Ontex Group NV (OTC:ONXXF) Q2 2020 Earnings Conference Call July 30, 2020 3:00 AM ET
Philip Ludwig – Head, IR & Financial Communications
Thierry Navarre – Interim CEO & Chief Transformation Officer
Charles Desmartis – CFO & EVP, Finance, Legal & IT
Conference Call Participants
Sanath Sudarsan – Morgan Stanley
Richard Withagen – Kepler Cheuvreux
Charles Eden – UBS Investment Bank
Good morning, ladies and gentlemen, and welcome to Ontex H1 2020 Results Conference Call. Today’s call is recorded. Today’s conference will be hosted by Thierry Navarre, Chief Executive Officer; and Charles Desmartis, Chief Financial Officer.
Following the presentation, there will be an interactive Q&A session. Today’s earnings release and presentation are available on www.ontexglobal.com. I would now like to hand the call over to Philip Ludwig, Head of Investor Relations. Please go ahead, sir.
Thank you, Emma. Good day, ladies and gentlemen, and welcome to our H1 2020 results call. Before handing over to Thierry Navarre, a few housekeeping issues.
First of all, I would like to remind everyone that the safe harbor statements apply to this presentation and to our subsequent remarks and the Q&A session. Secondly, the comments we make today as previously about revenue or on a like-for-like basis, except where otherwise indicated. Please also note that 2019 revenue in the division’s EMEA and Healthcare were adjusted due to a shift of customer responsibility between these divisions, which took effect on January 1 of this year. This has no impact, of course, on total Ontex revenue. And finally, definitions of alternative performance measures are in our documents.
With that, let me hand over the call to Thierry Navarre.
Thank you, Philip, and good morning to all of you, and thank you for joining us today. I hope that you are all safe and well in those very peculiar times. Before I begin, I’d like to say a few words about another announcement that was made this morning. As you may have seen, Charles Bouaziz has stepped down as CEO, and I’ve been appointed to assume the position on an interim basis.
On behalf of everybody at Ontex, I would like to thank Charles for his contributions to the company over the past 7.5 years, and wish him well in his future endeavors. I personally feel very honored to lead Ontex in these challenging times, and I will continue to focus in my new role on strengthening and improving our operations. I also look forward to working with our key stakeholders and also Ontex’ remarkably dedicated team, as we have seen in the last few months. And altogether, I’m sure we will return Ontex to a path of robust growth.
So let me now set the scene for trading updates, and focusing on the key highlights of the period, before I give the words to Charles, who will walk you through our H1 numbers.
Let’s now go into Slide 5. Obviously, I don’t need to tell you that we are still operating in a very particular disruptive environment. For us, as for everyone else, the COVID-19 pandemic has been something of an impact, impacting every aspect of our business, from the supply to demands, to human resources, to consumer behaviors allover. And that’s without mentioning, the extreme currency headwinds, which also play the parts in the game.
Against this backdrop, Ontex delivered a meaningful improvement in H1 operating performance. While the lower market demand weights on our sales, we delivered a substantial improvement in profitability, from gross margin to net profit. We also generated strong cash flow and continued to deleverage. We focused relentlessly on rolling out our T2G transformation plan, which delivered €49 million in gross value creation at constant currency during that first half. We have as well invested to drive further growth with limited capital investment, advancing our U.S. expansion strategy with the announcement that we would open a new personal hygiene manufacturing plant in North Carolina, while also acquiring feminine hygiene activities in the country.
The fact that we managed to do under the exceptional circumstances of H1, all of that, this is testament to the strength of the Ontex organization and the remarkable mobilizations of our teams. And for this, I would like, again, to thank them all, and also all our business partners who are working tirelessly to ensure that we supply daily use personal hygiene products to our consumer and customers.
Now that the lockdown is being eased in several markets, the mix continues to be a threat across the globe. And no one really knows where the end of it is. And through that period, Ontex remains fully mobilized to safe world employee health and communities, while ensuring at the same time business continuity.
So now let’s move to the next slide and have a look at the headline numbers of our H1 performance. For group revenue, at nearly €1.1 billion, was down 2% on a like-for-like basis. After the strong Q1 that we shared with you the last time in which we saw a very big surge in demand as of mid-March, approximately, as the consumer prepared for the lockdown by stockpiling the products, we saw a marked decrease in demand in April and May, before the gradual recovery in June. Q2 in the like-for-like basis, our sales were down 10.5%, which obviously in isolation is not a satisfactory performance at all.
On the other side of adjusted EBITDA, we had 130 — sorry, €126 million, which was up 13%. At constant currency, slipping away ForEx headwind, it stood at €158 million, a 42% growth year-on-year, with margin up 448 basis points to 14.4%. This was driven by an improvement in gross profit and gross margin. We benefited from lower raw material indices, but also from the ramp-up of T2G. Our adjusted earnings per share was 34% on the back of higher operating profit. We saw positive cash flow generation of €29 million in H1, driven by the higher EBITDA and tightly managed costs, working capital and capital expenditure as well. We continued also to deleverage our balance sheet with our net debt to the last 12 months adjusted EBITDA at 3.28x compared to the 3.71x in a year ago period, and 3.51x at the end of last year.
So this is a very solid performance, which plays in an unprecedented environment, as you can see on the Slide 7. Indeed, the personal hygiene market in Europe experienced an unforeseen surge in demand towards the end of Q1. And you can see that the March category of revenue is up double digits as consumers loaded the inventories. This was followed right after in April-May, with a double digit decrease. And this decrease in demand for the track channel was impacted by, one side, the customer, but also the consumer using their stock of product after stockpiling, lower personal hygiene consumption due to restricted consumer mobility across the different regions, also lower store traffic due to the lockdown related to closures and consumer health and safety concerns, and also shift in channels with higher online sales.
After this decrease in May-June, as I mentioned, we see — a decrease in May — sorry, in April-May, in June, we started seeing a pickup again in demand. The Healthcare side of our business was less impacted by the retail trend, which help us to provide some stability amid the market volatility that I’ve just described.
Going now on Slide 8, I would like to share with you the advances that we made in our U.S. expansion strategy. You may remember that at the end of May, we made 2 plants announcements regarding the U.S. First of all, we announced plants for our first U.S. production site. A new personal hygiene manufacturing plant in North Carolina. The new facility scheduled to start production around mid-2021. The North Carolina locations was selected because approximately half of the U.S. population lives within 1,000 kilometer ranges. Secondly, we also announced that we were acquiring the feminine hygiene production asset of an Israeli company, Albaad. These assets are based in the same country in North Carolina. This acquisition strengthen them Ontex growing feminine hygiene business in that regions, providing us with a more robust supply capabilities and options for current, but also prospective customers.
With these two steps, we are accelerating the execution of our strategic priorities to increase the presence of the company in the U.S. Let me stress that, obviously, this involves a lot of energy. And we also did that with more capital outlay, which does not require any additional CapEx beyond our previously announced plans.
Now on Slide 9, I would like to give you a glimpse on some of the key innovations in H1. As you can see — displayed there, we brought several new innovations to the market. And this across the 3 segments that we are covering, baby, feminine hygiene and adult. Let me mention, in particular, the SeconDRY, instant dry system for baby diapers. This was developed by Ontex engineering in Germany and has been rolled out in some Ontex brands. It will now be included in diaper produced for major retailers and also other Ontex brands across the world in the coming months. Ontex and independent lab tests have shown that diaper with SeconDRY technology are as dry as the A-brand diaper tested. This new technology is also shown to lead to a lower carbon footprint per diaper. So this also contributes to our sustainability agenda.
Clearly, I’m very pleased to see that our innovation team is bringing this and other new products to our customer and consumer. As you know, in consumer goods, innovation is one of the key drivers for growth.
With that, let me turn to our progress reports on our T2G plan. And now let’s go on Slide 11. I have to say that I’m pleased that our transformation journey continues its progress while the world in which we are operating is facing one of its worst crisis indicates, like we just discussed before. This further, we have reinforced our predictions that T2G is and should be a transformation program looking at structurally changing our ways of working, with the aim to step up our efficiency and agility rather than a simple one-off cost-cutting project. Hence, a huge effort has been made in reviewing in-depth for key processes and with a lot of energy as it puts in change management to properly accompany our people through the journey. This request for each key roles in the company have been redefined. Training programs have been developed and rolled out to a significant part of the organization. We’ve had as well new capabilities. The operational reason of the company has been redesigned as well, so that we can ensure more optimal cross-functional interactions across the entire business.
So overall in H1, despite the disruptions due to the COVID, which has impacted actually all aspects of the program, we have delivered €49 million of gross value creation.
Now looking forward on the road map of the transformation. 2021, we focus on making sure that all that has been developed during the first 2 years are fully institutionalized into the business, so that we can sustain on an ongoing basis, a year-on-year value creation momentum. This is absolutely fundamental for the future of the company.
Now looking further details in the different pillars of T2G on the next slide. I can say that while significant progress has been made in all areas that are driving the performance improvement of Ontex, it’s fair to recognize that we are also facing some challenges in execution in that environment that is more uncertain than ever.
On the operations side, first, we delivered €57 million of gross value creation. Given that procurement is addressing, by far, the biggest cost line of our P&L, this is also where a material part of this value creation comes from, with about 80% of those gains generated from procurement initiatives. This, excluding any benefit from lower raw material indices. We’ve made a significant step up, thanks to the very analytics that we have developed per categories of raw materials, as well as thanks to the tools and the specific training programs that the programmer teams have intensively leveraged to get the best out of the negotiations. In parallel, what we have done is also to reset the structure of the team so that the cross-functional alignment with the business and should a flawless execution when it comes to implementing the new deals throughout the organization.
On the manufacturing side, our new organizational model that we shared with you previously and all the new processes have been rolled out in 10 plants, and has help maintain our efficiency level and deliver savings in material usage and production despite the turbulent condition in the peak part of H1. It is fair to say, though, beyond the role that COVID has played, which is obvious, we are also realizing that given the magnitude of the change that we ambition, the manufacturing transformation will take more time than initially anticipated and requires further enhancements of our skills or processors and our systems, and this is pretty high on our agenda. Otherwise, on the supply chain area, most of the initiatives are ongoing and clear results are visible like, for example, the rationalization of our distribution footprint that went an order of step further or the material improvement in pallet and tractive rate where we see KPIs improving month after month. We’ve also relooked at all our product design in a very systematic way and connected the reengineering program that has proven to be very beneficial with product costing being further optimized, but this without impacting the quality and the performance of our products.
Now looking in further details at the advances on the commercial front. I am pleased by the great progress made to speed up our innovation process, which as I mentioned today, it’s key, absolutely fundamental for consumer goods. We are fully on track there with what we have decided to do. For example, now the full baby line is 100% dedicated to R&D, and this has allowed to drastically accelerate the speed of innovation. The new setup in place in R&D — organization is also serving more adequately the specific needs of retail bond on one side and on the other hand, the specific needs of our own brands, which have actually their own dynamic. Further on the purely commercial front, a lot of work has been done to methodically review and structure our accounts and brand plans; clearly identify also where our growth and profit pools are and how to get to them; as well as to leverage all the expertise, which has been developed in areas like category management or revenue management.
All of this has started to have a very good and consisting effect on our relationship with our key customer, which is a very good news. Nevertheless, even over the last 4 months, are not allowed to fully leverage these elements, and we do not see yet the visible effect on the short term. And — so overall, on the commercial side, while meaningful progress has been made in several initiatives, this was still and so far had a negative impact of around €8 million on the total T2G gross gains of H1.
Market conditions and increased competition pressure definitely held back the delivery of the expected benefits. And the improvements that we made in price/mix did not fully offset the volume shortfall due to lower market demand.
So now I will hand over to Charles to walk us through the financial results. Charles, towards you.
Thank you, Thierry, and good morning to you all. Before I start my remarks on the financial performance of H1, likely my turn to express my thank you to Charles B, as we used to say, when there were 2 Charles in the organization. So Charles was is invited me to join the Ontex journey in November 2018, and it’s really been a pleasure for me to work with him over the last 20 months. And I wanted to make a point before this audience, Charles and I having shared the microphone for a number of quarters, probably 6 or 7, I’ve not counted. So thank you, Thierry, again, and good morning again.
And we’ll start on Slide 14, to review our consolidated revenue. So a lot of, what I’m going to say has been already covered by Thierry, but we’ll get into more details. And of course, this exceptionally change in patterns between Q1 and Q2, sequentially highly exceptional, will be a recurring theme in my next remarks. So we’re reporting like-for-like revenue of €1.092 billion for H1, down 2% year-on-year. And as I just said, H1 was marked by 2 distinct periods.
In Q1, as the COVID-19 pandemic spread globally, the personal hygiene market experienced an unforeseen surge in demand, mainly in Europe and in the U.S. towards the end of the quarter, with revenue in our category in March up double digit. And Q1 was followed by a very steep slowdown in market demand in Q2, in the tracked channels, for which we get fully reliable data. And this particularly, in April and May, and this was due to different factors that Thierry has mentioned, which I think is important for me to repeat because they really are the drivers of what we’ve been experiencing in the last 3 months.
First of all, in the first weeks, obviously, of April, customers and consumers use their stock of products after the stockpiling of March. Also due to our restrictive consumer mobility, the consumption of personal hygiene products decreased. Store traffic decreased due to lockdown-related closures in consumer health and safety concerns. Our customers in the big retail chains have postponed or canceled promotions and new product launches that we’re dealing with the immediate operating worries of managing the business through the disruptions of the COVID. And finally, online sales were higher, which is more difficult to track. But due to the combination of these factors and also to the loss of consumer confidence across our markets, in front of the looming economic recession, demand did not return to pre-COVID levels across Q2. And of course, overall, this weighed heavily on volumes with a negative impact on our H1 sales measure at 3.4%, with all the divisions posting shortfalls. Price/mix made a positive 1.4% contribution to revenue, and all categories reported improvement. And geographically, this was more marked in AMEAA.
In line with indications provided when we reported Q1, currency headwinds were strong as from mid-February, with a negative impact of €38 million in sales, reflecting mainly the weakness of the Mexican peso and the Brazilian real. As a reported basis, our revenue decreased by 5.5% to €1.053 billion in H1.
We can move now to the category review on Slide 15. In Babycare, which made up 56% our sales in H1, revenue was down 5.1% like-for-like. This decrease was driven by the factors, I just discussed, which hindered the recovery of demand in Q2. In the adult category, which represented 32% of sales in the period. Like-for-like revenue was up 0.9%.
Adult Incontinence is a key long-term growth category, in our H1 performance, quite resilient in the context, I described, shows we are well placed to serve customers in our markets. Our Adult Incontinence sales were up 5% in the retail channels. We saw growth in the first quarter, followed by lower market demand in Q2. In the institutional channel has decreased as the result of the temporary suspension in Q1 of a contract in our Healthcare divisions, for which shipments have resumed in Q2, excluding these temporary contract suspension, like-for-like revenue was up in the institutional channels and in the division. We’ll get back to this.
In the Feminine care category, which made up 11% our sales in H1, like-for-like revenue was 5.3% higher for the period on the back of a strong Q1. In particular, and due to one specific subcategory, demand for organic cotton tampons remained strong, which drove the category growth in the AMEAA division.
Let’s move now to the review, more details of our 3 divisions, and we’ll start with Europe on Slide 16. Like-for-like revenue in Europe in H1 was down 4.7% to €447 million, reflecting lower sales during Q2, essentially in line with the market demand trends for personal hygiene products, again, after the strong surge in demand in March. Our retail customers, I just mentioned, have been mainly focusing on managing the operating disruptions posed by the pandemic, and consequently delay most product launches and promotions for their own brands. Our baby diaper subscription offering, little bit change, launched in France in July 2018, and in the Benelux last summer, continued to grow strongly across the first half.
Finally, currencies had a €5 million negative impact on Europe in H1, mainly related to the ruble and to the British pound. Consequently, our reported revenue in Europe for H1 was €442 million down 5.8% compared with same period year.
Let’s move now to Americas, Middle East, Africa and Asia division on Slide 17. Considering the geographic footprint of the division and the specific pandemic-related challenges in many of its markets, we’re happy that we succeeded to post-sales growth in H1 2020 over a strong comparable in the same period of last year. On like-for-like basis, H1 2020 revenue stood at €427 million. In the Americas, revenue grew on the back of an improved price/mix and stable volumes. In Mexico, the solid positioning of local brands helped our business to contain the impact of lower demand in most retail channels in Q2. Brazil, by contrast, we performed well despite several week of store closures. Future in Brazil marks the seventh consecutive quarter of like-for-like revenue growth. In the U.S., where stores remain open, albeit with less customer traffic, we also posted higher revenue, boosted by lifestyle brands, in particular, where we benefited from the strong e-commerce sales. So really Brazil and the U.S. have been driving the growth for the Americas.
Revenue in Middle East, Africa and Asia was down versus last year as many markets were impacted in the second quarter by the lockdown measures implemented in many countries and also by lower product usage by consumers due to a decrease in available income. Currency headwinds were particularly strong in H1 for the division. So reported revenue decreased by 6.9% for the Americas, Middle East, Africa Asia to €394 million compared with the same period last year, so down 6.9% reported.
Let’s turn now to Healthcare on Slide 18. Healthcare like-for-like revenue decreased by 2% to €218 million, showing a good level of resilience in this changing environment. As I said earlier, the drop in revenue was entirely due to the temporary suspension of a large institutional contracts in Q1, for which shipments resumed in Q2. And excluding this temporary impact, Healthcare revenue was up year-on-year. Our activity in Healthcare was also hit by the temporary closures of some sales channels in March and April, which are gradually reopened from mid-May. Also, our commercial teams who support hospitals and nursing homes remain confined for more than 2 months. We continue to make good progress in the sales-pay market and e-commerce, which are critical for us to continue to grow in Healthcare.
Revenue grew solidly again in self-pay and e-commerce, particularly for Adult Pants, while our products very innovative, provide users with a very effective discrete solutions to address the full range of their evolving needs. In addition, sales in home delivery channels were solidly ahead. And to close the chapter on Healthcare, currency movement had no material effect on our division for the period.
After the category and division revenue review, we’ll move now to the adjusted EBITDA analysis and performance. So please turn to Page 19. So in H1, as Thierry mentioned, adjusted EBITDA came in at €158 million at constant currencies, up 42% year-on-year. The associated margin stood at 14.4% in H1, an increase of 448 basis points versus H1 2019. This strong improvement was driven by increasing gains for our T2G program as well as easing raw material indices. The adjusted EBITDA bridge detailed is building box of this performance improvement year-on-year. So T2G benefits continue to ramp up across H1. These benefits amounted to €49 million on a gross basis. Gross basis means before inflation, salary increases and other operating cost increases, which are covered separately.
Those T2G gains reflected contrasting performance between the operations and commercial work streams, as highlighted very clearly by Thierry. In operations, we achieved gross gains, sorry, of €57 million. Procurement gains reached €46 million, while gains in other operational work streams came in at €16 million. Over the period, we continued to invest in resources and specifically higher steel people in procurement, production engineering and management to further drive our manufacturing formation, and this resulted in increased cost of €5 million for these areas.
On the commercial front, despite real advances in macro stream, as Thierry highlighted, gains to date are not matching our expectations; market conditions, notably lower demand in Q2; operating disruptions at our customer and intense competitive pressure as well as execution gaps in their delivery of results. So we report volume shortfalls, which fall within the scope of T2G, with a negative impact of €3 million on EBITDA, while our investment in sales and marketing to support our brands, which we adjusted, of course for lower demand in Q2. This investment increased by €5 million year-on-year.
This altogether make up the T2G contribution to EBITDA improvement in H1. Lower levels of raw material indices compared with prior year accounted for €25 million improvement in EBITDA. Operating expenses, mainly in manufacturing and supply chain, were €10 million higher due to salary increases, inflation and other costs. Our expenditure in R&D to accelerate innovation and in IT to support manufacturing and digital initiatives as well as different phasing in certain G&A expenses versus prior year account for the €10 million increase reported for these cost categories.
Finally, we incurred €8 million in cost directly related to COVID-19, which mainly included extra compensation for our employees, additional transportation costs for our products, disinfection and cleaning as well as protective equipment for employees. This cost has been recognized as recurring expenses in the period. So all in all, this resulted in an adjusted EBITDA margin of 14.4% at constant currencies, a strong advance of 448 basis points versus a 10% margin reported in H1 2019. Strong currency headwinds from March onwards erase part of the strong gains, however, with a negative impact of €32 million on adjusted EBITDA in H1. Depreciation of the Mexican peso and Brazilian real accounted for more than 2/3 of this amount. Considering the currency impact reported for H1 and those forecasted in H2, on the basis of current priorities, we expect the full year unfavorable impact from currency headwinds to reach €115 million on revenue for the full year and €76 million to €80 million on adjusted EBITDA compared with year ago.
As a result of the current headwind of H1, our adjusted EBITDA was €126 million to reported currency for a margin of 12%.
Let’s move now to Slide 20 to review our nonrecurring income and expenses. Nonrecurring expenses decreased steeply compared with H1 2019, driven by lower T2G related costs, of which we recorded a charge of €6.5 million this year versus €27.8 million year ago. Group reorganization and acquisition-related expenses were also lower at €1.2 million in H1 versus €6.6 million last year. The cash impact of nonrecurring items in H1 2020 was €23 million, of which €20.8 million related to the T2G implementation. For full year 2020, we now expect €10 million lower nonrecurring expenses and cash impact than previously disclosed. Our updated forecast is that nonrecurring expenses recorded in the income statement for the full year will amount to €30 million to €35 million, of which €15 million to €20 million related to T2G. And the cash impact of nonrecurring items is forecasted to €35 million to €40 million, of which €25 million to €30 million related to T2G implementation, including one-off expenses and capital expenditure. So that was a good transition to discuss our free cash flow performance for the first half, and I invite you to turn to Slide 21.
So we generated €29 million of free cash flow in the period, and this is net of the €25 million of T2G’s specific cash outflows, as I mentioned earlier, €21 million one-off expenses and €4 million for capital expenditure. So excluding the T2G outflows, our free cash flow in H1 came in at €54 million, which compares very well with the €57 million generated last year on that same basis. We posted solid growth on reported EBITDA on the back of higher gross profit and lower nonrecurring expenses that we just saw. The tight toward our trade receivables and payables allowed us to mitigate the impact of higher inventories at June end. Inventories was higher due to strong increase in finished goods compared with the low level we had at the end of December, potentially as a result of lower Q2 sales. Raw material inventory also increased to ensure production continuity as the pandemic is still active in several locations.
Working capital as a percentage of last 12 months revenue was 8.1%. And excluding trade receivables monetized for our factoring lines, which amounted to €157 million at the end of H1, down compared with €171 million at the end of H1 last year.
Finally, capital expenditures stood at €45 million, well on track for the 5% revenue projection for the full year, including T2G expenditure, in line with our earlier guidances. So the good free cash flow performance was the main driver for leverage decrease, down from 3.51% — sorry, 3.51x at the end of 2019 to 3.28x at the end of June 2020.
I’m now finished with my remarks on the financial performance, and we’ll hand over back to Thierry for his concluding remarks. Thank you.
Thank you, Charles. Let me conclude today’s presentation on the key takeaways and on the current prospect for Q3. And I am now on Slide 23. So what, to my point of view, are the key takeaways for today? First of all, we achieved strong progress in operating profitability in H1 ’20, driven by the improved gross profits, lower raw material cost and the ramp-up of T2G. Secondly, our T2G program has made good progresses with the delivery of €49 million in gross value creations during the period. We are seeing greater operational efficiencies and the commercial transformation is progressing, while some execution challenges are being addressed by the business. Thirdly, the overall visibility remains limited with the market demand picking up more slowly, as we speak, than expected.
On the raw material front, the fluff pulp index has increased sequentially in U.S. dollar since early this year, which will have a limited impact on our purchase prices. And the most recent indices for the oil-based derivatives show sequential increases following downward trends earlier in Q2. However, these indices remains very low — very low, sorry, and below the level of prior year.
Looking at currency, at the current rate, we expect the year-on-year negative impact of currency depreciation on reported revenue and adjusted EBITDA in Q3 to be similar to the impacts reported in Q2.
So overall, I have to say that considering the persisting uncertainties related to the pandemic and its impact on our business, in particular, on the evolution of demand in the several markets where we are, we are not in a position to provide projections for the balance of 2020. In this challenging context, we remain fully focused on supporting our customers and improving our operating performance.
So this concludes our presentation. Thank you very much to you all for your attention. And I’m now opening the floor for the Q&A session. Thank you.
[Operator Instructions]. We will now take our first question from Sanath Sudarsan from Morgan Stanley.
This is Sanath here from Morgan Stanley. First of all, just let me extend my congratulations and best wishes to Thierry for taking up the new role as interim CEO. I have two questions for you here today. And the first one, Thierry, you have done a great job with the T2G program and expanding margins. Your underlying margins are quite strong, excluding currency. And so — and I would have that I guess that for Europe, your private label operations, your margins already are at now, what is like high-teen level. How much of this can you sustain for long-term…
Can you hear me, right?
Sorry, very clear signal. Could you please try to get closer to the mic?
Can I speak, again? Yes, is it better now?
No, not really. It’s very distant.
It’s very distant. I’m actually on the headset, sorry about that. Any better?
A bit better, repeat that, let’s try.
That’s okay. Yes, please. So my question is basically, having a guess about your operating margins in Europe, which is largely a private label operation and largely a Babycare market, you’re probably at about 18% margins or in there about high teen — mid to high teens. How much of this you think is sustainable longer term given that you’re operating at such high margins? What’s your experience historically with your customers, all our retailers on the levels of margins you operate and from competition in terms of what levels of margins are enjoyed right now in terms of promotions? And my second question is also in terms of what you need to achieve for your emerging market business, largely to drive growth and margin improvement here. I would have it again at much of your margin improvement right now is coming through your developed market operations and cost savings, and you’re losing a lot on FX. So what’s the longer-term strategy here to sustainably improve margins?
Well, thank you very much for those questions. Starting for the first one on Europe, and then I will give the words to Charles who will answer to the second part. On the — on Europe. I mean — and actually, it’s the same for most of the markets where we are. What — the aim that we have is to make sure that we create values for the key stakeholders. So it’s actually — it’s going to be — create value for contacts and create value for the retailers. So as long as we can continue to balance rightfully these equations, I think that the sustainability of the levels that we are driving now is actually — could be maintained. And this is the whole work which is also being done within the transformation, and T2G is really upscaling our capabilities, upscaling the tools that we have put in place in order to leverage anything else done, only looking at pricing.
There is ways to build up the business, reinforce the brands of the retailers in working together in partnership on the different drivers of value creation on the commercial side. So is it going to be a walk in the park? Absolutely not. Is it something which is possible and we are aiming for? Absolutely, yes. And we have, today, as you see in our results, a lot of emphasis on protecting our profitability. And for us, the challenge is that big balance between this profitability and the top line growth. But we are heading, I’m sure, into the right direction there with the action in place. Charles?
Your second question on what is the longer-term strategy in the emerging market to protect profitability, in particular, from a currency movement? I think there are 2 — it’s a 2-pronged approach. The first one is to strengthen our business in each of these markets and to enhance our pricing and more importantly margin power, in particular, our own brands, which are really driving our business in these markets. And this hinges on the progress in the top line drivers to strengthen our positions through innovations, improved value proposition for our customers, better services, improving logistics. And this is really the full focus of both the commercial and operational work streams of T2G.
On the cost side, is to further improve our ability to source locally, and we know that’s not always easy. But we’re doing strong progress in these areas for all the material or procurement that we can, and also improving the manufacturing efficiency in these markets. And we’ve been investing and continue to invest, but we believe it’s appropriate, including in this context. So that’s for the strengthening of our business in these markets. Also, on a constant basis, we have to progressively rebalance our geographic footprint to be less reliant today as we fully measure the impact, which is extremely positive again from a gross standpoint, if you look at the history of Ontex over the last years of venturing out of Europe. But we’re measuring, of course, some of the shortcomings is that in very stressed global economic scenario and the one raised by the pandemic has been — is very telling about this. The spread of the pandemic has caused currencies to collapse in a matter of days, by mid-February.
So for us, this is a lesson learned. And clearly, we get back to one of the key strategic advance for the first half, which is now getting into the real implementation of our U.S. strategy, developing business in the U.S. And therefore, increasing the share of dollar-based revenue for us will also contribute to progressively alleviating our dependency from sources of income and results coming from emerging markets.
Can I just clarify? Is that a definite shift towards more private label operations versus branded in emerging markets?
No. I would say, for us, it’s very important that we keep a balanced portfolio. So there is not a shift of strategy as such. We are the, let’s say, the expert in retail brands for personal care in Europe. The biggest market in the world is North America. And there, they are under development in those — in all categories, specifically on baby, on a private level. So we definitely would like to have access to this market, leveraging the big strength of the expertise and the history that we have with retail brands. But it’s very important for us to keep that balance because the pocket of growth, when you look at the landscape of the market in the world, actually is also with branded markets. The key private label regions are Europe and North America. And then the rest of the world is basically branded. So if we want to continue to reinforce the resilience of our profile, it’s important to keep that balance between Ontex — with brands and retail brands as well as a proper portfolio or mix of regions, as Charles is — has mentioned, and this is what we are working on as well, so that we get another step-up in the resilience of the company.
We will now take our next question from Richard Withagen from Kepler.
I have two questions on T2G. First of all, can you give some more details on the reasons for the slower savings in manufacturing and supply chain and in the commercial capabilities? And importantly, what are you doing to change this? And then second question is on the objectives for 2021 on T2G. The objective is 125 to 175 basis points of EBITDA improvement on the basis of the 2018 revenues, that means something like €35 million. You already made €49 million in the first half of 2020, probably there’s some savings also in 2019. So could you clarify why you don’t see bigger upside from — or by 2021?
Yes, thank you for your questions. So first one regarding the pace of the savings in manufacturing. I think we need to realize, and that’s why I reminded at the very beginning of the call is that we are engaging in a transformations program, which requires a new setup and new ways of working. And it is what it is. And when we are facing the execution of that, we realize that changing ways of working takes a bit more time than cutting a cost or, let’s say, closing a plant or doing something on the short term. But it does pace on the longer-term and is sustainable. So for me, it’s a very important point. So we prefer to take the proper time to put the right setup in place. And it’s not like we are not delivering savings, and it’s not showing because, as I mentioned, there are more than visible signs. There are contributions which are positive into the profitability of the company. It’s just not at the pace that we ambition initially. But it’s coming.
In that context, you can also imagine that the COVID environment has not helped in terms of speeding up some operational efficiencies improvement. No access to the sites. You cannot talk to your suppliers. You cannot make the test on the machines. All of those are actual initiatives, which are in plan. So the good news is, is that they are not canceled. They are still there. They are just a question of phasing — pace differently. So first it’s very important that we keep the pace, keep the momentum of the program behind the very strong governance, which is doing — giving the rhythm of the execution. The resource in terms of capabilities are now fully in place. There were some gaps which are now in place. And I’m pretty confident that now, as we go out — this for me, the only question mark, is go out or not go out of the COVID phase? We will resume a higher speed of deliveries there.
On the objective of T2G on 2021, and you have a very good memory, and — we said we — ambitions to deliver between 125 and 175 basis points of improvement. I have to remind you as well that we said that this is the net improvements that we are aiming for, knowing that the reporting, and you’ve seen it in the bridge that Charles was mentioning very clearly, T2G contributions are gross savings or gains which are contributing, and this is offsetting and absorbing some other elements, like extra investment in R&D or in IT. The COVID cost also digested in there. And so all of that is playing. And let’s not forget, there is also a bit of ForEx into that, which is playing against us as well, that we need to digest and absorb.
And Thierry, what — I mean do you have any budgeted gross cost savings for T2G in the second half?
We have objectives.
Yes, indeed, we have internally targets on that. For us, the cap is to deliver what we committed to you by 2021. And we will deliver it and with investments required, which will be lower than what we put into the initial investment. And so this is what — this is my aim. We are relentlessly working towards that. And we will post that result for 2021. And it’s not going to be in gross, but in net improvement of basis points. So that’s the path we are, and we’re continuing there.
We will now take our next question from Charles Eden from UBS.
Two questions from me. Firstly, on the like-for-like sales growth, which was down nearly 5% in Europe in the first half, which doesn’t appear to align with the performance from some of your listed peers and some of the retail monitor for this market. So would it be fair to conclude in losing value share in this geography? And if so, can you discuss where the specific soft spots are? And how you are looking to address this trend going forward? And then my second question is a question for you, Thierry. You’ve been named interim CEO. Is this a role that you’d be interested in on an ongoing basis? And sort of follow-up on that, what are your key priorities in the shorter term, given your affinity and closeness with the T2G program? Would it be fair to assume this is your #1 priority?
Thank you for your questions. On the first one regarding the trading in Europe. It’s clear that the performance in Europe has indeed not been at the expected level, and we’ve been suffering from the very intense competition there. Nevertheless, as I mentioned, we continued to implement the different initiatives in that area. And when you look into more granular details, you see that we are gaining share in Baby and slightly in Femcare, whereas where we are losing ground is more on the Adult Incontinence. And there, as you know, the segment is growing. So we are losing down on that segment, which is growing, and this is not compensated by what we gain on the other side. And this element has been impacted by the supply issues that we have experienced and some delays in some specific innovation. The good news is that we have no solving the capacity, which is now on the ground and running. And the innovation has been accelerated through T2G. So we’re going to resume in order to, as you were talking for, the pocket for potential, it’s there, and we are going to be accelerating this.
And what I would like to say is that, overall, the Europe work stream — commercial work stream is a key priority. And that’s why this investment that we’ve done in structuring our customer approach in a more disciplined way, putting the new capabilities, putting the team’s training program very intense, this has increased the constructivity of the relationship that we have with some of our key customers and our credibility. This is the necessary basis in order to start rebuilding the business again.
So are we delivering the results now? No. Do I see a light at the end of the tunnel? Yes, because the bases are visible and we have the right signs coming in front of us. And during COVID, if I look back at it, we’ve been very feasible, very agile, and I’m very proud that some of our customers have even sent us thank you letters for the support given, which has been exemplary during that period and which for me is the testimony of what Ontex can do, and that we need to continue to do even outside of an unprecedented crisis situation like the COVID-19.
Now on the personal questions, regarding the CEO position. Indeed, this is set as a position as an interim. And as you have certainly noted, there is a search going on, which has been launched by the Board with internal and external candidates. And I would say that I’m not neither shying away to the fact that I am an internal candidate, and I will definitely take that challenge on, knowing that on the short term, my priority is to fully take the role of the CEO of Ontex. And my priority is, as this is also what you asked, is first, to continue to strengthen the operational performance of the company by accelerating the T2G program. And other was at the pretty lead of that, that should be a continuity. And I will ensure that there is a proper setup so that the momentum is maintained.
Another priority for me is also to continue to mobilize the leadership team and the rest of the organization behind the urge to return to growth. This is something which is absolutely critical. It will not happen by itself. The team is behind this. The team needs to be mobilized. And when you have changes in organizations, there is always a risk that there is a bit of floating situation. I don’t want that. And that’s something which is also on top of my priority. And last but not least is also to work very closely with the Chairman, along with the Board, to review the strategic priorities and where the Board would like the company to go. And I would like to — I will be aligning with them on those strategic priorities.
That will conclude our Q&A session for today. I will turn the call back to your host for closing.
Thank you. Thank you all for having — attending our H1 trading update. I am very pleased to have had the opportunity to share with you our progress to date. And I am also very proud of the meaningful profitability improvement that the company has delivered in very, very challenging times. I know that we have some challenges in front of us. And I know as well that the team is fully mobilized to work on them. So I hope that we have answered most of your interrogations. And I’m looking forward to meeting you again pretty soon. Good bye to you all and keep safe.
Ladies and gentlemen, that will conclude today’s conference, and you may now all disconnect.