Intercos S.p.A. (ICOS.MI) Earnings Call Transcript & Summary

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos Group First Half 2025 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Renato Semerari, Chief Executive Officer. Please go ahead, sir.

Good evening, everybody, and thank you for connecting to our conference call. In a generally, a stable macro environment and a beauty market that is displaying an overall soft trend in both Western and Eastern World, Intercos posted strong semester results with sales ahead of market and above all, a very good improvement in profitability. Now it's important to underline that the semester offers the most objective view of our results since quarter's reading is blurred by last year's cyber attack, namely the quarter 1 was depressed by the cyber attack. So it was easy to beat comps. In quarter 2 last year, we had the backlog absorption. So all the orders that we could not produced in quarter 1, were absorbed in the course of the second quarter. So all in all, we believe that the first semester data reflect a bit the overall trend of the company, giving a more reliable balance to our results. So in the first half, we had sales growing ahead of market, as I just said, with a plus 6% at constant rates versus a year ago, and this was driven by the exceptional performance of Make-up, which grew at double-digit rate and gained back a weight on our total sales of above 60%. But what is really remarkable, in my view, is the record EBITDA that we posted in the semester. We posted EUR 75 million of adjusted EBITDA, up 16.5% versus a year ago, with 140 basis points of improvement over the first semester of last year. Looking at the EBITDA margin on value-added sales, we reached 18.3% of margin, up 176 basis points, which is the best ever margin on value-added sales the company has ever had. And it's important to note that profitability grew substantially also in the second quarter, and we now have a rolling EBITDA of EUR 154 million. Net debt was at EUR 135 million, maintaining the leverage ratio we had overall last year with 0.87x EBITDA, despite the increase in CapEx we have experienced in the first semester for the expansion of the Korea plant and the Chinese plant as we had anticipated now a roadmap of planned expansions. Let's now look at the overall figures a bit more in detail. So as I said, sales were up 5% at current rates, 6% at constant rates, with value-added sales growing also by 5% at current rates, which reflects a substantially flat percentage of packaging costs on our sales. So the phenomenon we had seen in the past 2 years of an increasing weight of packaging on our net sales has stopped, and we are now flat versus a year ago in terms of weight of packaging. Adjusted EBITDA grew, as I said, by 16.5%, with a margin expansion of 140 basis points. As I said, what is more important, in my view, is the marginality on our value-added sales, which grew by 176 basis points, getting to 18.2%, which is the highest ever achieved. Net income was instead down by 60 basis points due to two factors: the negative exchange rates had an impact and also interest rates had an impact. Stefano will take you through in more details on these dynamics. Looking at the second quarter in isolation, sales were substantially flat at constant rates facing last year orders backlog recovery, as I just said. The good news is that the margin expansion was there, despite top line was basically flat, with a gain of 103 basis points over last year, which was the best quarter in terms of profitability for the total year. Now looking at the sales dynamics, let's start by the sales by business units. Now here, the sales trend showed a completely different dynamic than last year with growth, which was entirely driven by our key business unit, which is Make-up. Make-up was up by 18% in the semester and plus 13% in the second quarter. We posted growth -- material growth in all regions. Multinationals were the key contributor to the growth, mostly pushed by our innovation in powders and foundations. Those were the two segments that were displaying the fastest growth rates. Both Mass market and Prestige grew with a skew to Prestige, which also helped profitability. So Make-up went back to over 60% of our total sales, and Stefano will explain that this as a mix impact, which is favorable for our total profitability. Skincare closed the first half at minus 6%, mostly due to the first-quarter result. The performance was affected by the U.S. emerging brands, while multinationals were growing, especially in Europe. Important to remind that [ BU ] was facing a strong first half of last year at plus 15%. Hair & Body closed the semester down by 15%, entirely due to the sharp drop we faced in the quarter 2. Last year, just as a reminder, quarter 2 posted a plus 39%, thanks to a number of Fragrance initiatives that could not be anniversarized this year. Moving to sales by region, sales growth were again pushed by the performance of Asia like in the past 2 years. America came back to high single-digit growth, while Europe had a flat semester. Going in more details region by region, Asia posted a plus 16% in the first half despite last year very high base. Last year, we had a plus 28%. We had both quarter displaying double-digit increases, with both Korea and China continuing on their traction, and this is no different versus what we experienced last year. Make-up was clearly the driver segment in this growth, and now we have Asia [ weighing ] for 24% of our total sales. Just as a reminder, a couple of years ago, Asia was only 17% of our sales. America posted a plus 9% growth in the semester, with both quarters displaying growth. Make-up was once more the only growth driver. Prestige was clearly the winning channel, driven by both multinational and emerging brands. As for EMEA, the semester ended flat versus a year ago due to the soft quarter. Now the region was -- the regional performance was affected by the difficult Hair & Body second quarter. As you know, Hair & Body is a segment which is basically present in Europe. So the drop we saw in the segment had a weight on the region, while Make-up and Skincare at very healthy growth rates. Moving now to sales by client clusters. Also in this case, we witnessed a growth profile which is different from the recent past. In fact, multinationals took back the main role in the scene, getting back to 48% of our total sales. So they posted double-digit growth in both quarters, closing the first half at plus 18%. Make-up was obviously the focus, with Asia and U.S. as key regions. As for the emerging brands, they closed the semester down minus 8% due to the second quarter double-digit decline in front of a year-ago plus 34% growth. Also, in this case, the main driver of the decline was Hair & Body category, as explained a few minutes ago. As for retailers, as you may remember, last year, we had a difficult year with retailers. Now we gained back part of the year-ago decline, growing at double-digit rates in both quarters. First half ended at plus 18%, with Make-up and EMEA as major drivers for this group of clients. Let me now pass the mic to Stefano, who will take you more in details into the financials.

Thank you, Renato. Good evening, everyone. Well, as already mentioned by Renato a few minutes ago, the first half of the year recorded a 5% increase in sales, bringing total revenue to EUR 525 million and this despite market uncertainty caused by the severe geopolitical situation and the well-known issues of the U.S. tariffs, which dominated the scene in the second quarter. The macroeconomic turbulence triggered by the Trump administration was also felt in the currency markets. And for our group, the depreciation of U.S. dollars and the Chinese renminbi weighed particularly heavily. In fact, revenue growth at constant rate FX would have been 6%, 1 percentage point higher than the reported figures. The EBITDA showed a strong growth, reaching EUR 74.5 million or up 16.5%, effectively 3x the rate of revenue growth, with the EBITDA margin further improving from Q1 to 14.2%. Main reasons for this positive and sound performance were the excellent performance of the Make-up business unit, up 18% compared to last year. a favorable customer mix, particularly because of the growth of the Prestige clients, which grew double digit in both in the Make-up and the Skincare business unit. At the same time, the group was able to keep the pre-issue revenue model with adjusted EBITDA on value-added sales at 18.3% or plus 177 basis points versus '24. On top of this, the company and the group continued the improvement in the transformation cost. Among the operating expenses, we recorded net nonrecurring charges of EUR 4.4 million, mainly related to HR severances, legal consultancies, LTI bonuses; with positive impact that came from the insurance indemnities for about EUR 2.5 million and the release of bad debt provisions. Taking into account the depreciation and impairments, which amounted to EUR 26.2 million, the EBIT came in at EUR 43.9 million, equal to 8.4% of revenues, up 25% over last year. The financial component weighed on operating profit by EUR 13.4 million, mainly due to currency effects, with a net impact of approximately EUR 6.6 million. With an average net financial position ex-FX -- ex [ IFRS ] of EUR 75 million for the semester, the financial components resulted in the net financial charges of EUR 6.4 million. Finally, considering a reported tax rate of 45%, the group net income amounted to EUR 16.6 million, where excluding extraordinary income components, net profit reached EUR 20.7 million, equal to 4% of net sales, slightly below last year result despite the aforementioned FX impact. Let's then turn to the results -- EBITDA result by business unit. The $74.5 million EBITDA is attributable 66% to the Make-up business unit, 19.2% to the Skincare business unit and the remaining 15.2% to the Hair & Body business unit. Compared to the same period last year, the Make-up division improved its profitability by over 120 basis points with an absolute increase in EBITDA of 27.8%. And this positive result was achieved across all geographic areas, where the group operates, thanks in particular to the performance of Prestige and multinational customers. After a particularly strong '24 in terms of revenue, the Skincare business unit experienced a slight decline in sales but still managed to improve its EBITDA both in absolute value at $14.3 million or plus 32.5% and in relative terms to revenue, plus 530 basis points, thanks to a more favorable Prestige customers' mix. The Hair & Body business units saw reductions in contract manufacturing activities related to emerging brands during the first half of the year, brands that had shown strong results in the same period last year due to the numerous product launches. As a consequence, EBITDA was impacted by these trends and decreased to EUR 11.2 million, down EUR 3.6 million, representing 10% of the net revenues. All in all, the excellent results of the core Make-up business unit more than offset the temporary weakness in the business unit dedicated to contract manufacturing. Let's have a look then to the cash flow. In the first half of the year, the group used approximately EUR 36 million in working capital and over EUR 33 million in CapEx. As a result, the operating cash flow was EUR 7.7 million and the lower cash generation compared to the one recorded in the same period last year, it is justified by higher CapEx, particularly in China and Korea, where the group is expanding production capacity in response to the significant local business growth and by higher DSO due to the current seasonality and the current weight of multinationals. At this stage, we do not see any critical issues in terms of cash flow, even when considering expectations for the second half of the year. Following the distribution of approximately EUR 18 million in dividends, the net financial position stood at EUR 134.5 million, corresponding to a leverage ratio of 0.87x EBITDA. That's all for the financial highlights.

Thank you, Stefano. Now moving a bit our side ahead of us. Now the situation of the market is very visible for everyone. So the market is quite unstable, as we've seen these trade wars and announcement about tariffs are polarizing everybody's attention, including in our sector. All in all, the market is quite soft in the beauty sector this year, especially for what concerns Make-up, which is obviously the segment we follow with more interest, given the weight it does on our business. So U.S. market is showing a low confidence rate from consumers. Most of the segments, especially Make-up, are showing a soft trend, eyes are declining since a few years, sales is quite stable; while lips is the only segment that is really showing growth. So U.S. remains an area of a bit of concern. On the other hand, we have EMEA that is posting some positive growth, not comparable to the growth rates of the last year, but still positive, although less so in volume terms, which is the indicator that is more interesting for us. As for Asia, we've seen some positive recovery signs from China. Unfortunately, the June 18 promotion, e-commerce promotion was not that positive. But despite that, the semester closed with a plus 3% growth in China, which is better than the one we saw last year, but still not strong enough to drive growth in a more decisive manner on a global spectrum. So all in all, the market is pretty soft. We'll now see what are the consequences of all the tariff moves on the second semester. But all in all, we expect now a market that will remain positive but below the usual growth rates this market is used to do. In this context, we have decided to focus our attention, to focus our efforts on our core business, which is Make-up. This is the segment where we can leverage superiority in innovation, and this is where we're going to be focusing our attention, as well as pushing hard to improve our profitability as we did in the second semester. So despite this will be a year with top line growth rates, which are below the usual rates of this company, we are very confident in a significant improvement in profitability, which will -- which makes us confident to reach the consensus expectations in terms of EBITDA for the fiscal year. The last sign I would like to leave you is that the order entry continues to be solid, and this gives us confidence -- and especially in Make-up, which again, as I said, is the focus of our effort for this year. That's all the key points we wanted to flag to you. We are now ready to take on your questions.

[Operator Instructions] The first question comes from Anna Frontani of Berenberg.

I have a bit of questions. The first one is if you can confirm whether you still expect full-year sales growth at constant FX in the range of 5% to 7%, as previously communicated?

Excuse me, we can't hear you very well.

My first question is related to the previously communicated guidance. Do you still expect sales growth for 2025 at constant FX in the range of between 5 to 7? The second question is about emerging brands that noticed the decline in Q2. If maybe -- could you provide more color on what's driving the softness? Are you seeing a broader slowdown in demand, delays in launches or maybe some brand-specific issue? Then third question is about the U.S. market dynamics. Specifically, we've seen the news [ Kolmar ] Korea plant opening in the U.S. I was curious if you're seeing an impact or a shift in customer behavior from these or maybe it's too early to have some potential implication for Intercos? And sorry, if I can squeeze a very quick one. If you can give us the split of volume versus pricing, either for Q2 or H1 growth?

Okay, Anna, thanks a lot for your questions. I'll start from the last one, which is the easiest. The pricing impact was in the range of 0.5%, so was a limited -- very limited impact on the total, as expected. So not -- its growth was really volume-driven once more versus pricing. Moving to the guidance, which is the key question here, the reality in terms of top line, we expect it will be a bit below that. It will be in the low single digits, is going to probably be more in the range of 3%, 4%, more than 5% to 7%, given how the market is shaping and the fact that we have Hair & Body that is going to be below our initial expectations and is showing a declining rate. So we are very confident about growth in -- on our innovation categories, while on the more contract manufacturing part of the business, it will be tougher than originally anticipated. So in terms of top line guidance, I would say a bit more on the conservative side. On the other hand, and this is more important, I think that the results in terms of profitability is better than what we had anticipated. And as you've seen, I've always spoken about a 50 basis points improvement. We are way above that rate, and that is what we want to focus in this moment of overall market softness. So all in all, it will be a rebalancing year after very strong years in terms of top line growth with dilution in marginality. This year, we're going to rebuild marginality and have a more moderate growth rate in terms of top line. Going to the emerging brands, well, the picture is a bit affected by what is happening in the Hair & Body sector, where we had emerging brands that were pushing sales, thanks to initiative in the Fragrance market that had a high impact in terms of top line last year. And this year, the anniversary of those initiatives is not producing the expected results and is a lot softer there. So emerging brands is a bit affected by this trend. If I look at the key -- the core segments of Make-up especially, we are seeing emerging brands continuing to perform well; in some regions, very well. So all in all, we are not worried about the signals that we're getting. It's more contingent on specific performances in certain segments. As for the U.S. market, I think the [ Kolmar ] is not that I think, I know that the [ Kolmar ] decision was taken way before the famous April 2 announcement of Mr. Trump. It's a market where [ Kolmar ] wants to expand. It's very much focused on Skincare, which is their core category, as you know. We are already equipped with plans in U.S., as you well know. And -- but it's a bit early to say -- to predict what is going to happen. The picture is clearing up. But with ups and downs, we do not know exactly on which foot we're going to be dancing. The reality is that we have not seen -- aside from a few emerging brands that are asking us to move production to U.S., we are not seeing yet a massive movement in that sense. It's a movement that I would personally like a lot, to be honest, because we are better equipped than most of our competition in U.S. So we would welcome a move to U.S. The big question mark for clients is related to packaging, which in many, many instances, is still coming from China. And so the more packaging cost, the more the tariffs on China are having an impact on the final cost of goods. So it will be a bit of a scattered reaction, depending on what kind of packaging clients are buying from which country that will lead to different way of behaving. So we are obviously studying. We have seen the impact of tariffs on the second quarter of the year. We have reverted the vast majority of it to our clients. Whether that will trigger a massive movement to U.S. is still to be seen, it's a bit -- still a bit early days. I hope I've answered to all your questions.

The next question is from Guillaume Delmas of UBS.

Two questions for me, please. The first one is on your EBITDA margin outlook. So you've decided to focus on profitability this year. You mentioned that the first-half margin was ahead of your expectations. So several questions here. What were the main reasons for this positive margin surprise in the first half? And do you think this is extrapolable to the second half, so that 100 basis points plus of margin improvement in the first half, we could see something of similar magnitude in the back half of the year? And thinking about 2026, are the margins you'll be achieving in 2025 sustainable or it's a bit of a one-off. And from next year, we could see margins coming backwards? And then my second question is on adjusted net income because again, your EBITDA in the first half was nicely ahead. Year-over-year, I think, 16.5% you mentioned. But then adjusted net income was 9% below. So tax rate, financial expenses very much ahead in the first half compared to where they were in the first half of last year. What should we expect for both lines, tax rate and financial expenses, for 2025 as a whole? And how will it compare to 2024 to what you reported in terms of tax rate, financial expenses last year?

Thank you very much, Guillaume. So EBITDA margin, there were different factors that played in our favor. There were things that we knew and we expected and things that we didn't expect at least in the extent that we saw it coming. Mix was favorable compared to last year. There were two different types of mix effects. One is the relative weight of the business units on the total sales, which had an impact. So the fact that Hair & Body, which, as you know, is the business unit with lower marginality for us; went down, while Make-up went up in such a significant way, played in our favor and brought our weight of segment, more in line with our historical situation. This was favorable. And this was a bit above our expectations because we were not expecting Hair & Body to perform to this extent. The second is the fact that Prestige has been growing faster than Mass market. This also is very visible in Skincare profitability. It's also visible in Make-up profitability, and this was somewhat expected. But again, given the growth rate we had in Make-up and especially driven by Prestige, was a bit above our expectations as well. And the third factor, which is the one we knew better, is productivity that for once, it has not been hidden by mix effects, increases of packaging cost and all that. So all of a sudden, then you're now seeing the results of not only 6 months of work, but the whole previous year work now become visible to you, and this is also leading to the improvement in profitability. So all this went in a very positive way, I would say. Is this a one-off? Personally, no, I don't believe it's a one-off. The productivity improvements were already there last year. We continued in this semester to bring productivity improvements. And they will keep being visible, unless there are factors like full service, so packaging growing in a significant manner or having different mix effects that like in the past years, were affecting our profitability. So I don't think it is a one-off. In reality, there is nothing really extraordinary. We are just coming back to a mix of business that is more in line with the history of this company. So I think that it's more a one-off, what we've experienced in the past 2 years more than what we are seeing this year. So I'm pretty confident for next year as well. Now on the adjusted net income, it's better that I pass to Stefano. He is certainly more precise than I am on this.

Well, regarding the tax rate, as you may know and understand that the tax rate of the first half is affected by the dividend distributions. That's why we saw 45%. What we see for the full-year tax rate more standard, in line with last year. And I would say I would expect the tax rate of about 30%. Regarding the financial expenses, taking aside for a while the possible impact on currency, that is very difficult to predict at this stage; I would consider EUR 10 million net financial expenses.

The next question is from David Hayes of Jefferies.