Oriflame - Even Sweden has Fata Morganas

All,

Please find our updated and improved model of Oriflame here.

Even Sweden has Fata Morganas. Or so it appeared to us when we saw progress evaporate in Q3, pushing out any stabilisation by another few quarters. The new cost savings program appears well-aimed and efficient, but it can only stabilise cashflows between now and restructuring. Cost reduction alone cannot address overall leverage. With docs somewhat leaky, the shareholder having sold €100m of securities recently - therefore apparently liquid and with a Scandinavian broker hovering up the bonds (have they stopped now?), we are bracing ourselves for a tough negotiation in 2025.

Investment Rationale:

- We were awaiting a signal that a bottom comes into view for the fast-dwindling membership. Thus far there seems no bottom in sight. As a result, we are still not having any bonds, even at these prices. 

- An apparent Scandinavian bid for the bonds suggests a shareholder-friendly party might make a restructuring difficult for bondholders. We see this name as a certain restructuring candidate in 2025. The market seems to be expecting an approach by mid-2024, but that looks decidedly too early to us.

- On the upside, Q323 has had a lot of distortions. So perhaps our previously favourite gauge: revenue/member will resume improvement by Q124. It better will.

Q323 Performance:

- Oriflame's revenue and profitability continued to deteriorate in Q323, performing even worse than expected. EBITDA reached zero.

- Sales volume declined shockingly in Q323, even more than membership, as volume per member took another hit and local currency revenue dropped faster again on a local currency basis.

- There are no signs yet of revenue stabilizing or "bottoming out”. The stabilisation we had previously been anticipating has moved out by at least two quarters into H224 at the earliest.

Cost Savings Program:

- Oriflame announced a cost savings program in Q3 aimed at bringing costs in line with diminished sales. It targets €35m in annual staff cost savings and €10m in other indirect cost savings from Q423 onwards.

- The associate restructuring cost of €20m were provisioned for with €16m in Q323. The €20m outflow will mostly take place in Q423 to implement the program.

- The program focuses on simplifying the regional management structure into 5 regions overseeing 13 markets. We think Asia and Europe will be primary targets of the simplification.

- It sounds sensible but it is only aimed at balancing cash flow. The company’s over-indebtedness cannot be cured by cost-cutting. Management is fully aware of it.

Membership Price/Mix and FX:

- Membership shows no signs of stabilizing, continuing to decline rapidly.

- Revenue/member had been improving through Q223 but worsened again in Q323, including, but not only due to FX headwinds. 

- Price/mix growth slowed in Q323 as management tries to increase product affordability, particularly in EM.

- FX provided a strong headwind to reported results. Oriflame is now unhedged. The company has sold its FX hedges in the quarter for €16m, in is therefore now fully exposed to EM fluctuations and the USD (see €475m bond denomination).

Working Capital:

- Inventory and payables spiked in Q223 before payables were paid down, leaving net WC approx. In the zone it was in at the start of 2022. However, the business has literally collapsed since that time, so both inventory and payables are excessive now.

- Management is working on decreasing inventory, even as it seems it paid invoices for it first. The company expects WC inflow in Q423 and early 2024.

Where is the buyer?

- Since August we have been observing a buyer of the bonds in the 30s. We understand this buyer to be Scandinavian / come through a certain Scandinavian broker. 

- This roughly coincided with the final sale of its NCAB stake by R12. We have no evidence of anything, but the aligned timing strikes us as curious. This name will have to restructure and we are concerned of a blocking minority that is friendly to the shareholder. We think that would take 25% to thwart any Scheme and some control of 50% of the moderately drawn RCF  and the Hedging liabilities, which have been sold. 

- As of late, however, we are not observing the same bid as before the Q3 results.

Looking forward to discussing this name with you,

Wolfgang

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