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 2025 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Renato Semerari, CEO of Intercos. Please go ahead, sir.

Thank you very much. Good evening, everybody, and thanks for joining our call. In a global market that has continued to display softer-than-normal trends, especially in volume terms and especially in the U.S. market, Intercos kept focusing on restoring profitability after 3 years of exceptional top line expansion with a CAGR of plus 16.5%, but with a margin dilution that was apparent in these 3 years. This focus, if you move to my second slide, brought Intercos to achieve a 12% EBITDA growth in fiscal '25 year-to-date, resulting in a 143 basis points margin improvement. The macro blocks that led us to these results are a slightly positive volume component, a significant profitability improvement mainly due to productivity gains and a deliberate rebalancing of our sales mix that we will discuss in more details later. And third, a negative ForEx exchange impact. All in all, we closed the 9 months with EUR 116 million and a 14.7% EBITDA margin. Looking at results in a bit more details, in the year-to-date, sales were up by plus 2.9% at constant rates, thanks to the strong performance of our core color business, which was up 9%. Overall stability of Skincare and a market decline on the other hand of contract manufacturing and, therefore, our Hair & Body business unit. Adjusted EBITDA growing double digit, as we just said, with all quarters of the year up substantially, thanks to a better BU mix. So with Make-up now over again the 60% bar and Hair & Body down, a lower weight of pack in sales, and this is a very important component, especially in the third quarter, a better mix within the BUs with Prestige growing faster than mass and productivity gains across the board. Net debt, the leverage was stable versus last year at 0.86x EBITDA with an absolute value increase mainly driven by CapEx linked to our plant expansion plan, dividends and the share buyback program that we announced a few months back. In the third quarter of this year, sales were down by 2.7% at constant rates, mainly, if not exclusively tracing by decline of pack components of our top line, which, as I said earlier, was a deliberate choice and direction we took at the beginning of the year. The EBITDA, despite the top line decline, was up 5.4% with an acceleration of the margin expansion at plus 161 basis points to 15.9% margin. This is our third quarter in a row of marked margin expansion. Moving up the details of the sales component and starting with the view by business unit, Make-up is our best-performing business unit in the year with a plus 9% growth and over 60% of our sales. Multinationals are the key growth driver, both in Asia and in Europe. Prestige performing better than mass. In the third quarter, sales drop was essentially driven by foreign exchange and pack with also to keep in mind that last year base was pretty high since we grew 15% in the third quarter of last year. Skincare in the year-to-date still shows a slight decline of minus 3%, all driven by the first quarter results. Asia and EMEA are both growing, while U.S. is suffering, also driven by tariff affecting particularly Switzerland, which, as you know, is affected by a 39% duty in coming to U.S. In the third quarter, we had a slight positive result, plus 2% despite the last base we had last year at plus 12%. Hair & Body in the year-to-date shows a double-digit decline, mostly driven by fragrance and mostly driven again by the packaging component and a high base of last year. As you know, we had a very, very high growth across 2024. Now looking at the picture by region, overall, the year-to-date shows and points to Asia as our key growth driver, plus 9% in 2025, while EMEA and U.S. are quite stable. Looking region by region, Europe a very consistent trend, pointing at stability, both in year-to-date and third quarter are at minus 1%. This is made up by Make-up and Skincare growing, but offset by the Hair & Body performance, which, as you know, is -- has a quite high impact on this region. Multinationals and especially the Prestige brands of multinationals are the best performers, both in the year-to-date and in the quarter. Americas, a slight positive in the year-to-date, plus 1% despite the double-digit decline of the third quarter. Make-up is growing with Skincare offsetting here, again, ForEx has an important impact. But the overall soft performance of the market and our clients over the first semester had obviously an impact on reorders. As for Asia, high single-digit growth in the year despite the very high base of last year at plus 29%. Both China and Korea keep displaying strong trends in the year. In the third quarter, which was highly impacted by negative currency trends, we recorded a slight decline on a high base of last year, which was 30% up in the quarter. And this was driven by a softer trend in Korea, while China kept growing at high single-digit rates. Moving to the cluster of clients. 2025 is characterized by a consolidation of the emerging brands, mostly due to the performance of Hair & Body. Multinationals in the year-to-date are growing at double-digit pace and regaining 50% weight on our total sales. Make-up is obviously the main driver of this comeback with strong results in all regions. Prestige was clearly the best performer. And also in third quarter, multinationals displayed growth. Emerging brands, as said, saw a consolidation, which was mainly driven by Hair & Body and affected both in EMEA, especially EMEA, but also U.S. Asia saw conversely steady growth in both Make-up and Skincare for this cluster of clients. As for retailers, in the year-to-date, retailers displayed high single-digit growth after a difficult 2024. Hair & Body was good for this group of clients, although in the third quarter, we had negative results, mainly driven by new projects seasonality. To conclude, in a year which has confirmed an overall softness of the market and that we believe is going to get back to normalized growth rates in 2026, Intercos has decided to focus efforts in restoring the marginality level lost during the past 3 years of accelerated top line expansion. Also, the team is executing the plan that is instrumental to the group future growth, both in terms of innovation with an acceleration of blue sky innovation led by the think tank, which is a multifunctional team devoted to this kind of disruptive innovation. Manufacturing expansion that, as you know, has seen the expansion of our Korean and Chinese plants in 2024 as well as in terms of organization design. This is probably new to you, but we have decided and implemented new reporting lines for regional R&D meant to increase the autonomy and, therefore, improve our speed in responding to the regional emerging trends. In the meantime, we confirm our confidence in matching the current fiscal year '25 EBITDA consensus. That's all on my side. I'm available for any questions you may have.

[Operator Instructions] The first question is from Anna Frontani from Berenberg.

I have 3 questions. The first one is on sales growth. If you are comfortable with 2025 sales growth of 3% to 4% at constant FX. Second question. You've shifted the focus from top line expansion to profitability. I wonder how sustainable are the current margin levels once volumes will recover in 2026? And the third question is on the U.S. Because you mentioned a rebound in '26, do you have a specific timing in mind? Should we expect a rebound more in the first half or maybe in the second half?

Thank you, Anna. So no, I don't think that we will match the 3%, 4% growth in the year at constant rates. I expect that there will be stable or a slight positive at the end of the year. And this is driven by the packaging component element that I mentioned to you earlier. So we took decisions at the beginning of the year that coupled with a market that is softer than we had expected because we were expecting a second semester rebound, which didn't happen, I think is going to bring us overall in a stability kind of position in terms of top line. This is what I think or what we believe we're going to be landing for the year. The second point, the sustainability of margins, yes, I do believe that these moves are sustainable because of all the work that is now showing in terms of productivity, because of the push that we have deliberately made towards clients and brands and initiatives that are at higher margin level. There is always some volatility that is related to the sales mix of different clients. But all in all, we have made a shift in our portfolio of clients and products that should show sustainability over time. We're basically going back to the profitability levels we had back in 2019, which we think it's a very sustainable base on which to build further improvements going forward, to be honest. The third question is the most difficult one because no one has a crystal ball, obviously. I do personally expect that the progressive decrease of interest rates in the U.S. will have an impact on consumption. I think it will be more visible in the second half of the year than in the first half of the year, although I personally hope that we will start seeing some effects already in the second quarter. But that's my guess. So take it with a certain level of cautiousness, I would say. But this is what I would expect. U.S. now is showing a flattish market since 2 years. Usually, in the normal trend of the past, you would see that after 2 years, you should see a rebound. So we hope this is going to come. I hope I've answered all your questions.

Yes, you did. I just have a clarification on the first one to ask you. So we can expect flat sales growth for 2025, which factors in a negative FX contribution?

We're going to be landing at the same level of last year, all in all. This is what -- obviously, the currency impact, the more you go on in the year, the worst it has got. So there is a higher impact progressively. But all in all, I think we're going to end up flat versus last year in sales terms.

The next question is from Andrei Condrea of UBS.

Two from me, please. First of all, if we look towards 2026, obviously, you spoke already about the U.S. But could you share some more color as to what makes you so confident about the other regions, China, Korea and the emerging markets? And secondly, could you offer a bit more color on the changes you're making in terms of your local operations with the increased autonomy and improved innovation speed?

Thank you very much for your questions. Well, in terms of trends, China has shown quite good recovery numbers post the June '18 event, which was negative versus a year ago. In the year-to-date, China is a plus 3.9%, which isn't yet at the level we were expecting, but it's definitely better than last year. Now the big question is what is going to happen in the double-11 event, which is the most important of the year. What we know is that the promotional sprint has started earlier than usual this year, and this helped the market to record a plus 8% growth in the last 4 weeks. But the jury is out. We obviously hope to see a good all in all double-11 season, which would signal that China is getting out of the woods and that there will be a much better 2026. Emerging markets, they are doing well. We are doing fantastically well in India and in Brazil as well. But reality is that their impact on the total results of the company and in general of the beauty market is still quite limited. So they do not have the size altogether to make a swing on the total results yet of the company. But I'm very positive about especially India. I'm also positive about Southeast Asia, but those are still quite marginal in the global scheme. Korea is a bit of a different story. Korea local market is not that big either. It's a very competitive market. We are seeing a very violent reaction from our competition, given the growth we've had in the past 3 years. So they are really dumping on many fronts on prices to recover a bit of the lost shares -- the shares they've lost in the recent past. Korea is more a factor of how much -- the country is going to be exporting into U.S. and Europe. We know that Korean brands are having a good development in U.S. and also partially in Europe. This is more Skincare-driven, so it's not having a big impact on us so far. But all in all, Korea, we keep being quite bullish on the growth we can have, mostly driven by the share gains we can still achieve in that country. But all in all, as you know, Asia is mostly dependent on what is going to happen in China. So that is the market everybody is looking at. The second point is quite important. So what we have noticed is that the era of extreme globalization is over. I think that this is not a big discovery. It's visible across the board. And we had a way of working that wasn't really allowing us to be as fast as we could be in catching local trends. We've always been very good in all what is blue sky research and coming up with new technologies that then get applied across the board. We've been very good in catching some global trends and responding well and fast to those. But then there are -- and we've seen more and more local trends that are important in just one region, and we've not been fast enough to jump on those. And we have noticed it, especially in the Western world, which was more dependent from our corporate R&D, so the central teams, while, for instance, for China that we had decided to keep more autonomy in -- for the local labs. They were more reactive and faster. So what we decided is to shift the reporting of the local R&Ds to the local CEOs so that R&D sales and marketing can be faster and more reactive or actually more proactive in responding to these local trends. So we think that this will -- coupled with all the goodies we have in terms of more fundamental innovation, which is going to be led as in the past, but this proximity of decision-making in the regions will allow us to be faster and more proactive for what local trends are concerned. So this is something that we have announced a few weeks ago, and we think it's going to give us results already starting next year. I hope I've explained it a bit better. Otherwise, if I've not been clear, please ask again.

The next question is from Francesco Brilli of Intermonte.

I've a couple of questions from my side. The first one is on 2026 guidance behind your confidence on a more normalized and rebound in volume growth and revenue growth. So do you have just the confidence on trends on different markets? Or is based also on internal activities, new launches or commitments from clients on new technologies? So you have something that make you confident on a rebound in 2026? Or it's just a projection on market trends? That's the first question. And the second one is on the APAC normalization in third quarter. I appreciate that the ForEx impact is hitting, but it would have been up low single digit at constant FX. So we were used in the last few quarters to see a much higher growth. I was wondering if something happened there, something changes or it's just a mix of comp base and ForEx impact.

Okay. Francesco, the guidance for '26, obviously, the guidance we're going to give it at our next earnings call. We are going through the budgeting process as we speak. So at the end of it, I will have much clearer ideas. But all in all, there are 2 components. One is that we see -- we believe and based on the -- on historical data that 2026 should see a rebound of the market. And I've also seen a number of clients that are all pointing and believing in the same direction. So this is obviously very important because it impacts more or less 70% of our sales, which are reorders. So if sell-out is lacking, then this 70% suffers. But the second is also driven by the level of interest, especially in big multinationals about the innovations we are showing to them and the level of interest on new technologies, and formulas we are showing them is pretty encouraging. This year, already, we have a weight of new products that is beyond the usual 30%. So we are already seeing more, let's say, interest in outsourcing innovation to us. And we think based on all the signals we have and the interest from clients that this is going to continue in 2026. So both are pointing in a good direction. Then how much that will materialize, we'll have clear view in a few weeks. As for the second, which is the APAC normalization, well, I've always said that when you have very, very fast growth, there is a moment where there is consolidation. That's -- I couldn't say it's biology, but it's quite normal. This normalization is coming from ForEx exchanges that is clearly well out of our control. but it's also driven by -- in the quarter -- in the last quarter in Korea because we are coming out of years of exponential growth in Korea and we had a quarter that was softer because of clients dynamics, launches dynamics, a number of things that it's bound to happen sooner or later. What is important, it's the trajectory, which remains very positive. And for the region, all in all, I must say that I'm very happy about the results we're getting this year as well. So I do not see any alarming sign, to be honest. I hope I've answered your question, Francesco.

[Operator Instructions] The next question is from Paola Carboni of Equita.

I have a few questions. The first one is a similar question about China. So if I got it right, you mentioned high single-digit growth. So it's a progressive slowdown here, although clearly outperforming the market. But I'm just wondering here whether are you seeing again a bit of catch-up from multinationals compared to Chinese brands on that market and how this is possibly affecting your performance in the region? Then another question is about the new organization for the R&D responsibility and so with greater local autonomy. I'm just wondering whether this might impact your profitability in any way, like, for example, a business of scale in your innovation -- economies of scale in your innovation process? And third question, sorry, is instead on the sales mix. If you can share with us your thoughts about the possible landing point of the mix between full service and free issue because we started the year saying that it wouldn't change too much versus last year, whilst apparently, given the very strong performance of EBITDA margin we are seeing, it's probably going towards an improving trend compared to -- an improving mix compared to 2024. I'm wondering if this is correct? And where do you think we should be end of this year and possibly also next year? So to what extent are you committing on this direction even further?

Okay. Thank you for your questions, Paola. Yes, China continued growing high single digit. In reality there, you do not see the results of what's happening with multinationals versus the local brands. I remind you that in the numbers you're seeing, you're only seeing what we sell to the local clients because multinationals are tracked where the -- and are placed where the headquarter of the multinational is.

No, no, Renato, that's clear to me. It's just that because, I mean, as much as for Korea, your growth used to be much stronger last year. So I'm just wondering whether such a slowdown is possibly correlated to multinational picking up a little bit again in the region versus local brands that you are working with?

No. I mean -- thank you. I just wanted to be clear not to confuse others. Maybe I realize that sometimes it's not easy to remember that point. No, all in all, I wouldn't say so. So we see multinationals starting to do better. L'Oréal is doing reasonably well in China. Lauder, you've seen the results. They are clearly saying that they're getting a bit out of the woods and the crisis they had with the local market in China. But all in all, local brands are still doing better than international brands in total. So we do not see a rebalancing of the positions. Then you will always have one brand doing better than the other and things like that. And it will depend also a lot again on what happens with the double-11 activity and the level of promotional push that the brands will put in play. I think that there will be a moment where the swing of market shares from international brands and Chinese brands will slow down in terms of gains for the local brands. I do not see any reverse, at least not in the short midterm. So I think that the part of the market that has been gained by the local brands will remain in the hands of these local brands for a while. Obviously, if the market picks up, that is going to benefit to the volumes of everybody in proportion to the shares they own. But I do not see -- sorry, international brands overall taking share back from local brands. Again, it's what we sense, so we might be wrong, but this is what we're getting as signals from the market. The second point, I hope I've answered your first question, Paola.

Yes, very clearly.

Thank you. The second point about the new organization of R&D. It's not going to have an impact on profitability in any material way in the sense that it's not that we are building an organization that wasn't existing, we are only shifting the decision power more regionally than centrally for, let's say, the nondisruptive innovation, which is new technologies or new things like that. So there won't be an impact of that kind. There won't be an impact in terms of critical mass that we have behind our innovation. Again, most of our investments in innovation are in the advanced innovation, the blue sky innovation, which is going to stay led by the central teams. What we want is a faster decision process and adoption of formulations that are kind of already somewhere in our portfolio's adaptation to local trends in a faster way. So the answer is no. I do not expect any impact from this new organization on profitability per se. I expect only a faster speed to market for those local trends instead of getting them approved by a central team that will debate because they do not leave and do not see the market reality on a daily basis. This decision is going to be taken locally where sales, R&D and marketing are sitting together, talking to clients together on a daily basis, they can react faster and better. That's it. The last question you had, sales mix, full service and free issue, it's true that what we said at the beginning of the year is that we saw the shift from free issue to full service had stopped. In the last quarter, we are seeing a rebalancing of the proportion getting a bit closer to what historically we were used to. It's -- again, it's the result of a specific push in certain cases. It's within the same clients. We have agreed not to buy packaging any longer for them. So it's going a bit back in the past. Now to -- as I said earlier, and you can make the math for yourself, the decline of the third quarter at constant rate is all linked to packaging. So there is a change for the better. Admittedly, last year, in the last quarters, third quarter and -- and in the second half in general. So third quarter and fourth quarter, there was a particular spike in the component of packaging in our sales. So this is coming back to a healthier level.

So all in all, you can assume that the level of pack in terms of weight on the sales is going to remain the same that you have seen more or less in the first half of this year, which is the opposite of what happened last year when the weight of packaging in the second half increased quite significantly.

Okay. And so just as a follow-up to that, your guidance of simply confirming consensus EBITDA might possibly turn a bit conservative given that you have already gained more than EUR 10 million in the first 9 months. So do you have any specific concern on Q4, why should we not have any increase in absolute EBITDA in Q4 then?

I wish you were right. And I would love to surprise you with some positives. We need to see -- I think that all in all, if it is not consensus, it won't be materially different, to be honest. So we'll see. And obviously, the better we do, the happier we are.

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

So my first one would be on the recently announced partnership between L'Oréal and Kering. Do you think there could be any implications from this partnership for Intercos? Is there potential for some incremental business for you? And the second one is a follow-up question. And apologies, I know you've been asked about this already, but just to be absolutely certain in terms of full year expectations, when you refer to stable sales, you meant stable absolute sales, i.e., the same absolute sales as we achieved in 2024, i.e., EUR 1,065 million. That's what you are referring to and not growth, not flat constant FX growth. Am I correct?

Thank you for your question. First question, L'Oréal-Kering partnership implication. Well, in reality, Kering is not an organization we are dealing with because their brands are licensed to Coty nowadays. The most important one, actually, the only important one for us is Gucci. And you've seen that the Coty contract expires in 2028. So there won't be any immediate change. Now what I expect long term, and I see it as a positive for us as well is the fact that L'Oréal has -- and I wish this was not recorded. L'Oréal has better muscles than Coty in pushing brands, especially Make-up. They have a machine that is #1 in the world. Otherwise, they wouldn't be the #1 player in the world. So I do expect them to push these brands better and faster, and this should be a positive for us. As you know, we are very good partners with L'Oréal already. So I do not see any possible negative from this move. Also, the fact that, if I remember well, they are getting the license for the Kering brands to 2050 where I will be retired at that point, if I'm alive. It means that L'Oréal will have all the latitude to invest behind these brands and harvest the fruit of these investments before their licenses get back into discussion. So I see it positively. It won't have an impact in short term because there is not going to be a short-term change for us because Coty is going to stay there until 2028. And the second question, the answer is yes. It's current exchange rates. We think we're going to be landing in line with the EUR 1.60 billion something of last year. So answer is yes.

[Operator Instructions] The next question is a follow-up of Paola Carboni of Equita.

Yes, it's me again, sorry. I wanted to hear from you about what's happening in the U.S. You have referred to the fact that possibly the price increase your clients are implementing to offset tariffs might have been impacting to some extent, volumes. Did I got it right? What's the, let's say, price effect you are seeing? And to what extent do you believe this might really be a hinder to volume in the next few quarters for the U.S. market?

Thank you, Paola. Yes, in terms of pricing, what we are seeing is that the overall price per unit in U.S. have moved from 1.6% in the first quarter of this year to 4.4% in the third quarter of the year and in the last 4 weeks at 6%. This is -- it's not called anymore Nielsen IRI. It's a different name of company. These are retail data. So there is a move in pricing, which is pretty evident. Now will this impact in a significant way volumes? Personally, I don't think there is going to be a major change in trends. The reality is that volume trends have been soft since 2 years, as I said before. So I don't think it's going to help. But I think that the move on interest rate is going to be more important than these price increases. Then we need to see what is going to happen. It's going to get worse or not. I don't know. But in general, the market -- sorry, the U.S. consumer has always proven a high sensibility rate to interest rates, which is linked to the fact that they are all they're getting debts very young in their lives since they had to pay tuitions to university and so on. So when interest rates go down, it makes an impact on their available income, and they go into consumption pretty fast. So I think and I hope I'm right. That moves is going to be more important and more than offsetting the price increases we are seeing, which are most probably related to these duties dynamics. Then you may have different behaviors from different -- for different brands. Obviously, the brands that are more, let's say, relying on price competitiveness may be affected, but it all depends on how the relative moves of pricing are going to happen.

Mr. Renato Semerari, there are no more questions registered at this time.

Thank you very much.

Thank you. Good evening to everybody. Bye.