Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Hello, and welcome to the Ontex Q2 and H1 Results Call. My name is Jazz, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, Geoffroy Raskin, Vice President, Investor Relations, to begin today's call. Thank you.

Good afternoon, everyone, and thank you for joining us today. Before I pass on to our CEO and CFO, let me remind you of the safe harbor regarding forward-looking statements. I will not read them out loud, but I assume you will have duly noted them and read them. I would also like to repeat that since 2022, we now present our emerging markets as assets held for sale and discontinued operations following the strategic review end of last year and our subsequent plans to divest this. And as you know, we made progress. Our P&L going forward will thereby only encompass our core markets as continuing operations. And in the meantime, we will continue to provide you with business information for both continuing and discontinued operations and will make clear throughout this presentation, what scope we cover. And now let me pass over to Esther, our CEO.

Good afternoon, everyone, and thank you for joining us today. Our turnaround is well underway, and we are delivering on many of the strategic priorities we set last year. I would like to take this opportunity to thank all Ontex employees who are working tiredly to turn around our group. Thanks to these efforts, Ontex is delivering in the areas where we have controlled even if this improvement is not yet visible in our results, and our adjusted EBITDA has continued to be severely impacted by the unprecedented cost inflation. The strategy is delivering excellent volume and mix growth, driven by new customer contracts. Our strategic growth drivers, pants, adult and North America and a favorable market momentum. Our actions to reduce the group's structural cost base and bring down our breakeven point continues to deliver with a further 4% cost reduction in H1. However, inflation continued to rise impacting our overall cost by 20%. And more specifically, raw materials were up 30%, with an impact on EBITDA of some EUR 180 million in the first half. Even if we see some signs of stabilization in the index evolution, other costs such as energy and wages are still increasing. Against this backdrop, we have continued to increase our prices to reach 8% on average in the first half. Pricing actions are continuing as we still need to close the gap compared to the cost increase in our products. On the portfolio side, the divestment of the Mexican business for EUR 285 million represents a major milestone in our strategy to shape the group. The proceeds from the sale will contribute to reducing our net debt and will strengthen our financial structure. I am convinced that Softys with its 40 years of experience in the personal hygiene market in Latin America is very well placed to take the business forward, benefiting from the talent and expertise of our team in Mexico. We expect the deal to close by the beginning of 2023. So let us now look in more detail at the results for the first half of 2022. Like-for-like revenues for the total group were up significantly by 15% to EUR 1.2 billion with our core businesses up 12% to EUR 781 million. Our adjusted EBITDA margin was 4.3% for the total group and 5.1% for our core businesses due to the impact of cost inflation, which I will come back to in a minute. The group's net loss of EUR 177 million is negative and negative EPS was impacted by 2 noncash one-off impairments totaling $144 million. First, our decision to ring-fence our Russian business as a standalone operation; and secondly, the consequences of the divestment of our business in Mexico. Peter will come back on this. Regarding the financial structure of our company, the drop in the adjusted EBITDA, an increase in net debt to EUR 826 million results in a higher leverage of 6.8x. On Slide 6, you can clearly see how we have steadily turned around the top line since the beginning of 2021. H1 2022 is the highest revenue recorded by Ontex in the last 5 years, built on 5 quarters of sequential growth. The 15% like-for-like growth in total revenues was driven by a 7% increase in volume mix as well as an additional 8% increase driven by pricing. And this trend, in my opinion, is very encouraging. This brings me to Slide 7 and a bit more detail on how we are delivering the 7% volume and mix growth for the total group. The overall market is growing and retail brands are gaining share, particularly in baby pants and in Feminine Care as consumers look for more cost-effective alternatives to A-brands. Moreover, Ontex is outperforming the retail brand market in most categories, thanks to customer wins and the momentum of our 4 strategic growth drivers. Our penetration in the North American market continues to grow, resulting in double-digit volume growth in H1. And from now on, we will benefit significantly from the startup of a new production facility in North Carolina. Baby pants grew very strongly double digits based on our renewed product design and a solid growth of retailer brands. Adult Care is also delivering significant volume growth with up solid single-digit in H1. And we also see growing interest for sustainable and natural solutions with double-digit growth in organic, cotton-based baby and Fem Care products, and we increased the recycled content in our packaging. All these product growth drivers fuel volume growth and improve our mix as these categories have more added value and higher price points. In parallel to restoring top line growth, bringing down the group's structural cost base is key to the turnaround. We have delivered EUR 36 million of cost savings in the first half, which is consistent with our objective to bring the group's cost base down by 4% each year. Operating cost savings were significant. We continue to reduce scrap rates and improve operational efficiencies, while benefiting from the footprint optimization in Europe. We also see grand contribution from design-to-value innovation. This is where we renew the design and composition of our products in collaboration with our suppliers and customers to reduce the cost while preserving performance and quality for the end consumer. On the SG&A side, we have been focusing on offsetting the impact of inflation after the restructuring efforts, which led to a solid net reduction last year. In 2021, we set the target to bring down SG&A spend to a maximum of 10% of revenue, and I am very pleased that we have already hit the target in H1, down from more than 13% in 2020. In our core markets, we have achieved even better results with a 4.6% cost reduction in H1 and SG&A over sales ratio of 9.7%. The cumulative savings since the start of 2021 now stand at EUR 110 million, and we expect the momentum to continue in H2 and in 2023. These cost savings will stick for the long term and will be a significant driver to the group's future profitability and value creation potential. However, in the short term, these are not sufficient to assess the extent of input cost inflation. On Slide 9, you see the extent to which the raw material indices have climbed since the beginning of 2021. The increases of the main indices now range from 40% to as much as 80% over the past 12 months. And we have seen further increases in 2022, especially for fluff and SAP, which have impacted our costs in Q2 and overall raw material cost, as I said before, were up 30% year-on-year. Whilst we have seen early signs of stabilization in the industries and even some reduction outside Europe, the increase in energy, transportation and other costs represent a headwind impacting our distribution and transformation cost significantly. This is why pricing is so important for Ontex. On Slide 10, the chart illustrates the steady ramp-up of our pricing momentum for the group as a whole from the negative trend in 2020 and the first half of 2021 to plus 7% in Q1 2022, plus 10% in Q2 with an exit rate of 12% in June. Obviously, this is not enough as our margins show, so we will continue to roll out further price increases to help offset the raw material costs that remain at an extremely high level. Slide 11 gives us a summary of how our EBITDA evolved in the start of 2021. On the left-hand side, you have the overall picture of how adjusted EBITDA has evolved over the last 18 months. The blue line represents the net impact on EBITDA between the underlying value creation ingredients and the net cost inflation in red, which clearly, the net impact remains very negative. The gap has stabilized, and we expect this gap to continue to reduce as net cost inflation level is off, pricing flows through and underlying value creation accelerates as we continue to execute our strategic plan. The other 2 bar charts break out in more detail the moving parts of value creation drivers and cost inflation. The middle bar chart in green illustrates the underlying value creation with a run rate of around EUR 30 million per quarter in 2022. While cost reduction measures delivered consistently since 2021, the growth in volumes and mix marked a significant change in 2022, as you can see, and we intend to keep this pace going forward. On the right-hand side, you see in the bar chart in red, the evolution of pricing against the unprecedented cost inflation. And you see that we have steadily increased our prices in the face of higher and higher cost inflation. However, we are still behind, so we will continue to increase prices to catch up. I will now hand over to Peter, who will take us through the Q2 and H1 financial results in more detail.

Thank you, Esther. We're in -- Esther primarily focused on the H1 results for the total group. I will focus on the reported P&L numbers of core markets in Q2 and the cash implications on the group by June. On Slide 13, you'll find the key figures. This confirms the double-digit like-for-like revenue growth for total group and core markets and shows a sequential improvement versus Q1. Pressure on EBITDA margins increased slightly in Q2 versus Q1 as a result of further raw material and other input cost increases only partly offset by the profit gains from pricing, mix, volume and cost reduction programs. Net debt remains under strict control, and we improved it compared to March with free cash flow generation. But with the decrease in operating profit, our leverage has increased to 6.8x. When we break out the Q2 revenue in our core markets on Slide 14, we see how the 10% like-for-like revenue growth splits half in volume and mix and half in positive pricing. Q2 core revenue grew 3% compared to Q1, and this marks as Esther said, 5 consecutive quarters of sequential growth. We also benefited from a foreign exchange tailwind of plus 4%, taking the overall core market growth to 14%. The volume growth was driven by retailer brands gaining traction in a solid underlying market and Ontex outperforming above that with contract gains in Europe and North America. The momentum of pricing is going well, growing month after month with 5% in the quarter, up from 2% in Q1 and with June already marking 7% pricing. Further price increases are planned in the coming months. The momentum is particularly encouraging when you look at the pie chart in the middle of the slide with both Baby Care and adult posting solid double-digit rates of revenue growth and this primarily impacts. As Esther highlighted, these are the growth drivers we invested in through innovation and capabilities. Q2 revenue in North America was in line with Q2 and increased double digit for the half year. Turning to Q2 adjusted EBITDA for core markets on Slide 15. We see the very significant and full impact of the unprecedented input cost inflation of EUR 76 million. The total cost base is up about 25% in Q2, driven by higher indices, but also by higher energy and distribution costs as well as wage inflation. Our own distribution and transformation costs went up as well. Costs have further increased versus Q1, mainly in our core markets actually in Europe with the impact of the geopolitical events. Against that, we delivered in the quarter, almost EUR 50 million of increased profits from areas that we control from volume, mix, pricing and cost savings, which together with more than last year's EBITDA in Q2. We continue to consistently deliver on our cost-saving programs as we did over all previous quarters. And as Esther pointed out, the pace is higher in core markets, where we expect to deliver more than EUR 60 million in a year. Operating savings focused on manufacturing footprint review, operational efficiency and design to value and a strong cost containment in SG&A to more than offset inflation, allowing to drop SG&A to 10% of sales. As a result of that, adjusted EBITDA in Q2 drops to EUR 19 million with a margin standing at 4.8%. What I want to make clear is that core markets are at a different point of the margin recovery cycle than our emerging markets. Inflation hit earlier in emerging markets in H2 2021. The rest, it accelerated in core markets from Q1 to Q2 this year in light of the geopolitical context. Pricing has been initiated earlier also in emerging markets on our branded business there, whereas pricing in core markets takes longer and is still very much ramping up. As Esther said earlier, our cost reduction measures are structurally bringing down the group's cost base by 4% each year. This and mix improvement with the strong volume growth in baby pants and Adult Care will drive value creation further. And that underlying value creation together with more pricing to come will eventually more than offset the cost inflation. Looking at the bottom half of the P&L for the first half year. Ontex's EPS for total group fell to a negative EUR 2.08 per share. This is explained by 4 factors: first, adjusted EPS from continuing operations decreased from EUR 0.27 to minus EUR 0.14 as a result of the lower EBITDA compared to 2021, positive tax impact and a minor impact of slightly higher depreciation and financial costs; second, the nonrecurring costs required to optimize the manufacturing footprint in Europe totaled EUR 6 million; third, our decision to ring-fence our Russian business as a stand-alone business serving only local essential products and in full compliance with European sanctions resulted in an impairment of EUR 84 million. And finally, to add to this, the loss from discontinued operations, while the business result was positive there and is improving sequentially with sales growing quarter-over-quarter and margin improving also from the low point in Q4 last year, onetime elements resulted in this net loss of EUR 72 million. These onetime elements consist of EUR 9 million mostly restructuring charges, mainly in Ethiopia and a noncash valuation impact from hyperinflation in Turkey. And on top of that, we booked a noncash impairment on the Mexican activities. This was triggered by the reverse carve-out of the Tijuana plant, which remains in core markets to support the growth in North America. Turning to cash. For the total group on Slide 17, with free cash flow negative in the period at minus EUR 59 million, starting from EUR 49 million absolute EBITDA for the total group. There is a slight increase in CapEx versus H1 '21 due to continued momentum of investment in our strategic growth drivers. The ramp-up of the new U.S. East Coast plants, efficiency projects throughout the group and innovation. However, we're still keeping a strong discipline in optimizing also this CapEx with 2.3% of revenue so far likely to increase in H2. CapEx, including lease payments, still exceeds our depreciation, securing our investments in strategic growth and cost reduction initiatives. Working capital mix increased by EUR 34 million, and this is mainly due to 2 factors: first, revenues were 12% higher in Q2 compared to the last quarter of 2021. And the difference is even more pronounced in the last month of the period with volumes up, raw material inflation impacting inventories and accounts payable and higher pricing affecting the accounts receivable. And secondly, we're still keeping a security margin in our raw material inventories to ensure production momentum and flexibility in a market where there are still supply constraints. And finally, it's important to note that the free cash flow turned positive in Q2 as a result of a working capital inflow. Net debt totaled EUR 826 million at the end of June, up by EUR 100 million on December due to the negative free cash flow, which could not offset the financing expenses. Compared to the end of March, that came down as we managed to reduce the working capital needs after an accelerated level of demand in March. It will come down significantly after the closing of the Mexican divestments, which will allow us to reduce gross debt with EUR 220 million term loan as a priority. This is the debt that entails the covenants for which the next test is foreseen mid-2023. Looking at the remainder of the debt, it is important to note also here that the main component is the EUR 580 million bond at a 3.5% fixed interest rate and maturing in 2026. On the Mexican divestments, as you are now aware, we reached a milestone agreement with Softys to sell them the Ontex business in Mexico and related exports to regional markets, including the factory in Puebla. The business generated EUR 308 million sales in 2021. The plants in Tijuana, Mexico remains within the Ontex portfolio as an integral parts of Ontex's North American supply chain footprint. We aim to close the transaction by early '23, but it is, of course, subject to the customary conditions, including the applicable merger clearance approvals. The Mexican business is being sold at an enterprise value of MXN 5,950 million or approximately EUR 285 million at current exchange rates. This represents around 10x the EBITDA over the last 12 months. It includes a deferred payment of EUR 500 million spread over a maximum of 5 years. And the aggregate net cash proceeds after the impact of taxes, transaction expenses and balance sheets adjustments are estimated at approximately EUR 250 million, of which some euros -- of which some EUR 25 million deferred, and EUR 225 million at the closing. And as said, this will be used to reduce debt. And on that, I will now hand back to Esther for the outlook.

Thank you, Peter. So regarding the outlook now, the uncertain geopolitical and volatile macroeconomic environment means visibility still remains low, provided that the market momentum persists and inflation and the pressure on commodity and energy prices does not increase further. Ontex specs for the full year 2022. The revenue for core markets and for the total group, including discontinued operations to grow at least 10% like-for-like based on a positive market momentum and continued gradual price increases. The adjusted EBITDA margin for the next quarters to sequentially improve for both core markets and for the total group as additional pricing is passed through, cost inflation gradually stabilizes and structural cost reduction measures continue to deliver. The adjusted EBITDA of core markets to be within EUR 100 million to EUR 110 million range, while total group adjusted EBITDA is expected in a EUR 125 million to EUR 140 million range. Cash flow discipline to remain a focus with leverage to reduce by year-end from the current 6.8x as working capital over sales normalizes and CapEx gradually increases to 4% of revenue in H2. So to conclude, we have delivered solid volume growth and favorable mix driven by our focus on our strategic growth categories turning around the top line trend. We have an excellent momentum in reducing our structural cost base and have made 4% savings this year, building on what we achieved last year, and I expect this trend to continue in 2023. On the portfolio side, we have hit a major milestone with the divestment of our Mexican business, and we will now focus on closing this rapidly and moving ahead on the other divestment projects. Our immediate priority is now to accelerate our pricing execution to offset cost inflation and to restore our EBITDA margins. Thank you for your time. Now Peter and I will be pleased to answer your questions.

Thank you, Esther. Thank you, Peter. So we'll move to the Q&A. [Operator Instructions] In case of time constraints, contact the IR department, it is me. Over to the operator.

[Operator Instructions] The first question comes from the line of Karine Elias from Barclays.

I had a couple, if possible. I was just hoping you could actually give us some guidance on working capital. So what should we expect in it to? Obviously, sales have been stronger as well. Should we expect a neutral working capital for the full year? And then secondly, you obviously mentioned a leverage reduction. Any particular targets for you and based on your EBITDA currently?

Thank you, Karine, for your questions. I'm going to defer to Peter.

Yes. All right. So and I'll combine them in one answer, if you don't mind. The -- on leverage, as I said, we've been guiding leverage to go down from where we are right now by the end of the year. We might be somewhat prudent in that statement as we expect the last 12 months EBITDA by the end of this year to be slightly higher than what we have it right now. We are strongly focusing as Esther said, on improving that EBITDA based on the structural progress that we are making. The top line turnaround of 15% strong volume momentum that we expect to continue considering the strength of the retailer brand segment and our own strength above that. 7% pricing. If I talk about the core already in place at the end of June and further accelerating over the next months, core savings on track, seeking to exceed the total savings targets for the year. And finally, as some gradual stabilization of some input costs that we expect in Q4. On the forecast -- on the -- sorry, on the free cash, there's a number of further initiatives we're taking. And admittedly, there's also a level of uncertainty on that, which is why we are a bit less specific on what we guide on that level. It depends on a number of factors. If I go one by one, we control CapEx very carefully. This year-to-date, we are 2.3% still investing in the growth initiatives and the saving programs that we are delivering. We expect this to go up in the second half of the year, but we will, of course, be managing it very closely in view of our cash situation. Nonrecurring cash outs is expected -- in H2 is expected to be similar as H1 and will be below the plan that we have been putting forward earlier. So also there, we're limiting it to what's absolutely needed. And then on the working capital, on your question as well, there's many moving parts in current context. First of all, it depends to some extent, of course, on the revenue growth that we continue to see in the remainder of the year with the volume and certainly the further pricing, which will have its impact on the working capital. And it also depends to some extent on the extent to which we can deploy and that we want to deploy all the initiatives in the inventory. As I mentioned, we are taking some caution on the inventory levels given the supply constraints that still exist in certain categories, and that allows us to grow to the level that we are growing. And we are now deploying initiatives to selectively and steadily more and more deploy the initiatives that we have for the inventories over the rest of the year. Some categories are softening in supply constraints, so we'll be stepping that up. But of course, there's still a level of uncertainty on that level. And finally, maybe we don't see -- we don't think we're going to have the same impact on our inventories in terms of inflation as we've seen so far as some of those indices are starting to soften a bit. And if you talk about the debt, of course, the sale of Mexico will have -- the moment of closure will have its impact certainly as well.

The next question comes from the line of Faham Baig from Credit Suisse.

I've got 3, but I'm going to try to link 2 of them into one question. So could you update us on what the input cost guidance is for the year? I believe you highlighted it was EUR 200 million for the core markets previously. And at the same time, you're highlighting that some of the pressures have increased. I'm sure there is a transactional element to the increase as well. And partly related to that, if your input cost guidance indeed has increased, and at the same time, you now expect full year EBITDA to be in the core markets to be higher than what the market was expecting, what are the building blocks that will allow you to get there? I know pricing is one, but is the benefit from the extra U.S. revenues quite material like EUR 10 million to EUR 15 million? Are the contract gains quite material? If you can help us understand the building blocks, that will be super useful. And then my sort of second/third question. I know you've managed to sell Mexico, which arguably is -- was actually a really good business that you had. But if I do the math, your leverage doesn't change materially, maybe with the initial inflow of EUR 225 million, maybe the net debt-to-EBITDA ratio improved by 0.2 to 0.3x, but that doesn't really resolve the problem. Does it?

Faham, thank you for your questions. I'm going to start, and then I'm going to ask Peter to continue. So I'm going to start addressing your question on the guidance and how -- what are the building blocks between H1 and H2. So first of all, I expect that the revenue momentum to continue. We said above 10%. We want to be slightly cautious, but I do expect the current rates to continue going forward. As you know, a big portion of our business is based on contracts. So we have visibility of what the contracts are for the remainder of the year. Our net gains and losses continue to be positive, not only for this year but projected for next year. And then in addition to that, we have a positive market momentum overall. And in addition, we have private labels gaining market share in that positive market. And of course, being a big portion of our revenue is based on our retailer brands, we benefit from that. So it's a combination of market growing, private label gaining market share and us gaining contracts having a positive net gains. So that will continue. The cost will continue. We have really a very good program in place. We do have good visibility of the initiatives that will deliver the 4% plus cost reduction in second half, and now we are focusing on executing that and filling the pipeline for 2023. So the difference between H1 and H2 is more pricing because as you saw in the slide, in the complicated slide that I showed at a certain point, the reality is that when we look at the current market context, the inflation is much higher than the pricing that we have been able to execute. And this has been driven by 2 reasons. On the one hand, we have been taken by surprise with a huge spike of inflation that we were not expecting, especially in Q2 with the macro sociopolitical situation, but also the fact that it takes some time between the moment in which we start in pricing and when we see that pricing going into the P&L. And the reason behind is that typically what happens is we need A-brands to increase prices and then retailer brands follow. And we have -- we are in the process of negotiating additional pricing. We are making very good progress, and we will see the pricing to progressively increase starting from July. Now on the -- then maybe that is one piece. Then I'm going to ask Peter maybe to give you the answer on the cost, the input costs that we expect for the full year.

Yes. So from where we -- as I already mentioned that we had a significant increase between Q1 and Q2. We expect some further inflation in Q3 versus Q2. More specifically, energy costs, logistics cost that is reflected in some supplier pricing. But that delta Q2, Q3, not to the extent as we've seen in Q2. And -- but and it's more than offset by additional pricing, which means that we will start a gradual margin recovery going forward. Moving to Q4, we'll see some more stabilization expected as some of the indexes are softening.

Now on the question on the leverage, it is true. I mean, first of all, your math is the leverage, that's improved. But the reality is that we are with the -- as we conclude this sale, we will be able to pay -- to completely remove the term loan, and we will remove the leverage of the covenants from our debt. But of course, we need the EBITDA to go up to have a bigger impact on the leverage.

And maybe just to add to that, today, it does help. The multiple is about 10 on the last 12 months EBITDA, which is high than the leverage. So we should be beneficial. And now we need to improve the rest of the business, which would be indicated by early 2023.

The next question comes from the line of Karel Zoete from Kepler Cheuvreux.

I have 2. The first one is when we look to 2023, you've been quite clear about the financial expectations for this year. But when we look to next year, is the old target of 12.5% to 13.5% margin for the core business still are feasible given a significant price-driven growth that has been added to the sales space? And the second question is on the term loan. You basically say you want to repay that. But if you look to your listed bonds, those trade at 80% to the dollar. Isn't it a consideration to look to buy back those instead of the term loan?

Thank you, Karel, for your questions. I'm going to ask Peter to answer the second question, and then I will go back to the first question.

Yes, I can be short on that. We will -- the repayment -- we'll use the proceeds from the Mexican divestment to pay back the term loan as a first priority.

Okay. So in terms of your question on 2023 expectations, as I said during the presentation, I expect the underlying trends to continue on volume, on mix, on cost and on pricing because we still need to catch back compared to the massive inflation that we have in the system. I do believe, and I am still convinced that the targets that we set mid-last year or the midterm are achievable, but the timing remains a little uncertain because it's going to be dependent, also not only on what we can do within our control but the external context.

Next question comes from the line of Eric Wilmer from ABN ODDO.

I got 2 questions, one on the Mexican business and one on the U.S. manufacturing footprint. I was wondering if you could give a rough range or qualitative wordings on the current margin of the Mexican business. I think margins have been going up in H1 this year versus H2 last year following price increases. And I think what you just said implies 9% margin over the past 12 months. Does this mean that it's significantly above 10% at the moment? And also on the deferred payment, the EUR 25 million included in the takeover price. I was wondering if you could shed some details -- share some details on the underlying agreements, including which KPIs, which minimum levels and what milestone there? And then finally, on the U.S. manufacturing footprint, you recently opened a plant in North Carolina, which is about 30 kilometers away of another plant you bought 2 years ago, and you will also keep your Tijuana plant. So I was wondering what's the strategy there. And will you combine these 2 North Carolina plants?

Eric, I'm going to start with the U.S. manufacturing, and then I will ask Peter to comment on the question on the Mexican business and on the building blocks of the proceedings. So as you say, we have been enjoying a really strong growth in the North American market for several years. That growth is accelerating, and it's a combination of continue to gain new customers, continue to expand our business with current customers. And we decided that considering our customer footprint, the Tijuana plant that has been serving mostly entirely since many years, the U.S. market was [ noted ] off. So we will continue to leverage Tijuana, but we have to build the capacity, and we decided to do that in the East Coast because that will help us to improving the logistic and do efficiencies. So that's it. So we'll have the 2 plants. And then, yes, you have -- we have a very small plant in -- also in North Carolina in Reidsville, which is -- was an acquisition that we did a couple of years ago. This plant is producing Fem Care products. And I am not in a position today to comment on new plants, but we are looking at the possibility and how to make the overall footprint more efficient. And I can confirm that we have already started production and shipments from the North Carolina plant. And we are in the process of expanding the capacity in the plant. So it will take probably a couple of years before we get the plant to full capacity as we continue to install new lines to support the growth that we are having in that market.

Yes. Eric, on the Mexican margin has been improved as one of the leading drivers of the emerging market turnaround over the last months, and it's north of 5% EBITDA margin that we have business right now.

Then the question is on the deferred payment. Yes, EUR 25 million claims.

Yes, there's EUR 25 million basically of the total amount that we communicated that's going to be paid in the course, maximum next 5 years as per agreement that we have closed with Softys.

And could you -- on that, could you maybe share which KPIs and which minimum levels and milestone there or at least some more color on that?

No, I can't comment on that at this point, Eric.

But it is -- if there is no KPIs there, [indiscernible] sure. But it's so then -- it's not depending on…

It's just timing.

The next question comes from the line of Reginald Watson from ING.

Sorry, could you clarify something for me, please? I'm a little confused. I think I heard you say that the Mexican business has been sold for Softys for 10x last 12 months EBITDA multiple. But if I look at the last 12 months EBITDA for the entire emerging markets discontinued business, it comes to EUR 9.3 million. So I don't understand quite how we get to 10x.

Yes. I was waiting for a second question, but all right. Yes. I started partly answering that question already. Mexican business has already recovered substantially from the drop that we've seen across the emerging markets and thereby has been the driver of the rapid recovery of those emerging markets. You need to be aware in your calculation that these numbers do not reflect the full group cost allocation. And therefore, the EBITDA you calculate by making the difference as you've done for the remaining activities is not fully representative. Now having said that, we do have more catch-up to do on the Brazilian and the Middle East activities. Keep in mind that especially Middle East, it's always been a very good region also in terms of profitability. And of course, we're facing the hyperinflation, which takes like in Europe, actually it's time to recover because the level of inflation is really, really huge there. So there's some catch-up to do there. And -- but don't just compare -- the number is naked because they're not exactly comparable.

Okay. That makes sense. And the question for Esther. Esther, could you give us an update, please, on the discussions with AIP?

Yes. Unfortunately, I cannot comment. There's nothing that I can say at this point.

Okay. But they're still ongoing. They haven't closed at this point?

Nothing to comment, to be honest.

Okay. And then sorry, given the no comment, I hope you don't mind if I sneak a third question then. This is for both of you. Given the success you've had with the sale of the Mexican assets, should we expect other asset sales to be at similar multiples?

Yes. I mean, we -- as we communicated, the objective was to basically execute the portfolio strategy within 2 years for '22 and '23. I am really pleased with the speed with which we have executed the first step, and we are progressing very well with the other files. We have received binding offers for the different businesses -- excuse me, nonbinding offers. And we are in the process of due diligence. So I have -- more to come in the next quarters. But things are progressing well, and we will communicate as we make progress. Now regarding the multiples, it's too early to say whether we will be able to execute the divestments with the same multiples. But of course, our focus is to create value for the company, and we will make sure that, that is the case in each of the files.

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

I also had a few. First of all, if you give guidance for 10% -- of more than 10% like-for-like sales growth and pricing already now at more than 7% end of the June for the core group, then do you assume volumes to slow down? And what is causing then that slowdown? Is that simply the higher comparison rate the cause? But you sounded quite positive on the market. Then the second question is on the raw material cost, let's say, the spillover for next year. Could you -- are you able to quantify that? And would you like to share that with us?

So thank you for your questions. So on the like-for-like growth, do I expect the volumes to slow down? No, I don't. I think, yes, the reason why we have guided about 10% is because the comparables you saw in one of the slides that basically the revenues have continued to go up in a sequential way. So of course, the comparables in the second half are more difficult than in the first half. But we -- I do expect the volume momentum to continue, and I do expect more pricing to progressively hit the P&A month after month starting in July. So on the raw material cost, Peter?

Yes. Raw material question you asked about spillover. First of all, we will be pricing significantly more also in the next month. So we'll be pricing for the inflation that we are facing right now by then, which means that at that time, we'll be already at better levels. And you heard me say that before that we expect a small increase up to -- of current input costs by Q3 and then a bit of a softening in Q4. So overall, the big -- the one thing that I think next year we'll be facing still is energy. If I look across the different input costs, it's clearly still quite bullish on the energy side, and that's where we will be facing. And if needed, we will be pricing further. Now of course, we also have significant cost saving programs that will equally help next year. We'll have to look at the balance of all of that, of course, as we go into next year.

Okay. Maybe one last question, if I may. You mentioned in your prepared remarks that you want to pay down first the term loan because there are the confidence on. Does that actually mean that you say that you are probably not going to reach the confidence next year in summer?

I'm happy you asked the question, Fernand, because that's not what I mean. It's what we agreed, and that's our plan that we have set up for ourselves. When we extrapolate work on the year outlook, extrapolate and do the math a bit more specifically that I just done with your previous question, with our operational plan stand-alone without proceeds of divestments, we should be fine. And that's where we're heading. So it's nothing to do with that.

The next question comes from the line of Nick Roope from Barings.

First one for me is, does the total group expectations of EBITDA are EUR 125 million to EUR 140 million include Mexico?

Yes.

Okay. And then second one and in the interest of being straightforward where I'm going with this is I can't work out whether you've actually sold Mexico for a really, really high multiple or whether the rest of the emerging markets business. It's basically generating no EBITDA. Is -- are you able to give some just like-for-like numbers that add up to what your reported numbers are historically for what Mexico, Brazil and the other relevant divisions do for the LTM period EBIT -- for EBITDA? Does that make sense?

I'm not sure I completely got that, Nick.

Sorry. Are you able to basically -- so you -- if I take your expectations ranges or the reported numbers, you get to a range of somewhere between 10 and 25, the LTM divisions or the forward-looking for what the noncore business generates EBITDA. Are you able to just give some -- what Mexico, Brazil and the other divisions do for EBITDA? Or I don't know which numbers you have at the hand, but just that would actually add up to that rather than us trying to back solve it with what the multiple was what you sold in Mexico for that type of thing. So we can actually do it on a like-for-like basis.

Okay. I'm not going to be able to answer that full question right now. Again, what I said about Mexico, this is the 10 multiple on the last 12 months EBITDA. So that's what I said. If you look at the outlook for the year, we have been guiding 2 numbers. One is the EUR 125 million to the EUR 140 million, which is the total group, including Mexico, including all the emerging markets. And we've been guiding EUR 100 million to EUR 110 million on the core. The difference, obviously, is the sum of Mexico, Brazil and the Middle East region.

Okay. Understood. Sorry to ask a third, but it's a follow-up. It doesn't -- if I take roughly the midpoint of EUR 130 million and roughly the midpoint of core, which is EUR 105 million, so I call it EUR 25 million, and you're saying you sold Mexico for 10x of, call it, EUR 250 million, which again implies EUR 25 million for Mexico. Doesn't that not imply that noncore generates EUR 25 million, i.e., taking out Mexico zero?

There is a difference. The multiple is calculated on the last 12 months EBITDA margins that go from June last year to June this year, where the guidance is for full year '22. So it's a different period. So it's not a like-for-like comparison.

And it's a little bit back to the question that Reginald asked that. And we do have some work -- again, we are not comparing exactly apples-to-apples with that question, but we do have some work to do still on Turkey and on Brazil because of the hyperinflation, and we know we have some struggle there. So they're more in the recovery curve as we have the businesses. Mexico has been leading that back. So it's back to that question. And at the end of the day, that's also why we are decided to refocus on the group and on the core.

Yes. I mean is the answer not just yes or am I missing something? If you can't answer the question, I understand. But am I -- unless Mexico is going backwards, is that not -- am I missing something? Or it's fine if you can't answer the question, but I'm just -- I'm basically thinking of future disposal proceeds and what you'd be able to sell those businesses for. Or the other thing that obviously maybe is wrong is that the multiple you sold in Mexico for is in reality much higher, in which case, fair enough. I'm just curious kind of which bit of the puzzle is maybe not quite right.

I mean the multiple that Peter mentioned is the right multiple. So there is no -- we are advancing. So we are not going to answer the detailed EBITDA by -- we haven't done that in the past, and we are not going to do it now. But I can assure you that on the one hand, as we keep -- as we have these businesses in our portfolio, we continue to work in every single business to improve the KPIs and especially the profitability feature of the business. And in the meantime, our main focus is to continue with the divestment program. And as I said, yes, we have -- each of the businesses is gathering a good interest. We have already nonbinding offers and we will continue with the process, and we will come back as we make progress.

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

I also have a couple of questions. Maybe first on the deal on Mexico. Is there any antitrust risk on this deal execution? And any thoughts you can share about potential penalties that would have to be paid if the buyer breaks off? So that's the first question. And then the second question I would like to ask is on the contract terms, you are currently negotiating with retail change supermarket change. Is there -- how are they looking at this inflation cycle? And when you pass 2 price increases, is there limitations on durations or the -- yes, more on the country looking to lock in the volumes? Any thoughts about on that would also be helpful.

Yes. Thank you, Wim, for your questions. So I'm going to start with the first one on the contract terms. I need to say that as the situation has evolved and I've been personally engaging with some of our key customers. I mean our customers understand the situation. And they are fully aware of the stress that is in the entire supply chain. And we've been collaborating with them to find the right solutions. Of course, for them, especially with the retailer brands, I mean, typically, there is a price difference that needs to be there between the A-brands and retailer brands, of course, and that's why there is a time lag between when we see the pricing going up with A-brands to when the prices go up with the retailer brands. But I am incorrect and confident that we will continue to price. We will see progressive impact in our P&L. And it is not a one-off because there are so many factors that are impacting. But I am very confident that we will continue to price until we will be able to offset inflation. Now talking about the limitations, of course, the innovation in the market, we need to remain competitive in the market and depending on what happens also with the industries in the future, we need to stay competitive. And that's why we've had a very strong focus for the last quarters on structurally improving our cost competitiveness. And this cost program that I've been talking about since I arrived, it is very critical because the raw materials and the pricing, there will be cycles up and down. But I think what is important is that we structurally lower our costs that we continue to invest in innovation and in mix, so that we continue to drive structural profit improvement. So right now, the issue that we have is that -- that is working. But at the same time, we haven't been able to fully offset the raw material impact with the pricing. And we will continue to price until we get there. On the question of Mexico, I'd say you were asking about antitrust. I mean, this is the typical process. It's difficult to say. I mean, the current competitive environment doesn't show significant challenges. But of course, I mean, it is very difficult to predict, and we need to go through the process to really understand whether there will be any remedies requested. And we foresee this process to last around 5 to 7 months, and that's why we have communicated that we are expecting to close the deal at the very beginning of next year. So it is very difficult to say at this point. However, we don't foresee significant risks. But again, very cautious because it is difficult to predict.

The next question comes from the line of Othmane Bricha from Bank of America.

First, could you remind us how much the group cost represent in percentage of sales in both core markets and emerging markets? So just asking about the allocation of group costs.

Peter, do you want to [ answer these ]? So you are -- we said that -- you are talking about the SG&A or specific group costs?

No. Headquarter costs.

Yes. We cannot disclose -- the headquarter cost is spread across the different businesses based on revenues and based on the support that headquarter gives to the businesses. I can understand…

And again, the important thing is that we target and will deliver below 10% of SG&A in total of net sales, so…

Yes. Going forward, even following divestments. So that target of below 10% stays.

Okay. And my second question, I think you mentioned that the exit rate of price increases in June was 12%. So could you maybe comment on what was the price increases -- the exit rates for June in core markets versus emerging markets?

Could you repeat the question? I didn't get. So in June, what do you think? Please…

The exit rates of price increases in June.

The total group was 12% in exit rate in June and core, it was plus 7% in June.

Plus 7% in core. Okay.

And in emerging market was about 20%.

The next question comes from the line of Beatrice Monti from Wellington.

Just one remaining from my side. Can you remind me what is energy and gas as a percentage of your COGS and whether you have any hedging policies there?

I'm going to ask Peter to answer this.

We are -- I cannot give you the percentage right now immediately honestly. We are locking in our contracts for -- our own contracts for quite a longer time. And so we have really covered for full year on that one. And so we are covered there.

Okay. Thanks a lot for your questions. I think we're -- everybody had the opportunity to do so. So I'll give the word to Esther for final words.

Thank you, Geoff. As you have seen, we are delivering on our strategic priorities. I am really pleased with the Mexico deal, and we will continue to advance the other files to refocus on Europe and North America. I am confident that pricing will continue to grow, and we will generate improving margins in H2. Thank you so much for your time this morning, and I wish you all a good summer.

Thank you for joining today's call. You may now disconnect your lines.