Earnings call transcript: Ontex Group sees stock dip after H1 2025 results

Ontex Group reported a challenging first half of 2025, with like-for-like revenue declining 4% and adjusted EBITDA falling 22% to €93 million, resulting in an 11.68% stock price drop. The company attributed the weak performance to soft consumer demand, increased competition, and supply chain inefficiencies, leading to a negative €40 million free cash flow. Despite these headwinds, Ontex projects an H2 EBITDA margin recovery to approximately 12% and full-year adjusted EBITDA of €200-€210 million, driven by new contracts and expected double-digit growth in North America, with InvestingPro indicating the stock is significantly undervalued.

Analysis

Ontex Group (ONTEX) reported a challenging first half for 2025, triggering an 11.68% stock decline. The company's performance was impacted by a confluence of negative factors, leading to a 4% like-for-like revenue decrease and a significant 22% fall in adjusted EBITDA to €93 million. Key drivers for this underperformance included soft consumer demand, intense promotional activity from branded competitors which eroded private label share, and customer destocking. Internally, Ontex faced a 4% rise in raw material costs, an 8% increase in operating costs, and specific supply chain disruptions, including a plant flood. Despite these headwinds, the balance sheet remains stable, with a leverage ratio of 2.7x, which is below the company's 3.0x internal limit, supported by a recent bond refinancing and debt reduction from divestitures. Management has issued optimistic guidance for a strong second-half recovery, projecting a full-year adjusted EBITDA of €200-€210 million. This forecast hinges on several factors: the fading impact of 2024's negative price carryover, the commencement of new contracts in North America and Europe, the resolution of supply chain issues, and an expected decrease in raw material costs. Consequently, the EBITDA margin is projected to rebound from 9.8% in H1 to approximately 12% in H2, with a target of breakeven free cash flow for the full year, a sharp reversal from the negative €40 million in H1.

Key Decisions for Investors

• Investors should view a position in Ontex as a bet on the credibility of management's guided second-half recovery, monitoring for evidence of volume growth from new North American contracts and margin expansion toward the projected 12% level.
• Key risks to monitor are persistent softness in European consumer demand and continued promotional intensity from branded competitors, which could jeopardize the company's ability to achieve stable H2 revenue and meet its profitability targets.
• Given the significant share price drop and an InvestingPro Fair Value model suggesting the stock is undervalued, investors may consider the current price an attractive entry point, provided they are confident in the operational turnaround and accept the execution risks involved.
• The company's guidance for a return to breakeven free cash flow for the full year is a critical metric to watch, as achieving this would validate the H2 operational recovery and demonstrate improved capital discipline.