Ontex Group NV (OTCPK:ONXXF) Q3 2022 Results Conference Call November 10, 2022 7:00 AM ET
Company Participants
Geoff Raskin – Vice President of Investor Relations
Peter Vanneste – Chief Financial Officer
Conference Call Participants
Andre Philippidis – Barclays
Wim Hoste – KBC Securities
Charles Eden – UBS
Othmane Bricha – Bank of America
Patrick Folan – Barclays
Karel Zoete – Kepler Cheuvreux
Peter Testa – One Investments
Fernand de Boer – Banque Degroof Petercam
Eric Wilmer – ABN AMRO BHF
Geoff Raskin
Good afternoon, everyone, and thank you for joining us today. I’m Geoff Raskin from Investor Relations. Before I pass over to our CFO, let me remind you of the Safe Harbor and regarding forward-looking statements, which I will not read it out, but which I assume we will have duly noted.
I would also like to repeat that since 2022, following the strategic review end of last year and our subsequent plans to divest our emerging markets business, we now present these assets held for sale and discontinued operations. Our P&L thereby only encompasses our core markets as continued operations. And in the meantime, we will continue to provide you with business information for both the continuing core markets and to discontinued emerging markets.
And we’ll make clear throughout the presentation when we cover what. Peter, with that, I give it over to you.
Peter Vanneste
Good afternoon, everyone, and thank you for joining us today. As you know, we have a new CEO with Gustavo as from next week, and that change has been explained in the press release this morning. I will obviously be focusing on the Q3 results in this call. This Q2 result show that we are turning the corner in our performance recovery with sequential EBITDA and margin improvements. We have been ramping up actions to deliver on our strategic priorities over the past 18 months, and each is now contributing to the recovery in our performance.
This achievement is, of course, against the backdrop of a continued challenging external environment with high raw material costs, energy and wage inflation. Ontex’s revenues in Q3 were up 17% like-for-like driven by volume, mix and pricing.
We have now consistently seen this mid-single digit year-on-year volume and mix growth every quarter this year. Prices are up 13% in Q3 and countered a huge increase in raw material inflation that cannot be offset by our cost reduction programs and all. We have now begun to turn the corner with an EBITDA at €35 million, up from the €25 million in Q2. And this will further increase in Q4.The group’s financial structure has touched a low point in Q3. But with the improvement in EBITDA, the leverage will steadily come down starting in Q4.
And the net debt will be significantly reduced with the €250 million proceeds from the divestments in Mexico early next year. So let’s look first at the revenue growth on Slide 4. Ontex has now returned to strong revenue growth, and this is driven by, as I said, volumes, product mix and by pricing. The momentum we’re now building in the turnaround of our top line is clearly visible in the chart. This swing has been built on 6 quarters of sequential growth with Q3 2022 revenues up at a record high level. The role our strategic decisions have had in this change have been vital, which I will illustrate in the following slides.
So turning to Slide 5 on volume and mix. Ontex has been driving consumer dementias to retailer brands, where market share has increased in Europe, notably in baby pants and femcare.In this context, we have outperformed the market, posting mid-single-digit volume mix growth in both Q3 and year-to-date. And we even did 2 percentage points better in core markets only.
This growth has been driven by our strategic growth priorities, which you can see in the middle graph, showing the last 12-month volume and mix growth impact on revenue. The blue line is Ontex in total, where volume and mix impact turned positive this year and stands at 4% today.
The growth drivers combined are in red where — and they were positive since the second half of 2022 and stand at 7% today. Baby pants continues to be a big driver in Q3. Our outperformance shows the effectiveness of our strategy to return Ontex to its influential role in Europe. As a direct consequence, we are gaining share in retail baby pants, which are winning in the market.
In North America, we continued to ramp up our footprint. In Q3 and year-to-date, we have generated consistent double-digit volume and mix growth, and this momentum will be supported by the expansion in capacity of our new U.S. plants and the performance improvements being rolled out in Tijuana.
Adult care volumes were somewhat lower, but driven by outperformance in retail channels, where we also see higher growth in line with the trends for more home nursing. Cost reduction on Page 6 in parallel to restoring top line growth, bringing down the group’s structural cost base is key to the turnaround. In Q3, we maintained the momentum with a further €23 million gross operating savings, of which 15 in core markets, bringing that total so far at 60% for the group.
Most recently, the small U.S. production facility acquired a few years ago was closed with capacity being absorbed into our other plants on the continent. In Europe, scrap rates and operational efficiencies are better than the year before, and our service levels have continued to improve throughout the year.
We expect to achieve around €80 million of gross operating cost savings for the full group this year. And while wage inflation driven by increased cost of living has pushed salary costs higher, SG&A costs are remaining at 10% or below.
Turning now to raw material and input cost inflation on Slide 7. Raw material costs were up close to 30% year-to-date, reflecting the delayed impact of rising indices in the previous quarters. Some raw material indices continue to climb, mainly for fluff and superabsorbent polymers. And while others see some stabilization, they remain at significantly higher level compared to 2020.
Energy, transport and wage inflation also play a role in the material — in the raw material price increase as it does for our own transformation costs, which are up about 30% for energy year-to-date and 15% for transport.
Overall, we’ve seen a 20% year-to-date cost increase and close to 25% in Q3. Cost information is not over or behind us, and margins have only partially recovered. So pricing remains key over the next quarters. With pricing on Slide 8. As with volumes, pricing has been positive since the second half of last year, with momentum steadily building throughout the last — the past 9 months to reach 13% in Q3 for the whole group.
In core markets, we see a strong acceleration in the last quarter with a 6 percentage point sequential increase from Q2 to Q3.With our still low margins, we will continue to roll out further price increases to help offset the unprecedented raw material cost inflation. So to bring all these various drivers I presented in the previous pages together, let’s turn to Slide 9.
And this slide gives us a summary of how the year-on-year evolution of volumes, cost reductions, cost inflation and pricing impacted our adjusted EBITDA since the start of 2021.On the right, in green, you can see how consistent delivery of cost reduction measures since the start of 2021, plus volume and mix growth turning positive from 2022 are now contributing about €30 million to the EBITDA every quarter since the start of the year, and we intend to keep this pace going forward.
The left-hand side in red shows how we managed to price against the unprecedented cost inflation. You see that we have steadily increased prices in the face of higher and higher inflation. And although we are not fully compensating cost inflation yet.
Q3 is the first quarter where our additional pricing exceeds the further increase in costs. In the middle, we have the overall picture of how adjusted EBITDA has evolved over the last 7 quarters.
The dark line represents the net impact on adjusted EBITDA, adding the impact of growth and efficiencies in green and the net cost inflation in red. Whilst clearly, the net impact remains negative, the gap is narrowing significantly in Q3 with EBITDA improving versus Q2.
We expect this to further improve in Q4 with EBITDA step-up year-on-year. Now, doing a deeper dive in reported core market figures, we break out the Q3 revenue on Slide 10.
You can see here how the 17% like-for-like revenue growth is based on a solid contribution of volume, mix and a growing price component.
Ontex’s volume and mix growth of 6% clearly continues to outperform the market based on recent contract wins, positioning in higher-value categories and retailer brands gaining share in the recessionary environment. Pricing is clearly the main game changer with an 11% increase, up from 2% in Q1 and 5% in Q2. The momentum of this pricing is going well across categories, growing month after month and with further price increases planned in the coming months. And we also benefit from a foreign exchange tailwind of 6%.
Turning to Slide 11, we can see the impact of revenue growth on adjusted EBITDA, contributing €48 million year-on-year, of which most is from the pricing, of course. Not that this €48 million marks a 50% increase compared to the revenue impact in Q2.
Relentless focus on cost reduction delivered €15 million, bringing the total for continuing operations at €41 million in the year. However, these strong measures were not yet enough to compensate cost inflation, which is still sequentially up and amounted to an €81 million year-on-year.
Wage inflation also led to higher SG&A expenses, but strong cost containment allowed to keep those costs below 10% of sales, as indicated before.
Finally, we had a positive impact from ForEx, which mainly the ruble appreciation more than offsetting the adverse impact of the U.S. dollar appreciation of our costs. All this led to adjusted EBITDA down 41% year-on-year but marks a sequential improvement of 28% versus Q2.
And that’s also reflected in the adjusted EBITDA margin with a 0.8 percentage point improvement versus Q2. Returning to group numbers on Slide 12, net debt totaled €895 million at the end of September. The increase versus the — versus €826 million at the end of June is mainly due to the lower EBITDA and increasing working capital needs as revenue grows through volume mix and pricing and raw material prices are still up sequentially.
We continue to do work on our DSO, which improved, and we remain cautious with inventory levels for now as we keep them relatively high to secure supply in the current volatile environment. With higher net debts and especially the last 12-month adjusted EBITDA, still lower than the previous quarter. The leverage speaks at 7.7x.
This is temporary as from the next quarter onwards, the last 12-month adjusted EBITDA is expected to increase again. The debt will come down significantly after the closing of the Mexican divestments foreseen by end Q1 2023 with a €220 million loan as a priority.
This is the debt that entails the covenants for which the next test is foreseen mid-2023. The remaining debt after that is largely secured with the main components being the €580 million bond with a fixed rate of 3.5% and maturing in 2026 and not wearing any covenants.
So regarding the outlook on Slide 13 now, the uncertain geopolitical environment and the inflationary macroeconomic situation continues to be volatile. For the short term, we have enough visibility to confirm our full year outlook 2022.We have a positive view for Q4, and we expect the volume growth and pricing momentum to continue current trends.
We now expect core — revenue in core markets to grow by about 15% like-for-like, an improvement on the above 10% we anticipated prudently previously. The adjusted EBITDA of core market is confirmed to be within a €100 million to €110 million range, while for the total group, we expect it to land at the high end of the range of €125 million to €140 million. This implies that the adjusted EBITDA of Q4 is expected significantly up quarter-on-quarter and year-on-year, confirming the start of the recovery.
Cashflow discipline clearly remains a focus. And while we want to ensure that we can continue to support our strategic growth initiatives with CapEx and working capital. Nevertheless, we expect leverage to reduce by year-end to below 6.5x.
So I do believe our priorities are clear. We continue to drive the volume mix growth that
we’ve seen in the previous quarters. And combined with the further step up on pricing and the consistent cost savings delivery, we will continue the EBITDA improvement. And this improvement and the cash discipline will bring leverage down. We’re on track to refocus our portfolio and the divestment of the Mexican business activities will allow to reduce net debt in 2023.
And with that, let’s pass over to Q&A. Now before we start the Q&A, can I ask all the participant to limit themselves to 2 questions only, please. And if you have more, I invite you to go back into the queue. And if we have time, we will address them. In case of time constraint, please contact the IR department afterwards. Operator, over to you.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Andre Philippidis from Barclays.
Andre Philippidis
I had a couple please, and I’ll back to the queue for a — back in the queue the rest. On the — can you confirm your drawing on the RCF? I believe in Q2, you had drawn about €50 million on that. And then secondly, if you could comment on the working capital movement Q3 and year-to-date as well.
Peter Vanneste
Yes. All right. On the — starting with your first question on the RCF. The RCF is providing working capital flexibility for us. So yes, we’re still using it as we speak right now.
We have been using it partly also because of some peaks that we’ve seen in Europe as we changed our payment cycle that has been leading to a few peaks. And we will intend to continue using it as long as we need it because that’s also where — what it is for. So that’s on the RCF.
On the working capital levels, we have — they are above what they can be and they should be. I’ve mentioned already in previous calls that because of the supply disruption context, we are more prudent on our inventory level. So we keep high levels of safety stock to make sure that we can absorb fluctuations we might have in the supply.
Now, the level of the evolution of the working capital is essentially driven by what’s happening with the raw material costs and our growth basically in our top line.
So the volume growth is leading to high receivables. Pricing is leading to high receivables and then the inventory is impacted by the cost of inflation. On days, we are doing well.
Andre Philippidis
That’s very helpful. Sorry, I may have missed. Have you mentioned the actual drawing on the RCF, the Quantum drawn on the RCF for the quarter, please?
Peter Vanneste
No, it’s — I don’t have the exact number right now, but it’s still above the 50% that we have that you’ve quoted that we’ve been at the base at the half year.
Operator
The next question comes from the line of Wim Hoste from KBC Securities.
Wim Hoste
Yes. I also have 2 then, please. Can you first talk a little bit about the commercial momentum for Q4 and into ’23, net contract wins, for example, I understand from the press release that retail brands are doing relatively well versus private label, given the depressed consumer or the, let’s say, the pressure on disposable income. But how is the kind of contract book looking for Q4 and in 2023? That’s the first question.
Also a little bit by segment and geography piece. And then a second question, is on the guidance for the full year on the core markets, suggesting a significant jump in EBITDA margin in Q4 if you see that there is not going to be a major deviation in revenue, for example. So can you maybe talk about the key drivers? Is it mainly the inflationary context that will come down? Is it mainly further pricing? Is it a combination of those together with cost savings.
Can you maybe offer a little bit of additional kind of quantification or insights in what will drive that significant margin bump in Q4 that is kind of baked into the guidance. Those are the questions.
Peter Vanneste
Okay. Thank you, Wim. Taking your first — first question on the volume. We have — I talked in my presentation about the mid-single-digit growth that we are having in the different quarters already this year. Getting into Q4, we absolutely will continue to see that happening.
October is giving some reassurance on that already. So that momentum is there. We’ve not — with the pricing, all the pricing that we have done, we have not been — actually, we’ve been winning volumes across. There’s a few drivers on that. First of all, there’s contact wins that have been helping that.
Secondly, there is indeed a clear trend from consumers shifting from A brands to private labels and to discounters, which, of course, creates a favorable environment for — and that’s especially we’ve seen that in baby pants and in femcare.
We’ve seen it also in Europe across baby pant, femcare in the North America, we’ve seen that more on the — on baby, on the pants and on the diaper side. So that’s a clear trend that if I link up to 2023 is also something that we expect to carry over in 2023. Next to volume, we are seeing a very positive pricing and mix. We are growing, especially on our strategic categories on bands on about across. So that is not only, of course, on the sales, but also on EBITDA, a good thing. Yes, I think that’s more or less going across the volume, your first question.
There’s been relatively limited tenders over the last 18 months with partly driven by COVID.
Geoff Raskin
Is the line from somebody opened.
Peter Vanneste
We expect some more tenders next year, which is, again, going to create a few more opportunities also for us. So that’s how we look at the volume today. On your second question, I think, was around evolution from Q3 to Q4. Q2 has already — Q3 was already significantly better in absolute than Q2. Not yet — clearly not yet at the margin levels that I want to see.
But it’s important to see that the core has been there. And we know the — all the efforts we’ve done in the past is now also starting to deliver the margins in the quarter. The step up in Q4 will actually be bigger. We expect than the one between Q2 and Q3, both in absolute as in margins. and that’s going to be conferring the momentum. A key driver within that is pricing.
It’s a continued volume mix, as I said, in frame of your previous question. And next to that is continued pricing. We still are at margin levels that we want and we will be seeing growing and that’s why we’re still pricing and some of that will be coming in, in Q4, and that’s driving the increase that you will see in both emerging markets and sports.
Wim Hoste
With regards to inflation, how much inflation are you going to see versus what we saw in Q3, for example.
Peter Vanneste
Yes. In Q3, we still had an increase versus — I mean, year-on-year, we’re always — I’m still talking big increases. But sequentially, which is I think what you mean — we had a further increase between Q3 versus Q2. In Q4, that increase will be less. It will be only slightly up versus Q3.
Operator
The next question comes from the line of Charles Eden from UBS.
Charles Eden
Couple from me. First one on the change of CEO, and I appreciate you don’t want to get into the details here, but I do think it’s important to comment. So clearly, Gustavo has extensive experience in the industry, which would have benefited the firm and sure already has during a time on the Board.
I guess what is less clear to me at least is the timing of the decision? Because I guess one would have to assume Gustavo was heavily involved in the setting of the strategy in the first place. So therefore, change your strategy is unlikely.
So is it simply a view of the need for increased speed of delivery on this strategy, which has driven the change? Anything you can kind of comment there would be helpful, Peter.
And then secondly, just following up on the earlier question around sequential pricing, obviously, a step-up in Q4. Are you able to kind of give any indication compared to that 6 percentage point increase sequentially Q3 versus Q2 for core markets, how you think about the sequential benefit from pricing in Q4. Those are my 2.
Peter Vanneste
All right. Thank you, Charles. Yes, on your question on the timing. As there has been instrumental in building the new Ontex in the past 2 years in defining, first of all, the strategy, of course, together with the Board, implementing it and mobilizing the organization around these themes and certainly also navigating the organization in Ontex through the many headwinds that we have been facing.And we’ve been consistently delivering on those basic levers and that say, over different quarters. We’ve been consistently growing our pricing, the price savings sorry, sorry, consistently delivering on our cost savings, stepping up our pricing in different ways.
Volume mix, I talked about already on the turnaround and starting and progressing on the divestment program. And we see some of that now in Q3 results. There’s more to come. Margins are still low, leverage is too high and inflation is not over. So more of those levers and discipline will happen in the months and quarters to come. And there will be more opportunities also to realize.
I talked about a favorable private label context. There’s opportunities with releasing a bit of the disruption on the supply side. And in all of that, as we enter into the next phase of the transformation, the Board believes that Gustavo is the right person and has the right experience to lead us to the next phase.
Now your second question was more on sequential Q4 versus Q3. Actually, I’ve answered on that already, I think, partly in the previous question, which is it’s mainly driven by pricing, which is not the exact amount, I don’t have as a percentage point, it becomes also more difficult because we’re comparing — when we talk about pricing, we compare — we talk about percentage versus last year. So what’s happening now already in Q3, but even more in Q4 is that you’re comparing to a quarter where we already have been pricing.
So last year, Q3, we have been pricing in first pricing in emerging markets. In Q4, we’ve been already significantly pricing in emerging markets and started in the core. So the percentage will be less readable or comparable to previous quarters. But if I look at it, absolutely, in absolute numbers, the majority of the increase will come from that and the consistent volume mix growth. And maybe one thing to add to that is that within — I always talk about quarter-after-quarter sequential higher pricing. It’s also within the quarter that we see pricing ramping up.
So September has been higher than August. August has been higher than July, and this is a trend that we’ve seen also in the previous quarters.
Operator
The next question comes from the line of Othmane Bricha from Bank of America.
Othmane Bricha
I have two. First, on M&A, could you please confirm if you are still in discussions with AIP. And do you feel that now you are more advanced in the disposal of Brazil and other emerging markets businesses compared to last time when on results, on Q2 results? And my second question is more on the long-term. I’m trying to understand better your business ambition in the U.S., specifically the North Carolina factory, which you’ve opened earlier in the year. So can you maybe talk a bit about what is the factory utilization rate as of now?
What’s the product and customer mix? Have you signed with new customers or mainly extension of contracts that you’ve already had from the Tijuana plant? And also, can you maybe comment more on your market share in retailer brands in the U.S.
Peter Vanneste
All right. Thank you, Othmane. Taking your first question on AIP and the divestment project. So if I first talk about AIP, there is an opportunity clearly in the business combination with Attindas. But there’s no progress to report on that currently.
We’ll obviously come back, of course, when there is a significant change. But at this point, honestly, I’m focusing mainly in the bigger turnaround in that we need to make for Ontex.On Brazil and the other divestment projects, so we have, as we discussed before, we’ve engaged with advisers and we are making — we have projects running on all of them. We’re making progress on all these files, including Brazil. And there’s, again, at this point, not more to report. We will inform you when there’s more.
And also here, I mean, we are clearly focusing on the — improving the profitability of these activities. And we do see that our progress in these markets is gaining traction. Part of the reason that we have guided the full-year EBITDA outlook on the higher end of the range is because we see that we’re making structural good progress in the emerging markets.
Within the emerging markets, it was initially more Mexico, but then in Q3, there’s actually more traction coming from the other markets who have been suffering a bit more before from things like hyperinflation or an unstable economic environment. So that’s on that part. And now I’m thinking back what you the question was on the U.S., yes, specifically on operations, stock sale.
Now U.S. is clearly our strategic growth platform. We are making structural investments in the region to support the group. We have been and we are and we will be growing double digits in that region. And indeed, in that context, we are initiating many things. We have — we are carving in the Tijuana factory from our Mexican operations, and that’s something that is really happening as we speak and will be done by the end of the year.
We have closed our Reidsville factory, which is the femcare factory that we bought some time ago and integrated that into the operations in — within the North American footprint.
And we’ve officially opened, as you refer to, Stokesdale. Shipping started in quarter 2. We are further ramping up where there’s obviously customers being served from that factory, existing customers with new business within existing customers. And obviously you need to further ramp up and to grow and get the optimal profitability, but that’s very much within the frame of course, as we have these double-digit roll plants in North America that we are delivering today.
Othmane Bricha
And maybe just comment on your market share in retailer brands in the U.S. now maybe versus 2 years ago?
Peter Vanneste
Yes. We’re not disclosing our share on that level. We obviously are gaining traction because we are at a growth rate to double-digit growth rate. It’s clear that we’re gaining fare. And it shows — honestly, we’re still fairly low.
We’re still below the 10% within the U.S., and that growth that shows that there is a lot of potential for us to grow, especially with the solid throughput that we now have on the ground.
Operator
The next question comes from the line of Patrick Folan from Barclays.
Patrick Folan
Just two quick ones for me. You touched on one of them briefly before. On the volume mix, just heading into Q4 and 2023, can you provide a rough split of the volume benefit you saw between contract wins and then consumers trading down to retailer brands. And I think you mentioned that there’s limited tenders this year. So will that impact the volume mix number heading into the first half of next year?
Or will the momentum carry through into 2023? And on that volume mix, are you seeing stickiness in terms of pricing on those negotiations? And then secondly, just a quick one. Is there any market or any category to call out that you’ve seen any price elasticity at all?
Peter Vanneste
All right. Thanks, Patrick. Okay, on the volume side. So yes, two elements that quoted before. So that’s the contract wins that we have.
And actually, it’s a little bit broader than that if you look at Q3 because we also had some more traction, especially on femcare, for instance, where we — had a bit more supply disruption challenges before and now which is a bit of a catch-up on that level. But essentially, yes, contract wins both in North America and in Europe and then a trend from private — from a brands to which private labels considering the recession that we — that they offended the release, the purchasing power challenges that they have. We expect absolutely that to go forward into 2023. There’s no reason to believe at this point that, that momentum is going to is going to go away, and it’s not what we see today in our volumes and what’s — and the start of Q4 either.
You asked about pricing negotiations — so far, we have not — we’ve been pricing significant. We have not lost volumes. On the contrary, we’ve been gaining volumes through that.
This is not repricing for inflation. This is an industry challenge that everybody is facing. And if you look at other companies, public companies communicating you’ll see similar things. So within that context, we believe we are well positioned also on the volume side to continue the momentum that we have.
Patrick Folan
Just on the down trading. What percent of that 11% volume mix was due to that trend? Is there a rough spot there?
Peter Vanneste
Yes. I’m not going to go into in that level of detail. They both are contributing and fairly consistently.
Patrick Folan
Second question…
Peter Vanneste
Could you… Sorry, Patrick, we didn’t — I didn’t capture your second question.¦
Patrick Folan
Yes. Just on pricing elasticity, is there any particular market or category within the portfolio to call out that you’re seeing anything? It seems like it seems pretty robust at the moment, considering the trends. But just any market you’re seeing anything?
Peter Vanneste
No. I think it’s very good. We’re pricing across — considering the nature of the reason why we price, pricing across categories, across markets. What you can notice and you’ve probably seen that is that the step-up between Q3 and Q2 and Q3 has been higher in the core from 5% to 11%, so 6 points up, which is more than what the first step up in emerging markets who have been started to price earlier.
If you look at the segments, we could make a nuance between — for the institutional market where in health care, where basically it is a bit more complicated because there’s longer-term contracts, and then there is legal constraints sometimes. So it takes a bit more time to price in these circumstances.
But still, we’re also making progress there, and we are pricing. And there’s also a rollover of context, of course, that as every day or every month, there’s contracts being renewed, that’s obviously then the opportunity to face.
Operator
Your next question comes from the line of Karel Zoete from Kepler Cheuvreux.
Karel Zoete
I have 2 questions. The first one is on — yes, staying with pricing and the upcoming price rounds in a few months. Has the tender structure seen your industry have been altered at all?
Or will it remain like it was where you have typically a 12-month agreement with each other. Reason for asking, of course, is that retailers are clearly seeing that prices have gone up dramatically and maybe more as needed, but also, at some point, cost might come down. The second question is more on net debt and cash flow drivers.
You already spoke on EBITDA improvement or adjusted EBITDA improvement and the working capital drivers and the decisions there. But can you speak about other cash drivers, how you see that developing in the coming quarters, thinking about the interest cost, but also certainly CapEx where you must have had some inflation in those lines as well and some cash out for exceptional. So any guide on cash flow items would be much appreciated.
Peter Vanneste
All right. On your pricing question, on tender structures, I mean, tenders have not structurally changed. I did comment before that there has been. We’ve seen less than before in the last 18 months, and that’s again linked to probably the context that everybody has been facing and to some extent, COVID that the structure itself has not changed. It’s, of course, in the — when we’re renewing contracts in certain areas like health care, we, of course, try to learn from sometimes the complexity in some specifications that we have and implement that.
But apart from that, I think it’s — there’s no fundamental changes to how that is being done.
You did hint and ask about when inflation would start coming down. Again, I would be looking forward to that moment. At this point, we do see further inflation, and we do see the market still being — needing to do what we have been doing over the last months and is now finally resulting also in an increase of the margin. And on the cash side and the different drivers, you talked about CapEx.
Let me start by CapEx. We — it’s one of the areas CapEx together with a combined it in this logic with the nonrecurring investments.
So the one-offs is that’s something that we really, really care for the managing in a very disciplined way. So we’ve been spending less than what we have been talking about in terms of long-term or midterm guidance. So I think we’ve been in the first half, we have been at 2.3% Q3 of sales on CapEx, and we’ve been higher in Q3.
We will be going gradually and again, in a balanced way up to the guidance that we have on the 4% towards the end of the year. Q4 will be a little bit higher as well. But again, we play it in the right way because we need to balance it with the recovery of our EBITDA and the improvement on the working capital side of our cash flow.
But just also to be sure on that, we are — the large majority of that CapEx is being focused on the strategic growth drivers. So we’re making all the investments that need to be made, especially on the priorities on plans on U.S. expansion.
On interest, there is there is a limited increase. Most of the interest costs are quite protected against the interest levels. And what I especially want to highlight is that on the — versus our current debt, we will be reducing our current net debt level with the proceeds from the Mexico sales.
So with the €250 million that we expect early next year, we’ll be paying back our term loan, which is the area where we have the governance and then there’s a bit more impact on — in the level of our leverage.
Now after that, we will be essentially with a debt that consists of the bonds, which is €580 million, and that’s a 3.5% fixed rate and the maturity in 2026 and carrying no governance. So I think we have a strong financial position with that.
Operator
The next question comes from the line of Dan from Marisa.
Unidentified Analyst
I have just one. Can you help me understand the dynamics between your working capital expectations and factoring? Because you said that working capital is about what it should be. But I’m just a little bit puzzled by why that should change in Q4 when you continue to grow that substantially. And with input costs not coming down that much.
So should I be looking at it in terms of factoring that, that has changed? And could you also perhaps help me on the factoring in Q3 and what your expectations are for Q4?
Peter Vanneste
Yes. right, Dan, thanks for your question. It’s a clear and good one. And let me be also short on that. I think the positive — well, first of all, I need to put a bit of prudence because we are navigating working capital within the context of insecure supply.
And that’s why sometimes we do make goals to keep safety stocks higher than what we intended it to be 2 months earlier because there is a supply area that we want to cover it. Now having said that, the improvement to which Q4 is actually twofold. The first is really — is inventories. There is improvement in the supply disruption area. It started a year ago, and then we gradually started again, not just Ontex as an industry challenge. And then it started improving month after month.
There was a bit of a setback at the moment of the Ukraine-Russia crisis. And then again, we’re improving very nicely right now, which also means that on the working capital, we don’t need to — on the inventory specifically, we don’t need to be taking all the precaution measures that we have been taking before. So we are gradually releasing that. I hope to be able to do that mostly in Q4. If not, it’s going to be the first half of next year. And secondly, the second driver is on the DSO side that we have a further ambition to progressively improve our DSO, which has already happened so far year-to-date, but we will take it another step in Quarter 4.
Unidentified Analyst
And could you also comment on the factoring?
Peter Vanneste
The factoring is — we do that since several years, and we don’t disclose it at the quarter level, but I can tell you that we’ve been using the — since we use it, we’ve been very consistent in the usage. So this is not a major driver.
Unidentified Analyst
Okay. So for — at the end of Q4, we can assume it will be equal to half year.
Peter Vanneste
Yes.
Operator
The next question comes from the line of Peter Testa from One Investments.
Peter Testa
I was a couple of questions, please. One is just when looking at the margin implied in Q4 as a base for rolling forward at the start of 2023. Just wanted to make sure that when you think about the sequential nature of your development, whether we can consider that as a base margin to start the year next year, not looking for a forecast per se, but more as an understanding of how the metrics driving that Q4 being continuing?
And the second question is just on the medical side, whether there’s any opportunities to — in your contract negotiations there to start to catch up on the medical-related business on repricing.
Peter Vanneste
Okay. Thank you, Peter. First question on the margin Q4 and being a good base to start 2023 without making a forecast for 2023. Yes, it is too early to provide guidance on 2023. There is still volatility in the system and certainly, both on a demand level as on the cost level at the end of the day.
What — that I can talk a bit about what I do know and that what we used to. First of all, this consumer trading momentum from a brands to private labels, protecting — giving some protection and growth to our volumes. I talked about before, I see no reason to have different things anytime soon. We will have next year a pricing and cost carryover. If you consider the ramping up that we’ve seen on both pricing and cost inflation in the course of 2022. Clearly, that will have a carryover effect in 2023.
I mentioned before already that cost inflation is not over. We see some indices going down and like things like Ocean Freight improving. On the other hand, we have areas like fluff. So the resis record high. Energy costs are — well, you don’t have to explain you any costs and wages, wage inflation are 3 areas where we have increasing costs. Some of it we have been protected somewhat in 2022 by either hedging or longer term or yearly contracts.
And that, of course, will be an area that also kicks into the equation. Now we are planning and have already organized additional pricing, and we will continue to do pricing and cost reduction measures where needed. Cost program, we will roll over. We’ve been delivering consistently. We’ve talked about €80 million cost savings this year, and we will be going for that in 2023. So honestly, while I cannot give you a specific forecast, I can easily predict.
We will be hammering on the same mail and the same drivers as we’ve been doing this year and confident to see a year-on-year recovery of profitability also in 2023.
Your Honor, second question is on the medical side of the business. So health care, we are looking at every opportunity to take pricing in health care. It is more challenging, as I talked about before in our firm’s contracts because they are more longer, they are longer and they have more legal constraints at the moment. So that’s why it takes a bit of time. As I said, we are progressing.
We have contracts rolling over. When they’re rolling over or when we’re adjusting or when we have new contracts, of course, we take into account any learnings to implement in the next one because what we’re facing in ’22 is extremely unprecedented. Of course, some of that was easy. It was not difficult, it was not easy to anticipate. And next to pricing, which we are carrying through in that segment, we’re also working, of course, hard on product mix to make sure that we protect and grow our profitability within that spans is one good example of how that works in the second.
Peter Testa
So just a follow-up on my question on the health care part was whether if you looked at quite often these are annual contracts and have some annual element to them, whether there’s a significant body of that or whether these are still medium-term contracts largely?
Peter Vanneste
There’s a big, there is a mix of — if you look at an adult or in general, I mean, there’s a mix of many contracts. It’s not necessarily a little bit like with the tender question I had before. It is not necessarily structural dynamics that for certain segments, compacts are getting shorter or longer. It’s been a mix. Overall, it’s been longer in health care, institutional, and we expect that’s going to be the case.
Operator
Next question comes from the line of Fernand de Boer from Banque Degroof Petercam.
Fernand de Boer
Just to come back on, let’s say, the credit facility and the term loan, this is contractual that you have to pay down that first because if you look at the current bond price, it seems to be also rather attractive to buy them back at around 80%. So could you comment on that one?
And then on the confident calculation, I think next year, in June, you are back for the confident calculations. Of course, you will have then the sale of Mexico. But do they then also exclude in the EBITDA calculations, the EBITDA confusion in Mexico?
Could you confirm that
Peter Vanneste
Okay. Thanks, Fernand. Okay. So on the proceeds from Mexico, yes, so we are anticipating the €250 million proceeds from that divestment. And we have agreed with our banking partners that’s paying back the term loan is the first priority. What we will do, which again will help a lot also in making make sure that our financial debt position is going to be strong.
What we will do beyond that, honestly, we will evaluate and do whatever is best in the interest of the company and the shareholders. But it’s contractual that you are obliged to pay down the term loan first. Because you can buy something back at 80%, which is more effective as much? As I said, this is what we agreed with our banking partners that we would prioritize paying back the terminal.
Okay. On the covenant calculation for 2023, yes, obviously, when we have divested Mexico and we update the leverage we’ll be benefiting from the lower debt, significantly lower net debt because we are getting those proceeds.
And of course, also the EBITDA for Mexico will be excluded as of that moment, yes.
Fernand de Boer
Of course, you don’t have any confidence anymore if you have paid down the term loan.
Peter Vanneste
That is correct.
Operator
The next question comes from the line of Eric Wilmer from ABN AMRO BHF.
Eric Wilmer
A few questions left. I will ask them one by one. I appreciate it’s difficult to share anticipated sequential price increases, but would it be possible to share the exit rate in September.
Peter Vanneste
Okay, you were going to the question of your questions. Yes, I mean, I’m not going to give specific numbers by month. I already mentioned that within the quarter, the pricing has been ramping up, has been higher in August and June, July and high September in August. And it’s clear that the profitability step-up in Q3 has been driven by pricing. So that gives you the answer on the fact that September has been the best month in terms of margin within our quarter.
And we also see, of course, that’s entering and running over into Q4. And there, you also see that momentum is continuing.
Eric Wilmer
Okay. That’s helpful. And then next question, given your production skew in the Belgium or to the Belgium market and as such, your vulnerability to Belgian wage indexation, does this raise a discussion about moving some production to other countries.
Peter Vanneste
We have — first of all, we have — we’re pretty diversified. You talked about production in Belgium. I mean, we have multiple factories only 2 in Belgium. So that’s one part to your element. So it’s not that extreme.
Next to that, we have a very high ambition and cost program, both on operational costs and on SG&A. We have brought SG&A down below 10% already this year. We come from more than 2 points higher. We’ve done it different ways. We’ve been — we’ve done a restructuring — a significant restructuring in last year. This year, it was more about containing and managing the cost against the growing inflation.
We will continue to deliver on the objectives that we have set for SG&A via the recipes that we will meet, but it’s not that there’s anything on the table like you’ve been hinting at.
Eric Wilmer
Okay. Understood. And then my last question on the competitive environment from a brand. I think in the past, we’ve seen a brand introducing aggressive promotions as soon as their volumes started to suffer. Is this something you are seeing in any of your geographies as consumers are moving into private label?
Peter Vanneste
Yes. But obviously, I mean, first actually, we are growing volumes and quite nicely and quite strongly actually and especially in the core. So factually, it’s certainly not impacting us right now. Obviously, we see a branded players reacting and doing what they need to do beyond the pricing, they protect their volumes, which is what I would do if I were in their shoes. But still, we have gained.
We see some differences between markets. But overall, we are in a winning position on the volume side. And looking forward to Q4, I don’t see any sign why that would be different at that moment.
Geoff Raskin
Okay. We’ve reached the hours. So we will not do a second round for those who wanted to do that, feel free to get in touch with me this afternoon. So I’ll leave the floor to Peter, who make his final comments.
Peter Vanneste
All right. Thank you, everybody, for your questions. As you’ve seen, we have turned the corner, Q3 has been an important moment. I mean we — you can finally see the efforts on cost on pricing on volume sales turnaround affecting into an EBITDA and a margin that goes into the right direction. Certainly, not happy with the absolute 5.5% margin or a leverage of 8%, that speaks for itself.
But it’s important to see that in Q4, we will be significantly better on EBITDA and on the leverage. And that will — is the start of turning around and going to the right direction, thanks to the different efforts that we put in place. So thank you for your time, and I’ll talk to you soon or next time.
Operator
Thank you for joining today’s call. You may now disconnect your lines.
Be the first to comment