Ontex Group NV (ONTEX) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today. I'm Geoff Raskin from investor relations. Before I pass on to our CEO and our CFO, let me remind you of the safe harbor regarding forward-looking statements which I will not read out loud but which I assume you will have duly noted. I would also like to repeat that, since start of 2022, we are now presenting the Emerging Markets Division as assets held for sale and discontinued operations. And our P&L, thereby, only encompasses our core markets as continuing operations. We'll provide you with business information for both the continuing core markets and to discontinued emerging markets however. And we'll make clear throughout the presentation what scope we cover. Gustavo, over to you.

Thank you, Geoff. I'm pleased to be here with you this afternoon, but before discussing Ontex' recovery, perhaps a few words of introduction of myself. I'm very honored to have been appointed CEO, and I'm highly motivated to deliver on our recovery. I spent more than 20 years of my career at Kimberly-Clark. Through all these years, I have had the opportunity to develop an in-depth knowledge in the personal care industry and the challenges faced by both manufacturers and retailers in this very competitive space. As an Argentinian, I started in Buenos Aires. I then took up operational management responsibilities worldwide around the group; as well as in corporate strategy, being my last role as leader in the EMEA region. Now at Ontex, I believe that refocusing Ontex on its core european market and expanding the footprint in the U.S. is the right way to go. And as a member of the Board, I sat on the strategic committee, so I was deeply involved in this decision. So moving on to Slide 4. '22 was a promising year for Ontex on the top line. We delivered continuous growth throughout the year, ending at EUR 2.5 billion, up 17%. On the input cost side, the environment was extremely challenging, as we all know. And even though we've rolled out significant pricing and cost-reduction measures, adjusted EBITDA was down 21% in the year, which drove our leverage up as debt remained largely stable. The good news is that we started to turn the corner in quarter 4 with 20% like-for-like growth in revenue and a significant turnaround in adjusted EBITDA with 64% growth year-over-year. We see immediate effect of EBITDA improvement on the leverage, which after reaching a high point at the end of quarter 3 started to come down a little at the year-end. Next page. The bar chart on Slide 5 shows the success of the top line recovery. The momentum continues and this is really encouraging. Driven by volume, mix and increasingly price, we are now up 17% year-over-year for our total group and 15% in core markets. These represents 7 quarters of sequential growth, this recovery now also visible in adjusted EBITDA, as we've seen on Slide 6. We have started to turn the current quarter 4 after a really tough year impacted by huge input costs increases. Margin stabilized overall in the second half of the year. We delivered a significant improvement in quarter 4, when core market improved 68% versus quarter 3. Our cost reduction plans delivered solid savings, and price increases were steadily ramped up during the year. The chart on Slide 7 illustrates clearly how the decline in our EBITDA is the main cause of the increase in leverage to 6.4x rather than absolute level of debt. With higher than at the end of the 2021 at 4.2x, we have seen a sequential improvement since the end of September. Indeed the absolute debt will come down once we close the Mexican divestment, currently expected early quarter 2. Turning now to our extra-financial performance on Slide 8. We continued to make progress. Sustainability is an integral part of our strategy and as an important priority in both environmental and people safety. In June 2022, the Science Based Targets initiative approved that -- the Ontex climate action plan. And in December, Ontex received a top A rating for leadership in corporate transparency and performance on climate change from the global nonprofit Carbon Disclosure Project. Moving now to Page 9. Innovation is also an integral part of our strategy as a driver of growth and profitability. I would like to share 2 very successful examples. In retail brands, our Happyfit baby pants platform that started to roll out in 2021 has driven an outstanding top line growth of more than 30% in 2022. And after years of research and development, our smart adult care platform Orizon was successfully tested in elderly care homes in 2022, generating a high level of purchasing intent from health care customers. With that, I will hand over to Peter now.

Thank you, Gustavo. Let me now dive into the results of the year and the fourth quarter. Remember that we're presenting figures for the total group and for core markets. Those core market numbers are aligned with continuing operations scope of IFRS report. And I will make clear when I refer to what scope. Let me talk about volume and mix, first, with a chart that shows the evolution of by quarter over the last 2 years. We have clearly reversed the trend of the last couple of years. In 2021, volume/mix growth was negative. In '22, we grew consistently by mid-single digits or more. And that's for total group, the core Europe and North America. This strong 5% to 7% volume/mix growth was partly driven by an overall trend of retailer brands gaining grounds, with low single-digit growth in Europe, as consumers are shifting to retail brands and discounted channels in current inflationary context. And Ontex outperformed in that segment, thanks to contract gains in both Europe and North America. Baby pants were the main volume driver with volumes growing more than 30%, thanks to the success of our new platform, as Gustavo just mentioned. Moving to pricing on Slide 12. Our pricing in the core markets was just beginning at the start of 2022. In emerging markets, where we mostly manage our own brands, we already implemented price increases at the end of '21. In our retailer brand and health care businesses in the core, this took more time. Contract negotiations take longer there, and the massive cost inflation came gradually throughout the year, which meant that we were running behind the curve, which required several pricing waves. However, I'm happy to show that now we have priced up 14% for core markets and 16% for the group in the fourth quarter versus same quarter 2021, which then already included a 3% increase. You will notice in the graph, the light orange line, that core markets have been catching up strongly in the last 2 quarters, which has obviously been very instrumental to the margin recovery there. We continue to negotiate higher prices also in the first quarter of 2023, as inflation is not over and we have not yet recovered the full impact of inflation. On Slide 13. The impact of this accelerated pricing and sustained volume/mix growth is clear in the revenue bridges. This is the reporting for core markets I'm showing, full year view at the top, quarter view at the bottom. The full year like-for-like growth was 15% for the year, and 20% in quarter 4, thanks to the pricing acceleration and continued volume/mix strength. All categories grew, driven by price and volume. ForEx was supportive mainly through the appreciation of the U.S. dollar, the Russian ruble and the U.K. sterling, adding 4% to the like-for-like growth. It's important to note that, while service levels for the year were still below those of 2021 due to constraints in the general industry supply chain, we improved them steadily and were in quarter 4 well better than at the end of '21. As you can see on Slide 14, our cost reduction initiatives continued to deliver consistently, mainly about -- maintaining about 4% overall gross cost reduction levels. You can see that in the green lines on the chart. The SG&A costs, the purple lines on the chart, were reduced from 12% to 10% of revenue, thanks to the restructuring we did in '21 and the continued relentless discipline and multiple actions to offset inflation in '22, allowing to keep absolute costs roughly at the same level as last year. In operations, we optimized our footprint in Europe by closing the production plant in Mayen; in North America, by stopping operations in Reidsville following the opening of the plant in Stokesdale; and in emerging markets by closing the plant in Ethiopia. Footprint optimization is only one part of the asset optimization lever. And besides that, we have moved several lines across plants to further improve our output and costs. And this helped to further improve our operational efficiency and scrap rates that were down by more than 15%. And next to that, design-to-value initiatives in collaboration with our customers allowed to reduce the costs of our products while maintaining the same performance. For 2023, we developed a pipeline to keep the 4% savings pace, and we are reviewing in what way we can further accelerate that. Moving to Slide 15, cost inflation. I have been talking about cost inflation all year long. And input costs are remaining at very high levels also at the end of last year and to date. Our total cost base in quarter 4 was up 20% versus last year. And compared to 2020, before the increase started, they are up even 30%, as we show on the slide. Raw materials represent the bulk of that, up 25% overall versus 2021. And the leading indices for all derivatives came down somewhat towards year-end but remain at a high level. The indices driving fluff continued to increase steeply throughout the year. And on top of that, energy, distribution and wage inflation continued to drive raw material prices and own operating costs up. Compared to the 20% to 30% cost increase, our prices rose in the 15% to 20% range. And so there is more scope and needs to price further. On Slide 16, you can find the impact of all the above drivers in our adjusted EBITDA for core markets, again full year at the top, quarter 4 below that. For the year, the levers we control were not sufficient yet to offset the inflation, bringing the adjusted EBITDA down 33% year-on-year. In Q4, however, the consistent delivery on volume and mix growth, pricing and cost reduction more than offset the cost inflation, leading to a 31% growth of adjusted EBITDA. Q4 margin was at almost 9%, up 0.5 percentage points versus 2021 and more than 3 points versus quarter 3. This is an important milestone, yet there is important work still in front of us to further improve this profitability. ForEx was supportive here as well, with the Russian ruble and U.K. sterling appreciation on sales outweighing the net negative impact of the U.S. dollar appreciation on costs. Now turning to Slide 17, below the EBITDA line. The decline in EPS in '22 is mainly the result of noncash impairments, as you can see at the right side of this chart, most of these dating from the first half of the year. More specifically, in continuing operations, core markets, we have a EUR 92 million noncash impairment consisting mainly of the EUR 84 million on the Russian assets goodwill following the ring-fencing of that business. In discontinued operations of the emerging markets, we have EUR 76 million on the Mexican assets following their imminent divestiture and EUR 33 million impairment to offset the hyperinflation impact on the Turkish assets. Adjusted EPS of continuing operations was a negative EUR 0.62 and reflects the lower EBITDA and slightly higher financial costs with a full year of the bonds in play and the high Euribor affecting the floating-rated debts in H2. Taxes were higher as well related to the recognition of deferred tax assets. Talking about cash on Slide 18, I'm happy to report positive free cash flow in the second half of the year. This is by any measure far from enough even to offset the negative figure of the first half, but it does indicate we are moving in the right direction. The year free cash flow was EUR 54 million negative. CapEx was slightly higher than last year in absolute terms but at 2.5% of revenue was lower than the 2.8% at the end of 2021 in relative terms. Still, 2/3 of that was dedicated to EBITDA-generating CapEx, namely capacity expansions, innovation and investments to drive cost reduction measures. Working capital needs were up, driven by revenue growth and the net impact of inflation. And this brings us to net debt, Page 19. Gustavo already explained the decrease in the fourth quarter and the resulting improvement in leverage from 7.7x at the end of September to 6.4x at the end of December. Over the year, net debt was up, however, due to the previously explained negative free cash flow and higher financial costs. Gross financial debt was EUR 1.1 billion in December, and it's important to note that this debt is well constructed. The 3.5% fixed-rate bond of EUR 580 million with maturity in 2026 represents more than half of it. The term loan represents EUR 217 million. And as you know, we will pay back this loan shortly with the proceeds of the Mexican divestment. Lease liabilities represent about EUR 140 million and the remaining debt represents about EUR 150 million and is fully covered by cash. And with that, I will pass the word back to Gustavo.

Thanks, Pete. I set myself 2 major objectives to achieve during my first 90 days. First, I have dived deeply in all areas driving our competitive situation. And second, I started developing a plan together with my team which will accelerate the execution of our strategy. I have visited almost all our core manufacturing sites, distribution centers and commercial offices, connecting with our people, assessing our capabilities and jointly identifying opportunities. I have also started to meet some of our top customers, both retailers and in health care. I have visited several points of sales, elderly homes; and meet with top suppliers, so all these information and insights gathered during this deep dive now fits our acceleration plan and give us confidence on what we can do and achieve in the next 3 years. We will be sharing more about this plan in the next few months. Now a few words on our priorities on Slide 21, mainly through reducing complexity. The key to acceleration of our plan will be a drastic reduction in complexity, impacting growth, profitability and eventually strong cash flow generation. Let me quickly share with you a small example of just one type of complexity and its impact that I'm referring to. During a visit to one of our facilities and while walking the production floor, we discussed with the production line manager the root causes of the machine changeovers which create machine downtown -- downtime and high waste levels. And at the end, it was clear that the different products platform and SKUs were the main drivers. We then purposely ran the machine for a longer period of time, assuming no platform changes and less SKUs, so no major changeovers. We demonstrated the positive impact on productivity and consequently on the costs of the finished products. After that first exercise and joining with the supply chain team, we ran an S&OP simulation in order to visualize the benefits on inventory levels, resulting in less working capital and improvements in our customer service level by easy adjustments on the demand planning and reduction of delivery time. The exercise finished being inspirational by projecting all the positive direct impacts and all the collateral effects that reducing complexity will have on the performance of the company. As an example: Our R&D team will become more focused on less-complex portfolio and therefore being able to strengthen our innovation pipeline, aligning it to our customers' strategy. We have reshaped the executive management team by reducing it to 7 members. As a leaner and more accountable team, we will be able to take quicker decisions. In parallel to this, we will -- proposing to shareholders a new reward and performance review system, which will help us to build a performance-driven culture and with greater alignment with shareholders' interests. Restoring the balance sheet is one of my absolutely key priorities, particularly in the current macro uncertainty. Net debt will come down, thanks to the competition (sic) [ completion ] of the Mexican divestment early Q2. Pursuing the divestments of our emerging markets position will not just help us restoring the balance sheet but also will enable a greater focus of our organization on the execution of our core business. All these efforts are vital to restoring our financial structure throughout not just EBITDA improvement but cash generation as well, which will ultimately have a meaningful impact on our balance sheet and our leverage ratio. So now moving to Slide 22, we can go to what we expect in the short term. 2023 remains a challenging year with high levels of cost. Nevertheless, we expect revenue of Core Markets to grow high single digit like-for-like. Adjusted EBITDA margin of core markets is expected to improve from 6.2% in 2022 to around 9% in 2023, with some more headwinds in the first half of the year, due to a step change in the cost base while cost reduction measures and pricing continue. On emerging markets, we expect the Mexican divestment to be closed early Q2. While we continue to work on the divestment of the other businesses, we expect this to be contributing positively to EBITDA and free cash flow. Including all this, we expect the leverage ratio of the total group to come down by end -- by year-end, below 4. I'm pleased to see that the recovery of Ontex is now underway, and the corner is being turned, most importantly the beginning of our recovery in adjusted EBITDA margins in quarter 4 and the generation of positive free cash flow in the second half. We still have a lot to do. And I look forward to working with my team on accelerating the implementation of our strategy. So now the team and I are now pleased to answer any questions.

[Operator Instructions] And if you have more [ questions ], I invite you to go back in the queue in case of time constraints, however, we'll have to refer to the IR departments at the end. So over to the operator.

[Operator Instructions] The first question comes from the line of Andre Philippidis calling from Barclays.

Just on the RCF. I remember from the last call you had drawings on the RCF. Is it still the case? And my second question is on the guidance, on the growth guidance. Can you give us a bit more color on the volume, price, mix, please?

Okay, Peter, you can take those.

Yes, okay. On the RCF, yes, we are using the RCF today. So the RCF is providing us with working capital flexibility. We're using it. We're using -- end of December, we're using less than half of what the revolver has. So it's EUR 115 million out of the EUR 250 million, which is fully covered by cash also, but the geographical imbalance of cash generation and it leads make that we use this for working capital flexibility. As you've seen, as we said, our cash generation is going to improve, but we will continue to use the revolver as long as we need it because that's what -- that's why we have it.

On the second question...

The second question, on the guidance on the volume, pricing and the mix growth looking forward, right, was the question...

Yes.

Yes, yes, please.

Well, there's a few -- let me tell you a few things that we know and that we have. First of all, we have seen in the -- most of the year and secondly in the -- certainly in the second part that consumers are trading down to private labels from branded as the inflation environment is limiting their purchasing power. This is a momentum that this is given the private label segment that we expect to continue. And as I mentioned, we have been outperforming that segment. Secondly, we are expecting some pricing carryover getting into 2023 as well. We've been gradually pricing up. We expect this to be around 5% for 2023, gradually a bit more for the core because we've been pricing later for the core. And next to that, there's a bit more new pricing to come in quarter 1, as there is some additional inflation hitting us in the first quarter, especially on wages, fluff and energy. And the rest essentially is volume/mix, where we continue to push hard on the lever of our strategic segments, as has been demonstrated with the growth of our pants last year.

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

A couple of questions for me. First one, just to follow up on that first question, just to push it up, Peter. So because I've done the same calculation and didn't come up with the same number: mid-single-digit pricing carryover from '22; more pricing to come, obviously unquantified, but that alone seems to get you into high single-digit like-for-like sales growth for core market then obviously volume potentially on top of that. And you sort of say there's structurally a trend that -- towards private label, so could that be conservative? And I actually know the reason why you'd want to be conservative on that guide, but could this -- could it be more than that high single digits? That's my first question. And then the second one, a bigger picture question for you, Gustavo, if that's okay. Obviously you've been in the role 3 months or so, but could you just give us some of your first observations on Ontex? I guess, what does Ontex do well? What does Ontex ultimately need to do better? From your sort of first 3 months or so in-charge.

All right, good questions, Charles. Thank you. On your first one, I believe that we -- our guidelines is, I would say, defined as a prudent type of guidance and the -- on the top line. And our growth, yes, you are doing the math. We have some carryover, as Peter defined. And we have some pricing coming very little in the first quarter, but volume is growing as well in a modest rate. So our volume growth is going to be much more focused on our more strategic part of our portfolio, so perhaps the average of the volume will not be impacted so much, as you could -- perhaps you can predict. We are going to be focusing on big pieces of our portfolio that are more strategic in terms of consumer trends. On the second, my observations about -- my first impression about Ontex: Well, as you know, I've been part of the Board in -- previously. And I have also some story and I'm coming from Kimberly-Clark. We -- I always show -- have a view of Ontex as a player in the market, as a very strong player in the market. I think that what makes me now feel very proud of the team is how the team has faced 2022 with all the challenges and have been able to turn-around the -- turning the corner in the second half of the year, especially in the fourth quarter with a significant growth. I think that, that talks about the resilient and the strong capability that we have in the company. That give me a huge amount of confidence on the -- on our future, on our next years to come, so I would concrete that -- conclude that my observation is highly positive, of course recognizing that we are -- have to deliver. And the commitment of myself and the team is very, very high. I can tell you it's very, very high, to deliver on the expectations.

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

A couple of questions from my side as well. Maybe, first, on with regards to volume, can you maybe elaborate a little bit of where this volume growth will come from? Is it continued growth or market share gains of private label versus a label? Or is it still an impact from contract gains of the past and then specifically contracts entered into '21 or before that start -- that still have to start to kick in? So that's the first question. And the second one is on further savings initiatives and your ambition to cut costs further. Can you maybe elaborate a little bit more about, yes, other concrete initiatives that will drive further optimizations; and also, yes, clarify? How long can you maintain the kind of momentum of 4% going forward? That's -- those are my questions.

I got it very well, the first question, but then if you can repeat the second question, I would appreciate.

Yes. Just a bit more color on your savings ambitions. What initiatives are still possible after a lot has been done already in the past few years? And how long can you kind of maintain the savings momentum that we saw in the past few years going forward?

Yes, yes, okay. I go for both, Peter, all right? I'm going to attempt to go for both questions. So on the volume side, as I was mentioning before, our focus is going to be in terms of some of the most strategic categories, specifically most in strategic categories where we do believe that we have opportunities. And of course, that -- there is going to be a volume retail brand growth, but as you can imagine, in retail brand there are tenders. There are contracts. There are timing, right? And where we see where we point the emphasis is going to be on those that can drive the growth in where are more strategic for us within our portfolio. So giving you an example: As I mentioned, baby pants, it's a trendy category. Adult care pants is another one. And baby care as -- is always there, right, so the volume will come more from there. And as an overall, we do see a growth but is -- in those specific categories going to be a more significant volume growth. That's the expectation. On the savings question, it's, well, I have to be honest. I do see that we have plenty of opportunities here. We have opportunities to continue improving our OE, our waste, our de-complexification, which will allow us to really be more cost-efficient company. It's a work that we have started to do. And we are doing it, joining in many times with customers, understanding where they're going with their strategy, aligning their strategy; and that with a focus on reducing the complexity. And then there is other -- that is in the front of the manufacturing. We do see greater opportunities coming not just in '23 but in the years to come. At the same time, there are many other complex things that we need to reduce. Focusing that will allow us to focus on our core. The divestitures in the emerging markets, it's -- it will reduce the complexity on the business and will allow us to focus on the core. And then there are some portfolio changes that perhaps also we are going to be looking for strategic options and that it's too early to mention, but yes, there are channels in the portfolio. And all of that will bring us more focus and therefore also some cost opportunities.

The next question comes from the line of Markus Schmitt calling from ODDO BHF.

So the first one is on the assets available for sale. I think net assets are in total, EUR 412 million. And I think EUR 250 million is coming in for Mexico. And so EUR 160 million is then representing the remaining assets more or less. Would you believe that the net proceeds for the remaining assets will be higher or less than the EUR 160 million? Maybe you can give an indication where you see a fair equity value for these assets. And do you believe that these net proceeds will come in then in H1 '24 or maybe later? And the second question is on your covenants. You implied there is another reset required. Do you refer that to the liquidity covenant and/or the previous maintenance covenants, which will kick in again beyond June 2023, I think? A bit more clarity would be helpful here, and also why the headroom is assumed to be tight. So what variable in your earlier budget did not work out as expected?

Okay, thank you. I'm going to pass these 2 questions to Peter.

Yes. I think, on the first question, on the assets held for sale, important to note, first of all, we continue to make good progress on the projects that we're having. We -- especially in the area of the Middle East. So with Pakistan and Algeria and Turkey, we made progress on the projects, and we've talked about that in the past. So we hope and we assume that we can make some steps soon on that. On Brazil, also there, we're making progress. It's a more complicated assets, as you know, but also there we keep a line of sight on divesting. Important to say is that all of these markets that I just mentioned have stepped up strongly in terms of cash generation and EBITDA generation so that only -- that doesn't change the strategy, but that makes them more strategic and also contributing to our numbers for as long as we have them within the portfolio. As to your number in terms of the asset value, I'm not going to comment on what we're looking at in terms of potential proceeds from it, but of course, we have been making some impairments in this year, which does give a signal, but again I'm not going to comment on the exact same -- the exact numbers there. On the covenants, I hope I got the first scope of your question, but yes, we're moving into -- so we had a waiver in 2022 in cooperation with our banks. And now in '23, we indeed have again covenants as of the middle of the year. Now I am, we are confident on the strong momentum that we have and the strong plan of 2023 that we have to meet the covenants that we have. When I'm looking back, our banks have shown to be supportive last year to give us the operational flexibility and the headroom to execute our plan, so we got our covenants waived. And actually we have demonstrated a strong recovery, especially in Q4. And it's important to note that, once we have divested soon Mexico, we will pay back the term loan, so the size of the loan carrying -- size of the loans that carry the covenants will be limited to the RCF only. And on that, actually we are already starting discussions with the banks about extending the maturity of those -- of that RCF because it matures mid-'24 and we want to be ahead of time there.

Okay, but I mean, what was the concrete reason why -- just allow this follow-up, please, why the earlier plan did not pay off. I mean, what element in your planning did not pay off as you expected?

You are talking about the divestments or -- I didn't...

Yes, because, I mean, you reset -- when you reset like in last year -- I mean you don't want to come back to next year and do another reset, of course. I mean there should be some headroom included and applicable which gives you a little bit of flexibility, but now you have a situation that you have obviously -- albeit, I mean, the recovery is very strong for you. I absolutely see that, but now you have a situation where you have to talk again to them in line with extending the facility itself, yes. But the earlier budget and covenant plan looks now a little bit tighter than what you obviously expected. And that is why I would like to know what element in your planning did not pay off. I mean, did you expect a higher EBITDA contribution already or -- and more volumes or more and more cash -- cost savings at this point in time? So maybe, what element are you lagging a bit in terms of meeting the covenants with substantial headroom?

Okay. Now I'm not sure I fully understand what you're hinting at '22 -- '23 -- '22. And the reason why we had a discussion on the waiver was, of course, the unprecedented inflation which was massive, 20%, 30% increase. And that's why we negotiated some headroom with the banks to make sure that we continue our operations and working on those levers, hitting those same nails on pricing, costs and volume, price/mix, which we have done. And now essentially, for 2023, we are planning to meet the covenants, as I said, so we're confident, with the momentum that we have and with the plans that we have for 2023, that we will meet the covenants.

Next question comes from the line of Karel Zoete calling from Kepler Cheuvreu.

I have 2 questions on cash flow actually. The first one is on the increase of factoring by EUR 29 million in the year, which is quite a significant number almost in line with the operating cash flow for the year. What's the reason why it has increased? And would you consider, if the balance sheet allows for it in 2023 or '24, to actually reduce factoring or stop it in total? The second question is on your guidance for 2023 year, 8% to 10% EBITDA margin for the continued operations, but if you just look at very simple free cash flow after interest costs, exceptionals, et cetera, real money available to distribute to potentials to shareholders, do you expect it to be positive in 2023?

Thanks for the question. I will pass it to Peter.

Yes. On factoring, if you look at it over time, we've been fairly stable on the factoring side, over time. I think the increase versus the second -- the first half of the year has been less than what you said. And actually the main reason for the increase that you've seen versus the end of last year is in line with sales. So we had a significant increase of the sales, of course, with all the pricing and the volume gains, so that is pretty proportional. And that's what happened there. And we intend to use, continue to use the factoring for as long as we deem it is appropriate in the future. The second question is...

Free cash flow positive, yes. That's the question, also after interest costs, of course.

Yes. Well, if you look at -- starting from our guidance of 8% to 10% margin and high single digits, which I'm sure you have done, we are looking at a positive working capital, slightly positive working capital for next year. There's a few opportunities that we see, not in the least with some of the things that Gustavo has been mentioning about simplification, so we'll certainly work very hard on that. And we do believe that the cash flow is going to be positive next year, as it has turned positive in the second half of this year already as well. And then of course, we'll max out all of the elements I have been talking about and to the extent that we can.

Next question comes from Patrick Folan calling from Barclays.

Just [indiscernible] I'm trying to understand how to think about raw material inflation for 2023 and looking specifically at fluff and pulp prices from my understanding that there is more global capacity coming online, but we've not necessarily seen prices come off to prewar levels. So how should we think about that? And then secondly, it's good to see that good volume performance in 2022, especially when many peers are under pressure, but on that number and looking at baby pants in particular for Q4, what was the split for that 30% between the contract gains you guys had last year and then maybe trading down? I'm just trying to understand the moving parts between that trade-down element you guys are talking about.

Okay, I'll take your -- I'll start on the first question. So you were general about the raw materials inflation and then specific about fluff, but looking at '23 and where we stand today, as I said in the presentation, cost prices are still at a very high level, so 20% versus last year, 30% versus year before. We see different trends across different elements. We have some of the oil-based indices that start stabilizing, but they're still at 50% ahead of the levels we saw in 2020. As you said, we have been an increase -- we've been seeing, witnessing a big increase in the RISI index and -- which is supporting -- or which is part of our fluff. And that's still at record-high levels. We are taking in -- the assumptions and our outlook, we are taking the raw material prices, indices, energy costs, distribution costs as we see them today, so we're not -- we're taking today's spot prices, so not forecasting in our numbers any evolutions that we might have up or down. And also you need to be careful when you talk about RISI that there's different types of industries that are linked to the actual fluff that we are using, but having said that, on our way we look at it, it's record high. And that's what we assume, that level maintains over the full year. And that's how we look at 2023. As I said before, there is a bit more inflation to come in early of the year that we see from there with the wages, with energy. And that's why there's still a few pricing to be done in the beginning of the year.

I can take the second one. On your second question, I mean, it's on the baby pants growth on the fourth quarter. You asked about how do we see that between contract gains or smart trading. I will say that it will be more 50-50, but we still see room for keep growing in the baby pants. We have a highly competitive product there and we feel very confident on the opportunities there. So keep growing. That's the word.

Next question is from Eric Wilmer calling from ABN AMRO - ODDO.

I had one remaining question. Looking at reported Q4 EBITDA margin of almost 9% for your core business, the 8% to 10% margin guidance doesn't seem that ambitious. And I was wondering. Perhaps, is this partially explained by a more competitive environment in tenders?

So I can take it. I think that I would not call it ambitious. I think that the word that I'd like to say, that it's a prudent guidance, the one that we are giving. And as Peter mentioned before, our guidelines are -- these results are expected based on our current situation. And perhaps you -- current situation on the cost front, that we are expecting some -- continue some inflation in the first -- beginning of the year. And we are also expecting some pricing coming from our side, but at the same time, you're saying -- yes, you're right, more competitive situation. Yes, competition is hard. And yes, it could -- and yes. It's not that we are underestimating the competition at all, but the word I will say for our guidance is a prudent guidance based on our current situation. Our current situation is promising actually because we turned the corner last year significantly and we see this momentum continued. So yes, we are encouraged by that.

Next question comes from Fernand Boer calling from Degroof Petercam.

It's not an easy one. It's Fernand de Boer from Degroof Petercam. Also two for me, please. The first one is if I look at the margins in the, yes, emerging markets, actually down quarter 2, if you compare to the third quarter. So 5.1% versus 5.3%. Why is that improvement halted? And what does it mean going forward? That's the first one. And if I listened correctly, Gustavo, you said that we are -- you are coming with kind of strategic plan in coming months. Is that an entire new strategy with new targets, et cetera? Or is that only in, let's say, more extension version on the cost savings? Could you elaborate on that one?

Very good. I'm going to ask Peter to answer the first one. I will address the second question.

Yes. Well, the good news about that -- the numbers that you've seen on the emerging market is that they hide a step-up in operational performance between Q3 and Q4. What happened in Q4 is that we took a provision for Brazil because, as you might know, that -- there's a very big customer, a retailer, in Brazil that asked for protection on -- against bankruptcy. So we basically took a provision of several million covering the majority of that potential exposure. So if you exclude that, we had a further acceleration of our numbers in the emerging markets. So fundamentally operationally, we continue to track that we started in the second part of the year.

Very good. On the second, on your second question, Fernand, I -- our strategy, I confirm our strategy, which is focusing on our core business, meaning retail brand and health care, in the geographies of Europe and North America, in the baby, fem and adult care categories. That's our strategy. And we want to be the #1 partner for retail brands and health care. No doubt about that. We do have -- and what I see, that we have the need of accelerating the execution of this strategy. And by that, I mean to put a greater focus on our -- on many things that we have the opportunity to improve in the coming months and perhaps years. Not everything is so quickly, but I tried to address with an example of how can we quickly do things that will improve our margins and accelerate the execution of that strategy by reducing the complexity in the company and giving us a high competitive position again in the market. So it's more about acceleration than changing the strategy. I hope I addressed that question.

Could we then expect also again restructuring charges in the 2023?

No. I -- we have not finished our plans. I don't see any restructuring charges in addition to what we are facing today, but it doesn't mean that, for the future, we would -- we will see any changes there. But we are finishing our plans that, as I mentioned before, I would be more than happy, with my team, to share those plans in the near future.

And the last question comes from the line of Othmane Bricha calling from Bank of America.

I have two. First is on volume growth in 2023. Are there any contracts that you intend to terminate or not participate in the retendering, maybe contracts in areas which are not that profitable to you? And my second question is regarding the level of savings that you are targeting in 2023. Can you give us a figure, maybe as percentage of sales or percentage of costs, as you gave us for 2022, before? And associated to that, based on your current plan, what do you expect as cash restructuring costs in 2023?

Okay, I'll take the first question. And Peter will take the other ones. In the volume growth, your question was if we are expecting to exit or not to participate in some new contracts in '23 because of they are not -- so the answer is we expect to honor definitely all of our contracts. And new ones to come, we will focus on our more strategic parts of the portfolio. And we'll -- and we aim to gain those because -- that are most interesting for us. If we will exit some contracts very early, I don't have it. Perhaps it's a little bit too detailed for me at this point. And I apologize if I cannot answer that detailed question, but I don't think that we are expecting to exit any contract today because of not profitable. I don't think so.

All right then, on the next question, on the target level of savings in '23. We have had this performance quite -- or very consistently over the last 2 years, on delivering 4% of our costs in savings. And we also said we would bring our SG&A below 10%, which has happened, both of them, in different recipes and different ways of doing it, as Gustavo has been explaining. We are assuming similar levels for 2023, so again the 4% of costs in savings. We have a pipeline of projects for 2023 that gives us the line of sight on how we will do that. And they will come in, in the course of 2023. And obviously, as always, we are looking and working hard to see how we can potentially even go further, but that's the planning assumption that we have taken. On the nonrecurring question, for '23 -- 2022, we've had about EUR 30 million, EUR 35 million mainly on restructuring of the plant in Germany; and then also in the U.S., ramping up; and the factory that we closed in U.S. Of course, to generate the 4% cost savings I just talked about, there's a number of initiatives that also cost some money, so there are some investments that we also foresee in 2023. They will be along the lines or slightly below what we've seen in 2022.

There are no further question, so I will hand you back to your host to conclude today's conference. Thank you.

All right, very good. So thank you. Thank you very much for the questions. This has been helpful for me to see, to listen to you and where are you -- your point of interest. I have to say that personally I'm highly, highly encouraged by the turn that we have, this company has done during 2022, in the second half, especially in the fourth quarter. It's very encouraging in the way that we are moving, so far, this year, so I'm looking forward to meeting you in person in the next few years, some of you in the next few days. So really looking forward to see you in person and answer more questions and continue with the dialogue. Thank you very much.

Thank you.

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