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 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Renato Semerari, CEO of Intercos Group.

Thank you very much. Good evening, everybody. We are presenting today our third quarter results and obviously the 9 months results, which are clearly against the current trend in a positive way, I would say. In a global market which is decelerating its growth pace and many beauty players publishing soft third quarter results, especially in Asia, Intercos is posting double-digit growth at top and bottom-line level, accelerating its pace and recording excellent performances in Asia. If you look at the first page, we clearly see the trend which is accelerating, starting from the first quarter, which was heavily impacted by the cyberattack, as we all know. We posted the second quarter with a growth of plus 10%. We are now posting the third quarter with a growth of plus 12%. This in a context of deceleration of the market with regions like China and U.S. that are at best flat or slightly declining. This brings us to 9-month sales of EUR 775 million, which is up versus a year ago at plus 6%. Now if we look at the results a bit in a deeper view, we have a top-line growth of 11.6% at current rates, 12% at constant rates with an EBITDA growing by 12.3%. This is coming obviously from the top-line growth with a slight improvement in terms of marginality of 10 basis points, which is admittedly below our expectation. This was due to a shift in the mix with a significant percentage of prestige clients and prestige projects in full service, meaning that Intercos had to provide the packaging, and as such, with the lower than average marginality for prestige clients. At the end of the third quarter, then we managed to completely recover the EUR 9 million loss of EBITDA of the first quarter and we are now slightly better than a year ago at the end of the 9 months. Net debt was at EUR 118 million, which is EUR 6 million below the same period of year ago, with a leverage ratio on EBITDA down at 0.85x EBITDA. Net of IFRS 16 impact, the debt stands at EUR 74 million. Let's now deep dive into the top-line results, starting by the view by business unit. Well, the first important and positive news is that Make-up is back to double-digit growth. We recorded a plus 15% growth in the quarter, bringing us back in line with a year ago at the end of the 9 months. Asia was the star, but all regions were growing, and this is a very positive sign. And also, looking at the clients, both multinationals and emerging brands posted strong results. Skincare, on the other hand, kept double-digit pace, already showed in the first semester, with emerging brands still being the key drivers and especially Asia being the key driver of this performance. So Skincare keeps running fast. And in the year-to-date, the performance is very strong, at plus 14% in a market that is way below this kind of trend. As for Hair & Body, the third quarter was a consolidation quarter with a 3% growth, which is, in my view, a good result, considering that year ago quarter was up by 37%. So a very hard base to beat. Year-to-date remains very positive, also double-digit at plus 14% versus a year ago. Looking at the results by region. Asia confirmed its exceptional pace, scoring again a plus 30% growth in the quarter. Both China and Korea are growing at exceptional and a similar pace, which is clearly very different from what we are seeing from many of our clients around the globe, and in general, the performance of the market there, which is still about minus 2% versus a year ago. In the year-to-date, Asia is up by plus 29%, which is way above our expectations at the beginning of the year. Europe was back to double-digit growth, and this is another very important point with Make-up driving the growth. And from a client perspective, both emerging brands and multinationals performing very well. In the year-to-date, Europe is up by 6%, which is slightly ahead of the trend of the market in Europe. And this is also a very positive sign considering the heavy impact we had in this region due to the COVID -- sorry, due to the cyberattack at the beginning of the year. America remained the only region lagging behind year ago. In the quarter, it was minus 3% versus a year ago. In the year-to-date, it's minus 8% versus year ago. And this is mainly driven by market, which is down in volume since 1 year now, multinationals that are suffering. The only good news there is that Make-up is back to growth also in the region, and this is very important for us given the weight that Make-up has on our total business. Looking at the trend by customer type. The third quarter saw both emerging brands and multinationals growing at a double-digit pace. Emerging brands were once more the fastest-growing cluster, at plus 18%, with all business units up versus year ago. And in terms of regions, both Asia and Europe growing in a significant manner. In the year-to-date, emerging brands are now at plus 23% versus a year ago. Multinationals, good news, back to strong growth, plus 10% in the quarter, driven by Make-up and both Asia and Europe posting good results. In the year-to-date, we are still slightly down versus year ago, but we are catching up at a good pace. Retailers remain the sore point. Their weight on our total sales is smaller and smaller. And therefore, there is higher volatility in this segment. So still negative performance also in the quarter, minus 11% in the quarter, minus 20% in the 9 months. To note that the vast majority of this drop is related to 1 client that went in Chapter 11 at the beginning of the year. And the good news is that this client is now about to restart under new shareholders. So we hope that this impact will turn around in the coming months. All in all, if I have to summarize, we are in a situation where the market overview is not particularly positive. U.S., as I said, is a flat overall market, but with volumes slightly declining. There are some signs that the prestige market is giving some signs of recovery, but still not performing very well in the year-to-date. China is about minus 2% in year-to-date. Europe remains the positive region, growing, although it has slowed its pace from high-single-digit trend to a mid-single-digit pace. In this context, Intercos have started 2024 with a happy battle from first quarter due to the cyberattack. Yet, in the second and third quarter, we posted double-digit growth with excellent Asia and strong EU results. So this makes me believe that even in 2024, despite all the difficulties, Intercos is gaining market share once more. In terms of guidance for the fourth quarter, we are confirming our guidance for a growth of our top-line between plus 10% and plus 13% for the fourth quarter. However, we expect still a negative mix at the beginning of the quarter in terms of mix of clients and projects, which will lower the marginality at the beginning of the quarter. So all in all, we expect a quarter in terms of marginality, which is more or less in line with the one that we got in third quarter. To end my speech and then opening up to your questions, you can see that looking ahead, we still are looking at a very positive trend with the order entry still showing a very strong pace. In September, October, we had incoming orders for Make-up and Skincare. I remind you that Hair & Body is not included in this picture because it doesn't have a make-to-buy system based on purchase orders that cannot be canceled, but they are on a rolling forecast basis. So looking at Make-up and Skincare, as I was saying, September, October posted a 10% growth versus a year ago, driven by growth of Make-up, which make us believe that the trend of growth of Intercos will continue in the months to come. I think that's all on my side. I'm ready to take on your questions.

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

My first question is related to your margin performance. So can you elaborate on why prestige customers ordered more in full service? And what gives you confidence that this is a temporary event? You mentioned that the Q4 level of profitability should be broadly in line with Q3, but still, it would be useful if you can walk us through the key elements that will drive your margin performance in the next quarter? My second question is related to Hair & Body and the notable deceleration in organic sales growth. You mentioned that this is mainly a reflection of the tougher comparator. But frankly, that business was consistently delivering very strong growth rates last year. So it would be great if you could help us to decompose that growth. How did fragrance business perform versus the rest of Hair & Body? And where are you seeing the major deceleration? So basically, I'm trying to understand what is the -- basically, is the low-single-digit growth is purely a one-off or it's the new run rate for the division? And lastly, I wanted to ask about the decline in order intake for your Skincare business, both sequentially and year-on-year. So if you can explain some of the key reasons behind that?

Kate, thank you for your questions. First of all [Technical Difficulty] Okay, Kate. So margin performance and it's not that the clients are changing their buying patterns. We have some prestige clients that are in full service mode. So they ask us to buy packaging for them. They always did. It's not something that has changed. What is changing is that these clients are ordering a lot. And the ones that are buying packaging for themselves are ordering -- are growing at a lower pace. So in the order book we had in the quarter, and we are seeing this also for the beginning of the fourth quarter, these clients are the ones that are, let's say, driving most of the prestige growth, and therefore, carrying with them this packaging component that is dilutive to our margin. So there isn't a change of pattern by client. It's only that the clients with packaging in full service are growing at a faster pace than the others. And this is creating this mix impact that I was mentioning. Is this something that should continue going on forever? I honestly doubt. I think that this is more related to specific projects with these clients that are having an impact in this month. There isn't anything that points to the fact that we will have this on an ongoing basis. Hair & Body, I cannot give you splits by segments in each division. What I can tell you that is obviously evident that the moment you have such a big jump in the base, it's difficult to keep it up and to continue growing at the same pace, because growing from 10% to 15% is one thing, growing from 50% to 60% is another thing. It's different percentages. We've had a fantastic growth in Hair & Body. We think that the business is still very, very strong. I don't think we will go back to the plus-30s we've seen in the past. We're going to go to a more normalized growth pattern, which doesn't mean it's going to be low-single-digit, but it doesn't mean it's going to be the 30s or more that we've seen in the past. So this is what I would say. Obviously, when we will be giving guidance for next year, we will elaborate more. As you remember, probably at the time of IPO, we said that we were expecting Hair & Body to be growing at mid-single-digit levels. We have over-delivered big, big, big time versus that. We had growth rates in fiscal '23 of plus 47%. So I think that we're going to go back to high or mid-single-digit performances next year. Skincare deceleration, again, I wouldn't look at it on a month-by-month basis. You can have swings of all sorts in such a short period of time. The business is healthy. Asia is a fantastic driver of our Skincare business unit. The business unit is growing double-digit. I do not see any particular sign of concern. Again, in a bimonthly basis, you can have a new -- a launch of a new project or any swing like that can create a difference. Frankly speaking, in the numbers, I see nothing that worries me going forward. I hope I've answered to all the questions.

The next question is from Tilly Eno of Morgan Stanley.

The first one, just another question on margin. You obviously mentioned there was an impact from the full service packaging, but could you quantify what the underlying margin improvement would have been without that packaging? So the value-added service margin improvement year-on-year. And then my second question, a number of the global beauty companies on their recent calls have been emphasizing the importance of innovation to stimulate growth. And you've alluded to it too in your outlook comments that Intercos should benefit from it. Have you seen this playing out yet, i.e., have you been seeing an increased appetite for your services in your recent conversations with multinationals? And then just 1 last question to squeeze in, if I can. You mentioned the U.S. Make-up market returning back to growth. Could you just elaborate a bit on what is driving that?

So on the marginality, I cannot give you details. You will see the margin on value-added sales when we publish the second semester and the full year numbers. What I can tell you is that in the quarter, we had a big swing, especially in Make-up with packaging, gaining a significant percentage of the sales with full service clients. So the impact was especially coming from prestige clients in Make-up, which it's a bit unusual and we were not forecasting that to happen. We believe it's a specific period where this is converging in that direction. So we think it's a short-lived phenomenon because still the majority of the prestige Make-up clients are not in full service. So we should see a rebalancing of it in the coming periods. Again, it has been a significant impact in the quarter, especially for Make-up, where we've seen a swing of about 5 points, I would say, in terms of higher percentage of packaging on the total sales. In innovation, there has always been appetite. Usually during crisis, the appetite goes up. We are seeing it happening. Everything is a bit -- there are pros and cons in any moment. So the appetite is strong, but we need to turn it into reality, into projects, which we are working on, and we have a number of super interesting projects for 2025. Then we need to see again how much of the appetite that is a bit further ahead will translate in real projects and orders on our side. But I can tell you that what we are seeing from clients is more and more queries about further outsourcing attitudes from multinationals. For the U.S. market, the reality is that we've seen declining volumes. If I look at the data, I see lips as the only segment that is holding and is growing. Eyes is suffering since, I would say, over 1 year now. Complexion, which was a good spot after COVID, has turned into negatives in volumes also in the second semester of this year. We are seeing some data coming from prestige where it seems that things are about to restart. It's early signs. Let's see what happens now that the elections are going to be behind if the market starts up again. When you look at the fundamentals of the U.S. economy, there aren't any specific reason why there should be a steady decline of the market. I mean, the employment rates are good, wages have gone up. And so there isn't anything that is particularly alarming on that front. So we have always said that we would have expected market to go back to growth at the beginning of 2025 post elections. Let's see how Christmas goes. As you know, that is a very important data point for the -- to measure the health of the market. Let's see how it goes. I'm pretty confident that 2025 will be a better year for U.S.

The next question is from Molly Wylenzek of Jefferies.

Just looking at your outlook statement about pre-COVID -- a return to pre-COVID growth levels, obviously, not the first time we've heard this reporting season. Can you define what that means for Intercos? Second question...

Sorry, Molly, can you re-elaborate? I'm afraid I didn't get the question, sorry.

No, no. Just the -- no problem. You said in the market overview, you expect to come back to market growth of pre-COVID growth rates. Can you define that sort of in percentage terms? Second question would be around any major regional differences in profitability? And the third question, just more holistically, how do you think about balancing absolute profit delivery versus protecting or improving profitability margins?

Sorry, Molly. Sorry again. I didn't get the second question you had.

No problem. Regional differences in profitability. So margin differences between Asia, EMEA or Americas.

Okay. So the pre-COVID trends are the historical trends the market had. It's anywhere in between plus 4% and plus 6%. This is what is the long-term trajectory and pace of the beauty market. It has been there for decades pre-COVID. Then we had the bump in the road of COVID. After COVID, there has been a catch-up period with an acceleration in terms of growth paces. I think that what I expect and what I'm seeing also if you look at Euromonitor is always a bit more positive. But in general terms, you see that we are going to go back to the plus 5% plus 6% kind of growth pace for the industry in general. Then you will always have a bit more of color, a bit less of Skincare or the opposite, a bit more of prestige, a bit less of mass or the opposite and so on and so forth. But by and large, the trajectory of the market has always been in that kind of pace. And I think that, that is what we are bound to go back to. Regional differences in marginality. Well, it all depends on the mix of clients that you have in the different markets. The, let's say, European market has historically been a good margin region, first, because the prestige market is a bit bigger than in other regions in Europe and also because Intercos has been overskewed to prestige customers since many years. So Europe has always been a good pocket of profitability for the company. Asia, it's not, generally speaking, a high margin region. It is although a very good margin region for Intercos because we have chosen to play because of our positioning in the upper end of this market without going into the mass segments that are the ones driving down the profitability in general. U.S. is historically for the market and also for Intercos as a consequence, more skewed -- a bit more skewed to mass market. And therefore, it tended to have lower marginality in general for the market and for Intercos as well. So this is a bit the split of the picture of marginality differences by regions. Again, it all depends at the end what are the clients you're able to develop and to make grow more than others because that is what drives the mix and all that. As for balancing growth versus margins, I think I've always been quite blunt about it. We think we are, and I think that is factual, still a small company with a lot of market share to be gained still. So our decision process is driven by growth, profitable growth, let me say, which doesn't mean that it is margin accretive. So we are trying to build our business, pushing the top-line as much as we can, delivering profit growth at the same time. So we have been, I would say, very transparent when we took the decision, for instance, to take on the Dolce & Gabbana deal that, that was, from a marginality standpoint, was a dilutive business, but it was pushing our top-line and delivering EBITDA to us. So it was profitable growth, although margin dilutive. Those kind of choices we have done them in the past. I think that we will do them in the future. I think that gaining market share is super important. And then we work -- we're going to be working day after day to make this dilution a short-term impact, turning the business more into a higher marginality. So when it comes to taking new projects, we will be looking at profitable absolute growth. Then we're going to be working to make sure that time after time, we improve the marginality so that the balancing of the marginality comes in time, if you see what I mean. So this is what we've been doing in the past and this is what I think we will continue doing.

The next question is from Francesco Brilli of Intermonte.

Yes. I have 3 questions more on a general note. I mean, we are -- and the 2 -- the first 2 are related to the trends, very contrasting trends that we are seeing between your growth and your numbers compared to the one of the industry. And I was wondering if you can help us in better understanding the dynamics, first of all, in the Asia Pacific country. So we are seeing very strong growth, specifically in the third quarter, very strong growth, while the industry is struggling and the weakness in the area is triggering some big events, some warnings from big names. So just to better understand what's happening there. I guess, the customers are different to the big names and probably you are covering some clients that are not selling in the area or selling elsewhere or just to better understand the dynamics, if you can help us on this. And the second one is on -- more on -- not specifically on Asia, but on the whole industry, we are seeing still contrasting trends. And I was wondering if this is the result of the rebound of destocking that we had last year? And in this case, if it was, I mean, somehow true, how long do you expect this very positive trend to last going forward and before normalizing? And the third question is more on the focus on the U.S. just in light of the election that we saw the results today, if you are expecting some import duties to hit your business there? And how the imports from Intercos are mixed there from Europe or from other countries?

First of all, thank you very much for underlining the fact that we had some contrasting results compared to the other beauty players. I think personally that if I look at what has been published in this third quarter, delivering plus 12% growth in top-line and plus 12% growth in bottom-line, I've not seen many numbers like that, to be honest. So I was pretty happy about our results all in all, and thank you very much for underlining that. Dynamic in Asia is very different from what you're seeing from the Western players. It is driven by 2 key factors. The first one is that -- well, #1, remember that we classify under Asia the sales that we do with Asian customers. So we cannot catch what the Western players are selling in Asia. So what we're seeing in the market is that the local players, and now I'm specifically talking about China where this trend is particularly evident, is that the local players are gaining market shares. And therefore, our Asia numbers are helped and China numbers are helped by this overall market trend. But it's without any doubt, we are gaining new customers and we are gaining share of wallet within these China clients. So it's a double effect of the local brands gaining market shares and Intercos gaining share of wallet and new clients within the local customers of -- in China and also in Korea. And in certain particular technologies like foundations, cushion, foundations and skincare, we are doing extremely well, which is helped by the fact that in these overall market dynamics, the local clients are trying to elevate the quality of the products they are proposing to their clients so that they can be a real contender to the Western brands. So we are profiting from an overall dynamic of the market and I think doing a very good job also in gaining share on our own with the local customers. The industry trend, I mean, Intercos has been growing for years at more or less twice the market trend. We've been growing clearly faster than that in the past 2 fiscal years. We are doing it this year. I mean, at least in the second and third quarter, we are growing much faster than the market again. I think that our innovation is paying off. We are gaining market share -- sorry, share of wallet within existing customers. We have gained a good share of wallet in clients that are displaying good growth and gaining market share on their own. So I think this is a trend that should continue. I do expect Intercos to continue growing faster than the market, I would like to say always. Obviously, it's not going to be that literal that every quarter is going to be like that. But if I look at the underlying trend, I expect that to happen in a consistent way as it happened so far in the last decades of this company. So yes, I'm confident that we can continue running at a faster pace than the market. Post-election in U.S. This is a tricky question because I wish I knew how Mr. Trump [ neurons ] are going to work. It will all depend on what kind of tariffs he is going to be putting and on which imports. So in which region he is going to put tariffs. My -- I have a quite an optimistic view for the simple reason that we are everywhere. So not knowing where the problem is going to come from. I tend to believe that having plants in U.S., having plants in Europe, having plants in Asia we should find a way out to be competitive related to the tariffs that they are going to impose. So I would be more worried if I had all my eggs in one basket, if I may use that expression. I cannot say that I'm not worried because the guy is a bit unpredictable. But I think we are overall better placed than other competitors because of our global presence. That's the only sensible thing I can say right now, then we will see how things will unfold and we will react accordingly to make sure that we stay ahead of the curve.

The next question is from Anna Frontani of Berenberg.

2 questions. One, very quick, if you can give us the split between volumes and pricing either for the Q3 or year-to-date? And the second one, actually on packaging. I mean, I know that we've been discussing this topic in the past, and you said multiple times, you're not a packaging company. But in light of your growth ambition, and also I'm conscious of your balance sheet, is still expansion maybe in packaging vertical integration, is this still out of the equation? And if so, why?

Okay. Volume price, quite frankly, we have not measured it analytically, but I think that it's going to be a close relative to 0 in terms of price. So it's volume-driven. Maybe there is a little inch of a 0-point-something or not even 1% price, but it's basically all volume-driven, our growth in the quarter. The [ pack ] question is a very interesting one. We've looked at it many, many times. The reason why we decided so far not to do a vertical integration in packaging is that there are a couple of reasons. The first one is quite obviously, packaging is not our domain of expertise. So we should buy someone who is strong enough to run with his own legs because we won't be able to bring value to them in terms of know-how, innovation or anything like that. The second and most important one is that in the packaging world, there are many, many different suppliers because there are many, many different kind of packaging. You have glass, you have pencils, you have automatic pencils, you have jars, you have lipsticks, they are all different packaging. And the packaging players, unless they are very big, are specialized in specific technologies. The moment we buy and vertically integrate a packaging supplier that is specialized in 1 segment, we're probably going to improve our situation in a significant manner in that very segment, in that very technology. But we're going to be seen as a competitor by all the other packaging suppliers that we will still need for all the rest of our business, which is a bit of a double-edged sword kind of a issue. So you're going to gain on one side, you're going to lose on the other. So it's a difficult balance. So to really have a positive impact, you should buy a big packaging supplier that covers more or less all the segments or the majority of the segments that we need in packaging, which would mean buying a big, big player with a lot of money connected to it. This is the #1 reason why we have decided to stay away from it nowadays. There is also the component of locations. The vast majority of packaging in our industry is located in -- is coming from China. So most of the players are China-based. Going back to the question of Francesco, what happens in the moment the tariffs go up in a significant way, having done a big investment for a China player in packaging, the risk level is a bit -- is very high. Because of the expenditure we would need to do and because of the location, that may create big swings in terms of business going forward. So for these reasons, we have decided for the time being to stay out of it. It doesn't mean we will stay out of it forever. We are from time to time reconsidering things. We'll see. For the time being, we have no active project in that area.

The next question is from [ Misha ] Omanadze of BNP Paribas.

I have 2 follow-ups really. So you referred to your historical track record of outperforming the market. And then you said that we shouldn't expect this to be happening every quarter. But if we take an annual view, do you think that in FY '25, you will be able to outperform the market? And if I look at consensus expectations for Intercos right now, that's what sell-side assumes. If I look at Visible Alpha, we are at like-for-like of plus 7.6% next year, which I assume is market outperformance. And the second follow-up is on your balance sheet. I think it's pretty clear that it's not straightforward to find acquisition targets for you. How should we think about capital allocation, keeping in mind that you are becoming pretty underlevered in the coming years?

Yes, we've been overperforming compared to the market for many, many years. Actually, we've been running at, as I said, at least twice the market pace for many years. We clearly have done it even more in 2022 and 2023. We have done it again this quarter very, very clearly. Again, I think that in the long run, if I look at the CAGR of Intercos, it will come out that we are -- on an average CAGR level, we will be growing twice the market pace. We've been growing at a very fast pace post-COVID. So I do believe that we will grow over the market trend also in 2025. Again, we are getting into the season of budgets next week. So I will -- I could be much more precise in 15 days from now. But yes, I do expect that we will overperform the market also in 2025. As for the capital allocation, well, we are always active in looking for acquisitions. There are a number of targets that we would be interested in. We are always actively looking at the market and working on it. So I wouldn't exclude that we will not do M&As as we did in the past in reality. Aside from that, you know that in terms of capital allocation, we have a road map of manufacturing capacity expansion. We are building, as we speak, a second plant -- well, it's not a second plant, it's a doubling of the Korean plant. We started working about 6 months ago on that in Korea. We are expanding one of the Chinese plants as we speak right now. We have projects for Italy. We have projects for India. So in terms of capital allocation, we will have CapEx increases. We had CapEx increases already in fiscal 2023 because we had started expanding plants. We did Italy for fragrances, Poland last year. So we will invest capital to keep ourselves with the space that is needed for the growth of the coming years. So that is for sure. We have dividends. So we may increase the ratio of our dividend policy. And again, I still believe and I'm still working to make some acquisition come to fruition.

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

Okay. So thank you. Thank you very much for your time.

Thank you, everybody.

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