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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos Full Year 2021 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.

Thank you very much. Good afternoon, everybody. I'm happy to be here to comment our 2021 results. Before getting into the numbers, I would like to remind everybody that 2021 was quite of a peculiar year once more. We entered the year with a low order portfolio, which was the result of the COVID wave of the fourth quarter of 2020. Then during the year, we still had some new variants impacting in different countries reacted with different levels of restrictions, but all in all, we cannot say that life was really back to normal. In the second half, as you all well know, we were caught by a major supply chain disruption which had an impact on our performance of the second semester. Despite all these bad news overall, the beauty market went back to growth, recovered in total or in a good chunk, the ground lost in 2020 with the exception of Make-up, which remained a bit below the 2019 borderline, but despite this, I'm very happy to share what I think are strong sales and earning growth for Intercos. If you go to Page 4 of our presentation, you'll find a few key numbers. So we closed the year with a net sales growth of 11%, almost 12% constant fixed rate from currency rates. Adjusted EBITDA went back above the EUR 100 million threshold with a 15% margin on net sales, so with a 68 basis point EBITDA improvement. In terms of adjusted net income, cash flow, net debt, they were all positive. Pietro will dig into these numbers in the course of today's presentation. The last point is that not only the cost had positive financial results in 2021, but 2021 also marked a new step in our ESG road map. We just received a few weeks ago, the new EcoVadis score for 2021, which marked the fourth year in a row of rating improvements for Intercos. We've now got the platinum medal from EcoVadis that puts us in the top 1% of companies of our sector on a global basis. I will now move to Pietro, who will go a bit more into the financials, and then I'll come back to give you more color on the net sales results.

Okay. I'm on Page 5 of the presentation. Thank you, Renato. So now we can give a closer look to our performances. As said by Renato, we have been able to reach EUR 674 million of sales with a growth of 11.1% versus prior year, 11.8% at constant currency. On a like-for-like basis, that means considering the 12 months of Intercos Korea sales in fiscal year '20, we have been able to reach a growth of 6.4% at constant currency. The growth came from all geographies, we have been able to grow basically everywhere and also with all customer types. And we had a incredible strong increase in sales in Skincare and Make-up. Also, Hair & Body achieved a positive growth of plus 8% if we exclude the bubble of the extraordinary sales that we had in 2020 related to hand sanitizer, then Renato will comment later the performances by the different business units, geographies and customer types. Adjusted EBITDA, we have been able to pass the bar of the EUR 100 million. We have been able to reach EUR 101.1 million with a growth of 16.3% above prior year, and this was thanks to the increase in sales and the gradual recovery that we had in profitability through the year. EBITDA margin is now at 15% with an improvement of 110 basis points on a like-for-like basis versus 2020. Adjusted net income was equal to EUR 41.2 million growing EUR 15 million or 57% versus 2020. I remind you that the Board of Directors has proposed not to distribute dividends with reference to the current fiscal year 2021, in line with the dividend policy that was already now that foresee first distribution of dividends in 2023 based on the results of 2022. For net debt, again, also in 2021, the group has been able to generate positive cash flow, positive cash that allowed us to reach EUR 126 million in net financial position, down EUR 67 million versus 2020. The cash generation, excluding the IPO proceeds -- the net IPO proceeds was EUR 30 million, which now allowed us to have a leverage ratio equal to 1.25x versus 2.2 in Q3 at the end of 2020. Very important is to underline the performance that we had in Q4. We have been able in the last quarter of the year to reach EUR 188 million of revenues with a growth versus the last quarter of 2020 of 12%, and also very important is the performance in terms of profitability. EBITDA in the last quarter was EUR 30.6 million, up 24% on the last quarter of 2020. And also the in the margin, the EBITDA margin is 6.4 -- 16.4% back to the level of the pre-pandemic ratios. Now we can move to Slide 7, the part related to the performances of the business units. Renato?

So thank you, Pietro. In terms of views, you can see that we had a progressive recovery of makeup that in Q4 of 2021, went back to accounting for 64% of the group revenues. Skincare went up to 19%. Hair & Body was obviously down -- went down to 17% in Q4. All in all, out of the plus 11% growth, we had Skincare which had a lion's share of plus 27%, Make-up also in double digit at plus 12.5% while Hair & Body was negative, minus 5%, again, without the bubble of hand sanitizer in 2020, this number will reach plus 8%. On a like-for-like basis, obviously, the inclusion of Korea had a strong impact especially on Skincare, which on a like-for-like basis, was up 7%, while Make-up was up 9%. What is important to note is the acceleration we had in the course of the year with Q4 being the best quarter for us in 2021. So we had double-digit increases in color and in Skincare, while also Hair & Body went back to growth in that quarter. Thanks to the fact also that the hand sanitizer battle, which was almost over by then. Looking at the picture by regions, as you can see in terms of business split, EMEA has lost weight in favor of Asia and America, still representing a very strong proportion of 46% of our sales. U.S.A. had the strongest performance, and that obviously was the boost of the America result. Asia following with a very strong China growth partially offset by some Korea drops. As you can see, all in all, EMEA was flat and in recovery mode throughout the year. Looking at the acceleration in Q4, it was clearly driven by Americas and -- but also Asia, double-digit growth. EMEA was back to solid growth with 7% growth in Q4. Moving to the customer type. As you can see, there is no -- Page 9, you won't see any significant changes in the client split. Multinationals held more or less 50% of our sales. This was mainly driven by the strong performance we had throughout the year by client #3 and #4, both important multinationals. But it's important to note that all the client segments were on a growing mode. So multinationals were the fastest growing in the course of the year with plus 12%, emerging brands plus 11% and retailers plus 9%. In Q4, we saw acceleration in all segments with multinationals and retailers growing double digit. Important to note that even in the multinationals, we had an important contribution of ex-emerging brands that have entered into the multinational bracket due to an acquisition from a bigger company.

Okay. Back to have a look to the profitability. So now I'm on Page 10. As we have already said, the adjusted EBITDA is at EUR 101 million with a good increase of EUR 40 million, 16% up against last year. And this is thanks to the higher sales that we have been able to achieve and, of course, also the improved profitability. Very important to say is that the profitability has been able -- we have been able to increase our profitability from 14.3% in 2020 to 15% in 2021. Now if you remember, the first quarter that we had was affected by low sales, so basically, we have been able to increase the profitability quarter after quarter and reaching in the last quarter of the year, 11 of -- above 16%. The EBITDA of Make-up is up 6% against 2020 reaching a level of EUR 63.8 million at 15.3% of EBITDA margin, which is basically in line with the same -- with 2020, if we compare on a like-for-like basis, that means including the 12 months of Intercos Korea. Very strong is the performance that we have been able to achieve in Skincare. Skincare, we have improved our profitability, our EBITDA by EUR 12 million reaching roughly EUR 20 million of EBITDA with an EBITDA margin of 15.4%. So also in this case, as we have already said during the roadshow presentation and the announcement of the financials in September, based of September figures, you can see the really incredible work we have been able to do in the proceeds -- in the Skincare arena. In Hair & Body, we had a drop of EUR 2 million of EBITDA. We have reached 17.5% of EBITDA still a really good result, 13.7% of EBITDA margin. But this, you can -- you should take in consideration the drop that we had in hand sanitizer, EUR 15 million less of sales that did account for EUR 3 million of EBITDA. That means that on a comparable basis, so excluding the extraordinary sales of hand sanitizer, also in this case, we have been able to increase our profitability. Moving to the cash. We have been able to generate EUR 67.3 million of cash, increasing EUR 80 million comparing to 2020. Basically, we should exclude the net proceeds from -- that we got from the IPO. Excluding that, the cash generation -- the net cash generation was EUR 30 million, increasing EUR 41 million against prior year. That also was affected by the acquisition of the Korea subsidiaries that did account on the cash flow of EUR 45 million. On the operating cash flow, operating cash flow is up (sic) [ down ] EUR 16 million in comparison to prior year, still positive, EUR 36.5 million of operating cash flow. This is taking into account the increase that we had in raw materials, the increased volumes of raw materials and packaging that we have bought in order to cope with the possible slowdown in sourcing. And also, of course, it's taking in consideration the acceleration that we had in sales in the last quarter, that is affecting the increase -- this increase in basically the receivables. On a DSO basis, we're in line with prior year on a counting back methodology DSO, we are even better than prior year, even substantial. Our net debt is now at EUR 126 million, which is down EUR 67 million against last year. And this allowed us to have a leverage ratio of 1.25x, including the EUR 126 million of net debt is also including the EUR 26 million the results of the application of the accounting principles IFRS 16.

Okay. Moving now to the outlook and guidance. Now in terms of outlook, I have 2 bad news and 2 good news. The bad news are very well known by everybody. First and foremost, we want to say that we are shocked for what is happening on the borders of the European Union. We have many Ukrainian employees working in our plant in Poland and our group wants to express its closeness to their loved ones. We are currently putting place a well-structured plan to provide solidarity funds and access to work for Ukrainian refugees, this in partnership with the United Nation agency for refugees that is a partner we've been working with since 2019 for other projects and other refugees from other countries. So we will provide all the support we can. And also we are distributing products for refugees in these days. The second bad news, obviously, is related to the supply crisis. So all the difficulties we've been speaking about from the second half of last year in terms of availability and prices of raw materials, transportation and packaging are also affecting the beginning of 2022. I can say that we expect that the current geopolitical tensions will bring less visibility on when this inflationary dynamics will normalize. Also, they brought as a first consequence, a sharp increase in the cost of energy that wasn't factored in at the end of last year. So we are constantly monitoring the market trend in order to adopt the best solutions and the best actions to cope with these challenges. And I must say that the most difficult part of it is the volatility that we're seeing in terms of pricing especially in energy. Now moving to the good news on the 8th of March, we have opened the showroom in Intercos, which reopened also physically after 2 years of closure due to the pandemic. It is our 50th anniversary. So it's quite of a special day for us. And we are very happy to host again physically clients in our headquarter. Obviously, we also have virtual versions of the showroom so that we can have a fast reach to all the clients, also those who are not traveling yet. We have already reached over 100 clients presenting our innovation -- the most important collection of innovation for the year, getting a lot of positive results and a lot of interest from our clients. So that's the first good news. The second good news is that you remember that we had a very strong order entry in the second half -- actually started a bit earlier than the second half of last year. This order entry is continuing to be extremely strong. I will show it to you in a moment. And so we have a record high order book in our end already. Balancing -- no, go back one, please. Sorry. In terms of based on these balancing good and bad news, we are giving a guidance for fiscal year '22 in terms of net sales increasing in a range between plus 10% and plus 15%. This takes into account the complexity in supply chain that is causing longer lead times to transform orders into turnover. If you now move to Page 13, you will see a graph that you used to see from us, which is the bimonthly order intake, you can see that the strong order flow that started in March 2021, it's still going on. Actually, in January, February 2022, we have recorded the highest ever order intake by month with EUR 170 million collected for Make-up and Skincare alone plus 25% versus 2019. So very strong order intake. It's a dynamic that is -- we are still enjoying. Moving to the following slide, you see the situation of our order book at the end of February. We have EUR 319 million worth of orders for our Make-up and Skincare. This is a 45% increase over the same date in 2019, which remain our record in terms of net sales. We have an order portfolio, which is booming in Make-up, plus 49% versus 2019, and Skincare is plus 21% versus 2019. So in terms of order intake, order book, we have the means to do a very strong 2022. That's all on our side. We are ready to take questions from the audience.

[Operator Instructions] The first question is from Pinar Ergun with Morgan Stanley.

I'll kick off with 2, please. The first one is, could you help us please reconcile the strength of your order intake and order book with your outlook for 2022 on top line. Is it -- is your outlook maybe limited because it takes you longer to convert the orders into sales, given the challenging backdrop you're operating in? And if so, would there be a risk of cannibalization of future sales if it takes you longer to convert the orders into sales? The second one is on the, excuse me, on the profitability. Any -- could you share with us any color on how you expect profitability to develop in 2022? For example, on pricing, would you expect to be able to fully pass on all the cost pressures to your customers? And what kind of lag -- timing lag should we expect?

Okay. Pinar, thanks for your questions. Okay. Number 1 is a bit tricky to answer because when you look at a plus 45% order book, I understand that you are quite surprised by seeing our guidance. Our guidance takes into account all the difficulties and the longer lead times in executing the orders that we have in our end. Also, it reflects part of the delay in further or future orders that may arrive and may stem from the fact that it takes longer to execute. So in terms of reorders from clients, I would expect that a client that is still waiting for a previous order, will wait a bit longer to pass new orders. To be absolutely transparent, I would have expected the order inflow to calm down a little bit already. It didn't, actually February was our highest month ever in terms of order intake. And to be honest, also March is looking pretty solid again. But we have factored in some conservative -- conservatism linked to the lack of visibility we have on when the supply chain prices will start to fade away. So yes, if we were not in supply chain prices, I would have given a higher guidance than what I've just told you. The second question in terms of profitability and pricing. Well, pricing, as we communicated, we have raised prices well in advance. We communicated to clients end of July. We went through the negotiation. We implemented the price increases in Q4 with some clients delayed to the beginning of the year. But by now, all the price increases have taken place. Now the reality is that the visibility we had when we implemented the price increases was not perfect. And in reality, it isn't perfect nowadays either because the volatility is pretty high. So it's very difficult to have accurate forecasts, but we are now looking at a new round of increases before summer to compensate the energy costs that were not factored in our price increase at the time, and some higher variations we have seen in cost of certain raw materials. So most likely, and we are monitoring the situation on a monthly basis, we will have to adjust a bit further our pricing. So moving -- so we expect pricing will compensate the inflation -- the inflation impact we are seeing. There might be -- obviously, what is difficult to be compensated are the up and downs, actually, the ups more than the downs, the downs are always good to see, but when you have a sharp increase in a given moment and then that increase slows down, you're seeing the oil prices, the gas prices have spiked for a few days or weeks, then have come down a little bit, not completely, but those spikes are very difficult to be absorbed in pricing because they need to have a fair positioning towards your customers. So it's going to be a rough navigation throughout this interesting inflationary movements, I hope I've answered.

Yes, that's very helpful. So basically, what I take from what you're telling us is not get too carried away on the margin potential this year.

No, I wouldn't.

There is a follow-up question from Pinar Ergun with Morgan Stanley.

Yes, I had a few more, but I just thought I would go back in the queue. So I guess it would be also helpful if you could share with us what you're hearing from your customers in terms of their market outlook because it looks like your orders are coming in really strongly on Make-up, for example. So that's another follow-up. And then while I have you, if it's okay, we saw some news about Intercos exploring opportunities with Dolce & Gabbana, do you have any updates on that?

Okay. Client says you are probably updated as I am on the guidance they're giving. But overall, all the big multinationals are projecting solid growth for the year. We have other clients which are more in the emerging brands portfolio that are doing extremely well. So the -- overall, the outlook I see from clients or at least from the important clients are positive by and large, a bit more difficult for the Chinese customers because China is not moving in this very movement at the speed that everybody was used to see. So China, a bit softer at least for the Chinese brands than what we were expecting. But all in all, positive outlooks from our big customers. Lots of very interesting new clients for us going forward, to be honest, already, I think it's important to mention that, we've grown in terms of number of clients also in 2021. I think we ended the year with 720 clients, up from the 680 we had in 2020. But there are important clients we are getting in, D&G, Dolce & Gabbana is very likely one of them actually is going to be a very important one. We have not signed contracts yet. We are in the very final stages of the contractual agreements with them. So I'm very confident that we will start producing for them towards the end of this year, certainly beginning of next year.

And on that, I don't know if it's clearly still really early days, but would you have some sort of preliminary expectations of how big that contract might be for Intercos? Or is it too early to say?

It is too early to say, but I'm positive. It's not going to be a small client.

The next question is from Martin Deboo with Jefferies.

Renato and Pietro. I have to apologize. I have to leave the room just as Pinar's question was opening. Can we just look -- you've obviously given very clear top line guidance. Can we just go over the EBITDA guidance again? Do you expect EBITDA to broadly track the sales growth? Or do you expect some margin compression in 2022?

Okay. So Martin, nice to talk to you again. What I said is, clearly, we do not expect a revolution in terms of profitability. We are having a quite conservative look into it because there are these ups and downs in pricing that are difficult to reflect into pricing. What is a more constant inflation can be and will be completely reflected in our pricing exercise, but the spikes are difficult to be swallowed and are difficult to be passed to customers because you cannot do up and downs in pricing every day as you can easily imagine. So we are not expecting significant margin movements, but they -- not improvement either.

Okay. And just a follow up. Are you giving any sort of guidance on how much commodity inflation you expect to see? And is that still sort of in the areas you've talked about at Q3, silicones, waxes and micas and things like that? Just where -- what are the particular hotspots you're having to cope with?

Those are still the hot spots in terms of raw materials, unfortunately, energy has added to the list at a time we didn't have visibility on that. When we spoke at the time, we told you that we needed -- based on our assumptions, we needed a 5% price increase to offset the inflation we were seeing. Right now, it's probably 1 point higher than that 1 or 1.5 points higher than that. And this is what we are monitoring to implement possibly a new round of price increases before summer.

The next question is from Mikheil Omanadze with BNP Paribas.

Just a couple of name for me. So if we were to look at your full year guidance for sales growth, does it already reflect your incremental pricing that you are planning to take in the coming months? And my second question is on India. So you mentioned that you've finished the purchase of that plant. So I was wondering if we should see any tangible incremental volumes from there?

Thank you for your questions. The first point is the guidance reflects the price increases we have already done. It doesn't include the price increases we may do because we don't know whether we're going to do them still. It's slightly but is not given yet, so it includes the price increases that were negotiated in the second semester of last year with our clients and have been implemented at the end of -- during Q4 or at the very beginning of Q1 this year. That is included. Coming to the second question is about India, to be honest, on a group level today, India is a marginal contributor. So it's really minimal. As I probably -- as I told and you probably may remember it, we bought a small plant with a lot of land, so with a lot of capacity expansion potential in the future. For the time being, the teams are serving one client that is the company that has sold the plant to us, and we are working to bring in the technologies we need to start producing Intercos formulas in that plant and then start to expand our client base. But we are starting off from a low business level. So it's really marginal.

Gentlemen, there are no more questions registered at this time.

We can wait 2 minutes more. And then if there are no further questions, we can close it.

There is a question from [ Diara ] Thompson with UBS.

Do you see consolidation in the industry, maybe not in Europe, but in the U.S.? Or do you see it? And if yes, where.

We're not seeing a lot of consolidations yet in the market. Clearly, I think that everybody is -- was waiting also to go and wait for a back to normality before investing significant amounts of money. What we have seen last year were some transactions where private equity entered into some of our competitors, but we've not seen consolidation in the proper sense of this term. So I think that we'll need to wait 1, 2 years before seeing movements in that area. At that point, we'll start saving a number of private equities that have entered into -- in the past into some of our competition that we'll go back to the market and then we will be seeing some more movement, at least this is my expectation.

We don't have any more questions in the queue right now, gentlemen.

Okay, I think that -- if that is the case, we thank everybody for having attended this call and for your questions, and have a good evening to everyone.

Thanks a lot, everybody. Thank you.