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

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos 9 Months 2023 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. Tonight, I would like to start by sharing a picture on how retail market is performing. Overall, the Western market continued to display solid growth, both in Europe and in U.S. although we are seeing a bit of a softening of these growth trends from the double digits of the first half. On the other hand, China is still growing at a lower-than-expected pace. Also, Western clients destocking is still continuing, especially in prestige, yet we continue to believe this phase will end in the coming months. In such a market environment, Intercos is entering now also in the phase of difficult to beat comparables. As a reminder, the third quarter 2022 was a record quarter with sales up plus 34% and EBITDA up plus 35%. In such a context, we are posting very strong first 9 months results with solid third quarter performance. In the year-to-date, sales are up plus 25% at constant rate, plus 23% reported and plus 21% EBITDA. Net debt on EBITDA ratio is well below 1% despite the IFRS 16 impact of rent contract renewals. This was achieved thanks to the solid third quarter performance with sales up plus 11% at constant rates and 8% at reported rates. And EBITDA overall in line with year ago in absolute terms despite the already anticipated mix headwinds. In other terms, our diversification allowed us to offset an absolute level, the mix impact on margins with higher sales. Now diving into the sales results and starting by sales by business unit. We closed the first 9 months of the year with all the business units in double-digit growth. Hair & Body is confirming to be the growth driver in the year-to-date at plus 57% versus a year ago and in the quarter, plus 37%. This is mostly driven by Fragrances segment. Makeup continues to represent over 60% of our business and displays a plus 16% growth in year-to-date. Third quarter was slightly down versus a year ago, which was a record quarter at plus 45% versus the third quarter of 2021. Western markets and multinational, which last year as a major boost due to the backlog digestion were softer than a year ago, while Asia and emerging brands performed above a year ago. Skin care posted a plus 13% in year-to-date, mainly driven by Western clients. Third quarter saw an acceleration of the growth base, thanks to multinational and emerging brands. Moving now to the sales by region. Also all regions displayed double-digit growth in the year-to-date. EMEA is the main growth driver both in year-to-date at plus 34% and in the third quarter, a plus 15%, helped by the strong growth of Hair & Body and Skin care. Americas and Asia have similar growth patterns in the year-to-date, respectively, at plus 12% and plus 15%. However, the third quarter results are quite different with Asia posting double-digit growth in the quarter and notably China, confirming double-digit pace. Conversely, Americas was slightly down facing last year comparable, which was an all-time high of plus 47% versus 2021. Moving to the sales by customer type, all client, customer clusters are growing at high single digit or double digit in the year-to-date. Emerging brands are still our main growth engine. They displayed exponential growth in the year-to-date, plus 52% and also in the third quarter, up plus 37%, now weighing over 40% of our sales. Multinationals keep being our core cluster with about 50% of sales in the year. And they display a strong plus 9% in the year-to-date despite third quarter was down due to very high comps. Last year, we grew in the same quarter plus 40% plus the destocking of major players, we already discussed in the previous calls. Last but not least, retailers display a high-single digit trend, plus 8% in the year-to-date with a slight acceleration in third quarter, mainly driven by prominent Western retailers. Now coming to the outlook, the current environment, as I said, in a nutshell, we are seeing retail Western world performing well while China is still soft and the Double 11 Presale was not very good or at least not in line with the expectations, especially for Tmall while doing performed very well, but the relative weight of the 2 platforms is very different. Also, we are seeing, again, the stocking continuing and we believe this will last for a few months more. But we've also seen that the diversification of our business is allowing us to perform well ahead of the market. In the medium term, we are extremely optimistic. Destocking is limited in time by nature, first of all. Second, the innovation search is more and more intense in times when the market is growing at a softer pace because in these moments, market share gains is the king for any brand who wants to continue growing. Third, the search for clean and free of the "bad items" is leading many clients to open much more briefs of new initiatives with us and this is all good news for Intercos. Last but not least, we still believe Asia will definitely rebound sooner or later. India is extremely dynamic, although very small today, it will become a major factor in the future. China will exit from the current difficulties sooner or later, will retake its role of growth driver. And also Southeast Asia is starting to become more and more relevant in the near and midterm future. Now going to what we believe is going to up and until the end of this fiscal year. As I said, we believe that destocking will continue till probably the end of the year, but we also believe that the diversification of our business will allow us to offset this impact, although with a different mix of categories and clients in light of what I just said, we expect for quarter 4 top line single-digit up, so continue to grow single digit in top line versus fourth quarter of last year despite the very high comparables that we will be facing. EBITDA will be broadly in line with last year in absolute terms, which as said, means that our diversification will allow us to offset with higher volumes, the lighter marginality. This forecast is backed by our order entry development, which keeps being strong. As you've seen, we keep having a very healthy order intake despite we are seeing still reorders coming in double digit down versus a year ago. And this means that new orders are big time up versus a year ago and this is a very positive note for the future and starting from next year. The order book remains very healthy and now completely clear of orders backlog, which inflated year ago levels in a significant way. And in fact, if you look at our level of portfolio versus the last newly inflated October, we are 9% above October 2021. This is all on my side. I leave room for questions. Thank you.

[Operator Instructions]. The first question is from Kate Rusonova with UBS.

First of all, you mentioned in the press release that you expect the destocking that British customers to end in a few months. Does this bode well for strong first quarter? In other words, can we see a return to, let's say, mid-single-digit or high single-digit growth in makeup. And then you mentioned that new projects continue to grow very strongly. Can you provide more color on this or other new projects mostly ordered by most clients? And do these new projects come at a higher price? In other words, when these projects become reordered next year, shall we expect strong mix benefit? And then my second question is on your EBITDA margin. Firstly, would you be able to provide your margin development based on value-added sales and how it progressed year-on-year? And then also, should British customers start to reorder relatively quickly? Can we see a similarly quick bounce back in margins? I appreciate this is early time, but do you still stand by expectations for at least 50 bps of adjusted EBITDA margin expansion next year?

I tried to write as quickly as you see speak -- I'll try -- you stop me or add if I forgot anything. So destocking, yes, we believe it's going to last until the end of the year. This is affecting not only makeup, but also skin care. The trend is actually the same between skincare and makeup. We believe that this is going to end soon. We have seen the stocking now for -- if it lasts till the end of the year, it's going to be 10 months in row that we see this trend. So it will inevitably start lifting and going back to a normal trend. New projects, they're both mass and prestige, but there are many prestige projects that are coming in. There are also many more coming in terms of development nowadays. So [indiscernible] that are opened that we're working on, developments that we are working on and that you do not see in the order book yet because it's not yet an order. So no, I do not see a trend that says that new projects will be skewed to mass market at all. EBITDA margin on value-added sales, we do not give this kind of view. I can tell you that on a quarterly basis. But I can tell you that in 2023, what I see today in the 9 months is positive. So we are working well and the problem, the headwind on the marginality that you're seeing is all mix related. It goes back to what we discussed several times in a time when the orders of prestige clients are going down, we are offsetting it through diversification with market clients with Hair & Body care growing at a very fast pace. And all in all, this is helping us to keep a very, very solid top line growth and a very good EBITDA at the end of the day. So all in all, the good and bad, it's -- in this moment, diversification is playing a major role. You do not see it in margins, but you see it in absolute terms, and this is what I always said, it's the #1 priority for us. The fourth quarter was about bounce back, but I don't remember exact, I didn't get. So if you could repeat your fourth question, Kate, please.

Yes, that was actually about the next year. So do you see a -- so that's the guidance of at least 50 bps margin expansion spend for next year?

It's way too early to say we're entering as we speak, in our budgeting season with all the markets. So whatever I say is with very limited visibility. So I prefer not to answer to that question. I can tell you that because of our business model and how things are developing in terms of projects and on the rise, I am convinced and deeply convinced that we will keep performing ahead of market. So I'm pretty positive on that whether we're going to be 50, 30 or 10 basis points in EBITDA margin, I have really I have no clue is not that I don't want to answer. I don't have the numbers yet to give you an indication.

The next question is from Anna Frontani with Berenberg.

Thank you for the presentation. Three questions from me. The first one is, can you provide the split between volume and pricing for growth rate in the 9 months of Q3 and [indiscernible]. The second one, in light of the comments from the beauty multinationals we have seen until last week. Can you remind us what is your exposure to China? And what is your take on the dynamics of prestige and mass trends in the region. And third question, the realignment of the luxury brand inventory levels that you particularly multinational. Is it a big for emerging brands to the same extent? Or if not, why not?

Okay. So thanks for your question. Pricing accounted for less than 3%, 2.6%. So it's, again, mostly volume-driven growth again and again, and again, and this is confirming also in the third quarter of the year. China exposure, as you know, we do not know exactly how much of our clients end up in China. Our direct exposure to Chinese clients is about 12%. So this is the total, again, when I look at our data versus the multinational numbers that you are referring to, we are clearly doing a lot better. Again in third quarter, China for last was up double digit, solid double digits. So it's -- we keep performing well with Chinese clients. Now what is happening in the market. It is clear that we have entered into a phase where local brands are broadly speaking and generally doing later than imported brands, which as you well know tend to be prestige positioned. So today, mass is winning in China, but I don't think it's very much driven by the segment per se, but I think that our local winning over imported. This trend from what I've seen is confirmed by the presale of the Double 11 event. And it's a bit of a chicken and egg story in the sense that I don't know how much is driven by the Tmall difficulties that, as you know, it's a platform that is mostly exposed to imported brands. While [indiscernible] is doing very well, and they are mostly exposed to local brands. So is it the platform that leads to this skew towards Chinese brands, or is it the Chinese brands that are influencing the sales of the platforms. I tend to believe it's the second. Again, when I was there last time, I clearly saw not only a government that is pushing for local consumption with local brands but I've also seen a pride of being Chinese and consuming Chinese products that I've never seen before. So it's -- again, it's a trend that comes and goes. I've seen it many times. This is a period when locals tend to win over imported. Now the other thing I would like you to remember and I want to underline and especially, I'm referring to Estee Lauder now. You've seen the results. You've seen that there difficulty is, again, mostly focused on skin care, which was down something like 20%. While makeup was up 1%. You may argue that 1% is not a significant growth but is definitely a lot better than minus 20%. Now I repeat, unfortunately, we are not a client -- a supplier of loader for skincare. I would love to because it's huge volumes. But in the bad times, we are not exposed to that part of the business. So that is not really impacting ourselves. Obviously, we'd love to see Estee Lauder performing better also in makeup. That is a fact, but their performance is not that of a problem in makeup. Luxury versus emerging brands relative to destocking. Well, multinationals are the ones who have more means to protect within higher inventories than emerging brands. The topic of cash availability is certainly a major concern for any emerging brands. It's definitely not a big problem for the multinational. So obviously, in periods where you want to protect the fill rate of your brands, multinationals are more reactive, they have higher means to build inventory while emerging brands always have to count how much cash they're consuming for doing so. So there is obviously a more pronounced exposure of multinational destocking to emerging brands for this basic reason, I would say. I hope I've answered to the 3 questions, Anna.

Yes. Thank you very much. Just to check, the 2.6% of pricing is for the quarter [indiscernible]?

Yes. It's -- yes, it's for the quarter, but in the year-to-date, it's very similar. So it's below 3%, no matter what.

The next question is from Tilly Eno with Morgan Stanley.

Two for me, please. One, just a follow-up on your comment about the rationalization of prestige brand inventory levels. What gives you confidence that this should only last a few months? Are you seeing a normalization in your orders yet? Or is this based on your discussions with your customers? Just any more color there? And then the second question, you saw a big step-up in skin care performances in Q3. And I think you noted that, that's driven by customers headquartered in the U.S. and Europe. But do you have a feel for where the end consumption is coming from that's driving this, i.e., how much of it is sort of international clients selling into Asia or just thinking about from the perspective of how much headroom there is left for recovery in the Asian market.

Thank you very much. So inventory, it's a mix of, let's say, gut feelings in the sense that destocking trend that lasts for 10 months in view of the end retail that continues to be positive seems to be very logical considering that the inventory buildup lasted about 12 months. It's quite normal to believe that destocking phase is going to last more or less at the same level. Then we have indications here and there at anecdotical level, for instance that we know that Sephora U.S. lowered their weeks of coverage and they've already achieved their target. So the first signs of players that have achieved where they wanted to get to start being there. And in general, our discussion with clients doesn't show us a dramatic picture in terms of inventory, which means that most of the job has been done. Are we seen already an inversion of trend, not yet. I hope they will start coming in the weeks to come. But we are, I think, legitimately confident that we are at the end of the period. In terms of skin care, yes, it's Western brands. There are certain that are exposed to Asia as well, but it's mostly brands that are -- that have the bulk of their business in the Western world. And in one specific case, which is a major driver is mostly U.S. demand. So they are present in different regions, but the U.S. portion of the business is predominant. So it's not really that are particularly exposed to the Asian business. I hope I've answered your questions.

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

Just a quick question from me. When you said that you have convinced that you will be able to perform ahead of the market, was that comment just a medium- to long-term comment? Or it was related to FY '24 as well specifically?

Mikheil, now I don't want to sound arrogant, but I think it's both next year and the years to come. Honestly, the trend we are seeing in terms of the level of interest we're gathering from clients and our innovation is only up and this is from both multinational and emerging brands. I think that the overall trend I will -- it's favorable to us. When I mentioned things like the search performing products that are without talk and are free of microplastics and so on and so forth. We are seeing both prestige clients and mass market clients coming to us with a rate and a desire for accelerating the innovation phase in this territory, which is unprecedented. The fact that especially in powders, we are the recognized leader in powders is driving a lot of these demands to us. So this gives us a lot of confidence. When you're coming out of 10 months of very strong double-digit increases in new orders and you have a pipeline of new projects that are not yet orders that is as rich as we have today. Frankly speaking, if we do not perform back to the market, we've done something already wrong or it has happened something already bad, in terms of macro economy or political issues and we don't know if we are seeing enough for them. So it's for 2024 and also beyond that. Then how long beyond that, it's obvious, but I can tell you that the pipeline of initiatives we're seeing are covering in 2024, but are covering 2025 already.

[Operator Instructions] There are no more questions registered at this time.

Thank you, everybody. Thank you very much. Have a good evening.

Thank you.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.