Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Good morning and welcome to Ontex' full year webcast. I'm Geoffroy Raskin, IR, and I'm here with our CEO Esther Berrozpe, and CFO Peter Vanneste. Before we start this session, let me remind you of the safe harbor regarding forward-looking statements, which you will find at the beginning of the presentation. With that out of the way, I'll pass you over to Esther for the year review.

Thank you, Geoff. Good morning and good afternoon, everybody. 1 year ago, I announced a clear set of strategic priorities to create a new Ontex. The political momentum more scattered throughout the year in rolling this out, and we have put in place the building blocks to turn around the group. Organizational changes and major cost reductions have been achieved. These were accomplished in a very challenging supply chain environment, which severely impacted our 2021 financial results. I am encouraged by what has been achieved so far, even if there is a lot more to do, and we will not really see the full earnings benefits until the raw material situation is stabilized. We enter another challenging year where the financial results will continue to be impacted by a record raw material cost inflation. I would like to take a few minutes to look back at what we have done to reposition the group for the future. For each of the strategic priorities you see on this familiar slide, we set the future direction for the group to drive the turnaround. Fundamental change is underway. And to do this, we require the right leadership and experience. Let me start here. Ontex is now led by a renewed executive management team. And we also added new talents and capabilities in other senior executive roles. We have a team with complementary experience and turnaround track records, key to driving performance improvements. As new executives joined or took on new responsibilities, the immediate organizational changes were made to simplify the operations and increase accountability, agility and speed of decision making. In parallel, we implemented a new remuneration policy with significant changes at all levels to drive a true and strong pay for performance culture. We have also split responsibility for North America and emerging markets to reflect the change in our strategic direction. Showing an in-depth strategy review, we decided to focus on partner brands and the healthcare channel. These decision leads to geographical focus in Europe and North America where partner brands are well established, sizable and offer the greatest potential for profitable growth. This new approach will enable us to better focus our efforts in profitable growth opportunities and capture scale benefit, but also excel once again, in customer centricity. As a consequence of this strategic choice, we are exploring strategic alternatives for our businesses in the emerging markets, Central America, South America and Middle East and Africa. We have appointed advisors, and the organization is fully mobilized to execute. Some sites are more advanced than others and we are receiving solid interest from external parties. Much work was done to restore customer competence in Europe, leading to net contract gains and losses becoming positive in Q4 '21. And we expect the positive momentum to continue in 2022. In North America we continued with our growth path, up 7% and we won new customers. Our new plant in North Carolina is ramping up and combined with our operations in the Tijuana, this will give Ontex a unique coast-to-coast manufacturing and supply footprint. Beyond North America that will continue to be an important growth driver for us. We are investing and focusing our development priorities on 3 areas; pants, adult care and sustainable and natural solutions. And these are already gaining good traction. Let me start with baby pants. The baby pants segment continues to gather momentum in replacing diapers. With retailer brands closing the gap versus A brand. We are already back to growth. But more importantly, we have expanded the group's manufacturing capabilities and are now fully up to speed to capture the rapid growth with innovation playing a key role and next generation of baby pants was designed and launched by Ontex last year. We are now the first partner brand manufacturer to offer a level of absorption on par with the leading A brand products in key European markets. Adult care revenue increased 3.6% with adult pants at double digits like-for-like in 2021 driven by continued traction in Europe, in effect growing retail and self-pay channel and also growth in the Americas and the Middle East in particular. Also innovation drives our momentum. A good example is Ontex's patented Orizon smart diaper and this is a connected incontinence care solution for improved care for the elderly. Beyond better care, this integrated solution offers a more efficient use of the product, reducing the total cost and minimizing the waste. Lastly, the share of sustainable and natural solutions grew in 2021 by 7 percentage points to almost half of our sales. At Ontex, we are focusing on the whole lifecycle of the products working with suppliers to develop and test alternative raw materials and the whole circular economy. On the sourcing side, we are introducing bio based materials such as cotton and recycled packaging and work on the end of the cycle on recycling and composting possibility. We continued to drive momentum with sustainable products and with regard to Ontex's overall climate change objectives, work continued throughout the year on 3 key areas. First climate change. Ontex have set its science based climate targets for 2030 with the objective of having climate neutral operations covering Scope 1, 2, and 3. We continued to reduce our ecological footprint with 90% of our plants being powered by renewable electricity and this is 100% in Europe. Second, the circular economy. This is key to us. And it's fully embedded in our innovation portfolio where sustainability projects represent around 75% of our total portfolio. And last but not least, sustainable supply chain and alternative raw materials. We have more sophistication of our supply chain and that continues to evolve and increase. Also our supplier code of conduct was updated, and although still on the way, more than 90% of our suppliers signed it already. Turning now to the operational excellence. In 2021 gross savings of EUR 75 million were delivered. The group's cost base was reduced by 4%. And the main contributors of this result was the change of our organization structure and the industrial transformation. We plan to continue working on our cost base with the objective to deliver 4% reduction per year in '22 and '23. SG&A was reduced by EUR 17 million in '21, marking the first year that we see SG&A cost come down in absolute terms. Relative to revenue, the ratio was down to 11.6% versus 12.7% previously, heading towards our target to be below 10%. To optimize the European manufacturing footprint, our operations in Eeklo in Belgium were downsized and we announced the intention to close our production in May in Germany, foreseen in Q2 this year. The optimization of our industrial operations resulted in significant productivity gains. To give a few examples, the scrap generation was reduced by 30%, and the overall equipment efficiency improved further by more than 5 points over the year. Both indicators had a very promising exit rate, which gives us the confidence in our ability to drive further improvements in 2022. The simplification and streamlining of the supply chain across the group led to improved service levels, even with the shortage of components, cost disruption in the last month of last year. All these actions represent a structural long-term reduction of the cost base to make the group feeling and highly competitive. As you all know, these savings efforts are not sufficient yet to offset the current inflationary cost pressure. Raw material cost inflation increased significantly throughout 2021 and additional inflation will be felt in 2022 from the start of the year. And using this slide, the main indices affecting our raw materials were up some 40% for the right index relevant for fluff, which is a key component in our products and 70% to 80% for oil-based indices. The increase already happened midyear 2021 and since then it continue to rise. This is [indiscernible] for other raw materials such as glues, elastics and packaging, where there are no index-based escalators and price increases only occur as the contracts are renewed. Operating costs are up as well as the energy prices and its scarcity affected the manufacturing and distribution cost and also continuing supply chain disruptions. Let me turn now to the financial results. In 2021, revenues were down 1.5%. The promising news is that revenue performance improved throughout the year, and our year-on-year sales turned positive in Q4. Like-for-like revenues increased sequentially during the year, and there was a positive net balance of contract gains and losses in Q4 in Europe. Our margins were down to 8.5% despite the structural cost savings, which by themselves represent 360 basis points of margin improvement. I am confident that the vast majority of these benefits will stick and once the raw materials costs will stabilize, we will see these savings contribute significantly to the turnaround in our financial performance. We maintained strict control over working capital and focused CapEx on growth-driving investments. Net debt was down, thanks to the positive free cash flow and the Brazilian settlement. However, with the continued fall in EBITDA, our leverage ratio remains very high and up 4.2x. I now hand over to Peter to take you through the financial results in greater detail.

Thank you, Esther, and good afternoon, everybody. Before going back to the details of the full year results, let me dive into the last quarter. Revenue in Q4 grew close to 1% like-for-like, driven by 3% higher prices, more than offsetting a 2% lower volume and mix. And although there is some seasonality in the fourth quarter, we can see a clear quarter-on-quarter improvement, also considering the second half was hampered by supply chain disruptions. And this can actually also be seen in the year-on-year improvement since Q2. Now in Europe, Q4 sales were still 3% lower like-for-like, 2% reported, but we see the gap strongly reducing versus the start of the year. In Baby Care, and to a lesser extent, Fem Care, volumes were down. Supply chain disruptions continue to affect the sales in Q4, but the net gain loss balance has turned positive in the quarter, as Esther already indicated. In adult care, one of our growth drivers, volumes were well up. In EMEA, prices were up, leading EMEA sales to grow 7.5% in the quarter. North America volumes continue to grow, mainly in Baby Care, thanks to the contract gains made in the year. Looking at adjusted EBITDA bridge for Q4 on the right, we delivered a positive impact from revenue growth. We had another quarter of strong delivery on our savings plans with EUR 22 million visible in the P&L. Still the adjusted EBITDA margin decreased by about 4 points to just below 6% as a result of the unprecedented input cost inflation. The EUR 50 million input cost -- inflation costs that you see are almost double of what was incurred in the first 3 quarters of 2021, which illustrate the acceleration. The steep rise of these input costs since Q2 is increasingly finding its way in our cost structure, and we are taking that into account, of course, in our pricing and cost-saving plans going forward. Moving to the full year results. Revenue was still down 1.5% like-for-like, totally attributable to the first quarter that was still strongly impacted by the historic contract losses. In Europe, revenue was down 5.7%, besides a gradual improvement as indicated before. Volumes were lower in Baby and Fem Care linked to the tender losses where the balance is now turning positive and growth in Adult Care continued driven by continued progress and share gains in the retail and pharma markets, which more than offset softness in the institutional channel, where we sell to hospitals and government organizations, all of this linked to the pandemic. In EMEA, revenue was up 5.6% like-for-like on volume, mix and price increases across the main geographies. In North America, it was mainly volumes with contract gains in Partner Brands having its effect. In Central America, Mexico, the growth was slightly lower with Adult Care growing and in Baby Care, we launched the Pants product line. South America growth was strong, both on pricing and on volumes and where we launched the popular Turma da Monica brand. And in the Middle East, we saw mixed volume picture with growth in adults offset by contraction in Baby Care. ForEx was still negative, bringing total revenue devaluation to -3% and this on the devaluation of the Turkish lira and the Brazilian real. Adjusted EBITDA in 2021 on the next page came down 27% year-on-year, mainly as a result of the cost inflation of EUR 106 million, which we managed to offset to a large extent with EUR 75 million savings, both on operations and on SG&A. So inflation has hit us hard with EUR 86 million on raw materials, mainly oil-based derivatives, superabsorbent polymers, non-woven materials, polyethylene back sheets, but also elastics, glues and so on, and to a lesser extent the wood-based derivatives, mainly fluff. Operating costs went up almost EUR 20 million and reflects higher price for packaging, energy to run the plants and especially distribution costs. I will not dwell too long on the savings, as Esther already explained to you the strong momentum we have and EUR 75 million is a strong delivery, representing a recurring 4% reduction of our total cost base, and we expect to deliver additional reduction of the same magnitude in the coming years. If I now turn to EPS, first, staying on the adjusted level. The EBITDA decrease has been the major -- the main factor of the decline in EPS, where depreciation had no meaningful impact. Financial charges were up in the second half as a result of the refinancing of our debts that we did in the middle of the year. Adjusted taxes were up linked to the geographical mix of earnings and the consequences of an overall review of deferred tax assets. This brought the adjusted EPS to 0.07. Now as you know, the transformation of the company comes with the one-off costs. The restructuring investments in '21 were EUR 35 million, and these include both the streamlining of our SG&A and the optimization of our manufacturing footprint. And then we have a significant portion of impairments related to the idling of some production assets in review of our manufacturing footprint, but mainly the impairment on our Brazilian assets for EUR 96 million, which, of course, are to a large extent compensated by the EUR 80 million settlement we received on the Hypera acquisition in [ 2017 ]. Total nonrecurring cost was EUR 85 million, including EUR 121 million noncash impairments. As a result, also including the nonrecurring tax implication, total basic EPS was -0.76. Now while the P&L impact is significant, we have demonstrated a lot of resilience on the cash side as we maintained strict CapEx and working capital discipline. The nonrecurring cash impacts, which excludes the impairments was slightly lower than in 2020, reflecting a spreading over time of restructuring cash out. On CapEx, we reviewed maintenance schedules where this was possible without putting the business at risk and focus the growth initiatives to those that will make the difference, fueling our growth drivers in North America, adult care and baby pants, while at the same time, supporting the optimization of our manufacturing footprint, which is an essential cornerstone of our savings strategy. CapEx was at 2.8% of revenue. And if we correct for these payments, CapEx was actually only just below depreciation, showing that we're not structurally starving our assets. There was also a EUR 16 million inflow from working capital. Working capital at the end of the year was 6.4%, almost 1 percentage point lower than a year before. We managed to lower the trade receivable and DSO at now 4 days lower, and also payables are up, partly as an effect of the higher input costs. Inventory levels went up due to the higher input costs, but also in volume in order to create additional buffer to counter the supply chain disruption effects. Now with including the EUR 21 million cash -- tax cash out, we generated EUR 53 million free cash flow, so only 11% lower than in the year before, and that excludes the EUR 80 million Brazil settlement. Now turning to debt. We reduced net debt further this year by EUR 122 million from $848 million to EUR 726 million, thanks to the EUR 53 million free cash I just talked about and the EUR 80 million settlement in Brazil. Net interest payments were $24 million. This is lower than in the P&L, partly as the coupons of the bonds are only paid next year. And so you find the accrual in the noncash changes. Other financing income of EUR 80 million is mainly related to gains in the unwinding of certain hedge positions related to the local debt in Brazil. So net debt came down 40% to $726 million. Despite this, the leverage ratio is still too high and increased to 4.2x compared to 3.6x a year ago. This is entirely linked to the temporary contraction of our EBITDA, which we expect to see growing again once the full impact of the inflation will be offset by pricing and savings. Also, I'm happy to announce that we have come to an agreement with our bank lenders to waive the covenant tests in June and December this year and have reset the level in June 2023. Part of this agreement is that no dividend will be paid before July 2023. And in any case, the Board will propose not to issue a dividend for the financial year 2021. And on that note, I hand back to Esther for the outlook.

Thank you, Peter. Executing on the strategic agenda, we are actively pursuing investment opportunities for all our emerging markets. These activities will thereby be reported as assets for sale and discontinued operations going forward. Consequently, the 2022 outlook is focused on the core businesses only. Assuming the current inflationary environment persists, while there is considerable uncertainty and volatility, we expect the input cost inflation to weigh an additional EUR 160 million to EUR 170 million on 2022 cost as of Q1. We will price accordingly and the effects will build up gradually from the start of '22 and will continue into 2023, subject to the evolution of the inflationary environment. We plan to generate recurring cost savings exceeding those in 2021. EUR 60 million are planned to be generated in the core market and the saving momentum of 4% of cost is planned to continue going forward. So what does this mean for our numbers? Revenue is to return to growth with pricing, but also as growth drivers deliver. The adjusted EBITDA margin for the core market is expected to be sequentially lower in the first quarter and then the performance is expected to improve thereafter, as savings and pricing efforts are delivered quarter after quarter. We will invest in innovation and growth-driving projects as well as support the saving initiatives, bringing CapEx gradually to around 4% of sales, while at the same time, we keep a close eye on the market and will maintain a strict cash flow discipline. Just to finish, before Peter and I take your questions, a few words to conclude. In 2021, the raw material situation offset the benefits of our operational efficiencies and cost reduction measures. However, these are structural and the building blocks for turning around our financial performance are in place. In 2022, we will continue with the momentum started last year. We will aggressively pursue cost savings and continue to cut back SG&A to get below 10% of sales over time. We are implementing price increases as a result of the raw material cost inflation, and this will continue over the course of the year and into 2023 if the inflation proceeds. Operating performance actions to optimize capacity utilization, manufacturing and supply chain efficiencies will continue. And regarding the divestment of our emerging market positions, we will work to maximize the value from this and look for the best candidates to take these businesses forward. Timely divestment is key to strengthening the group's balance sheet. With all these actions in mind, I am confident in our ability to achieve our midterm targets and maintain a volume-driven revenue growth of 2% to 3%, bringing back our adjusted EBITDA margin to the 12.5% to 13.5% range and grow from there as we continue to make this company leaner. And finally, bringing net debt below 3x adjusted EBITDA with the expected proceeds of the divestments and 3x is reachable, even if only part of the divestments are closed by then. And with the full closure, it should be well below 6x. Thank you for your attention. Peter and I are now pleased to answer your questions.

Before we pass to the question-and-answer session, I just wanted to indicate that some people had requested to participate in the Q&A, for those people you should have the details in your mailbox, so you can connect. With that, I pass over to the operator.

[Operator Instructions] Our first question comes in from the line of Wim Hoste calling from KBC Securities.

I have 2, please. First, on pricing. Can you maybe elaborate a little bit on the dynamics of when contracts expire and you renegotiate them today, can you fully pass through the current raw materials inflation? Or is there some kind of clauses that are asked by your clients to maybe then allow for readjustments if and when raw material prices would soften again? Can you maybe elaborate a little bit on how contracts are structured these days in terms of pricing? That's the first question. And the second question I had was on inflation. There's the guidance for the core markets, EUR 160 million to EUR 170 million inflation. Can you maybe offer a little bit of quarterly breakdown? If you look at Q4 last year, there was a EUR 50 million total inflation roughly. Can you may be split that EUR 160 million to EUR 170 million up in quarters? And certainly, I'm definitely interested in your thoughts on Q1, how much would that be? These are the questions.

Wim, thank you for your questions. I'm going to address the first one on pricing, and I will ask Peter to elaborate a little bit more on the inflation for the core market. So your question on what is the structure of our contracts and whether we are capable to pass on price increases with inflation. There is no one answer fits all. We have different contracts in the different channels. Actually we have a portion of our business that is not in the contract, it's kind of a growing relationship with customers. We have a portion of the business that is linked to contracts. And typically, these contracts are the consequence of tenders and those tenders typically and these contracts typically last 2 to 3 years. And then there is a portion of business, especially the portion of the business that we have in the health care channel that these more contracts with institutions and governments and have a kind of a different dynamic. So the reality is that, that's why we are planning a safe approach. On the one hand, there is unprecedented inflation. So when I look back, what happened in the past, we need to go really way back to see available applications that we are seeing today. As we said during the presentation, between '21 and '22, our cost base is going to increase between 15% and 20%, and this is really unprecedented. We see pricing happening in the market. We saw in Q4 A brands that started to move their pricing and that creates space for retailer brands to also increase their prices. And we are now in discussions and discussing with the different customers in order to implement those price increases, which is not only like-for-like price increase, but also supported by a sequence of innovation launches, especially in the growth categories that will help then realizing and implementing the price increase. So your question is to the point that, the reality is that the phase approach is just because every contract is different. And in certain cases, we can just go ahead and implement the price after, of course, closing the negotiation and some others, we need to wait until the end of the contract and of course then renegotiate the contract.

Yes. And then your second question on inflation. Cost base, as we said, and as you repeated, is EUR 160 million, EUR 170 million up on the core '22 versus '21, after already having seen EUR 65 million on the core '21 versus '20. And that's linking back to that 15% to 20% cost base increase that Esther was talking about. Yes, we expect a further increase of the inflation in Q1 compared to where we are in Q4. That's reflecting all the to-date inflation that we have seen. We are also in the year assuming no softening on that peak inflation level, on the peak cost input levels for 2022. So these high levels, we assume that they stay in Q2 and onwards. So that's on the inflation, no relief that we saw after the different quarters. Obviously, as we said in the outlook, what will change is pricing and costs are going to step up over the following quarters, which means that our margins will improve consecutively quarter-after-quarter.

But is it fair to assume that the inflation in Q1 will be significantly up versus the EUR 50 million you saw in Q4?

I mean the total -- yes, it's going to be up versus -- if I look at the absolute pricing levels that we have, cost input levels that we have in Q4, that level will be higher in Q1 because, again, we have EUR 160 million, EUR 170 million higher inflation in 2022 versus 2021, and that reflects itself as of Q1. And equal way across the year.

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

A couple of questions from me. Firstly, for full year '22, can you give an indication as to what your likely finance costs will be given the covenant waiver, which I'm assuming cost you a little bit of money? Should we be thinking slightly higher finance costs in '22 versus '21, even with the lower debt? And then secondly, just thinking about those '23 targets, so 11.5% core EBITDA margin in '21. It sounds like your core EBITDA margins this year will be at least 100 bps below '21 levels. So that means that you need at least 200 bps of margin expansion in FY '23 to get to the bottom of your 12.5% to 13.5% range, which feels pretty aggressive. So any color you can give as to what the drivers of that margin expansion that you're expecting to see in '23 to get to the bottom of your range would be very helpful.

Thank you for your questions. I'm going to ask Peter to answer on the finance calls, and I will address the one on '23 target.

Yes. You actually already answered the question yourself, there's a limited cost related to the waiver that we have closed. So it's going to be slightly increased, but it's really limited.

And then related to the '23 target, yes, we will have significant inflation in 2022. But at the same time, we continue with our cost efforts and with our pricing efforts. Those are going to hit our P&L in a gradual way. We are talking about in the core business, EUR 60 million additional cost reduction in 2022. But of course, I mean, this is going to be happening gradually. And the same for '23, we are in a position to sustain this 4% productivity that we are talking about in '22. So that will be a big portion of margin improvement. And then as we implement pricing to fully offset the impact of inflation in margins and to get to the midterm targets. So I would agree it is aggressive, considering where we stand from, but we do believe that -- and we focus on the things that we control, we achieved cost and pricing. And of course there will be -- we need to continue monitoring the situation with the raw materials because it continues to be volatile. And to finish, which is an important part, is volume growth drivers because we need to consider that we have been seeing revenue declines since 2019. We were severely impacted in the first half of 2021. We are having a positive exit rate in Q4 '21, and we expect to continue driving volume growth very much focused on what we have defined as our strategic priorities, pant, adult and all the natural [indiscernible] solutions. So with these 3 elements, I am highly confident that we will -- we can deliver and we can get to the targets that we defined for 2022.

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

I also have a few. First question is on EMEA. On your EMEA sales, I think it saw a sequential improvement in Q4. Could you share with us the split between volume mix and price for this division? And in which regions did you see the highest growth for EMEA? Then second question is on inventory. I think it saw a record level last year compared to the past 3 years. So what were the main drivers there? And could you, yes, review if whether this mainly concerns finished goods or raw materials? And last question is on Russia. I believe you had a facility in Russia that manufactures a number of brands. And for -- I think for all of your 3 product categories is active there. I was wondering if you could share for which countries this plant manufactures these products?

Okay. So I'm going to start answering the Russia question, and I then will ask Peter to address your question on the Middle East and Africa sales and the inventory, the new drivers of the inventory. So in Russia, just maybe for you to understand, our business in the region, if I take Russian [indiscernible] is less than 5% of the total sales in Russia. You are right. We have kind of a local business we have planned near Moscow, in which we'll have localized production of almost the total product range that we sell in Russia. And of course, some of the raw materials that we use in that plant are not produced locally, like fluff [indiscernible] and we need to continue to monitor the situation. I hope that I answered the question on Russia and on -- and I ask Peter to talk about…

Yes. So your question on EMEA, in Q4 there was a big contribution on the growth coming from pricing because the acceleration, the inflation has started hit EMEA a bit faster than what we have seen in Europe and we've been pricing earlier. So there was a biggest contribution on that whole Q4 sales was actually from EMEA. There was a slightly negative mix, which was more linked to the country mix than it has been to the product mix and volumes have also been up about a point. So that's how it splits. And then I think you had a question on inventory levels for 2021. So just give me a second on that one. Yes. So if you look at '21, inventories have increased with -- on 2 levels. First of all, the higher input cost. So the cost of commodity has gone up in the year, but it's also gone up in volume in order to -- and especially near the end of the year when we started to face ourselves and the industry started to face disruption in the industry. So we increased safety stocks, and we postponed, if you want, some of the opportunities that we have on our inventory to secure supply where we could. So the opportunity on the inventories have not been completely captured, but remains. And now we've embedded that in our plans for 2022. There is certification, SKU rationalization projects that we now will be rolling out as soon as we get through the disruption phase. And that's also why we have an improvement target in our [ DIO ] for 2022, which is important. But on '21, it's both the cost inflation itself as higher stocks to secure supply.

And maybe just on EMEA, one question I had was on which region specifically, also taking into account the sale process of certain of your -- certain parts of your business? I was wondering if you could add some more color on where you saw, let's say, the biggest growth, so regionally?

Yes. First of all, on the pricing side, we've seen that across many geographical, I mean, the slight deviation, but it was quite consistent across. If I look at the total sales, it's especially being Mexico and Turkey with the best performance, the highest performance in the quarter.

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

My question is on the EBITDA bridge for 2022. I guess you have a starting core EBITDA of about EUR 160 million. And then you've guided for cost inflation at EUR 160 million to EUR 170 million, offset by EUR 60 million of savings. So I guess, very simplistically, there's around EUR 100 million gap that you need to make up, I presume largely by pricing. Have I missed any other offset, is the first part? And then the second part is, if not, then that implies that you need to take around 7% pricing at the group level to recoup that EUR 100 million. And is that a reasonable estimate for this year? Or is it going to be lower than that, the pricing?

John, thank you for your question. Yes, I think you math are correct. So we start from a level of profitability. We are heavily hit by inflation, and we will recover a portion of this with cost and a portion of this with pricing. And we are planning to price accordingly and continue to monitor not only in '22, as I said, but also in '23. So our cost efforts and pricing efforts will continue in '23 and of course they will depend on the inflationary situation that remains extremely volatile. So we continue to monitor that and [indiscernible] cost and pricing. Maybe because you asked about the 10% of the pricing strategy is -- we have a different thesis, we have a very surgical approach differentiated by region and category. As I said before, we have different type of contracts and we have a really surgical approach with a clear plan to execute that we offset inflation over time.

The next question comes in from the line of Anna Murray calling from ICG Asset Management.

First question from me is, clearly given the pressure on the business from raw material costs. Have you had any discussions with the rating agencies? Are you expecting any pressure on your ratings through the year? And then I've got a couple more, but maybe we start there.

Yes, maybe I'll take that one. We -- of course, we keep a very open and constructive debate and communication with our rating agencies. I've been sharing, of course, the plans that we have. I'm very confident about the plans to reach the target for '22, '23. And I'm sure they see the different elements that we're feeling very clear about with them as well.

The second question is on, I wondered if you could give an update on on-time deliveries in Q4. Presumably, you continue to see some supply chain disruptions. So was it similar levels to Q3? Did you see additional disruption, particularly in Europe?

Thank you for your question. So we are -- there is clearly an unbalanced situation between supply and demand, and we've been suffering from basically scarcity of raw materials, but not only on the scarcity of transportation needs, starting pretty much the impact in a meaningful way from the last part of Q3 of September. So we had some hit in Q3, a significant impact in Q4. It will -- this situation will continue throughout Q1, and we expect that we have to plan to re-establish our level of service at above 98%, which is our target effective from April. But we continue to see a difficult situation in Q1.

Is that something that's common across the industry? Do you know how your peers are performing on that kind of metric?

I cannot mention the exact level of performance. But when I go to the stores, I see out of stocks everywhere. So I would assume that it is pretty consistent and the disconnection between supply and demand and the challenge with transportation [indiscernible] across the industry.

And then one final question for me. I noticed that the RCF and the TLB maturities, it looks like they're 2024 with an optional extension subject to conditions. I just wondered if you could clarify what the conditions are for the extension to '26.

Sorry, could you repeat the question because I didn't -- there was something on the line. I couldn't get it.

That's fine. The RCF and TLB maturities, as I understand it, they are to 2024 with an optional extension to '26. I just wondered if you could mention or clarify what the conditions for the extension to '26 are.

We will rollover, I mean, there's no -- we will be -- it's indeed till '24 with an extension to '26 to roll them over at similar conditions, and we have to apply for that and discuss that early next year to do that. We cannot obviously disclose much more details around that, but we'll extend it in the course of next year.

And just to clarify, is one of those conditions meeting the maintenance covenants on the TLB? I guess [ PLC ] waived them right until June '23, if you need to start discussions early next year for that extension to '26. How does that play into those discussions?

Well, I don't think it does really directly play in those discussions. I mean, we have indeed reached an agreement on the waiver. We will be executing our plan and delivering into our plan, and that will be the base of simply extending our loans.

And in a downside case, are you -- have you got plans to apply asset disposal proceeds towards paying down the TLB? Or is that not something you've considered yet?

We have a divestment -- I think we have a divestment strategy, which is -- which we're implementing. And as Esther said, we're rolling it out and having, mobilize teams and projects to get speedy rollout of all of that, which is not really linked to [indiscernible].

The next question comes in from the line of Charles Eden calling from UBS.

Two questions for me, please. Firstly, you mentioned in the press release that your portfolio reorganization is aimed to be finalized at the end of 2023. However, that obviously leaves a slight disconnect between that time line and the waiver in debt covenants, which are through to the end of '22. So I guess my question is, how confident are you that you will see some material proceeds through the door before the end of '22? That's my first question. And the second one is on the revenue trajectory in the core markets for this year. So you mentioned sequential improvement in volume trends through '21 with some net contract wins by the end of the year. So am I correct to infer that you would expect positive volumes in '22? And then linked to that, if we look at pricing to follow-up on one of the earlier questions, could you confirm that you're looking to implement mid to high single-digit price increases in the core markets? Did I hear that correctly?

Yes. Maybe I can take question number one, and then Esther can take over on the others. I think your first one was on the portfolio and then the divestments related to the waiver. We are in a very volatile environment with unprecedented cost inflation, supply disruption, geopolitical evolutions, and we have a very important turnaround agenda to drive with restructuring that costs in terms of one-offs and it's not a good idea to pause those at any time with pricing. That takes some time, as Esther said, to implement in some parts of the business and a strategic divestment agenda to execute at the right time and the right price, which is, of course, the high priority that we put on that. So basically, with the waive process, we make sure that we have the operational flexibility to drive all of that agenda to a max value in any envisageable scenario. So I'm confident that with what we have now on the table, we can deliver and execute our agenda on all of those fronts in different assumptions on the volatility around us.

And to your question on the pricing, yes, we expect revenue growth in both Europe and North America, our core market. We are planning to grow volume, mostly in our strategic categories in pant and adult, taking advantage of the market growth, but also the opportunity to continue to drive share gains. And that will drive not only volume, but value because these are categories that are more premium and have in general better margins. So there will be a good balance between volume and pricing. But yes, in a nutshell, we expect to have obviously volume growth and price in all the format.

And if I could just follow-up on the first question, Peter. I guess maybe I'll try to be a bit blunt to my question. Are you ruling out the need for rights issue, I guess? Because obviously, on that time line, if you don't get a perceived "good value" for those assets that are under strategic review, would you be willing to not sell them, and therefore, you're going to be in that same position of risk on the covenants in '23, given the waivers at the end of this year? I guess I'm just trying to get a sort of answer to that question.

Yes, we have a clear plan consistent with our strategy. And basically, we -- as I said, we've been rediscussing to make sure that we have the operational flexibility to deliver on all of the elements that we have, also if some of the elements don't materialize in the way that we have initially foreseen them. That's exactly what we want to make sure and that we -- again, as I said, we're executing an important restructuring, which we want to continue because it works. We want to have the divestments fast, but also at the right price at the right time. And that's exactly why we made sure that we have the operational flexibility to be able to do that.

Yes. And just to complement on that, we are not planning right now a rights issue. I mean we are very focused on implementing our strategy, and we believe that we have the typical amount of space to get there operationally.

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

You mentioned 2% point overhead for the, let's say, emerging market activities. If you would dispose them, would that mean additional restructuring charges of, are these restructuring charges then to take care for this overhead cost included in the guidance you gave at the Capital Markets Day? That's the first question. And then on this supply chain disruptions, you actually said, okay, it is still going to hit your business in the first quarter. What makes you so sure that that will stop in April?

Okay. Let me start with the second…

And maybe on that one also, could you tell us what the service levels were in the fourth quarter in Europe?

So I'm going to start with the second question and will ask Peter to talk about the restructuring charges. So typically, serving mainly big retailers, our service level target is to be above or around 98%. And our service level in Q4 went down by around 10 points showing the [indiscernible], which is not good. And this is slightly -- slowly improving in Q1, in January, but slower than expected in the sense that the disruption is still there. I don't think I have the guarantee that this is going to go away by April. But right now, considering the current situation, we have to plan to bring our level of service back to the 98% level by April. And one thing that we are doing also is making our supply chain more flexible. So we are, on the one hand, Peter mentioned that we are increasing our inventory levels, both on raw materials and finished goods to deal with potential unexpected situations. And we started already late last year, really offset any possible disruption. And then we are also flexible [indiscernible] our supply be -- working very hard to diversify our sourcing. We have changed also our processes to qualify our new suppliers to make sure that we have better and -- more and better alternatives to deal with what can come during this year. So I think I have a really good level of confidence that we will establish the level of service. However, the situation needs to continue to be monitored because it is extremely volatile.

And then to your other question then on the overhead on the emerging markets and what I announced in December, the short answer is yes. They are included in the expenses that we have mapped out over 3 years in December. So they include both what we need for the capacity utilization, the operations footprint from an overall restructuring and sharpening of the structures, but also to get that overhead restructuring executed.

And then maybe final question is on this inflation cost. You guided from EUR 160 million to EUR 170 million for the core activities. Previously, I think you gave a kind of guidance of EUR 300 million for the group, for, let's say, '21, '22. Is that still the same? Or has this EUR 300 million gone up actually?

No, it's similar. If you -- the guidance that we do is on the core. So that's why these numbers are smaller. But if you add core, noncore, it's the similar levels and the assumptions have not materially changed from that moment.

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

I just wondered if you could talk a bit through the drivers of that tender improvement in Europe with you now back into positive territory for the first time in a very long time, I think, and how you anticipate that positive contract win-loss ratio evolving through the course of this year and what the drivers behind the improvement are?

Thank you for your question. So it's a combination of things. First of all, making sure that we can offer our customers the right innovation cadence. Second of all, making sure that we have the right level of quality and service. And third, that we have a competitive pricing. We talk a lot about pricing, but this is only one parameter. I think there are many others. And the reality is that Ontex was very good at that for many years. And as the company started to expand to different geographies and different business models, I think the company lost the focus on the basics. And what we have done is not rocket science, we just go back to the basics and make sure that we have an innovation and product pipeline that captures the market trends. Just to give you an example, there is a very strong trend of migrating from diapers to pant everywhere. This is a big opportunity to create value on better margins and Ontex spotlights into that trend. We developed a product, but then we didn't have enough capacity. We finally have catch up, and we have now a really best product in the market for retailer brands, and then we have added capacity everywhere, so just to give you an example. So it's making sure that we can -- we offer all the right products, that we have an efficient supply chain and that we have a competitive cost. And yes, we have made some investments during 2021. Peter mentioned that in Europe, our pricing was, for the total year, slightly negative, which is a combination of some price increases in certain countries and segments, but also some price investments to recover contracts that have been lost. I do -- I am confident. So when I look at 2022, it's not that 100% is done, but it's almost done. I mean, basically, when we talk about the positive net contract gains and losses expected for '22 and it's mainly the work that we did do in '21, and we do expect a positive net gain. And then we will need to continue to work during '22 to continue this trend towards '23 and beyond.

We have another question coming through from the line of Anna Murray going from ICG Asset Management.

Just a couple of clarifications very quick. The first one was, can you give any guidance on branded price increases through Q4, Q1? I think you guys [indiscernible] that you have started to see some coming through. I just wondered if you could give any update. And then the second one was on your service levels. Am I right in thinking you gave us the EMEA numbers, but not the Europe numbers. Would you mind just updating on Europe service levels as well, please?

Okay. So thank you for your questions. So on the -- so if I heard you correctly, the first question was on the branded price increases from the branded business, which basically is the business that we have outside Europe. As Peter mentioned in his presentation, we have -- we implemented price increases during 2021, especially in Q4, and we had a significant impact of the price increases already in Q4 and more is coming in Q1. So there, we will try to fully offset the inflation. I don't know if that answers your question?

Apologies. I still, and perhaps I'm wrong on this, I thought on the December 15 update call, you said that your branded peers in America had already started to put through price increases. And on that basis, you were confident you would also be able to start putting through price increases. Can you give any update on the pricing environment in America and Europe?

Okay. So we see pricing happening pretty much everywhere. Or I would say slowly happening pretty much everywhere. And it's a combination of price increases like-for-like, but also a mix improvement as certain categories grow more than others, that also drives price in the market. So we see, on the one hand, that like-for-like price increases, like same products is all at a higher price. But also we see an acceleration of what we call the premiumization. We see pants grow in an accelerated manner, like the premium, the more premium products growing more than basic products. And this is, of course, the strategy of retailers to try to drive pricing and more value. And this is happening everywhere. Yes. And I think we started to see the pricing happening in America, in the Americas sooner than Europe also because the impact of the raw material inflation was a factor and heavier in the Americas. But we see also crisis happening in Europe. And I mentioned typically how it works is the A brands drive the pricing, that creates additional space for retailer brands to increase. And then, of course, we need to continue to work with our retailers to [indiscernible].

Is there any terms we could quantify the kind of price increases the A brands are putting through at the moment?

Yes, I think it varies by category and by -- yes, I don't think we can disclose. I don't want to comment on peers unless we're speaking -- and it's too early. I mean we typically market data, we will have a better view on the market overall as we report Q1 result because we will have data for full Q1. Right now we only have department data. But all in all, I can say that the pricing is moving in basically all categories and all geographies. But there are differences between categories and geographies. On the service level, I think the question was whether the numbers that I mentioned were for America versus -- no, the number that I mentioned was for the company itself. And we've had service levels both in the Americas and also in Europe. The situation is very similar.

We have another question coming through from the line of Fernand de Boer calling from Degroof Petercam.

Yes. I have one additional question. I can understand it's quite tough times for you with all of this raw material and inflation. Do you see any competitors going out of the market because of this, going bankrupt or on the local, maybe local markets?

Nothing that might not be public, no. We don't see -- could that happen? Maybe in the future, we need to consider that, especially when we talk about the retailer brands, we feel that the market is still very fragmented. We have a lot of -- from the supply perspective there, we have a lot of manufacturers who basically play in one country or in 2 or 3 markets. So I do believe that -- I mean, this situation, if it continues, could lead to maybe consolidation of the industry. But for me, what I am focused on improving our own performance, and that's what matters for us. I don't want to count on anybody going out of the market. Now what I didn't mention in the call was the opportunity for us is that inflation continues to rise and we see price increases. The reality is that consumers are being heavily impacted by inflation everywhere. And I think this represents an opportunity for retailer brands because in the end, we are offering a similar level of performance and quality at more affordable prices. And I do believe that this could lead to an acceleration of the growth of retailer brands versus maybe the more premium brands. But that's yet to be seen. This is happening over in Europe,. not yet in the U.S. And I believe that there is an opportunity there as well.

If I may follow-up on that because when we did enter into COVID, your volumes were initially under pressure because people moving more to A brands, et cetera, and down [indiscernible]. And now -- but you don't really see the [indiscernible] already coming in.

No, I think that the reason why we were impacted is that there were 2 factors that play in the COVID situation. One is the institutional, so the business that we do in the institutional channel. So hospitals and nursing homes, we are kind of overrepresented in that channel. And as the level of occupation in elderly homes decreased significantly, we were hit because there was less consumption. So consumers basically migrated from consuming in institutions to consuming at home. And we historically have been overrepresented in the institutions compared to retail. We have closing the gap. In fact, we have seen double-digit growth of our adult category in retail, and we continue to leverage that. And the second factor that impacted our sales was the shift from in-store to online because the stores were closed, consumers were shifting to purchasing online or even to more convenient type of stores, not going to the big [indiscernible] where retailer brands are very strong, but more into the smaller stores like pharmacies and others. And again, our market share in the big [indiscernible] is higher compared to the small stores. Now -- this is now leveling up, consumers go back to the stores, and we see a shift [Audio Gap] in institutions are slowly getting back to the levels of pre-COVID, not yet there, but the expectation is that they will get there.

Thank you. That was the final question in the queue. So I shall hand the call back across to yourself for any concluding remarks.

So thank you so much. Before closing the call, I would like to make a few remarks. First of all, the turnaround with the building blocks is in place. We continue to work hard on the areas where we have control, we cannot control raw materials, but we can control the pricing, the level of service, the innovation. We continue to focus on structural cost reduction and also as part of that, making sure that we continue to get to best-in-class operating and production efficiencies. The raw material situation will stabilize at a certain point. And when this will happen, we will see the full benefits of all turnarounds and all the things that I just mentioned will bring significant financial upside to our P&L. Thank you for attending the call and for your questions, and goodbye.

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