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 9 Month 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Renato Semerari, Chief Executive Officer of Intercos. Please go ahead, sir.

Thank you very much. Good evening, everybody, and good morning for the U.S. attendees, and welcome to this call. I would like to start a bit unusually, starting from the results of the third quarter before getting into the year-to-date results. I'm doing that because quarter 3 has been the best Intercos quarter ever, both at top line and bottom line level. Net sales accelerated and reached EUR 229 million, which is a 34% growth at current rates and plus 29% at constant rate. This was driven by the progressive improvement in production feasibility, which we announced already starting last summer. Growth was largely driven by volumes, with pricing accounting for only about 5% of the result. EBITDA was up plus 35% versus a year ago with margin for the first time in the year above a year ago at 15.6%. This was also helped by the energy extra charge that we started to implement in quarter 3, which accounted for about EUR 1.5 million. Net debt was also at historically low level with a leverage at 1x the long term -- the 12 months rolling EBITDA and reaching EUR 116 million, which is EUR 64 million better than last year and EUR 10 million better than the [ landing ] of December of last year. This strong quarter 3 results brought us in the year-to-date at a growth of our top line of plus 23% at current rates and 18% at constant rates with a growth of EBITDA at 20% or 14.1% EBITDA margin. So pretty strong results in the quarter and in the year-to-date. Let me give you a bit more color on the revenues. So looking at the revenues by business unit, we continue to witness the comeback of Make-up, which are representing in the third quarter, 67% of our sales and 66% in the year-to-date. Skincare is a segment that is showing some softness, mainly driven by Asia and the China difficult year that you well know about. Looking at the results in a bit more detail. In the quarter, Make-up grew plus 45% and was the key growth driver, closely followed by Hair & Body, which grew plus 40%, mostly thanks to 2 key projects, which were postponed from quarter 2, you may remember that we commented on it during the last call. Skin was soft at minus 7%. Although if I look at the sales level, versus 2019, it remains the best performer at plus 34% in the year-to-date versus 2019. All the business units are now showing a double-digit increase versus the pre-COVID levels. In the year-to-date, all the views are positive, with Make-up leading the pack at plus 32% growth, followed by Hair & Body with plus 15% and Skin at plus 3%. Moving to the geographic performance, we continue to see the progression of our American commercial company with Europe and Asia losing a bit of weight in the total of our turnover. In the third quarter, Americas were the growth driver at plus 43%, followed by EMEA with a plus 29% and Asia at plus 24%. This is driven -- was driven by Korea exceptional growth, but also China in the quarter came back to positive with a plus 4% in the quarter. In the year-to-date, Americas are leading the pack with plus 36%, followed by EMEA at plus 18% and Asia at plus 15%. Moving now to the results by customer type. Emerging brands, as you know, have been the growth driver and keep gaining weight with multinational and especially retailers losing a bit of weight on our total turnover. Emerging brands in the quarter represented 36% of our sales with multinational up 49%. In the quarter, emerging brands performed the best, plus 42%; but closely followed by multinationals, which also scored a fantastic growth of plus 40%. Retailers were growing but a much milder pace at plus 7%. In the year-to-date, emerging brands outperformed everybody else at plus 35%, multinationals show a very strong plus 21% and retailers are at plus 8%, and they are held back by -- specifically by a key Chinese retailer that is suffering a lot this year. Now moving on to the guidance. Given our strong Q3 results, we are now raising our fiscal '22 guidance with top line going from plus 10 -- plus 15% range to a plus 20%, plus 22% range. We also expect in the quarter 4 to achieve an EBITDA margin overall in line with the margin -- EBITDA margin of Q3. So the current environment remains complicated. We are confident that we are now much better equipped to minimize the supply chain issues that we've been living through throughout the year. Also, we are now sure we have room for further price adjustment in Q1 of 2023 because when we look at the price increases that have taken both mass brands and prestige brands, we clearly have room to raise our prices and minimize the impacts that are expected on the inflation side. So we have announced the new price increase to our clients, and we are starting negotiations in these days with all the key clients. Looking further ahead, we remain extremely confident by our capacity to outperform the market. Our innovation, our diversification in products, geography and client types as well as our demonstrated pricing power are fantastic assets on top of a market, which has always shown resilience even during economic recessions. And more than anything, we are very confident also because the order intake pace is continuing to flow in at a very strong pace. In fact, as you can see in the presentation deck, we continue having an order inflow, which is very positive. In the last 4 months of the year, we are still growing double digit versus a year ago. So we keep having a strong performance, especially in Make-up. Now on top of this, as you know, we will be having -- beginning of -- starting in Q4, but especially starting Q1 of next year, from important new projects in Hair & Body, which will also help fuel our growth. This order intake continue to fuel a very positive order book in -- at the end of October, we had an order book for Make-up and Skincare of EUR 324 million, which is 49% higher than our best year ever, which was 2019 so far because this year, it's going to be better and also 21% above the level of a year ago. So very strong order book at the end of October means that we are positively looking at the end of this fiscal and a positive start in the new fiscal as well. That's all on our side. We are ready to take your questions.

[Operator Instructions] The first question comes from Kate Rusanova of UBS.

[indiscernible] So my first question is -- you have not mentioned on a number of occasions that you have been expecting a slowdown in the order intake for the Make-up category. But so far, it hasn't materialized and instead, the order intake is accelerated sequentially. So just wondering what contributed to such strong performance. And if there have been any signs that have made you more confident about the demand for this category for the next 12 months? And then my second question is on your Q3 margin performance because it seems to be rather soft considering the strong operating leverage you saw in the quarter and also helped by the improved production [ visibility ]. So why is that? Did the cost inflation trended above your expectations? And finally, I appreciate the market remains very volatile, but any indication as to what level of cost inflation you expect next year? Would be very much appreciated. And also what potential level of margin improvement we should expect? Do you think that 2023 margin improvement can be in line with your ambition of 50 to 100 bps per annum?

Kate, thank you for your questions. Yes, you're right. We've been expecting some softness in the order intake. It hasn't materialized, especially in Make-up. We are not seeing any sign of slowdown. I think this is a function of new projects that we are winning with clients and also and especially, I would say, strong performance from the products we have launched in the past 2 years that are performing extremely well. I was looking at some results, but we have, especially in the foundation category in Asia, for instance, in [ cushion ] out of Korea, we are seeing very strong results from launches that have happened in the past, I would say, 18 months. So that is certainly helping a lot. I cannot say that we are sorry for being wrong in this case, I'm very happy to be wrong when is for the good reason. So -- so far, so good. We're not seeing signs of softness. I would have expected it to start coming, but not coming yet. Margins, yes, all in all, I think I would like to underline the fact that in absolute terms, our EBITDA has been extremely strong in Q3, and if I'm not wrong, better than the consensus [ I had ] seen circulating around. The margin is -- the margin is a bit soft, but it's better than a year ago, which it took us some time to get there. Our objective remains the one-off improving EBITDA margin at least 50 basis points year-on-year, and we will be working against this. Now with maybe looking back, we may have raised prices more than what we've done. Honestly, the impacts we've seen in energy and other things, we could not forecast them. We could not imagine they were about to come, and we paid a bit the price of all this in the past 9 months. So we think that we are now better equipped, our production feasibility has improved. It's not yet to the level of 2019 but is way better than in the past -- in the beginning of this year and the end of last year. So we are now starting to plan production in a more efficient way and I'm pretty confident that we will soon go back to the right trajectory in terms of margins gains. I hope I've answered all your questions.

Yes. Maybe just on the inflationary outlook for 2023?

It's -- I wish I knew that. If I was good at forecasting that, I would be betting a lot more on soccer games, I would be much richer than I am. We think that we're going to continue seeing volatility and that's the biggest issue. The biggest question mark is related to the energy costs, and that are very difficult to predict. We see big ups and downs almost on a weekly basis. For what we are concerned, we are -- we have announced to our clients another 5% increase to our prices. We think that should completely offset the inflation bit. We do not expect a lot of inflation on raw materials. We expect energy to remain at high levels. But there will be more labor pressure in terms of salaries because in an inflationary environment, like the one we are seeing it's pretty obvious that the labor cost will increase more than what we've seen so far. All in all, we think that with another 5% increase we should be in a good position.

The next question is from Anna Frontani of Berenberg.

Renato, congratulations on the results. I would have a couple of questions for you. So the first one is on your multinational clients because we have seen some beauty companies being more cautious with their outlook for the year. So how does this affect Intercos? Should we expect actually a normalization in the growth of multinational clients, but could maybe emerging brands and retailers make up for doubt? So that's the first one. And then the second question is if you can provide some color on the dynamics of prestige versus mass. What is that you have been seeing in the quarter? And what is your view for Q4 and 2023?

Okay. So Anna, multinational, the reality, if you look at our results, multinationals has been accelerating, and they grew very well in Q3, and we expect also Q4 will be very solid. Now the reality is that we are seeing significant growth from all the main multinationals we are serving. We don't have even one that is declining so far, and we are not getting signs that are worrying us. I've read and I've heard the [ Lauder ] results They are mostly affected by skincare and skincare specifically in [ ENAM ] and China. As you know, we are not exposed to that business, unfortunately, because it's big, but on the other hand, we do not feel that pain either. We have done projects for the big multinationals that are proving to be strong and performed well in the market. I've seen comments from Fabrizio Freda saying that they were seeing some strong results for instance in MAC, which, if I'm not wrong, grew 22%. So all in all, for what we are exposed, we are not seeing any softness coming from multinationals. Bear in mind that the percentage of what we sell to them in terms of their total cost of goods is single digit, it's very single digit. So it's pretty marginal to them. So for small guys like us, the important is that what we sell them is performing well in the market, and we won't feel the pain that they're feeling in general. So no signs whatsoever I must say, of multinational suffering. To the contrary, we are seeing them growing very nicely and actually accelerating in the course of the fiscal. And I would say exactly the same in the prestige segment, which is performing extremely well. And in Q3, had very strong growth rates. So no signs of downsizing or down-trading either. For the time being, we are seeing very solid growth driven by this segment. Also remember that a very important chunk of what we sell in prestige is represented by emerging brands. They are in an expansion mode in terms of geographies and products. And this is all playing in our favor. So we are pretty optimistic both on the multinationals and prestige [ side ] of the business and even more on the masstige [ side ] of the business as well.

The next question is from Molly Wylenzek of Jefferies.

Good evening. I'm just wondering about your order book. I know there were some concerns in the beginning of the year that it was quite elevated because the lead times were so long, but it's remained so strong. Can you give us an update on lead times and whether those are back down to more relatively normal levels?

Molly, not really in the sense -- well, not -- yes and no. In the sense that the lead times of our sourcing has not gone down. So the increase in lead times for us to get the components has remained long, very much in line with the beginning of the year. What has changed is that we have better equipped, as I was mentioning in the last call, because of the inventory increase we have done and because we have found a way to get around and find different suppliers in different regions to procure the raw materials that proved to be more complicated. So we are a bit faster, but not because the market from a supply chain perspective has really improved in terms of lead times. Obviously, the fact that we are improving our production feasibility is allowing us to better execute our order book versus the first 6 months of the year. On the other hand, it remains high because it will take time to absorb all of it. And the order intake remaining strong to the contrary of what I was expecting at least that it doesn't help to completely digest it. So it remains strong. It's -- it's positive and negatives as everything. The good thing about it is that we will be starting the year with a rich order book, which is a nice insurance for a good start of the year, I would say.

Yes. That's great. Can I sneak in one more? Obviously, 2022 was a really strong year in terms of emerging brands -- new emerging brands coming to the market after a couple of years of less activity. How is '23 shaping up?

It's a bit early to say. I must say that I continue to be optimistic. The brands that have been driving the growth for emerging brands remain strong. They are giving us forecast that are pretty encouraging. As you know, some of them are still in a geographic expansion mode, and this will help our volumes. So I continue to believe that in 2023, we won't see softness on the emerging brands side.

The next question is from Rashad Kawan of Morgan Stanley.

Renato, just a quick question on China. Can you talk about the outlook you have there? I mean I think you talked in a prior call about seeing consumers migrate more towards the [ leading ] brands in times when mobility is restricted, but at the same time, you talked about kind of growing 4% this quarter. If you can talk about what you're seeing on the ground there and expectations for the rest of the year, that would be helpful?

Rashad, well, China remains a bit complicated. I'm sure you've seen that the government has no intention to soften the anti-COVID restrictions. It's news of a couple of weeks ago that they've shut down the Walt Disney park [indiscernible] there were about [ 100,000 ] people inside. So it doesn't look to get any milder on that perspective. I think that we should expect that till the tension is so high and the restrictions so severe that there will be difficulties for consumers to restart shopping in a normal way. So I still expect quite of a depressed China market till the end of this year, most probably through the first quarter of next year. Then we hope that in the second part of next year, things will start improving and they will start releasing a bit of this pressure. And I'm always very confident that as soon as the situation will normalize, consumption will pick up again in a very important manner in China. Now the whole -- the real question is when is that going to happen? Because in 2023, it will make a difference if it starts in April or if it starts earlier or later than April, we will have to see, obviously, it's very difficult to predict that. The only "relief point" for us is the fact that our exposure to China is much more limited to that of many brands and many players in our industry. China by now weighs about 10% on our sales. So even -- and we've seen it probably in the softest year ever of China, we're doing probably the best year ever in terms of growth. So for us, it's quite limited. But obviously, especially for Skincare, it is very important to see a pickup again of China. So we hope this will improve soon.

Got it. And if I can just squeeze in another question on margins. Obviously, a sequential improvement there. And I know you don't break up margins by divisions in the quarter. But if you can talk about maybe Hair & Body specifically and whether the postponed projects that came online in this quarter had an impact on kind of the margin profile for the quarter, that would be great.

Not really that much. When you talk about high volumes, high volumes [ projects ] at the startup, you usually have a bit of [ rust ] to take off and make -- adjust the lines so that you reach the growing productivity. So it didn't materially impact yet in terms of margins. We're confident that going forward, it will be the case, but it hasn't been really the case in Q3.

No, it was mostly driven by Make-up the increase in [indiscernible] in the quarter.

Yes.

[Operator Instructions] The next question is from [ Mikheil ] Omanadze of BNP Paribas Exane.

I have 2, actually. So question number one, reflecting on your recent conversations with your customers, where do you see retailer inventory levels for various beauty categories in Western Europe and the U.S.? And question number two, and I understand that it may be a bit early for this question, but can you give some color on how you think about your likely sales growth trajectory next year?

Okay. [ Mikheil ], the first question was related to the inventory in our clients, right?

Well, or if your clients are [ flagging ] that there are changes in inventory levels at the retailer level?

Not really. I mean, the -- our clients, if I can be blunt and transparent, are all shouting and screaming because they want us to accelerate production because in some cases, they are out of stock on some of our items we provide them. So I would be very surprised if they claim that they have high inventory in their warehouses. So far, we haven't seen or heard about reductions of inventories at retailer level. I know that [ Lauder ] in their earnings call spoke about the risk, but I think they were mentioning more about the future. I may have misread or not exactly heard what they said. But no, in our interactions with clients, nobody is mentioning this point to us at all. And coming to your second question, I think that we want to see how this year unfolds to the end before expressing our guidance for next year. I must say, and I know that [ Andrea and Pietro ] will hate me, I still -- I'm still optimistic. I am very confident we will outperform the market. We need to understand a bit better what is going to be the outlook for the market before giving -- start giving a range on our numbers. But I'm pretty sure that we will do better in the market also next year.

And at this time, there are no questions registered.

Okay. So thank you very much to everybody and speak soon. Thank you.

Thank you very much. Thank you. Bye.