY '22 margins are going to struggle to get out of single-digit range. So that would probably -- the cash generation implication of that would probably be a miss to the original medium-term plan. Then you've got to believe in FY '23 that you can get EBITDA margins up in -- from whatever that level is, up to 13%, which feels like a stretch. So I just feel I'd have to push you a bit harder, Peter, given you said you're confident you don't need to raise new equity. Relative to the evolving situation, is that definitely the case?

Okay. Yes. Thanks, Martin. I was actually waiting for the second or third question. But I'm not going to deny that the turnaround is a bit more of a challenge with the recent supply disruption. It is clear, and you can see that in the Q3 margins that our margins are going down. And the timing of the return to normality of the disruption in the supply chain is playing a role, of course, but that's rather outside of our control. I mean, what I can say is that we are accelerating our cost-saving programs with structural improvements that are quite significant, and that will stick, and we're accelerating them. Next to that, we are focusing on pricing. We were not focusing on pricing when we were talking as much as when we were talking in the middle of the year. So that's an additional element. And we're optimizing our portfolio on the more profitable parts of our business. The combination of all of these elements is what's going to deliver the 12.5%, 13.5% that we have been talking about in terms of 2023 commitments.

The next question comes in from the line of Iain Simpson calling from Barclays.

Couple of questions from me. So firstly, did I hear you correctly that 70% of CapEx is growth, 7-0?I may have misheard that. But sales have declined 3 years in a row. Your capacity utilization in Europe is 65%. I'm a bit surprised you need any growth CapEx really. It would be interesting if you could just kind of clarify how much is growth, how much is maintenance, and whether it's just a mix issue that you're needing to put a new plant into AMEAA and it's cheaper to kind of build greenfield in AMEAA than ship the plant or indeed the products over from Europe where you've got the spare capacity. But it would be good to get some color on that. Secondly, good to see the SG&A savings in the Q3, albeit kind of only EUR 2 million but still coming through. But just thinking about SG&A levels, in 2015, your SG&A was below EUR 150 million. In 2020, it was above EUR 250 million. So your SG&A had a 5-year period where it grew by nearly 70%, and your sales moved by less than 20% over that period. Structurally, what's the right SG&A level for this business? I'm guessing it's somewhere between EUR 150 million and EUR 250 million, but is it close to the bottom or the top of that? Where do you see that number coming out in millions of euros once you've kind of rightsized the SG&A cost base? And then just lastly, if I can, you're clearly dialing up the progress on cost saves and pushing harder there to help you manage through this period. Can you just give us a little bit of an update on what we should expect in terms of cash restructuring costs for this year and next year? Perhaps how much you've spent this year? How much is coming and how much we should see next year?

Thank you, Iain, for your questions. I'm going to take the first one on the 70% of the capital is growth. I confirm that number, and it is true, we have a low capacity utilization, but the situation is very unbalanced. So we have a very low capacity utilization in certain factories, very high in others. And also, we have a very low capacity utilization in certain product categories and very high in others. So the 70% of capital spend on growth has been very much focused on the priority categories, especially baby pants. You need to consider that the market is shifting from diapers to pants. And at a certain point, all our capacity was diapers, and we had to build, and we have had to build capacity on pants. And the same regarding to adult. This is a category that is growing very fast, and we have continued to add adult lines as we needed to produce the volume. And last but not least is the U.S.A. Of course, our products do not -- and I will come back to that, do not travel very well. So it is not possible to ship products from Europe to the U.S., especially the bulky products. So you need to build the capacity close to where the customers are. What we did at the beginning of the year is map what would be the ideal footprint if you started from a greenfield perspective, considering where we are selling. And I can tell you that when you take the different categories, baby category, so there are certain kilometers that different products can travel. Adult doesn't travel very well, so you need to have the factories very close to where your customers are. Baby can travel a little bit further away but not within a 1000-kilometer kind of a range. And then Fem Care in general travels very well. And of course, we are redesigning our footprint with that in mind, making sure that we have an optimized equation between the capital investments and the logistics, the cost -- the conversion cost and logistic costs. So hopefully, this answers your question on CapEx. On...

And I suppose -- sorry, just to kind of link that to my next question that I assume you're going to answer, which was around the kind of the cash savings question later on. Does that mean that if your capacity is being redeployed into the U.S. into diaper that you could have kind of ongoing cash savings -- sorry, ongoing cash costs as you need to shut sort of old nappies plants, shut plants in Europe and move that capacity to the U.S.? Apologies for interrupting there.

Yes. Maybe I'll pick it up before we go to the second question, pick up on this one, indeed, on the cash and your question on cash and restructuring costs for 2021, '22. If I -- the nonrecurrent cost for 2021 in line where I've been saying before, we're trending towards EUR 55 million nonrecurring expenses or just slightly higher because we're reinforcing some cost measures as we've been talking about. The vast majority of this is going to the cost program, so the footprint that we have been announcing and then the restructuring out of the workforce. Don't forget there's going to be an offset with an EUR 80 million -- EUR 81 million Brazil settlement income for this year. And there will be -- part of that will be noncash. But again, it's going to be turning to the -- towards the EUR 55 million I've also been talking about in the middle of the year. Allow me, for 2022, to come back on that later when we have concluded much more on that. Of course, there's some of that program that have been -- the longer program on the footprint and the restructuring that will come back at that time. But we will be more specific beginning of next year when we come back on the 2022 results on that.

And just to maybe complete the answer on the plants, of course, we move lines as needed. So it does not make sense to move products -- finished products because of the low-value products compared to the volume. But it does make sense to move lines. So as an example, one of the things we have been investing on baby pants lines in Europe because the market is shifting from diapers to pants. But that trend is much slower in the U.S. So as we free up capacity of diapers in Europe, we move the lines to the U.S. So we try to optimize our lines, and it is very usual that we move lines from one place to the other. And we have also been writing off lines that were very old and that we will not need in the future. So it's a combination of write-offs to reduce assets and capacity and moving the lines where they are needed but also investing on the new products following the market trend. On the SG&A, yes, so there has been, I mean, a negative evolution in that sense. You need to consider -- you mentioned where we were in 2015, I guess you mentioned, and where we are today. We need to consider that the confirmation of the company has changed because we have acquired different businesses that came with revenues and with SG&A. The businesses that were added into the group in those years were SG&A-heavy or heavier because these are kind of branded businesses, while back before we started the expansion, the main focus of the company was a retailer branded business. And this business requires less SG&A because you didn't manage all the traditional marketing activities that you manage with the branded business. So I think it has been a combination of just the company expanding and growing and expanding into SG&A-heavy businesses. You are also right that theoretically, we should have seen the revenues at a minimum growing at the same pace of the SG&A. And this has not happened because the expansion took place in emerging countries. We have seen very, very good growth on a like-for-like basis. But unfortunately, all of it worked out by currency devaluation. So net-net, we don't see that growth in the topline, but we see the cost on the bottom line. So we are working on it. And if you ask me, we reduced 100 basis points this year at around 11 -- slightly above 11%, 11.3% from 12.2% last year. So I think this is a really good progress. As I said before, my view is to take the SG&A to a 10% level or slightly below 10%. I think this would be a really good level and would be best-in-class in the industry. And it will be a combination of continuing to reduce our costs in absolute value and continue to drive revenue growth. And as a percentage, we will get our SG&A to that 10% or below level.

The final question comes in from the line of Eric Wilmer calling from ABN ODDO.

I got one remaining. I do would like to press a little bit still on CapEx. I was wondering what this means for your general replacement cycle of your equipment because saving on CapEx can have quite material consequences. How is this impacting your innovation capabilities as well as your growth ambitions and your sustainability agenda for a cleaner manufacturing footprint? And aren't you afraid that your competitors may actually gain a competitive advantage from you freezing CapEx, both from an innovation and growth and a sustainability perspective?

Actually, Eric, thank you for your questions. In reality, I would say that the reduction of CapEx has been driven by more focus on listings. So actually, when I look at what we are doing in our innovation pipeline and the pace of getting those innovations to market, I think we are accelerating, and I feel very good about the innovation pipeline. The difference versus the past is that, that pipeline is focused on listings. So we have been very selective on what are the areas in which we want to focus, and we have increased actually the investments on those areas so that we can do more and faster. But of course, that's required also to decide not to invest in other areas. So no, I don't -- and sustainability, you mentioned sustainability as an example. And we are doing a lot in that front. We are the main partner of what we call the large-style [ brands ] U.S. These are a very strong growing segment. These brands, kind of a niche brands, typically, operating online with a premium proposition that is very much focused on natural components, natural products and sustainable solutions. And we've been, for many years, great partner to most of these customers. We are also growing this business in Europe. So -- but of course, that's the fact that we are accelerating certain areas. That means that we have decided to stop the efforts on other areas. So I am not at concern. Now if you ask me, is the 3.5% sustainable over time? I would say no. Peter, we've been working on getting our CapEx back to 4% on an ongoing basis. And as Peter said before, it's not going to be 4% every year. It gets up and down depending on the projects that we need to execute on a yearly basis. Thank you. So I would like to close this call with a few comments. We are executing our strategic priorities, and I do believe that we are making major structural changes to the way the group operates, to be more efficient and lean. We are not letting the current supply chain crisis disrupt us in achieving this goal. Significant progress is being made even if the impact of the environment makes this less visible and impacts our short-term results. Once the macro supply chain situation settles down, Ontex will be in a strong position, and the benefits of all the changes will be fully visible. Thank you so much for your time today. I look forward to talking to you on the 15th of December.

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