U.S. Markets closed

Edited Transcript of ONTEX.BR earnings conference call or presentation 4-Mar-20 8:00am GMT

Full Year 2019 Ontex Group NV Earnings Call

Zele Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Ontex Group NV earnings conference call or presentation Wednesday, March 4, 2020 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles Bouaziz

Ontex Group NV - CEO

* Charles André Pierre Desmartis

Ontex Group NV - CFO and Executive VP of Finance, Legal & IT

* Philip Ludwig

Ontex Group NV - Head of IR & Financial Communications

* Thierry Navarre

Ontex Group NV - Chief Transformation Officer

================================================================================

Conference Call Participants

================================================================================

* Alan Vandenberghe

KBC Securities NV, Research Division - Head of Research & Equity Analyst of Food Retail

* Celine A.H. Pannuti

JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst

* Fernand de Boer

Banque Degroof Petercam S.A., Research Division - Research Analyst

* Mirza Faham Ali Baig

Crédit Suisse AG, Research Division - Research Analyst

* Richard Withagen

Kepler Cheuvreux, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Ontex Group's Full Year Results Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Philip Ludwig. Please go ahead, sir.

--------------------------------------------------------------------------------

Philip Ludwig, Ontex Group NV - Head of IR & Financial Communications [2]

--------------------------------------------------------------------------------

So good morning, ladies and gentlemen, and welcome to Ontex' Full Year 2019 Results Call.

I'm joined today by our CEO, Charles Bouaziz; our CFO, Charles Desmartis; and our CTO, Thierry Navarre.

Pleased to have your attention this morning. Just a few housekeeping factors. Obviously, we have the disclaimer statements, which are found in the documents published on our website this morning.

As usual, we'll focus on like-for-like revenue growth, that is excluding the impact of any currencies or changes in scope, which does not apply at this time. We'd also like to mention that we've also published a separate press release this morning regarding a change in the Board of Directors, coming from the Board of Directors. For obvious reasons, we're not able to answer Q&A on this question.

And finally, we listened very carefully to all of our investors, as we have done since the IPO, and certainly since last year, we've taken this to -- into account in our disclosure. And we're looking forward to sharing with you our results, our progress and the outlook for 2020.

With that, I'll hand the floor to Charles Bouaziz.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [3]

--------------------------------------------------------------------------------

Well, thank you, Philip, and good morning to all of you. Well, thank you for being with us today on this call. Joining me today are Charles Desmartis, our CFO; and Thierry Navarre, our CTO. I will provide an overview of the key highlights of our 2019 performance. Thierry will then update you on progress achieved on our Transform2Grow plan and Charles, as we call, the other Charles will detail our financials. I will return to share our outlook and make some concluding remarks. Then, of course, we will be happy to take your questions.

So to that purpose, thanks to go on Slide 5, with the key highlights of 2019. Well, overall, I would say that I'm pleased that Ontex performance in 2019, delivering as anticipated our outlook. Very importantly, 2019 was a pivotal year for us with the launch of our Transform2Grow plan.

As we will see later, we are already starting to see some encouraging initial results, and our Q4 performance showed an upturn in terms of profitability that marks a clear inflection points and lays the foundations for further improvements in 2020. If we look at our performance in the year, it was broadly in line with our expectations. We operated in very competitive markets, with challenges such as persistent high raw material costs and foreign exchange headwinds for most of the year that negatively impacted our adjusted EBITDA.

On a positive note, we continue to see a shift towards retailer brands and online sales of personal hygiene products continue to grow. Against that backdrop, our overall revenue was down 1% on a like-for-like basis. In fact, we delivered solid like-for-like revenue growth in the Americas, Middle East, Asia and Africa region with local brands, and where relevant, helping retailers with their own brands. This largely offsets an anticipated temporary slowdown in sales in Europe, whereas Healthcare was an element of stability. Adjusted EBITDA at constant currencies was in line with the following -- sorry, was in line with the previous year, with a stable margin of 11.5%, disregarding our raw material headwinds.

We benefited from our initiatives on price/mix and the first benefits from our T2G program. Within this performance, we saw 2 clear and encouraging signs of improvement. First of all, a meaningful improvement in adjusted EBITDA in our fourth quarter. With a year-on-year increase of 11% on a reported basis and 8% at constant currency. Adjusted EBITDA margins were up by more than 100 basis points, both on a reported basis and at constant currencies. These are very encouraging sign that we believe we are beginning to turn the corner, and we expect further benefits of our T2G program and more favorable trends figuring into our performance in 2020.

Second, 2019 was also notable for strong free cash flow generation, above our targets. These results reflects an enhanced financial discipline with strict working capital management and stricter allocation of CapEx, even while we invested in T2G.

Well, on the investment front, I'm pleased to announce today that we've made the decision to establish local manufacturing capacity in the United States to underpin the gains we've made in that market. We said in May last year that we consider the U.S. markets, as a reminder, the second largest in the world, to be an important opportunity for us. And our team have patiently, but persistently done a great job of increasing our position at a major retailer and to other retailers. In light with this and how our business is developing, it's the right time for us to start producing closer to our U.S. customers.

More generally and in line with the T2G plan, we are stepping up our investments in innovation, IT and marketing. This is to drive long-term growth and value creation. And I will just focus now shortly on innovation.

So if you go on Slide 6, I just wanted to highlight couple of examples of our innovations in 2019. Innovations are driven by changing consumer needs and trends, and this opens significant opportunities for us. On the slide we focus on some innovation in each of our 3 categories where we play in. In Babycare, we continued to strengthen our Pom Pom brand in Brazil, where it is now the leading player in São Paulo markets. The new Pom Pom has received positive consumer feedback, and in Q4, we were the second brand in Brazil to introduce a channel core to improve speed of absorption. Beyond this initiative, just like to remark that Brazil enjoyed 4 consecutive quarters of like-for-like growth in 2019.

In another large -- one of the largest markets for Ontex in retail, in the Baby category, we won the Best Diaper award in 2019, driven by consumer tests, magazines, highlighting the performance and the quality of our R&D in our products.

Following the successful launch in mid-2018 of our baby diaper subscription offering behind the brand Little Big Change in France, we have seen good growth, which led us to introduce this service to consumers in the Benelux in the summer of 2019. Young parents are more than ever looking for products that meet their environmental criteria and make their lives easier by delivering where they want, all, of course, at a reasonable price. We expect this brand to represent at least 10% of our retail sales in France in 2020.

In Adult Inco, which is Adult Incontinence, innovation remains central to our efforts to provide users with effective, discrete solutions to the full range of their needs. iD Intime, an absorbent underwear range for women was voted 2020 Product of the Year in the Incontinence products category in Belgium, following its launch in May 2019. This is the third time in the past 4 years that innovative Incontinence products from Ontex received this recognition from Belgium consumers.

Now in the third category, feminine hygiene, in Pakistan, we saw an unmet need in the feminine hygiene category, owing to the lack of choice for consumers. The market was dominated by one main player, but users of that brand had express willingness to switch to a higher-quality product. After testing a product that performed significantly better than competition, we decided to introduce a new brand, Sincere, for sanitary napkins in Pakistan. We are very encouraged by initial results.

In the same time, as a reminder, when we acquired Grupo Mabe, our Mexican operations, we had a two-pronged strategy, where we said this was the gateway to the U.S. markets, I just told you that we are accelerating in these markets. But also we said that we would enter into one category where we were not present, feminine hygiene with branded business. And I'm pleased to tell you that over the course of 2020, we will enter this category that is a growing category.

Now I will let Thierry talk about Transform2Grow.

--------------------------------------------------------------------------------

Thierry Navarre, Ontex Group NV - Chief Transformation Officer [4]

--------------------------------------------------------------------------------

Thank you, Charles, and good morning, everyone. We are now on Slide 8 of the deck. So when we announced T2G last year, or Transform2Grow program, we committed to making a status report at our full year results. And I'm pleased today to be able to share our progress with you.

You surely remember that T2G was launched in May '19 with the objective of step-changing our operational efficiency and commercial practices, making Ontex a stronger and more profitable company, delivering growth and creating value for every stakeholders. And since then, more than 55% of our initiatives are being implemented. And the initial tangible results are already visible in the improvement of our adjusted EBITDA across the second half of '19. We also brought forward some of the working capital initiatives. We strengthened the working capital management, driving the free cash flow generation, up 51% and decreasing our net debt. So what I would like to do now is to share with you a few concrete example of the initiatives we are putting in place.

Starting with the operational efficiency side, we rolled out our new shop floor model in already 4 of our main production sites, upgrading the capabilities there and starting to improving the productivity. We have also set up and put in place a production factory to address the capacity challenge that we are facing in the tampon category due to the strong growth that we are seeing.

Going into the logistic areas, we have implemented as well new warehouse operations practices across several locations, leading to more cost-effective in-store storage. And as a result, we exited from 9 external warehouses, which is about close to 20% of our external storage locations.

We've also captured the first benefits in procurement, and we are on schedule to deliver in 2020 the raw material savings well above the benefit from the lower current indices as well as the savings in the indirect spendings.

Now let's move to the commercial initiatives, and a few examples there as well. We have fully revised our R&D organizations and the processes, which has already speed up our innovations with a promising 2020 pipeline. Also linked to R&D, another initiative in that area is that we have dedicated fully a baby diaper production line, which has already brought benefits and is allowing us to bring product to markets much faster, which should help us further in 2020.

We have as well rebuilt and upgraded more than 50 account plans covering a large portion of our business across the different geographies, which has clearly strengthened relationships with our existing customers and helped us to win new ones, which will start to come through in 2020.

Charles also mentioned it, we accelerated as well the subscription model, launching Little Big Change in the Benelux. And I would like also to mention that, overall, we have reduced the FTE or headcount by nearly 1,000 across the company, which is a combination of the new setup we put in place in some areas to handle merchandising and the impact of our new manufacturing model.

So as you can see, a lot of work has been put in place. But I can tell you, there is much more to come. And in parallel as well of those operational initiatives, in order to embed these changes and make them sustainable, we have invested significantly in more training than ever before. And this also has been complemented by bringing new skills and experience into the organization. And on top, to keep all the work stream on track and to ensure execution and impact, we have in place dedicated resources and a strict governance with a weekly drumbeat that I personally lead.

So in a nutshell, I have to say that I'm very encouraged to see how our people have responded to the challenge of doing things differently and how it is already starting to pay off. And as we speak, we are well on track to deliver our 2021 targets.

So now I'm handing over to Charles Desmartis, our group CFO, to comment further on our financial performance. Thank you.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [5]

--------------------------------------------------------------------------------

Thank you, Thierry. Please let's go now to Slide #10 for a quick review of our financial highlights for the year, before entering into more detail in our income statement and balance sheet.

So as mentioned by Charles B in his introduction, our 2019 revenue and operating profitability were broadly in line with our expectations with a better second half of the year. Group revenues stood at EUR 2.28 billion (sic) [EUR 2.281 billion], down 1% on a like-for-like basis, reflecting lower volumes in retailer brands in Europe, largely offset though, by the strong performance of our local brands in AMEAA. Adjusted EBITDA reached EUR 245 million and EUR 261 million at constant currencies, down 1.1%, resulting in an adjusted EBITDA margin of 11.5%, in line with the one delivered in 2018.

Over the year, free cash flow generation was a highlight, and frankly, exceeded our initial expectations, growing by 51%, as Thierry just mentioned, to EUR 110 million versus last year. And this allowed us to continue reducing net debt, which stood restated for IFRS 16 at EUR 861 million at 31st of December 2019, a reduction of EUR 46 million versus 31st of December 2019 (sic) [2018], post-IFRS 16.

As a result, leverage only slightly decrease -- increased at the end of 2019 compared with the end of 2018 and came down versus the position at the end of June. We were in full compliance with the leverage covenants of our financing arrangements at the end of December, and did it with increased headroom over the second half of the year. I will now further detail this key aggregate in the following pages.

So please move now to Page 11 for the review of our revenue. So reporting like-for-like revenue of EUR 2.270 billion for 2019, down 1% year-on-year, as I just mentioned. As expected, like-for-like revenue improved in the second half of the year, on the back of a better trend in Europe, with the group reporting like-for-like improving from minus 1.3% in H1 to minus 0.6% in H2. Volumes were down 3.2%, impacted by contract losses in Europe and, to a lesser extent, high 2018 comparable in Healthcare. We posted solid revenue growth of our own brands in emerging markets and increasing retail or brand sales in the Americas. We achieved positive price/mix evolutions across all 3 divisions and categories with a positive impact on sales of 2.2% overall in the period. After 2 years of experiencing heavy currency headwinds the trend reversed in the fourth quarter of 2019. So we reported an EUR 11 million positive currency impact on revenue for the full year, leading to a reported revenue figure for the period of EUR 2.281 billion. So on a reported basis, like-for-like revenue decreased by 0.5% last year.

Let's move to the category review on Page 12. We posted slight growth in the Adult category, driven by our own brands as well as pants sales. Revenue in the other 2 categories was lower, mainly impacted by lower retail -- retailer brand volumes in Europe. In Babycare, which represented 59% of our sales in 2019, revenue was down 0.9% like-for-like. The decrease in Babycare revenue was driven by contract losses of retailer brands in Europe. However, both Babycare sales and European retailer brand volumes improved in the second half of the year on the back of higher baby pants revenue. Investments made over the past 2 years to raise baby pants production capacity underpinned sales growth above category trends, reflecting the shift by consumers towards this product. In AMEAA, sales of Ontex branded baby diapers grew in 2019.

In the Adult category, which made up 30% of our sales in 2019, like-for-like revenue was up 0.1%, which came on top of the 4% growth reported in 2018. Adult Incontinence is a key long-term growth category, and where we are placed to serve consumers around the world in both institutional and retail channels. In Q4, Adult Incontinence saw a 0.6% decrease year-on-year, largely due to a strong comparable base in Q4 last year, in particular, in the institutional channels of our Healthcare division. Lower revenue in institutional channels in Q4 was also due to the temporary suspension of a large contract for which shipments are -- will resume in Q2 this year, and we will get back to this.

Annual sales in retail channels, comprising our own brands as well as leading retailer brands, increased by 2%. Adult Pants sales posted broad-based growth supported by our investments in innovations and production capacity.

In feminine hygiene, which made up 9% of our sales in 2019, like-for-like revenue was 5% lower for the period after a strong 2018. However, the year-on-year trends were better in H2 and in Q4, during which the decrease in like-for-like revenue was more limited at minus 1.4%.

Europe reported lower sales of retailer brands, which make up today, the largest part of our revenue in this category, while Ontex' own brands and sales to lifestyle customers posted growth in AMEAA. Demand for organic cotton tampons remained strong, and we're adding production capacity in order to support growth in this category.

I'm now moving to the review of our 3 divisions, and we'll start with Europe on Page 13. Europe's like-for-like revenue was down minus 6.4% to EUR 955 million, in line with our expectations, reflecting volume decreases in the 3 product categories on the back of contract losses in 2018. While we experienced a low point in H1, as expected, we are reporting an improvement in sales and volume evolution trends in H2. For reference, like-for-like revenue trend in Europe improved from minus 8.4% in H1 to minus 4.4% in H2, with Q4 showing further pickup, with like-for-like revenue down by only 2.8%. The market environment remained highly competitive, marked by continued intense promotional activities by the international branded leader in Babycare. Higher sales of baby pants as well as improved innovation management, commercial approach and support to leading retailers, driven by the commercial work stream of T2G, as Thierry just highlighted, underpinned improved sales trends in the second half of 2019. The growth of our baby diaper subscription offering, Little Big Change, launched in France in July 2019, accelerated across the year. Currency impact on our sales in Europe compared with the prior year was positive, though minor, so that our reported revenue in Europe for 2019 of EUR 957 million was only EUR 2 million higher than that at constant currencies and was down 6.3% versus 2018.

Moving now to our Americas, Middle East, Africa and Asia division on Page 14. The division posted yet another solid performance this year and reported sales of EUR 883 million, up 5.6% on a like-for-like basis versus last year. In Q4, like-for-like growth was limited to plus 0.5%, largely explained by a strong comparable basis. Healthy growth is expected to resume this year in 2020. Sales of Ontex brands, which is the focus of this division, were higher in all 3 categories and all geographies.

In the Americas, revenue grew on the back of higher volumes and improved pricing and mix. In Mexico, performance was driven by our portfolio of local brands, notably Bbtips and Chicolastic. In the U.S., we also posted higher revenue, mainly driven by good momentum in retailer brands on the back of our partnership with a major player in the market.

In Brazil, the successful relaunch of baby diaper brands underpin good growth. Revenue in the Middle East and Africa also rose despite political and economic challenges in some markets. Our own brands, Canbebe and Canped drove growth in the baby and adult care categories. Our performance in AMEAA confirmed the relevance or a unique approach, combining a portfolio of local Ontex brands in developing markets with lifestyle and retailer brands in North America. Currency impact on our sales compared with prior year were positive, and our reported revenue for the division increased by 6.7% compared with the same period last year.

Let's turn now to Healthcare on Page 15. Healthcare like-for-like revenue decreased by 0.8% to EUR 432 million, largely driven by lower volumes in the highly competitive institutional channels. Our Healthcare division is generating the largest part of its revenue from the institutional market in Europe, which is slightly decreasing in value as we have shared with you on several occasions. The Q4 revenue trend versus prior year of minus 2.2% like-for-like is entirely due, as I just mentioned, to the temporary suspension of a large contracts for which we expect shipments to resume in Q2 2020 by financing our initiatives to increase our presence in the self-pay market and e-commerce. Revenue grew solidly, particularly in Adult Pants, where innovation remains key to provide ever demanding users with effective discrete solutions to the full range of their needs. The currency impact compared with 2018 was positive, yet minor. So our reported revenue for the division decreased by 0.7% compared to the same period last year.

So please turn now to Page 16 to look at our operating profitability performance. So in Q4, as Charles highlighted, Q4 marked turning points in our profitability improvement and indication going forward of what we're expecting. Adjusted EBITDA came at EUR 71 million at constant currencies and margin on like-for-like sales stood at 12.1% an increase of 105 basis points versus Q4 last year, pro forma for IFRS 16. This meaningful improvement of operating profitability reflect the first benefits from our T2G program as well as easing raw material indexes. We expect both improvements driver to continue to ramp up over the next quarters. For the full year 2019, now, we are reporting adjusted EBITDA of EUR 261 million at constant currencies and margin of 11.5%, stable versus 2018 pro forma for IFRS 16.

Now looking at the adjusted EBITDA bridge for the full year. T2G initial benefits ramped up across H2 and are now enhancing the impact of the ongoing performance improvement actions launched before we started T2G. So T2G contributed both to the improvement in price/mix, on the back of better commercial planning and execution, which drove enhanced price and mix, and T2G also contributed to savings in manufacturing, supply chain and procurement as a result of the ongoing reorganizations, rationalizations and process redesign that Thierry discussed earlier. We expect, again, these benefits to gain momentum across 2020.

Raw material costs improved in the second half of the year and had a positive impact on adjusted EBITDA margin in Q4 compared with last year. But for the full year, higher raw material costs in the first 3 quarters, had a negative impact on adjusted EBITDA margin. And this impact for the full year is measured at 103 basis points compared with the prior year. We will continue to invest in sales and marketing as required to bolster future growth, in particular, in our branded businesses. This investment has an unfavorable impact measured at 29 basis points on our adjusted EBITDA margin. So the net result of the variation of the key operating profitability factors that we just discussed, we report an adjusted EBITDA margin of 11.5% at constant currencies, stable versus 2018 pro forma for IFRS 16.

For the full year, I just mentioned that foreign exchange variation had a positive impact on our revenue, but again, currencies had a negative net impact on our adjusted EBITDA. This impact was negative EUR 16 million or 74 basis points. This is mostly due, as we reported to you across the year, to a stronger dollar, the currency in which we purchase a large part of our raw materials as well as the weaker Turkish lira. As a result, over 2019, reported adjusted EBITDA was EUR 245.1 million and reported margin was 10.7%.

Now switching to our nonrecurring income and expenses on Page 17. Nonrecurring expenses amounted to EUR 70.3 million in 2019, mainly due to the implementation of the T2G program for an amount of $49.9 million. The cash impact of nonrecurring expenses was limited to EUR 30 million in 2019, including EUR 20.7 million related to the implementation of T2G.

For this year, 2020, and for the full year, we expect nonrecurring expenses in the net income statement to be EUR 35 million to EUR 40 million, of which EUR 25 million to EUR 30 million is related to the T2G implementation. The cash impact for the full year 2020 of nonrecurring items should be limited to EUR 45 million to EUR 50 million, of which EUR 35 million to EUR 40 million related to the implementation of T2G.

Please move now to Page 18 for the review of our free cash flow generation in 2019. Free cash flow, post-tax and repayment of lease liabilities, was EUR 109.7 million. This amount is net of the EUR 30 million T2G-specific cash outflows, the EUR 20.7 million for nonrecurring expenses, as I just mentioned, and EUR 9 million for T2G-specific capital expenditure. Free cash flow improved by a strong 51% year-on-year or EUR 37 million despite lower adjusted EBITDA. So our strong cash flow performance was essentially attributable to the comprehensive working capital reduction initiatives we've implemented since the beginning of the year and enhanced in the framework of T2G. These actions include, in particular, tighter management of trade receivables, renegotiation of payment terms with suppliers, inventory optimization. The strong decrease in inventory in 2019, also reflect the fact that we carried high raw material volumes at the end of 2018 in anticipation for price increases in 2019. This was not repeated at the end of 2019, considering the current trends in raw material costs.

Working capital as a percentage of revenue was 9% at the end of 2019, a 220 basis point improvement versus end of 2018, and well within our target of 12% or lower. This improvement again reflects notably the decrease in inventory in the first half. Going forward, we remain, of course, committed to strict management of our working capital to optimize cash flow conversion.

Finally, capital expenditure as a percentage of revenue was 4.6%, including T2G-specific CapEx at the low end of our initial range planned for the year, reflecting more efficient allocation of capital cost projects and the phasing of some programs.

Finally, cash taxes increased mainly due to tax payments made in 2019 related to previous years.

So with this, I'm finished with the financial review of our 2019 results, and I hand over to Charles for his concluding remarks. Charles?

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [6]

--------------------------------------------------------------------------------

Thank you, Charles. Well, before I conclude today's presentation on the outlook for 2020. I wanted to come back on the outbreak of coronavirus. Priority is the safety of our 10,000 employees, and we are reminding them safety measures, limiting travel, meetings, et cetera, but trying to be very protective of our employee base.

On the business side, as of today, we don't see any material adverse impact of the coronavirus on the company. Ontex sales in China and other countries of the Far East are not material. We are sourcing several raw materials from a small base of suppliers in China and a few other Asian countries. At this moment, most of our key suppliers have given assurances that their activity is not affected by the coronavirus. However, we have started to build extra inventory for the most critical supplies and are activating alternative sourcing, wherever possible.

Our business in Europe has not been affected so far. Further spread of the coronavirus leading to restrictions in transportation of goods and individuals could nevertheless lead to disruptions to our supply chain and manufacturing organization, increased logistic costs and delayed shipments to customers. But be reassured, we continue to monitor the situation very closely.

Now let me conclude with the outlook for 2020 on Slide 20. So in 2020, we expect to report higher revenue, operating profitability and net profit. On revenue, we forecast low single-digit like-for-like growth. This will result from another year of solid top line growth in AMEAA, while sales in Europe and Healthcare should be broadly stable versus the previous year with a slow start in Q1 and improving thereafter, as T2G driven commercial plans strengthen our positions across our markets and gain momentum during the year. We expect to improve adjusted EBITDA, irrespective of the currency rates to EUR 270 million to EUR 275 million from EUR 245 million in 2019, on the back of strong improvement in gross margin, thanks to increasing benefits from our T2G program as well as lower raw material indices. We anticipate capital expenditure of approximately 5% of revenue, including T2G-specific CapEx, which is in line with 2019 and lower than the guidance we gave.

As a result, we expect to continue to further reduce our leverage by year-end. Well, we look forward to providing an update on progress relative to our 2021 targets at the Q1 2020 results and which take place in May. Beyond the 2020 outlook, and before turning the call over to your questions. I'd like to conclude saying that OpEx is particularly well positioned to benefit from the underlying growth trends of the personal hygiene industry with strong assets in terms of geographic footprint, including a growing presence in emerging markets, and an expanding position in the dynamic retailer brands in the U.S.

We have also built attractive positions in essential categories such as Incontinence, Babycare. As I told you in my introduction remarks, 2019 has been a pivotal year for the group as we started to implement our T2G plan. We are encouraged by the positive trend in Q4 and expect this trend to continue over 2020. Transform2Grow provides a clear strategic road map for Ontex, and our teams are fully mobilized to deliver on the plan. It is a comprehensive set of initiatives that may seem incremental when taken individually, but as said previously, our step change in our operations, when viewed in their entirety. We have started seeing first effects in Q4, and as anticipated, we expect further improvements in 2020 as the benefits of the planned ramp up.

This concludes our presentation. Thank you very much for your attention, and I'm now opening the floor for a Q&A session. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will take our first question today from Celine Pannuti from JPMorgan.

--------------------------------------------------------------------------------

Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [2]

--------------------------------------------------------------------------------

A few questions from me. First, if I look at your top line guidance for 2020. Could you tell us what you have in mind in terms of the environment in Europe in terms of market growth? And could you as well spell out a bit what you mentioned earlier, which were important gains in contract due to T2G, where is that, in which category? And I'm a bit surprised that we don't see a bit more contribution, if I look at Healthcare, from the contract you mentioned that will resume for Q2 given your guidance of a flat? My second question is on the building block of the bridge for margin for EBITDA growth in 2020. Is it possible for you to give us a bit more color on what the T2G -- what should we expect in terms of T2G savings? What kind of raw material cost deflation you're seeing? And should we expect pricing to turn negative in 2020? And then finally, working capital. Can you give us a guide for 2020? And are we reading, then there should be a deterioration, at least in H1 given the extra inventory you are building up?

--------------------------------------------------------------------------------

Philip Ludwig, Ontex Group NV - Head of IR & Financial Communications [3]

--------------------------------------------------------------------------------

Well, thank you, Celine. Those are a lot of questions in those 3. So we'll take them, but for -- please, for time sake, if we could try to keep the questions limited to 3 questions. Happy to take them.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [4]

--------------------------------------------------------------------------------

Good morning, Celine, and thanks for the questions. So in terms of top line guidance, the market in Europe is not growing, and that's not something new. It's on the back of aggressive pricing. It's also not new, so we don't see a change, and we don't foresee a change, whether it's the broader players that are lowering through promotional activities on their brands, and then consequently, the retail brands that are also aggressive. We don't see -- and forecast a change. So as we said this, we plan for -- -- and by the way, there is also another element that is step by step in some markets. The e-commerce activity is growing, and it's not monitored through the panel data. So it's an element like if you remember several years ago, in the U.S. with Dollar Shave Club, where after Dollar Shave Club realized they were holding 20% of the market. Everybody realized the market was not shrinking, but it was transferring to nonaudited segments. So that's where it is. In Incontinence, it's continued to grow in retail. There is also a dual effect. On one side is -- there is a shift from the health care channel into the retail channel, and that's continuing. Why? Because the pricing pressure on health care translates into sometimes quality that is at par or lower on the quality of the product and the performance that you have in retail, so it's not slowing down on the retail channel grow in Incontinence.

How do we impact or how do we perform in this environment? There is also another element to make life more complex is the switch from baby diapers in into pants. That is a global switch, leaded and initiated by the market leader, and we are following this as well. There is a big growth opportunity on pants in retail brand because the share of the pants in the retail brand is much lower on the share of pants in the branded part of 8 players. So we play on the mix and the pants are sold at a higher price from the baby diapers, which helps in terms of revenue management and in terms of gross margin management.

Now your second question on top line was on health care. And I must admit that -- I'm not sure I got it, but I can reiterate what Charles -- we told you is in Italy, we had one contract that was won, but suspended for a couple of quarters that translated into a lower Q4 and a lower Q1. Why? Because during the suspension, we didn't deliver, a competitor delivered in our place. But as the low told us that we won these contracts, we will resume the contract as of April, which means that as of April, of course, we will get an increase because it's a large contract. So that's why it's starting Q2, Q3, Q4 of 2020. Now very importantly, on the health care channel, as we said, strategically, we try to reduce the part of the business that is under tender, that is the reimburse part, and we work on increasing the self-pay part. Why? Because the self-pay is more profitable and is less dependent from tenders. So this, we initiated this in 2013, and we continue over time. And the mix shifts, of course, it's very slow because as you can imagine, the tender part is a big part for the reimbursed channel, but that's what we do.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [5]

--------------------------------------------------------------------------------

I take maybe the last 2 questions.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [6]

--------------------------------------------------------------------------------

Yes. The second one, and I will pass it to Charles, was the building blocks on margin growth. And in terms of T2G, you referred -- before Charles answer, and I'm sure the answer will be extremely detail and comprehensive, but it's -- the reality is T2G is a value creation program. And I understand that sometimes, people take it as a cost saving exercise. And in fact, it's a combination of different parameters. So it plays with innovation, with premiumization of the categories, with revenue management, and of course, with elements that are playing on the cost part of it. And that translate into -- that was in my outlook, gross margin expansion. It's very important in our consumer goods to work effectively on gross margin. So it's the combination of this that is resulting into an improvement. But I'll let Charles answer to this one and to the working capital guidance.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [7]

--------------------------------------------------------------------------------

Yes. We will not provide you with the detail of the building blocks of the EBITDA, which is essentially gross margin driven improvement that we expect. You will appreciate that we give an outlook more detailed and probably more aggressive than what we used to do in the past. So we will not provide -- you'll see as we report our quarterly numbers, how the building blocks evolve compared with the prior year. But as I've highlighted in my earlier comments regarding 2019, as Charles has highlighted, T2G is impacting all our -- all the drivers of the P&L, the top line as well as the cost of sales and also in particular through the gains in indirect purchases, the operating expenses. Now to get to your points on should we expect increase in working capital due to inventory buildup. I've not said that we would build up inventory in H1, what I said is that we'll build up extra inventory at the end of 2018 of raw materials in anticipation for higher cost in 2019. And of course, this inventory was used in the first half of 2019, leading to reduction inventory and to working capital, and we've not rebuild the same kind of inventory in 2019 because the price trend for raw materials, of course, would not justify this. So we don't expect to build inventory in H1, we have seasonality in our working capital. So there will likely be an increase in working capital, even though we'll continue to manage strictly in the coming months. But overall, for the year, we don't plan to increase working capital as a percentage over the last 12 months. Despite all the improvements, we've achieved this in the past year because we view this improvement as sustainable. Therefore -- but for seasonality, temporary increases in working capital, we don't expect working capital to increase on a percentage of sales in the year.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [8]

--------------------------------------------------------------------------------

Just if I may, Charles. To come back on one of your question, which was do we anticipate pricing movements driven by the impact of the commodities evolution. Just want to clarify because sometimes people have perception, it's there's 2 elements there in the raw materials that are the indices and the negotiation that are proprietary to our company. What I would say is the indices, as you rightly said, in different notes are improving, that's true. But we saw a slowdown like the resi, for instance, starts again to come back up as of February. So what we said is -- in our outlook is we are done, and we are doing a strong efforts in terms of managing overall the raw material element in our P&L. And then consequently, on the price expectations and the request from retailers, they will follow the indices. And in all fairness, it's minimal in terms of movements so far. I don't have a crystal ball on the balance of the year, but we hear mixed feelings between some manufacturers telling that the resi, for instance, would go up on the back of the year. And on some elements where people -- there are theories that the coronavirus or other elements could get a reduction of the raw material. So disregarding these elements, what we consider is, our guidance is a strong guidance whatsoever on the raw material indices. And we don't see -- the price war is there any way in terms of consumer pricing on the category of baby in Europe, and we don't foresee any change in the going quarters. I hope I answered the questions. Thank you.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question today comes from Richard Withagen from Kepler.

--------------------------------------------------------------------------------

Richard Withagen, Kepler Cheuvreux, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

I have 3 questions as well, please. First of all, Thierry, you mentioned new business contracts when you're doing the work on the account plans. Can you elaborate a bit on what are the drivers behind the new contracts? So why are the customers wanting to do more business with you? What are the reasons? Second question is to go back to your pricing, and can you elaborate a bit what is the pricing behavior in the retailer brands industry? So the suppliers of retailer brands, how are they behaving? And I'm especially interested how that works in relation to your like-for-like growth guidance for 2020? And then the last question I have is on EBITDA for 2020. Can you say what signs of ForEx impact do you expect based on the current exchange rates?

--------------------------------------------------------------------------------

Thierry Navarre, Ontex Group NV - Chief Transformation Officer [11]

--------------------------------------------------------------------------------

Okay. Thank you. So I'll take the first questions regarding the drivers behind the new business gains. At the end of the day, it comes back to the recognitions for unique -- our unique expertise in terms of driving retailer brands performance up and building the equity of the retailers because the -- as you know, retailer brands for the -- for all of our customers are a way to build loyalty and build their brand name across their banner. And baby diaper specifically, but also the rest of the -- baby diaper is a traffic driver. The rest of the categories Incontinence and Feminine are also very sensitive category. It's a big focus from retailers on how they can really generate traffic with those. So we bring our experience and expertise. We have the new tools and new capabilities that we have built in terms of working together in revenue management, how we can really optimize the positioning of the product in the different categories. It's looking at each of the categories in terms of -- from the product development stage until the merchandising stage on shelves. It's looking at the shopper habit and how we can leverage the shopper habit in order to optimize and maximize the sales. So really, it's the ability to sit down together with the customer, building a joint business plan, looking at building the brand equity of their banner. And this is where we are making a difference. Certainly, in areas, so some of the big gains is in areas where retail brands, let's say, is less sophisticated than in other geographies, to be mentioning North America. There we are really differentiating ourselves compared to existing suppliers. Now I'll hand over to Charles on the price items.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [12]

--------------------------------------------------------------------------------

Yes. And to close the loop on the first one, I think we have -- it's very interesting because Richard, you mentioned losses or wins in contracts. And life is not only about losses and wins, it's also farming. And when we say there's farmers and hunters. We have partnership with retailers, where one of the objective is to win with them. So to grow also the category for them. I told you initially that the retail brands are growing in Europe. We take share from the market leader, historically, that is not leading anymore. And the share of retail brand is above 50% on baby diaper. But the reality is, of course, we help them to grow the category. So a part of it is to -- with the existing portfolio of customers is growing their base, and it's the case in all European markets. And on top of that, what Thierry answered to you is, how we gain back some of the customers that we lost, on the back of price increase as market leader when raw materials were getting up, we took price increase. And some competitors, mainly family businesses, accepted to take contracts with no profitability. So the reality is we work on those 2 elements. The consequences in pricing behavior, it's linked to the ability we have to differentiate the products. As Thierry said, we work on 360s plan with retailers, and to build the retail brands, you need innovation, differentiation and marketing tools, sampling activity, promotional activity revenue management, category management, work on shopper insights. A shopper in (inaudible) is different from a shopper in Carrefour or shopper in Lidl or Aldi or Walmart. So that's very important to understand to whom we talk to make sure that the brands are correct. These are, for us, key element of differentiation versus just manufacturers, and this was part of the T2G transformation when we explained that we were stepping up in terms of capability. You could argue that it's a normal way of doing business. I think it's very different in this industry in retail brand. And that's why we had to accelerate our transformation, which is what we did. Now on the EBITDA for 2020, I will let the other Charles to answer.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [13]

--------------------------------------------------------------------------------

Thank you, Charles. As Charles mentioned, in his outlook discussion. This guidance is irrespective of the currencies, meaning it's both at constant and that on the basis of the current currencies. Of course, consider that constant currencies -- this would have a favorable effect compared with the current level of currencies, but we take the responsibility specific to the guidance in respect of the currencies. Now we've been observing in the last 2 months, and in particular the month of February, extreme volatility of currencies in which we operate, in particular, the Brazilian real and the Mexican peso, the Mexican peso has been extremely strong until mid-February. And has weakened tremendously largely due to the coronavirus fears, which of course, has an impact -- material impact of significant size on our business in Mexico. The euro has held well against the dollar, which, of course, for us, is a favorable impact. So overall, again, our guidance is both at reported and constant currencies, but considering and based on the current rates. Of course, we would update -- we will update you at each quarter end as we've done now since the mid last year on the potential impact of currencies on both our sales and our EBITDA.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Alan Vandenberghe from KBC Securities.

--------------------------------------------------------------------------------

Alan Vandenberghe, KBC Securities NV, Research Division - Head of Research & Equity Analyst of Food Retail [15]

--------------------------------------------------------------------------------

The first one is regarding kind of the raw material impact on the EBITDA. It seems to me that at least some of your competitors are providing a bit more transparency on the expected impact of raw materials on their performance, and I was just wondering -- so I was trying to understand why you were a bit more reluctant on providing more transparency on that front. That's my first question. The second question is on the U.S. investments, I would appreciate a bit more details there on what your ambitions are, the type of investments you are making in terms of euros. I understand it's covered by your CapEx guidance, but just to have a feeling of this -- with the size of the expected investment capacity. Maybe also information on the returns on invested capital, et cetera. And the third and final question is regarding the coronavirus. And I'm very pleased to read that you don't expect any negative impact. But aren't you seeing any positive impact from your client's sites, where people maybe tend to build inventories or to -- or end customers try to -- or start to stockpile amongst other baby diapers in these a bit more turbulent times?

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [16]

--------------------------------------------------------------------------------

Well, thank you for the questions. I appreciate your optimism. I think it's great. And that keeps me excited. So I'll start with the last one on the coronavirus. First of all, as I said, I've been very prudent. I said, so far, there's nothing that is material, especially because we have no sales in China or limited sales in China and Far East. I didn't say that, certainly, I remind you that if things get really worse in Europe. I don't know how it would go in terms of transportation and logistics or supply of some raw material. So it's more on the sell side that -- and that comes to your optimism in terms of opportunity that you could argue that the big players, big suppliers like we are would take a benefit from smaller ones that are one single plant and that could be at risk.

Today, we don't see it. So I cannot tell you that it will not happen. I'm just telling you that -- well, I would be very happy to help retailers if they have issues with some of our competitors. But I cannot tell you that it's materializing because today, we don't have a request from some customers to support them instead of competitors. We'll be ready, and we are. So if anybody will hear us, we will be very pleased to share this and support those customers.

Now on the raw material impact on EBITDA, I would be delighted when we meet together that you give me what type of transparency competition is doing. Because I'm afraid that I didn't see much about this. So of course, I'm -- I would be not only interested but also to benchmark because what we told you is what we know and what we don't tell you is what we don't want to share with competition. So what we tell you, as we know, is that, yes, indices are improving slightly. Out of the total of the benefits, I would say it cannot play more than between 10% and 20% of the benefits, in our view, of the component of raw material. Why? Because the big part is the way we negotiate on bilateral discussion with partners that are suppliers. And this one, neither the suppliers nor us wants to share it because it's proprietary to us and to them. So by definition, it's not that I don't want to tell you, it's just like this will -- as Charles said, will be visible in the quarters when we'll deliver because what we tell you is, yes, in 2020, we foresee a positive trend. Just have to keep in mind that in the last 3 years, we had to experience, and that was very painful, I guarantee you, EUR 150 million of currency and raw material headwinds that impacted our P&L. And we mitigated the majority of it. Unfortunately, not all of it. So it's true that over time, you expect that there is a return. And sometimes, the movement is inverting, and that's what we start seeing. And on currency or it's the same, sometimes the currencies were against us. And hopefully, over time, a long period of time, that should revert, and this is what we try to highlight. On the currency, whatever -- and that was just the previous answer from Charles, whatever the currency rate, except if it's something dramatic that is unforeseeable, but we say whatever the currency rate, irrespective of the currency, we gave a guidance that is very clear on the back of the T2G and the transformation we are making.

Now and I go on the last one, the first question, and the second one, that is the U.S. investments. What is our ambition? It's very simple. If you look at the market, it's more or less $12 billion of sales that are the 3 categories where we operate in the U.S. But these retail sales $12 billion, retail brands represent today 20% in the U.S., more or less, which is $2.4 billion. In Europe, it's more than 40% in the 3 categories with higher than 50% on baby diaper and the lowest part is Femcare, and the Incontinence is between 35% and 40%. So that gives you the magnitude of it. So why we keep telling U.S. is strategic for us and for the industry. It's because first of all, the share of retail brand is significantly lower in the U.S. than it is in Europe. And as we build the share of retail brand in Europe as the leader, and that's our job to grow the category against branded player, our ambition is to do the same in the U.S. So help the supply -- the retailers to grow the share of retail brand.

Now is it a short journey? No, it's a very long journey. You don't move from 20% to 30% or 35% in the course of 2 to 3 years. So that's a long journey, but we are engaging. And the way to do it is indeed to partner with large retailers and make sure that we answer their needs better than competition and this is all about -- and one element in answering their needs better than competition is, of course, innovation, and we work actively on bringing innovation to the U.S. market. That's one element. The second very important element is service level, how do you serve better customer, and it's true, by the way, in Europe. And service level plays with supply chain and logistics. And of course, we can source from all over the place in the world, but if you want to be agile, reactive, cost efficient, it is very important to source at least very close to your markets. And this is why we have decided and we got the full support of the Board to invest into a U.S. facility that will complement the supply chain footprint in the U.S. So again, the idea is not to source 100% from these manufacturing sites, but on the contrary, optimize the sites to make sure that it's close to the geographies. And the U.S. is a very large country. So today, we are sourcing partially from Mexico, a bit from Europe and different locations. Tomorrow our ambition is to serve better our customers through one sourcing facility on the East Coast and one on the West Coast, the West Coast being mainly in Mexico and the East Coast being on the U.S. That's, in a nutshell, the projects and the ambition. Now the type of investments, we plan to go step by step because we will ramp up our capacity according to the demand of our customers and the needs so -- and we start with baby diaper. So we go step by step by putting several lines. Again if you remember, we explained also that we have our own technology, with own tech engineering and our lines are -- our line that we will manufacture in Europe and ship to the U.S. and adjust for the U.S. market. Our objective is to start operation in 2021. That's very important. Now as Charles mentioned, it's within the envelope on our CapEx. Why? Because as we said, in May last year. And when we start up a new plant -- and we have the strong expertise in starting new plants. I remind you that we started Radomsko in Poland, that is a very efficient plant last year. What we do is we have the shell on the -- that is -- okay, the buildings and the power supply and everything. And this is rented normally. And what happened is, of course, we put our own line. So the CapEx is really related to what is proprietary to us that is our lines. So the idea is to get -- start with 2 lines and then ramp up step by step the lines into this facility.

So I don't know, Charles, if you want -- I don't think we can say any figures -- any more figures. We don't want to give too much figures to competition.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [17]

--------------------------------------------------------------------------------

Yes. I think -- and also as we enter into the execution of the program, we will update you. I mean, that's a very exciting program, of course, for us, that will go probably also along with evolution of our sales in the AMEAA region, particularly, the Americas, so we'll provide you with updates on this. But this is not a zillion dollar or euro project. As we said, we are renting a facility. We try to set it the right way so that it can accommodate further growth and development. So this is not going to change our, as we said, CapEx and the return because that was your question. We will not provide you -- but of course, it's -- our Board gave green light because the return is very attractive and far exceeds our cost of capital.

--------------------------------------------------------------------------------

Thierry Navarre, Ontex Group NV - Chief Transformation Officer [18]

--------------------------------------------------------------------------------

Just to complement on that one, it's the -- if you look at the -- in less than a decade, that's going to be the ninth plants that we're going to set up and start up. So we've got a pretty good -- very good grip on how we should do that and what kind of costs and ramp-ups are necessary for setting up these operations.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Faham Baig from Crédit Suisse.

--------------------------------------------------------------------------------

Mirza Faham Ali Baig, Crédit Suisse AG, Research Division - Research Analyst [20]

--------------------------------------------------------------------------------

I also have 3. Can I first start by pushing you a bit more on the EBITDA margin guidance again? And not for any quantification, but maybe some more qualitative comments. Now if my math is correct, in Q4, you saw around 100 basis points or maybe even more than that benefit from raw materials. And the midpoint of your guidance anticipates 100 basis points increase in EBITDA margin. So if that's solely being driven by gross margin and raw material tailwind, could you -- why is it, for example, the T2G program not contributing? Why did the highest organic sales growth not contribute? So that's my first question.

My second question is on top line. Now at the Investor Day last year, you said your markets are growing 0% to 2% currently and you expect to outperform that by 50 basis points. Now is it fair for us to assume that Ontex, on a medium-term basis, is a low single-digit top line growth company because you have access to markets that just don't offer much growth compared to maybe other more attractive markets that do offer higher growth. That's my second question.

My third question is on CapEx. Now you've set an agenda for capital expenditure at your Investor Day, but ever since then, you've been lowering your CapEx guidance. I just want to understand why that is? Is it because of issues around leverage constraints, for example? Or have you found more efficiencies? Or have you decided not to invest in projects that you initially thought out?

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [21]

--------------------------------------------------------------------------------

Okay. So thanks for your question. The first one on the margin guidance. I -- nobody said that it's 100% driven by raw materials. So I'm afraid that you get to very quick conclusions that could lead to very wrong interpretation, if I may. What is very important is -- as we said is there is a combination of elements that are, on one side, helping the P&L, and on the other side, we are investing. Because as I said, the program -- and we said it in May, you're right, the program is about transforming the company to grow. So it's really investing. So it's investing, and we said in IT, in marketing, in innovation, in R&D. So it's a blend of different parameters. So you cannot just take one line and say, if I extrapolate it, I don't understand the logic. I think it would be, in my view, misleading, so perhaps we've misled you. This is why I'm reiterating the fact that the reality is a combination of parameters. We work with T2G on transforming the company on the top part of the P&L that is the revenue, how we sell better -- premium products with better mix in different geographies, different customers. That's one element. And Thierry alluded to that with, by definition, the joint planning process and the fact that we have a very disciplined commercial strategy, and we learn the lessons. We are not ready to leave contracts going now. So we plan it differently. And another element that is, yes, investing on some elements, like when we do digital, it's an investment because we believe that over time, a lot of products will be sold through subscription and digital. It's a service. And that's today, an investment rather than an accretive proposition in terms of profitability. So that's for the EBITDA margin guidance. It's not changing. We already told you, it's EUR 275 million, EUR 270 million from EUR 245 million, as Charles said, it's irrespective. And as I said, is irrespective of our currency evolution so far.

The second question about the top line guidance. We said that at the current perimeter of our portfolio in terms of geography. Unfortunately, it slowed down versus the IPO because at the time of the IPO, we were at the higher growth rates and it was between 3% and 4%. And it is true, as a matter of fact that the market evolution has reduced, at least from -- what we see from Nielsen and IRI data, final data. Because I told you, a part of it is getting to Internet. But what is also true is when we talk about the power of our portfolio is that our geography is evolving. And it's not by accident that we are entering into North America, in Mexico strongly, in Brazil, in Middle East and Asia because those markets are higher growth markets. So the combination of it and probably I induce you in error when I started because I say to Celine, the European market, my answer was to the European market, when I say it's flat rather negative on baby and Femcare and we're still growing 2%, 3% on Incontinence. That was for the European market. Just as a reminder, we still have more than -- close to 50% of our business that is outside of this geography. We have the health care that is really stable, that is mainly in Europe. We have retail in Europe, but we have a lot of the part of our business that is highly growing that is outside of Europe. But again, the misinterpretation is we said our guidance is, we want to beat the market growth where we are, which means we want to gain share. One of the measure of the team is to grow share. And the only measure to grow share is to look at -- if we grow faster than the market. And this is the ambition and this is the way we look at it. Now your third element, which I like the question about the CapEx. No, we are not playing with figures, and we are not trying to change the logic to please people in terms of financials. The logic is we have put the guidance at the time that was our kind of normalized CapEx level, and we say because of T2G. And at that time, if you remember, we were explaining that we had a top-down and a bottom-up approach in terms of building our plans. We say, we foresee EUR 45 million spread across 3 years, 2 to 3 years of CapEx. That was one element. And we listened carefully to the market and the market say, well, in all fairness on one side, we don't understand, it seems very high. And then what we did is we look at every line of our CapEx, and we try to optimize our efficiency. We are not delaying anything. We are investing in the U.S. right now. We are investing on new lines, on pants line, on baby pants lines, on Incontinence lines. So it's growing. And the logic is not to try to make fake figures. It's just like we are running at 4% to 5% CapEx level. And in fact, yes, the guidance was -- let's say, I don't see if it's conservative, but protective. We did -- we wanted to beat the guidance and not to miss the guidance. So perhaps, we were a little bit too, let's say, safe -- on the safe side.

--------------------------------------------------------------------------------

Charles André Pierre Desmartis, Ontex Group NV - CFO and Executive VP of Finance, Legal & IT [22]

--------------------------------------------------------------------------------

Just one additional comment to clear doubts about something we've read recently is, by no means have we withheld any capital expenditure in the second part of the year by fear of the single covenant. When you look at our free cash flow generation in the second half of the year, but the second half, in particular, we could have easily spent another $10 million in CapEx and still maintain proper headroom at lower covenants. So this is -- this was never, for us, a factor. Is just, as we said, efficiency -- I mean we heard what the market told us. Me as new CFO, I'm a bit more experienced now in the company. And also we've strengthen or hardened our criteria for CapEx engagement. And clearly, we're not sacrificing any of the innovation or growth through reduction of CapEx. I mean clearly, we're shifting the focus of the CapEx on these projects and the U.S. one is one of them. We said we now dedicate fully baby line to a development to bolster and strengthen and accelerate innovation. This we'll do and we'll continue to do. Now on the rest, it's true that we will probably spread a bit more, as we say, all the lines. You'll see, and we look at the detail of our expenses. We're spending a bit more in maintenance going forward to make sure that we make better usage of existing lines.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our final question today comes from Fernand de Boer from Petercam.

--------------------------------------------------------------------------------

Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Most have been answered, but could you elaborate a little bit more on your online business, how that is going on the e-commerce?

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [25]

--------------------------------------------------------------------------------

Thanks for asking the question. I was expecting 3 questions, so that's why I was a bit silent. But thanks for asking.

--------------------------------------------------------------------------------

Fernand de Boer, Banque Degroof Petercam S.A., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

I had just only one.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [27]

--------------------------------------------------------------------------------

Well, no, no. I know we know each other. No, I think it's -- first of all, if you look at the big picture, the consumers and the shoppers are evolving at a fast pace. We have to be very realistic. And in my view, the wake-up call was several years ago when Dollar Shave Club was for sale, and we realized that they grabbed 20% of the market in the U.S., under the radar screen of everybody. And where -- as one of our competitors in diaper was also on the razor and blades, realized that they lost share, and they were not aware of that. That was the first element that start creating excitement behind. Then after, we realized that we are supplying most of the Internet companies that are selling feminine hygiene in the U.S. market on organic products and mainly organic tampon. And we have a lot of interaction with those entrepreneur, and we realize in North America that there is a growing trend from consumers. Women are very happy with the service provided, and it's -- we talk really about changing for supplying goods to supply services and it's a little change in the model. Why? Because in fact, what they want is on the subscription model is to receive the product on time without bothering, at a defined price and at home.

Then we started and we look at the market, and in all fairness, if you look at it, what matters in the subscription model is not only, of course, to get a great product, but to make sure that you manage the technology. It's a technology-driven channel. So it's very important to understand the payment system, the supply chain system, the subscription system, and this is why we have created our own company, it's a start-up, an intracompany that is little bit changed, that is almost managed separately like a start-up. And why we started with France, and then we expanded in Benelux, and we have, of course, objective to expand beyond France and Benelux, is because France is one large market on e-commerce, and we consider that it was a good test market, and we had a great positioning with the brand Little Big Change. But as you are in Belgium, you can also buy on the Belgium sites. So -- or you can make the advertising for your relatives. Now what happened is, the way we look at it is lifetime value of consumers because when you go into subscription, you have a cost of acquisition. And then after you have a shopper that stays until the end of the subscription. So for baby diapers, it's between 2 and 2.5 years, depending on when you start the subscription, and when the baby is cleaner. He is not wearing diapers anymore. So it's a business that is gross margin accretive, where you have a high supply chain cost, and we work on this extensively. And what matters is the snowball effect that you generate by growing your subscriber base. So as Charles said, we started in June '18 are really with learning the first 6 months, we were very silent, and I'm more open today. But the reality is, it's still on a growth base, and we look at how many subscribers we gain every day. The beauty of it is, when we'll meet, I can show you, we track it on iPhones or cell phones because you get in real time, the number of subscribers. And we consider that in France, this channel is above 10%. So it's not like in the U.S. with the Dollar Shave Club being 20%, but it's already 10%, and we consider that it will continue to grow. Now there's a couple of players. The difference is we are the unique player that has the full chain. We are the only one that starts from making the product. So working on the products and getting the IT system in place, and managing also the chain of delivering until the home of the consumer. So that's, in our view, a competitive edge now. And we expect that this business can be also expanded in other categories. So in my view, it's a starting point. And it's growing, as I said, is -- at the end 2020, our plan is to be more or less in the range of 10% of our retail sales on baby categories. So that's, in our view, significant. And the interesting part of it, I revealed that last time is that the brand is uniquely, as a service, sold through Internet, so we are 100% focused on helping our retailers to continue to grow the business against A brands on the retailer, and namely, international players, big players. So that's our ambition. We have them to grow retail brand share. And on the other side is to serve some of the shoppers that don't want to -- that want to serve this and don't want to bother. That's the logic.

So I think it's time -- there's no more question?

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

No. There are no further questions, so I'll hand the conference back over to Charles Bouaziz for any closing remarks. Thank you.

--------------------------------------------------------------------------------

Charles Bouaziz, Ontex Group NV - CEO [29]

--------------------------------------------------------------------------------

Well, thank you for joining our results call this morning. Well, we were very pleased to report that 2019 outlook was delivered, we have hit our inflection point in Q4 profitability, we generate a strong free cash flow, and we'll be getting increasingly supported by T2G in 2020. So we look forward to meeting some of you and speaking with you during the couple of weeks, and also to meet you soon and report on the further progress at our Q1 conference call that will take place in May. Thank you very much. Have a great day.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.