Oriflame - Two Years

All,

Please find our updated analysis of Oriflame here. 

It’s finally happening. Membership is beginning to turn around and even a little faster than we imagined. But that’s the good news - all of it. The turnaround is effectively too little too late and the company will run out of money / have to approach creditors in H224. Listening to management, it doesn’t feel like they have mentally switched to working for Oriflame's new owners yet, although for one year in the seat we can’t complain about the effect they’ve had.

Investment Rationale:

- We are not taking a position.

- It's finally happening. The decline in membership is showing signs of slowdown. However, the company is headed for a restructuring later this year and by our numbers, any D/E swap will not be an instant win for creditors. The beauty and direct selling sectors are undergoing deep transformation and owning this company is risky (clearly). Most of the turnaround will have to be achieved in the top line and by brand partners who are not directly under the control of the company. So it's not as straightforward as for instance reducing costs. 

- The company should restructuring in H224 and we see control moving into creditors' hands. However, we are not inclined to lock up capital in this name, which would remain illiquid for a very long time, we fear, and with uncertain prospects.

Membership:

- Membership did not fall as fast as we had forecast, which seems to be adding to a trend we were looking forward to seeing in our last update. 

- Revenue per member fell a little faster than we thought, but together with membership, the total drop is less than modelled. 

- In particular in Europe and Turkey we seem to have been too negative in each case as regards membership and revenue per member. Asia membership has been slightly more stable than in the past - as forecast - but revenue / member has also beat our forecast. 

- We have increased our projections. Having been surprised on the negative side over the last two quarters, we had only modelled a schematic normalisation of developments over the next year. We admit, however, that our forecasts have been lacking conviction. The turnaround in what seems to be the nadir of performance looks to be faster now. We have raised our forecasts proportionally.

- Back in H123 Herbalife and Nu Skin seemed to have already turned a corner (the former more than the latter), but in H2 they also have been digging deeper. It is also worth noting the increased investment volume Herbalife are forecasting to boost growth going forward. We have not heard the same from Oriflame - yet.

Volumes:

- Volume / member is roughly as bad as forecast. Promotions seem to have come down post Q423 and members seem to have bought at a higher price point than before, offset by lower volume. 

- The latest deceleration in membership meltdown does therefore not yet translate through to volumes. We had observed an improvement in H123 and had mistaken it for a false dawn. 

- We are still concerned that Oriflame have "stuffed" their downstream supply chain with hard-to-move product and that this will take some time to clear through the chains. But perhaps we are starting to see that clearance now.

Two years:

- Management indicated that the May coupon would be paid. Cash is around the minimum mark for Management, although the company can be run with less than that for a while. To fund the coupon, the company would sell an asset in the near term. We do not know which asset it is, but are assuming it's the Russian business that was removed from the restricted group two years ago. We are mindful of the porous documentation. The company removed the Russian business from the restricted group a crucial two years ago and has subsequently sold the Russian plant (relatively modern). We have booked €15m inflow from Other Investments in the next quarter. 

- The November Coupon looks insurmountable and we expect negotiations to commence over summer. The coupon payments marked in red above will not be made and the payments shown for 2006 are purely illustrative for a utopian refinancing.

- The company, as it enters restructuring, will have ZERO debt-carrying capacity.

Looking forward to discussing the name with you,

Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk