(Debtwire) Oriflame liquidity and medium-term maturities provide room to execute on growth rebound target
02 Mar 2023 | 13:41 GMT
Oriflame had a challenging 2022 as earnings dropped sharply following the war in Ukraine and net leverage climbed subsequently. The Swedish beauty products firm's cash outflow for a dividend has also irked bondholders and 4Q22 results last week suggested continued operational hurdles. This means its B3/B/B rated bonds remain risky despite a liquidity buffer and distant maturities leaving potential to deliver on a turnaround strategy according to six buysiders.
The company reported 4Q22 results last Tuesday (21 February) with adjusted EBITDA falling 11% YoY to EUR 37.8m, as reported.
Click HERE for the 4Q22 earnings call transcript.
Oriflame had a tough year with FY22 adjusted EBITDA of EUR 106.5m down versus EUR 188.9m at FY21 as adjusted EBITDA margins fell to 11.5% versus 18.6% in the prior year period. Most of the fall was attributed to declining volumes and the impact of selling and marketing expenses despite a positive impact from fx swings and price/mix effects.
There remain fundamental suggestions as to whether earnings can rebound in future. Oriflame management noted in their financial report that there were sequential improvements in top-line, bottom-line and cashflow generation in 2H22 though 4Q22 sales performance in Asia was a disappointment. They added that Chinese operations can benefit from any reopening while pricing is catching-up with inflation and that the company is targeting a return to growth in future.
Long-term, the business is taking steps to improve its online offering with most orders in 4Q22 processed through the Oriflame mobile application, while the company e-catalogue has increased its share of units sold. The Oriflame app had 935,000 monthly active users at 4Q22. Total company 4Q22 members were 2,135,000, up from 1,912,000 at 3Q22.
Reported net leverage metrics are currently hefty as Oriflame reported total net leverage of 6.5x and net senior secured leverage of 6.0x at 4Q22. The 4Q22 net secured leverage ratio at hedged value was at 5.5x.
Oriflame increased its year-end cash position over the course of 2022 to EUR 121.9m at FY22 versus EUR 118.9m at FY21 in spite of the earnings drop over the period.
The business can still be cashflow generative off reduced earnings. With a FY22 post-IFRS 16 adjusted EBITDA of EUR 106.5m, the company could face around EUR 10m capex, EUR 40m interest, EUR 20m cash taxes and EUR 20m lease payments which would still mean rough estimates of EUR 16.5m of annual free cashflow ahead of working capital swings and discretionary dividend payments, with upside should earnings improve.
The company also has a healthy liquidity position with EUR 122m of cash at FY22 as well as access to an undrawn EUR 100m RCF that matures in October 2025. The RCF has a financial covenant where the drawn super senior net leverage ratio is required to remain above 0.8x with the test kicking in if the facility is 35% drawn according to the bond prospectus.
“I’m constructive. The previous dividend was not good but it shows confidence that management believe future sales can grow after being hampered by COVID,” one buysider said. “From a liquidity and cashflow perspective 2022 has been the worst year ever but the business still generated free cashflow.”
The first buysider added that the business can become more cash generative and he does not see any issues on liquidity while they can grow earnings and reduce leverage this way. He noted that with the Chinese economy reopening there could be an opportunity here and this could be pull-to-par eventually with a refinancing possible down the line too.
“China has reopened. The company still has a fundamental exposure to Russia and a recovery is needed in China but they do have self-help measures and one has to assess what risks are already in the price,” a second buysider agreed.
The Jochnick in the pack
The Swedish founding family Jochnick bought out Oriflame in 2019 through the Walnut Bidco holding company they control at a EUR 1.5bn enterprise value, or 7.5x the LTM 2Q19 EBITDA of EUR 192.7m, meaning a decent equity cushion for bondholders, as reported.
The Jochnick family could be incentivized to support the company given Oriflame has paid large dividends to the owners in recent years. Oriflame paid a EUR 30.5m dividend initially planned for 4Q22 in January 2023, a EUR 30.5m dividend in 2021, close to zero in 2020 and EUR 67.8m in 2019 with more dividends paid in previous years to shareholders, according to historic company annual reports. No other dividend decision for FY23 has been made by the Board according to the company 4Q22 financial report.
“The name is certainly cheap but the dividends are a concern for us,” a third buysider said.
A fourth buysider was also sceptical on any recovery. “Why are people so positive? Membership numbers are boosted by seasonality,” he said. “The trend is what it was and there are big risk buckets for this company that we cannot see management at this point have solutions for.”
“We don’t want to be the Knights of Fortune here and enter this,” the fourth buysider continued. “The company continues to lose sales and volumes and there is a glimmer of hope on positives but we don’t see in the next two quarters how the business turns around.”
Oriflame has a number of other operational risks currently. Adjusted leverage metrics are high. The company noted in its FY22 financial report that EBITDA defined for RCF purposes at FY22 was EUR 86.5m if making a EUR 23.4m deduction for its unrestricted subsidiaries adjustment. This would leave its RCF defined net leverage ratio up at around 6.8x with adjusted leverage including lease liabilities climbing to 8.0x according toDebtwire analyst calculations (see analyst capital structure below).
The business has a large emerging markets focus with around 61% of 4Q22 sales derived from Europe and the CIS, 18% from Asia, 13% from Latin America and 8% from Turkey and Africa. Oriflame already in March 2022 suspended activities in Russia and designated its Cetes Cosmetics and Oriflame Cosmetics as unrestricted subsidiaries, as reported.
The emerging markets exposure has contributed to covenant weaknesses on security and guarantees. The marketed Guarantor and Collateral structure on the bond covenants was weak and heavily engineered, according to a report from Xtract Research, a Debtwire sister service, at the time of bond launch. While guarantees and security from subsidiaries in specified jurisdictions (China, India, Vietnam, Kazakhstan and Nigeria) are understandably excluded, the rationale for excluding other subsidiaries, such as non-wholly owned subsidiaries, is not apparent to Xtract and should have been challenged. The collateral that is granted is principally "soft" collateral – pledges of shares, bank accounts and intercompany loans, Xtract argue.
One other risk for investors is the company’s direct selling business model, which could be prone to further regulation. It relies on social selling by its independent Brand Partners who make a large chunk of sales to ultimate end-customers, as reported.
Additionally the company has faced recent management changes. Gabriel Bennet had been CFO for more than 15 years but has decided to pursue another career opportunity later this Spring and has been replaced in the role by Carl Rogberg. Rogberg was most recently CFO of beauty company Avon International. Gabriel Bennet will remain as Chairman of unrestricted subsidiary Cetes Cosmetics until mid-2024.
Bondholder recovery values could also be low in any downside restructuring scenario. Senior secured bondholders could recover 51% in any base-case given estimates of a EUR 104m adjusted EBITDA, an EV multiple of 4.0x and EUR 85m balance sheet cash plus a fully drawn EUR 100m RCF in any distressed scenario according to a Debtwire 2Q22 credit report.
Oriflame’s B3/B/B rated EUR 250m E+ 425bps senior secured 2026s are indicated half a point down following the results at 63.75-mid with a 2,079bps discount margin while its USD 550m 5.125% senior secured 2026s are indicated steady at 63-mid with a 21.9% yield to worst on Markit.
“It’s probably just a matter of catching a falling spoon,” independent special situations firm Sarria said. “But the spoon has two explosives attached, which we are very mindful of.”
A fifth buysider noted that some investors thought this was a long opportunity as it is high margin but he was concerned that the business includes demand from Eastern European consumers who are facing pressure on their gas bills.
Oriflame declined to comment.
by Adam Samoon with capital structure by Dipali Karekar