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

Good evening. This is the Chorus Calls conference operator. Welcome and thank you for joining the Intercos First Half 2023 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 thanks for attending our call. Quarter 2 has been another very strong quarter, actually our highest quarter ever in absolute terms, allowing us to close first semester 2023 with very strong results. However, the quarter 2 has also shown a clear change of business dynamics, which have started to have an impact on business, and we will go more deeply into this one later on. All in all, after 18 months tops our listing on the public exchange, we have grown in the Intercos size by 40%, both in sales and EBITDA. And I must say that we are pretty proud of these results we got. Let's start with a snapshot of our key semester data. Let's say close first semester at EUR 488 million, which is a 33% increase over last year with a slight Forex headwind, especially in the second quarter as we will see. Value-added sales, which are, I remind everybody, net sales minus the value of packaging went up by 28%. Adjusted EBITDA was at EUR 67 million, a growth of 39% with an EBITDA margin of 13.8%, which is 57 basis points increase versus last year. Margin over value-added sales was at 17.2%, a gain of 129 basis points over the first semester of last year. Adjusted net income was EUR 27 million, a growth of about 30% versus last year. Aside from the financial results, I'm very happy to share some news on the ESG front. And in fact, we've been awarded by the an Association for Refugees, an award for the activity that we do in Europe to help integrating refugees in the world of labor in our countries. Coming back to financials. Net debt, which was influenced by a few sizable one-off item was at EUR 123 million year level and reaching a leverage of 0.87 over adjusted EBITDA, which is, again, an improvement of 0.31x EBITDA versus last year. Going a bit more in the details and going into the quarter 2 results, quarter 2 saw a growth at current rates of plus 31%. As I said earlier, we had a bit of ForEx headwinds. So common spend rate growth was at 34%. Adjusted EBITDA was up EUR 37.5 million with an EBITDA margin of 14.8% and a slight dilution versus last year margin of 50 basis points. If I look at the value-asset sales in the quarter, they grew 27%, and our margin over value-added sales was at 18.3%, in line with last year. I won't repeat the result over the semester because we already saw them in the previous slide. Let's now deep dive on the sales results, starting by looking at the results of -- in terms of top line by business unit. All business units registered double-digit growth, both in Q2 and in the semester. Hair & Body has been the fastest growing in both periods, 89% growth in Q2 and 70% in the first semester, thanks to big new clients and high growth also of well-established clients. Makeup also kept a fast-growing base. In Q2, it grew 23% and in the semester by 29%, with all regions and client type performing extremely well. Skin care went back to double-digit increase in Q2, plus 12%, which allowed the view to land the semester at plus 10%. As you may remember, in Q1, we have grown at high single-digit numbers. a consequence of the different growth rates of the different business units. Hair & Body now weighs 23% of total sales of Intercos, while makeup remains over 60%. Moving now to the top line results by region. Also in this case, I'm happy to underline that all regions displayed double-digit increases in both Q2 and semester 1. Mainly EMEA was the fastest-growing region with a very even growth of over plus 45% in both quarters. All client types and all business units displayed strong performances, but obviously, the key drivers were Hair & Body and makeup. Asia was the second fastest region in the second quarter at plus 19%, thanks to China, coming back to double-digit growth. And thanks to Korea, maintaining the very strong traction we have witnessed in the past 18 months. This led semester 1 to a strong plus 18%, with both China and Korea in double-digit territory. Americas, which has been the fastest-growing region in the past 18 months, confirmed its fast pace, plus 16% in quarter 2 and plus 22% in semester 1, mainly thanks to the growth of emerging brands and multinationals. And finally, looking at the results by client clusters. All clusters have been growing at double-digit pace in quarter 2. While in the semester, we had the slight exception of retailers growing at high single-digit pace. Emerging brands remain the high-traction cluster, achieving plus 68% growth in quarter 2 and plus 62% in semester 1. Both mass and prestige channels displayed high growth with a skew from U.S. and EMEA from a regional standpoint. Now emerging brands have reached 40% weight on our total sales. Multinationals grew by 15% in the quarter and plus 22% in semester 1. Again, all dues were growing and the regional SKU in this case was EMEA and the United States. Retailers accelerator in quarter 2, plus 15% after 1 quarter of stability. So this allowed this cluster of clients to reach a plus 8% at the end of the semester, and the growth was mostly driven by EMEA in this case. I'm now passing the microphone to Pietro for the financial results.

Thank you, Renato. So Renato already commented extensively all of the sales dynamics and now for me it's worth to underline the performance that we have been able to achieve in contract currency, especially in the second quarter of the fiscal year, where we have the -- our sales growing at apatite 33.8% at constant currencies versus EUR 31.3 million as reported currencies. And once again, this growth was mainly driven by volumes with price effects basically at 1.4% on a year-to-date basis. We have been able to achieve EUR 67.4 million in EBITDA, growing 38% versus prior year. With the second quarter being, as already mentioned by Renato the highest level -- the highest absolute level for the group. Profitability has been growing from last year. We have now 13.8%, growing 57 basis points, but even better is the result that we have been able to achieve in EBITDA on value-added sales, growing from 15.9% last year to 17.2% current fiscal year with a growth of 129 basis points. Adjusted net income grew by EUR 6.1 million, a plus 29.6%. -- thanks to the higher EBITDA and the better tax rate. And this was partially offset by the partial expenses that last year in the first half benefited from positive currency fluctuation. For me, it's worth to remind you that despite the higher cost of the money, Intercos is not really suffering of it, thanks to the fact that the senior financing has been hedged at the beginning of 2020. Therefore, our interest expenses linked to the debt remaining basically flat. Net debt in the period increased by EUR 32 million so we are now at a level of EUR 122.7 million of net debt. And this growth -- the increase was due by EUR 14 million of dividends that we have paid in the period and especially for a noncash driven financial liabilities that we have booked in accordance with the accounting fees for IFRS 16, linked to some rent renewals that we have in the group, namely the renewal of the plant that we have in the U.S. and an additional plant that we have in Poland. Now we have already commented the EBITDA at group level and now if we look at the performance by business units, it's important to point out that all of the business units grew in the first half. Exceptional results is the one that has been achieved by here in [indiscernible] that basically doubled the EBITDA growing 93%. And this thanks to 140 basis points back to profitability coming from increased production efficiency better production planning and obviously, leveraging on the new contract that we have been able to take. Makeup EBITDA increased by 36%, thanks to higher volumes and a better investor productivity that allows us to increase the profitability by 76 basis points. Skin Care increased as well by 8% in absolute level, though with a lower profitability due to a different customer mix compared to the one that we had last year. Now if you look at the operating cash flow, this amounted to EUR 7.4 million. Those -- this was reflected by higher CapEx, including the EUR 23.5 million of IFRS 16 accounting impact, real operating cash flow generated by the group was EUR 31 -- EUR 30.9 million, excluding the accounting effect. And this positive result was achieved thanks to an improved working capital management with trade working capital ratio on sales improving from 21% prior year to 18% in the current fiscal year. Trade working capital absorption was mainly due to increased level of receivables following the sales growth, though with an improved DSO. And we also have been able to maintain the level of inventory the value of inventories at a stable level. Cash flow before dividends [indiscernible] and mainly due by less favorable exchange rates, higher taxes and an exceptional cash out related to the finalized settlement of release we already accrued in 2021. If we look at the increased level of net debt in the first 6 months of the year, equal to EUR 32 million, EUR 14.4 million were due to digenite and EUR 20 million derived by the accounting effects related to FY '16.

Okay. Thank you, Pietro. We now move to the future, looking at what we expect in the near future. The macroeconomic environment is showing a mixed picture. On the positive, the industry shows resilience, especially in the Western world, especially in Europe. China is recovering growth, inflation is more predictable and has slowed its pace. On the negative growth rates in U.S. are slowing down. China growth is still below expectations, and the monetary policy is not yet there. So we can look at the glass half full or half empty depending on how we are. And I would say that the same kind of mixed picture is on our side, on the positive, we have strong order book and new projects inflow, which is extremely strong. And on top of that, we see no signs of pricing risks. So we are no finances challenging the price increases that we have done so far. On the negative, semester 2 will have very high comps. You will remember that semester 2 of 2022, saw a big increase in our top line linked to the first phase of backlog absorption from the supply chain disruption that we witnessed in 2021 in the beginning of 2022 as well. On top of that, as we already mentioned, we had an unfavorable mix in terms of business units. You've seen [indiscernible] which is our lowest margin, but you see it growing the fastest and also a mix that is changing in favor of full service and mass market brands. Based on that and based on the fact that in semester 1, we have seen growth, which has been better than our expectations, considering the high base of 2022, we confirm our guidance for the year, which we always indicated as a strong loaded year. So we are -- so before we get back to our normal growth trajectory, we expect a second semester of consolidation with performances in line with last year. In particular, net sales are expected to slightly increase compared to the second semester of last year, while adjusted EBITDA, we expect it to be in line with that of last year. To conclude, I would like to show the usual order book frame. Order inflow continued to be strong for makeup and skin care. I remind you that we do not monitor the order intake for Hair & Body because of the different business model with rolling forecast and different trading zones by client, so very difficult to read. For makeup and skin care in the past 6 months, we have established our highest semester ever, despite we registered a double-digit decline of reorders, which was more than offset by exponential growth of new projects. To give you an idea, our mix between reorders and new orders has moved from a 70%, 30% ratio to 60-40, which is clearly unusual. This leads to an order book of over EUR 300 million, which declined only 10% versus last year despite the impressive acceleration of our order execution in the past 12 months. So this concludes our presentation, and we are ready to take on your questions. Thank you.

[Operator Instructions]. The first question is from Rashad Kawan from Morgan Stanley.

Thank you and good afternoon Renato and Pietro, congrats on the results. A few for me, please. So the first one on your updated guidance, just a quick clarification. When you say EBITDA being similar to H2 of last year, I mean I'm assuming it's on an absolute basis, right? And if it is, that will suggest your EBITDA margin will be flat for the year versus last year. If you can just kind of break that down, is that a combination of both mix as massive versus premium and also Hair & Body impacting the mix as well? And then just the second question around just mass accelerating versus Prestige. Is that a dynamic you're seeing specifically across 1 or 2 of your multinational customers or is it more broad based? I know some of your customers are quite exposed to Asia Travel Retail. So wondering if they're not ordering as much in the Prestige category, and that's part of the dynamic you're seeing there. Thank you very much.

Thank you, Rashad. Let me first answer to your second question. Yes, there is a clear [indiscernible] in reorders where we see Prestige reorders suffering a lot more than Mass. I think what you mentioned about Travel Retail and Asia in general as a big part of the game here for sure. I also have the sensation that during the period of crisis of supply chain, Prestige, we're more careful in increasing their inventory levels to protect their fee rates. And therefore, now they are the ones that are rationalizing their inventory faster. So yes, we see Mass growing faster, although we do not see a real change of trend in terms of sell-out. I'm talking now on the Western world between precision Mass, we are seeing the orders shaking suffering a bit more. So that dynamic then it's difficult for us to understand how much is influenced by Asian Travel Retail. But that, again, I believe it has an impact. Coming back to your first question, yes, I mean -- yes, you're right. It's -- when I said flat in terms of a dividend in the second semester, I'm referring to the absolute figure that's exactly right. And of course, in giving you this guidance, we are factoring in this change of mix in terms both of the consumer and also clients that are impacting all the business units in reality.

Next question is from Kate Rusanova from UBS.

First all, I want to check on your full year growth outlook. So just to confirm, when you talk about a slight increase over the previous year, do you refer to reported growth or growth in cost effects. And then with quite resilient order intake data for makeup and skin care and continuous contribution from Hair & Body, what is driving such a cautious outlook? Do you see the risk of destocking in the coming months to kind of materialize a bit more in the numbers. So then I wanted to ask about your gross margin. It was down 10 bps in H1 year-on-year. So just wondering whether that was mostly due to the higher portion of packaging. So if you can provide more color on that, and if you can look it about is with the number on the value-added sales. And lastly, I wanted to talk a little bit more about the Hair & Body division. Do you have any visibility on how the sellout is progressing for Dolce & Gabbana. Do you see any extra inventory in place? Basically, I'm just trying to understand what sort of growth mineralization you should expect in the second half of the year for the business. And also with the very same contribution from Dolce & Gabbana, it's hard to see how the rest of the Hair & Body division is progressing. But maybe you can also tell us what the growth rate for the Hair & Body division, excluding Dolce & Gabbana was in the first half. And lastly, if I remember correctly, at the time of the IPO, you were talking about kind of low to mid-single-digit growth for Hair & Body division in the medium term. So with such a strong asset in your portfolio now and with fragrance market booming, do you see this medium-term growth potentially accelerating to high single-digit rates?

Thank you very much for the question. You always speak superfast so I tried to follow and keep track of your question. No problem, I'll start from the end. Hair & Body, what is the visibility we have in terms of sellout? I think it is a bit early days, at least for where Dolce & Gabbana is concerned. Now I want to be very clear. Our growth in Hair & Body is not just connected to Dolce & Gabbana. It's connected to other new clients we have taken on board, again, also in the fragrance territory. So clients we didn't have last year and that come in and are growing very nicely. Now if I could tell you the name, you would know that their sellout is pretty good because they are reporting their sales as well. But in general, as you know, the market has seen a surge of the fragrance segment, which was unexpected, and that is way above the expectation of everybody. So we are getting a lot of benefits from that because of the new clients, because of Dolce & Gabbana. But again, it's -- but also clients we previously had, and we had prior to the acquisition of Codman in fragrance arena are growing very significantly. This being said, the growth that we are having in Hair & Body is not only connected to fragrances, but also other segments are growing very nicely and to be very clear above our expectations again. Now in Dolce & Gabbana, as I said, I think it is still early days. I know that the fill rate of the pipeline of distributors and retailers is not over yet. So we will need to see what happens next year. I think that for the whole of this year, we will be seeing strong numbers coming in from Dolce & Gabbana and from all the players of fragrances. So I hope -- although I didn't give you numbers, which I know that you are living with like, I hope I've given a bit more color on that part of the business. The second point that you raised was related to the growth of packaging. If I followed it right, yes. We had a significant shift, as I said, from free issue to food service. So to clients that are asking us to buy packaging. As a matter of fact, in the semester, our top line has grown 33% and our value-added sales have grown 28%, and this clearly shows that the component of packaging has been growing. As I've always said and I will repeat it, it's not something we like per se. But again, I must say that on the other side of the coning, which is the positive side of the coin, it's the benefit of our diversification. We didn't have about 50% of our portfolio in Mass market and therefore, in foodservice, we would have suffered a lot from the decrease of the orders in Prestige, which we were able to compensate, thanks to our diversification. So we need to take the good and the bad when they come when put grows faster, obviously, we are a lot more at peak. When we see Mass compensating and offsetting Prestige, in this case, growing 33%, it's over offsetting a reality Prestige has been growing as well. And this is important to be underlined in an important growing double-digit way, but Mass has grown faster. I think that it plays to the strength of what we've built over the years of having a diversification and a balanced portfolio of clients that allows us to perform well relative to market no matter what happens. About the -- I heard the question about our cautious outlook. Well, the reality, and this is something that I've been repeating, I will be repeating it again. We have been in the past [ 12 months ] into -- allow me to say it, and please do not take it negatively. We've been in abnormal growth because we've been absorbing a backlog of orders, and you remember and you've witnessed very regularly, the fact that our order inflow was growing a lot more than our output for at least a good 12 months. We've had the benefit in the second semester of last year of a major increase in our sales. And a part of that was related to the digestion of part of this backlog, which we have completed digesting in the first semester of this year. So to be honest, if I look at it from a pure business performance, repeating the performance of last year without the backlog digestion, it means that we are growing in an organic way in the same compensating the effect of the backlog of last year. So all in all, the reality is that our business is organically growing also in the second semester. Aside from that, we expect a slight increase in our sales in the second semester. And I want to underline that because I'm not saying you that we are going to the higher part of the guidance, we view during the last call, we're probably -- we think we can do a bit better than that. So growing a bit faster than the top line guidance we've given. But on the other hand, we need to be cautious in terms of EBITDA projection because of this mix change, which is a reality. And I don't know how long it's going to last. But when I look at the orders that are present in our book, I see this change of mix and it's correct that you know that this is happening and will happen in the next 6 months. And I know that I'm always accused to be cautious. But if I -- if we do better than that, I will be the happiest in the world to be wrong. I think you had another question about reported versus I think it's the answer...

No, I think you answered it.

Yes, it's reported growth I'm talking about.

Yes. And just a follow-up, would you be able to provide the gross margin level based on the value-added sales?

I didn't get it. Sorry. The gross margin?

Gross margin based on value-added sales.

The gross margin, we don't disclose it.

Anyway, you can calculate it because you take out of the packaging components from the top line and then you end up with the gross margin, but on a lower number in terms of top line.

The next question is from Anna Frontani from Berenberg.

Actually, 2 questions. The first one, do you feel -- if you can provide some color on how about July look like in terms of order intake? And again, maybe if you can give some idea how Prestige versus Mass orders were in this last month. And then the second question is related towards increased production efficiencies, as you mentioned. Were this efficiency just driven by a better supply chain environment? Or did you take some internal actions to make this happen?

Thanks a lot for your questions. July order intake, I won't give you the number, you will see it together with others as usual. But I can tell you that it has been strong and has kept the growth pace we have seen so far. So in total, July orders were absolutely in line with the growth trajectory we've had so far. So we are very happy about that. In terms of Prestige versus Mass, I will confirm what we just said, Prestige is the one growing less. So it's telling factoring would be a lie, it's growing, but it's growing at a slower pace than Mass market. And again, I think that as Rashad said at the beginning, they're still paying a tool for Travel Retail and Asia in general, but also digesting the excess inventory they built over the supply chain prices. Unfortunately, we do not have visibility on when things will go back to normal in terms of the orders. But I would like to underline once more that one of our -- first of all, I'm super glad about the increase of orders we are seeing, which is way beyond my expectation because this is orders repeated orders for the future. So this is extremely positive. -- and the flow of projects we are winning is not over. It's continuing. And again, this is again a testimony of the strength of our innovation and that the underlying business, aside from short-term adjustments and things like that, things are going well. So I'm super happy about that. Production efficiency is that I mentioned earlier is coming from both the factors that you highlighted. Certainly, the capacity to plan production in a more efficient way is giving us productivity advantages. On the other hand, we are in a cost program to improve ourselves day after day. So we have automation projects that have gone live. We have other efficiency measures that are being put in place and are paying very good dividends. So in terms of productivity improvements, we are getting actually a bit better results from what we had budgeted ourselves. We're doing very well. I'm very happy about the results we are getting there. And last but not least, I think that our centralized buying team is doing an excellent job and it's a had a very, very strong first semester, so bringing us with negotiations and good rates from the suppliers and also increasing the average paying terms with them to a more to a better environment for us. So all in all, I'm pretty satisfied about the 3 components of industrial underlying efficiencies.

Sorry, just another question maybe for Pietro. Can you remind us on the CapEx plan?

Yes, sure. If you remember, we have this expansion plan that basically discovery starting in the current fiscal year 2023, we'll go on next year and also the year after '24 '25 will be the highest in terms of expenditures. We will have to raise the level of CapEx at the level of in average 7.5% on sales, starting from the increase we start from this [ year ].

The next question is from Mikheil Omanadze from BNP Paribas Exane.

Just one question from me, please. So you just mentioned that you expect Page 2 to see on the slight sales growth before you return to your normal growth trajectory. Can you please remind us what that growth trajectory is and whether you expect FY '24 to be in line with that growth trajectory?

Thanks for your question. Well, what we said is that we have the ambition to grow twice as fast in the market. This is what we said during our road show, this is -- if I look back at the 10 years prior to COVID, we had an average growth rate of 10% a year. So it's in the high single digit, low double-digit. This is what we've proven capable of doing in the past, and this is what I judged to be our, let's say, normal trajectory. Now clearly, after the IPO, things have gone in a much better way. If you asked me at the time of IPO, would I expect 18 months after the IPO to be at plus 40%, I would have never said yes, never ever. So I think that having a semester of consolidation before we go back to our normal trajectory, it's pretty normal. I hope I'll answer to the question, Mikheil.

The next question is from Rashad Kawan from Morgan Stanley.

I just had a question on China. You're talking about -- the commentary sounds cautious in terms of the recovery path and what you're seeing. You grew double digits. I know, obviously, on pretty weak comps in Q2 of last year. But maybe can you talk a little bit about what you're seeing on the ground there? When do you expect things to improve over the next few quarters? I think that would be helpful.

Okay. So I think we need to make a distinction between what is happening in the market in general and what is happening to us. In the market, in general, we are seeing growth. Things have improved progressively from the beginning of the year to the end of June. Clearly, I think that many of us were expecting a faster acceleration of COVID from China. This has not happened. I've spent 15 days in Asia, which 10 days in China 2, 3 weeks ago. So I have quite a fresh memory of that. I think that overall, what I sense is that there is cautiousness after COVID in the Chinese public opinion. I think that they've seen the government to take very harsh decisions. So they have -- they are a little bit worried about how the government can steer a direction for the country. So I've seen a higher propension to pay back mortgages rather than buying luxury rooms in general, may be an anecdote, but I never heard about mortgages when I was visiting China in the past. And a few people I spoke to mention it very clearly. So there is a bit more cautiousness in the spending behavior of the Chinese consumer. This being said, the recovery is there, is progressive. It's not exponential, and I personally believe we will be seeing that throughout the year. I've seen, by the way, also commentary from L'Oreal that goes along those lines, which I personally adhere completely. In the market, what we're seeing is that there has been -- I've seen over the past 30 years, periods where the Western brands are growing faster than the local brands and then periods when the local brands are doing better than the Western brands. I think we are in a period where the local brands have been better than the Western brands. And that is explaining also why we're growing double-digit so much faster than the market overall. So we have clients. We have done an excellent job in the past year to acquire new clients, new Chinese clients. And this is obviously helping us in the first semester of this year. Will that continue? I don't know. I think that the progressive opening of China, the come back to traveler will inevitably help Western brands that are more prestige than the local brands. But I think that certain Chinese brands that have taken market shares in the past 18 months will stay strong for the -- in the short, medium term. So this is a bit what I've seen in China, and I'm not worried about the growth part of China in the mid long term. I think that before moving back to the trajectory, we will take a few more months.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

So if there are no more questions, I think we can close the call. Thanks, everybody, for having attended it and for your attention.

Ladies and gentlemen, the conference is now over, you may disconnect your telephones.