Intercos SpA

MIL:ICOS

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos First Quarter 2022 Financial Results Conference. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Renato Semerari, Chief Executive Officer of the Intercos Group. Please go ahead, sir.

[Renato Semerari, executive]

Good evening, everybody. I'm pleased to be here to present and then discuss with you the results of our first quarter. As you all know, the first quarter has been marked by a number of events, not very positive, to be honest. Everybody knows about the geopolitical turmoil in Europe, which added further issues in the economic goal, but also the lockdowns in China due to the COVID pandemic and the zero-COVID policy has put further turmoil in the situation, especially in terms of consumption in China, but also in terms of supply chain disruption on a base that, as you well know and we discussed it several times in the past months, it's far from being rosy.

In this context, Intercos performed in line with our expectation, at least. I won't comment on your expectations, but I know well our expectation, with a very solid top line growth and EBITDA growth, which is in line with the development of the top line. I'll pass the comments to -- Pietro will start the presentation of the results, and I will come back in a moment.

[Unknown Executive]

Thank you, Renato. Good afternoon, everybody. So we ended the first quarter with sales at EUR 175 million, which is a growth versus prior year Q1 of 21%. On a like-for-like basis, meaning at constant currency, our growth has been 18%.

Solid EBITDA of generation, we are growing also in this case by 20%. We have an EBITDA -- we have reached an EBITDA of EUR 19.1 million that brings us the possibility to have an EBITDA margin at 11%. The growth was very positive with American and European customers and also, we are very, very satisfied with the performance that we had in skin care and makeup, which is continuously having or showing the recovery after the year of the covid crisis. Renato will show you afterwards, the results by categories of products by customer types and also by geographies.

The cash generation, our net financial position is at EUR 155 million, which is an improvement versus prior year first quarter by EUR 46 million, a deterioration on December last year, that is caused by the absorption that we had from the increase in inventories and increase in receivables. Basically, the increase in inventory is coming from our choice of increasing the level of certain categories of raw materials and packaging in order to cope on one side with the high level of sales that we are foreseeing in the next months and quarters and also in order to cope with the lack of availability of certain products. So we have increased the level of security stock.

On the other side, also, as already mentioned by Renato, we have to cope with the supply chain disruption. And in certain cases, we do have still some difficulties in finalizing complete with the production that is causing an increase in the level of work in progress or semifinished products.

Now we can go to look at the performances by categories and customers.

[Renato Semerari, executive]

Thank you, Pietro. So I'll start by giving a bit more details on the revenues by business units. Make-up is coming back, and it's coming back to its pre-COVID levels. As you may remember in -- back in 2019, Make-up was accounting for 64% of our sales in quarter 1, 2022 is at 62.5% and -- the thing which is, I think, very important is, it is the first quarter that we've beaten the corresponding quarter of 2019 in Make-up, which is a super good news because it means that we have reached the water line level of 2019.

Looking at the performance by business unit in terms of growth rates. Skincare grew 37% versus year ago; Make-up, 24%, while Hair & Body was up by 3%. This 3% is still penalized by the comparison with the previous end sanitizer phenomenon. If I exclude the end sanitizer, it was up 14%, also the division in double digit.

Now going a bit more into the details. Make-up a plus 24% was driven evenly by U.S. and Europe and also evenly by multinational and emerging brands. Prestige was slightly faster in terms of growth versus mass. While we saw a decline in direct sales, direct sales are the the door-to-door channel, as you may remember.

Skincare at 37% was mostly driven by EMEA, again, also U.S. helped quite a bit. Emerging brands were clearly the driving force. Also -- even if also multinationals were up. And also in this case, we had a slight skew towards Prestige in terms of growth rates.

If we now go to the revenues by region. Here, we see EMEA standing slightly above the 50% of our sales. Americas continuing to gain traction and gaining weight on our total sales, while Asia has lost a bit of steam, and I will come back on this one in a second.

In terms of growth rates, Americas has been leading the pack, plus 32%. This has mostly been driven by emerging brands, but also multinational contributed to this. Also in this case, a slight skew to prestige versus mass in terms of growth rates, both were growing but prestige a little bit faster than mass. EMEA, very strong growth at plus 20% as well. Here, we saw good performances from countries such as Italy, U.K. and France. Big growth coming from emerging brands, but also retailers did pretty well. And also in this case, we had both prestige and mass growing but prestige, again, growing faster than mass.

When we come to Asia, the situation is a bit more "complicated". We have a mix of results that are a bit different with Korea growing extremely fast, partially offset by China suffering a bit and other Asian countries doing pretty well. So China has moved from being the engine of growth to a bit the break in our expansion in Asia, and this is not too much of a surprise knowing that in the quarter, we have seen lockdowns in different regions, in different cities of the country, and the fear of COVID expansion has reduced foot -- traffic in the stores a bit across the country.

Then obviously, situation at the peak with the lockdown of Shanghai that impacted March in a very clear way.

In terms of results within our client types, multinationals have been the driver of growth, which were on the opposite, a bit offset by retailers that declined compared to the past year.

Moving now to the performance by customer type. We see the continued expansion and progression of emerging brands with retailers losing a bit of weight. As you can see, the growth rate of emerging brands has been spectacular, plus 43%, but also multinationals performed very well at plus 15%, with retailers growing a bit below the double-digit bar at plus 9%. So good performance across the clients type. Clearly, emerging brands are seeing a lot of traction, and this is, I think, a very good news for the company in general.

Moving to the outlook and guidance. We are highlighting 4 news. All in all, 2 are good, 2 are or bad. I will be mixing them so that you don't -- you're not left with a good or a bad flavor. The first, I will start with the good news. The week of April 25, so it's very recent, so the physical reopening of Cosmoprof that as you know is the biggest fair in the world for beauty. And this has followed our Beauty Event, which has started in March. We have welcomed over 150 customers from multinationals to emerging brands. And so we had the occasion to be physically meeting with a lot of clients, some of them we had not physically seen for a long period.

So very positive Cosmoprof outcome. I was honestly expecting a lot less traffic, a lot less clients, especially because there were few Americans traveling, but especially, we couldn't expect any Chinese customer and very few Asian given the situation in that part of the world.

Moving to the bad news. We are continuing to observe, we regret the situation and the evolution of the situation in Ukraine. The evolution of the war is leading to a high level of volatility in terms of energy costs. And this gives, again, poor visibility on what is going to be the inflationary impacts going forward, both on our direct cost, but also on raw materials and packaging materials going forward.

But obviously, the other negative news has been the progression of COVID in China with the first in Hong Kong and then China and especially with the lockdowns, I must say that the most worrying one is the lockdown of Shanghai, both because of the impact on the local consumption, which, as you know, is very important, but also because it puts a further cloud in the supply chain storm that everybody is well aware of especially the congestion at the Shanghai port is something that is not going to ease up the situation in terms of supply chain, and that we will certainly prolonged the issue in terms of supply chain normalization. So this is clearly something that is not going to help anybody in our industry and well beyond our industry, I would say.

We still -- we do believe and we are convinced that our strong position in other regions of the world will help us to actually gain market share compared to other competitors that are more exposed to that region and to those phenomenon.

The other thing that helps us a lot is the incredible growth that we are seeing in Korea, and that helps us to rebalance what is happening in China. And also the fact that the Chinese market and the Chinese consumption is very skewed to skin care for once, it helps us because we are more skewed to Make-up. So we're going to be suffering proportionately less of what is happening in the country.

This being said, there is the last news, and this is very positive. We continue to achieve an incredibly strong order intake, and I will show that in a moment to you. So our order book goes to strong strength to strength, and this obviously is an excellent news. So all in all, balancing of the news that we have and the context, the general context together with the results that we have had in the first quarter, we confirm our expectation that was communicated to the market that foresees growth for 2022 in a range between 10% and 15%. And these factors in the supply chain complexities that we are navigating through.

If you move to -- now to the next page, I go a bit more in detail with the order intake progression. As you can see, we continue to go from record to new record, March, April has marked a new all-time high in the history of this company. Again, this is only Make-up plus Skincare. So there is no Hair & Body because we are in a rolling forecast system, so it's less clear, the situation there in terms of orders intake. But you can see that with EUR 120 million, we have reached the new record, which beats the record that I spoke to you about in our last call, which was January, February of 2022. So we continue to not seeing a softening of orders intake.

And this leads us moving to the next page and last page to our order book, which is 47% above 2019, is actually even higher versus 2021. And it's an extremely strong order book at EUR 344 million, where you can see that the chunk in Make-up is extremely higher than we've ever had. So we have all the means to do a fantastic year. It's all a matter of being able to convert this into production and invoicing as soon as we can possibly do that. We remain confident about the year, despite all the clouds that we've been speaking about. And I think that we will continue to see progression that is very positive for the company.

That's all on our side. We are more than happy to welcome your questions.

[Operator]

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

[Kate Rusanova, analyst]

My first question relates to your profitability. If I remember correctly, during the full year results presentation, you mentioned that you do not expect any significant margin movements this year. So I'm just wondering if that is still in place considering the most recent developments in the commodity markets? And whether you think you can meet or exceed the EUR 100 million EBITDA profit achieved last year? And also, maybe you can share with us whether there is any seasonality in the profits and whether Q1 is typically a low-margin quarter for you?

And then my second question is on the partnership with Dolce & Gabbana. Would you be able to provide any potential range for the size of the deal, when will it start beginning to benefit your sales? And when do you expect a full impact? And is it fair to assume that the expansion of fragrance category will also result in a positive mix benefit to your Hair & Body operating margin?

[Renato Semerari, executive]

Thank you so much for your questions. I hope I will answer all of them because there were 2, but there were many inside. In terms of profitability, I confirm what I said last time, so we expect to perform in line with the profitability of last year. Again, ideally, with top line, the growth double digit we would normally expect to see margin expansion.

But because of the situation, the inflation and especially the volatility of the inflation and the lack of visibility on what is going to happen next. We've told you that we expect to have a year of stability. We are confirming that, and the first quarter is confirming that. So we are walking the talk, if I may say, in this respect. So we still believe that is going to be the case. And obviously, that means that we will be above EUR 100 million because by sheer math, it will mean we will be above EUR 100 million.

In terms of...

[Unknown Executive]

Quarter, like normal...

[Renato Semerari, executive]

Okay. Sorry, the first quarter. The first quarter is always the lowest quarter for a number of reasons. First of all, the output in the first quarter is always impacted by a slow start in the year, which is pretty typical. So January is always the slowest month in the year.

In general, if you look at the -- if you compare with the highest quarter, it tends to be always the Q4, is either the Q3 or the Q4. If you do the math and see the gap in output in net sales that we had in Q1 versus Q4 of last year, you would see that with the sheer numbers of gross margin, we would get back to the profitability more or less that we had in last fiscal year.

Also consider that we tend to be a bit conservative maybe. But in the beginning of the year, we provision things like just to give you an example, the rebates we have agreed with clients depending on the level of sales that they achieve are fully booked at the beginning because we don't know how things are going to develop. So typically, we start in the year with full provisions and all the rest.

And in the course of the year, when we start seeing clients that start diverging significantly versus the rebate rates, they tend to be corrected and to release part of the provisions. So it is -- it has always been in the 5 years I've been here, and I know also the previous history, the first quarter is always the lowest margin quarter in the year. I think I've covered everything, then I talk about Dolce & Gabanna.

Dolce & Gabbana is, again, it's a bit difficult to give you a precise guidance on what to expect. In the midterm, we expect this to be a very important client. Now we need to bear in mind to remember that the contract will go into full force in 2023. And we will start some productions at -- in Q4 of this year, but they are more, let me say, extend that industrialization productions to be sure that when we start in January 2023, everything is smooth and oiled. So in this year, the impact will be marginal, if not 0, it will be very marginal.

As you know, the agreement that Dolce & Gabbana with Shiseido is that they will be supplied by Shiseido for the -- until the end of 2022. Going forward, we expect Dolce & Gabbana to become a significant client. In 2023, it will depend on how much stock Dolce & Gabbana really inherit from Shiseido, and so depending on how equipped they are in terms of inventory, 2023 will be more or less important than the going year. But again, Dolce & Gabbana will be a significant business for us.

And you're right when saying that the fragrance is a -- is going to move the -- if fragrance growth faster, it's going to help in terms of mix, in terms of profitability for the company. This is correct. Again, you won't see this happening this year. I hope I've answered to your questions on this.

[Operator]

The next question is from Martin Deboo of Jefferies.

[Martin Deboo, analyst]

It's Martin Deboo from Jefferies. Two questions for me. One on the cost versus price environment, and one on Shanghai Port. On cost versus prices, can we just get an update from you on how well -- where we are on cost inflation and price recovery? You said you got 5% pricing through. We're looking for more in the summer. Can you update us on that? And secondly, what sort of inflation are you seeing in your raw material basket is how is that trending relative to your expectations? That's the first question.

Second question on Shanghai Port. It's more from the supply side than the demand side. What are you buying in, in terms of components that are coming through Shanghai? Just help us understand what the vulnerability? And secondly, what sort of mitigation strategies are open to you to manage the supply side of the business away from Shanghai dependency? Those are the questions.

[Renato Semerari, executive]

Okay. So cost versus price, the major deviation we are seeing is related to the energy cost. There is a slight deviation in terms of raw material and not really in packaging. So I would say that the deviation versus our expectation in terms of cost of material is in the region of 1% difference. The energy is playing, and it's very different by region, the region that is most effective is Europe. So yes, we are starting discussions with our customers.

To be honest, we are going to do something, which is a bit of a creative solution, if I may say it, in the sense that we are asking clients to compensate the energy cost gap versus the pricing scenario that we had through credit notes...

[Unknown Executive]

Debit.

[Renato Semerari, executive]

Debit notes, sorry. Debit notes at the end of the month. So we're not doing, let's say, a regular change of lease prices because that will take longer. And it's, from an administrative standpoint, is more complicated. While through debit notes, we can charge them the extra cost in energy, and this will come and an impact every single month. This will bridge us to the beginning of the summer when we will publish the list price increases anniversarizing with a bit of anticipation, the price increase that we announced in July last year. So we basically want to bridge the moment when we change all the lease prices again, and we do it in a way that it impacts all clients, all the orders, including those that are older than normal. So it has a higher impact on our P&L than if we were changing the lease price at this moment on the new orders. .

So this is the action that we are putting in motion. It's very early days. We have started the discussion with clients. And so far, we haven't received any serial crisis, I would say. And so the -- I wouldn't say that is expected, but they were kind of expecting move on our side in that front. So yes, we are acting on it.

The Shanghai Port situation is clearly what worries us the most out of the Shanghai lockdown. Now there are a number of things that are being doing. First of all, we are moving to the nimble port, which is the closest to Shanghai that is open. For the most urgent things, we are moving to air shipment, negotiating agreements with the clients for the extra costs that are related to that. So we are trying to minimize the impact in all the possible ways finding either other ports or other means of transportation to try and mitigate the impact of that as much as we can.

Packaging is the #1 issue, and it's true for the packaging we buy, but it's also true for the packaging that our clients are buying and then delivering to us. So it's -- that is the #1 category. Then you have silicones where the medication is obviously to go through all the different distributors around the world. And the fact that we are present with plants in different regions of the world allows us to buy in the exclusive distribution -- distributors in different parts of the world. So it's a it's a constant effort from our buying teams we find where alternatively, we can buy the same raw materials elsewhere. Those are the main elements of it.

Clearly, there is also the -- we shouldn't forget that we have plants in China. So there, we found carriers that can ensure and we actually found the carrier that allowed us to have inbound of components to our Chinese plants even during the Shanghai lockdown. So it doesn't make -- it is not impossible to receive the components. It further complicated it, if I can summarize it in a few words. So nothing is blocked, but it's a bit more complicated than before to get access to components.

[Operator]

The next question is from Pinar Ergun of Morgan Stanley.

[Pinar Ergun, analyst]

I have a few around the order book and the order intake. Growth in the order book year-on-year appears to be driven by Make-up, whereas Skincare has stayed relatively flat. Is the supply chain dynamics to blame here? I mean are there different supply chain dynamics between products where you're finding it may be more difficult to fulfill orders and Make-up relative to Skincare? If you can give us a bit of color on that, that would be helpful.

We're also seeing Make-up order intake growth slow month-on-month. It was flat in March to April. Is that a function of reorders slowing down as a result of the backlog in orders? And similar question on Skincare order intake. Skincare order intake in March to April was roughly 20% lower year-on-year. So if you could maybe help us out a little bit more on what's going on there, Skin, Make-up, the different dynamics, so why are we seeing this kind of slow down? That would be very helpful. So that's one theme.

The second one is on -- it's a easy question, actually, is on your customers. Are you seeing any signs of down trading in the markets? Or are your clients changing orders in expectation of a consumer down trade? Because you were just mentioning that premium prestige is growing faster than the rest, do you expect that to be the case for the rest of the year?

[Renato Semerari, executive]

I'm afraid I've lost you. Can we take it one by one? I...

[Pinar Ergun, analyst]

I'm so sorry. It was a very long question.

[Renato Semerari, executive]

No. There were many different questions inside. So I've lost you and you were speaking quite quickly. So the first one you asked, if I understood well, was the order book, Skincare versus Make-up. Is that correct?

[Pinar Ergun, analyst]

Yes. So Skincare is pretty flat, it's all driven by Make-up. Do we have different supply chain dynamics between the products?

[Renato Semerari, executive]

Yes. I don't think it is that much driven by difference in supply chain dynamics. The reality is that is driven by the weight of Skincare in Asia, and therefore, China. There has an impact in there more than anything else. The dynamic in terms of supply chain are unfortunately very similar. So the weight of China on the Skincare business unit is definitely higher than the one in Make-up, and that explained the -- a bit the gap.

But also we shouldn't forget that Skincare has been consistently growing. It has grown almost double digits in 2020. It had a strong growth in 2021, so growing on growth is always a bit more complicated. For Make-up, we are still in a catch-up mode versus where we were in 2019. So there, you see more over an acceleration. So that is driving the different behavior of the 2 business units. So those are the 2 factors.

China on one end, and the fact that Make-up is an acceleration to recuperate and go back to the 2019 levels and above that, while Skincare has been growing in a much more steady and consistent way.

[Pinar Ergun, analyst]

And I guess the follow-up on that is why is the Make-up order intake growth slowing month-on-month? Is that because of the backlog in the order book?

[Renato Semerari, executive]

I don't see a slowdown month-on-month. I see the curve going from July, August '21, it has been steadily progressing. In reality, we have not seen any slowdown. Yes, if you look at the March, April 2021, was that the moment when -- I'm sorry, I'm using not very technical data, but that was the month -- the by month, when cages were reopened and we had the rush in. But all in all, if you look at Make-up alone, even towards March, April 2021, March, April 2022 was up. So we do not see a slowdown in Make-up. There is a slower progression, so they are growing...

[Pinar Ergun, analyst]

Yes. That's what I meant, yes.

[Renato Semerari, executive]

Yes. But then the day you reach very, very high levels, here, we are talking about a record high after record high. And I would sign to have this to the end of the year. It's -- you never have such a steady growth rate always growing faster and faster. It would be fantastic, but I've never seen it in my life, to be honest.

[Pinar Ergun, analyst]

Okay. Fair enough. I guess the bottom line is you are not seeing any impact of supply chain issues in the order intake. You're still getting order intake is just impacting the shipments and...

[Renato Semerari, executive]

I will -- absolutely. To be -- and I'm saying it was surprised because I would have expected by now to see the impact of delays in deliveries, slowing down the new orders of clients. I still believe it will happen because it's the sheer logic of it. If I've not received the previous order, I'm not going to issue a new order, so that is what I think will happen. I've been wrong for 4 months in a row now, so we have not seen this yet. But sooner or later, it will happen.

[Pinar Ergun, analyst]

Okay. This is great. And then are you seeing any signs of down trading in the market? Or are your clients changing their orders as a result? Or would you expect premiums to keep outperforming?

[Renato Semerari, executive]

No, I think that the premium segment has been a bit lower to restart and especially talking about Make-up. We've seen encouraging NPD data from U.S. in the makeup sector, so we continue to -- we expect to see a continuation of that. And to be honest, what is particularly encouraging, and it shows in our Q1 number is the emerging brands performance. These are brands that are in expansion. They have geographical opportunities still, and we have a major advantage in terms of share of wallet with these clients. So the fact that they are continuing to display the strong growth is extremely encouraging going forward.

[Pinar Ergun, analyst]

Okay. Excellent. I'm sorry, I have one final one and then I'll shut up. But wouldn't you -- given how strong the start of the year has been, would you characterize your top line guidance is conservative? Or is there just too much uncertainty to know at this point?

[Renato Semerari, executive]

I will repeat what I said because I'm still convinced of what I am saying. If we were in a normal year, the guidance in top line would be very conservative, okay? The reality is that we are not in a normal year. And unfortunately, every month is bringing a new news, confirming that, so I think that our guidance is realistic and kind of balance of the uncertainty and the difficulties that we are seeing and that we will continue seeing in terms of supply chain with an extremely positive business development in terms of orders, projects, clients, all this is extremely positive.

But since we know that we are very conscious of the difficulties in converting all this into production, we wanted to be realistic since the beginning. That's why we are not devastated by the news in China because we knew that we were going to go through a difficult year in supply chain. We factored that in -- since the very beginning, and this gives us the confidence to confirm what we told you since day 1.

Now I can tell you that if every month we have a new war and major port in lockdown, maybe they are not. Maybe we have not been sufficiently realistic. But we factored in the negative we were seeing and the kind of unexpected news we may get. So you may call it conservatism. I think it's realism. And again, I said it from the very beginning, if those issues didn't exist, we would do a fantastic year.

[Operator]

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

[Mikheil Omanadze, analyst]

So I have only 2 very quick ones. So if you could please at least directionally provide us with the split of price and volume in Q1? And the second question would be on your orders. You historically have provided the split on reorders versus new orders. How has that prepared recently? So for instance, in Q1, what share of your orders was reorders versus the new ones?

[Renato Semerari, executive]

Okay. I won't give -- I'm sorry, but I won't give you a precise number on the price volume. There is also mix that is playing a factor. The reality is that the price impact on the first quarter is limited. I think it's below 5%. It's going to be in the range of 4% probably. So the vast majority is volume driven. Actually, there is -- if I look at the development of the different technologies that we have, we are seeing a lot of growth in dry powders, and this means that in terms of mix, is requiring even more volume to deliver EUR 1 of the previous mix of last year. So the volume growth is very high and is actually higher than what you're seeing in terms of net sales growth. So there is a very high volume increase.

The second question you asked, orders versus the reorders. What we're seeing is a split, which is very much in line with the averages that we used to have. So it's always in the region of 70-30, more or less, 70% of reorders, 30% of new projects. We are not seeing a major shift in this trend.

[Operator]

[Operator Instructions]. Gentlemen, at this time, we have no questions registered.

[Renato Semerari, executive]

Thank you very much. Thank you to you all of you.

[Unknown Executive]

Thank you, everybody. Thank you.