Management confirmed the group will continue to operate in Russia “until economically viable”, despite their intention to sell the Cetes Cosmetics manufacturing entity. The transaction technically means Oriflame will subcontract the manufacturing process to the buyer, but will continue to generate revenue in the region. Before it was combined with the European financial reporting, Russia accounted for ~16% of FY 21 sales. 

Although the entity is placed in an unrestricted subsidiary, management claim the proceeds from the sale will trickle down into the restricted group, where it will be used for general corporate purposes or to bolster their liquidity position. One investor on the earnings call questioned the risk that proceeds could be used to pay another dividend to shareholders. This comes off the back of the controversial decision to pay a €35m dividend in FY 22 — with cash outflow realised in Q1 23.

There are no such dividend plans in place, according to management, who also confirmed there is no change in financing policy since the founding family re-bought a controlling stake in the business in 2019. Questions were also put to bed on the disposal of the groups entire Russian operations.

Active Member make-up shake-up

Oriflame reported a material deterioration in operating performance in Q1, with a 9% decline in sales (-10% on a local currency basis) and a 24% fall in Adjusted EBITDA versus prior year. This decline can be attributed to a few events, including the decline in active member numbers, slower recovery in Asia and the devaluation of the Turkish Lira. 

Typically the group sees a seasonal uptick in active members which reverses through the year. But with active members declining 20% YoY, there might be an underlying structural problem at Oriflame. Management admitted they may have to reassess there strategy, which includes the renumeration policy, in order to drive member engagement & sign-ups. As we’ve noted previously, in Europe Oriflame benefits from having a member distribution channel which markets products to potential customers, and reduces the cost of final delivery.

A 28% decline in unit sales was partly offset by a 18% positive impact from price/mix. 

Despite China re-opening from Covid-induced lockdowns, Asia sales continued to decline, falling 23% on a local currency basis. This is partly due to lower member base, but may also be down to structural problems in Oriflame’s business model, which means they don’t have a competitive advantage in the region. 

In Europe, sales continue to be impacted by the events happening in Eastern Europe, although sales in Ukraine have recovered slightly. According to management, the group is seeing a negative trend whereby Russian citizens don’t want to join foreign companies, therefore impacting the inflow of new members.

Margins were also hit in the quarter, due to increased sales & marketing expenses and administrative costs. Management attributed the increase in marketing expenses as a normalisation versus the lower levels seen during the pandemic. Despite the group realising an increase in administrative expenses, likely due to inflation, they did benefit from €5m of cost savings through their restructuring initiatives. On an annualised basis, however, this is lower than the €30m originally guided in cost savings.

As mentioned earlier, Oriflame completed €30.5m dividend payment in Q1 23. This cash outflow, along with €16.2m of cash burn from operating and investing activities, leaves the group with a worsened liquidity position compared to at year-end.

Working capital movements was the main contributor to the disappointing cash generation in the quarter. Lower global sales have lead to higher inventory levels at Oriflame. The group also reported higher prepaid expenses related to future conferences, which had a negative cash impact. Working capital should swing back into Oriflame’s favour once sales begin to pick-up according to management.

Interest Coverage glow-up

Although the overall business performance has been poor in Q1 23, management have been proactive in dealing with the higher interest rate environment. The $550m 5.125% Secured’s have been swapped to a Euro interest rate 3.53%, meanwhile €200m of the €250m SSFRNs have been swapped into fixed notes with a 0.14% margin.

According to 9fin calculations, this improved interest coverage to 3.1x (calculated as EBITDA divided by interest paid), from an otherwise low 2.3x. 

Fortunately there are no near-term maturities on the horizon, and management expects to return to its deleveraging strategy shortly, with a 3x target nailed in for the long-term. Liquidity remained adequate, aided by an undrawn €100m revolver.

After taking into account proceeds from the Russian asset disposal, net leverage falls 0.3x of a turn to 6.9x – still considerably higher than peers.