Intercos SpA

MIL:ICOS

Earnings Call Analysis

Intercos Faces Cyber Attack Impact, Maintains Positive Outlook

In Q1 2024, Intercos faced a challenging period due to a cyber-attack on February 18, resulting in a 5% sales decline and a 30% drop in EBITDA. However, the company saw a 19% increase in order entries, driven by 16% growth in Make-up and 34% in Skincare. Despite a 13% decline in Make-up, Skincare grew by 23%, with Asia showing a strong performance with 24% growth. Emerging brands grew by 15%, driven by the Asian market. Intercos remains optimistic, reaffirming its 2024 guidance of 6-8% revenue growth and benefiting from increased outsourcing trends and innovation initiatives【4:0†source】【4:2†source】【4:3†source】.

Quarter Overview: A Challenging Start

Intercos faced significant challenges in Q1 2024, primarily due to a cyber-attack that occurred on February 18. This attack disrupted operations leading to a 5% decline in sales at constant rates compared to the previous year—a stark contrast to the strong growth of 34% in Q1 2023. The EBITDA fell by 30% largely due to revenue losses and additional costs from manual processes that arose during system downtimes. The financial impact was uneven across various regions, with the Americas suffering a 16% decline and Europe reporting an 8% decrease.

Business Unit Performance

The Make-up segment was the most affected, experiencing a 13% decline, which contributed to 58% of total sales for the quarter. In contrast, the Hair & Body unit only declined by 2%, bolstered by strong growth in fragrance sales. The Skincare division demonstrated remarkable resilience with a 23% increase in sales, significantly driven by the Asian markets, particularly in countries like China and Korea.

Regional Breakdown: Resilience in Asia

The regional performance further emphasized the uneven impact of the cyber-attack. While the Americas and EMEA regions recorded declines of 16% and 8% respectively, Asia achieved exceptional growth of 24%. The strong performance in Asia was largely attributed to emerging brands, which collectively saw a 15% increase in sales. This results in emerging brands accounting for 46% of total sales.

Looking Ahead: Optimism through Recovery

Despite the setbacks in Q1, management is optimistic regarding recovery in the following quarters. The guidance for 2024 remains a revenue growth of 6% to 8%, reflecting expectations of a better second half of the year. The current order book stands 12% higher than the previous year, indicating strong order entry growth, with Make-up and Skincare order entries up 16% and 34%, respectively, in the first part of the year. This positive outlook relies heavily on expected demand recovery and a favorable mix shift towards higher-margin prestige products.

Margin Expectations and Challenges

Intercos' management remains hopeful about improving margins in the second semester, driven by a better mix towards prestige products. Although there are concerns about recovering the EUR 1.9 million in lost EBITDA due to production inefficiencies, the volume-related losses of EUR 6.2 million are considered recoverable through increased sales. It’s acknowledged that higher operational costs incurred due to the cyber-attack will not be recoverable, impacting Q2 profits.

Innovation and Market Positioning

Innovation continues to be a key pillar for Intercos, crucial for maintaining its competitive edge in the beauty industry. The management highlighted a successful presence at the Cosmoprof trade fair and indicated positive feedback from over 400 clients. This indicates a strong market position and readiness to capitalize on emerging trends and opportunities, particularly in e-commerce platforms in Asia.

Conclusion: Heartening Signs Post-Setback

In sum, while Q1 presented considerable obstacles for Intercos, the company is navigating through this rough patch with resilience, particularly in Asia. The robust order book and promising outlook for the remainder of the year reflect potential for recovery and growth. However, investors should keep an eye on the ongoing impacts of past disruptions and how effectively the company can manage costs while capitalizing on the anticipated surge in demand.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus call conference operator. Welcome, and thank you for joining the First Quarter Intercos 2024 Results Conference Call. [Operator Instructions].

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

[Renato Semerari, executive]

Thank you very much. Good evening, everybody. Well, Q1 2024 has been really a typical quarter. Unfortunately, not in a good way. Cyber-attack occurred on February 18, has had a significant impact on our capacity to generate revenues and on our cost development. Hence, our quarter 1 results have been radically different from the true Intercos business space.

For this reason, I would like to start from giving you a glimpse on the underlying business trend, which is really positive, knowing that the closure of the cyber incident, which was communicated on March 19 will be a bump in our growth path.

So -- if you look at our Make-up and Skincare order entry in the first 4 months of the year, we see a plus 19% order entry growth versus year ago, with Make-up growing 16% and Skincare 34%. Also, the mix of orders is coming back to a normalized profile with prestige brands orders growing faster than us. This proves that our expectations about an end of the destocking phase are materializing. This order entry allowed us to end April with a record high order book plus 12% higher than a year ago, with both Make-up and Skincare at double-digit growth. And also, our order book now sees a more favorable prestige mass mix.

Coming now at the quarter 1 results. We had a really challenging quarter from the beginning, given the fact that the year ago base was very high with a plus 34% of the first quarter of last year. In this context, despite the very positive start in January, our February and March results were heavily impacted by the cyber-attack. This led us to close the quarter 1 with a minus 5% decline of sales at constant rates in line with our estimates communicated during our last call.

As we will see the magnitude of the disruption was uneven by regions and business units. Since the cyber-attack had [heavier] consequences in Europe and U.S. when -- than in Asia, and that's affected the most complex productions, and Make-up.

Also, our EBITDA was not only impacted by the loss of revenues by the mix and balance towards mass, which we narrated from last year's orders, but also by the higher cost we had to bear to keep business going despite no or low system availability during a month of the quarter. This brought us to a minus 30% EBITDA decline in quarter 1. Debt remained at around EUR 100 million, below the onetime EBITDA threshold in line with December 2023.

Let's go now look at the sales profile in more detail, starting from the business units. As previously mentioned, Make-up was the most affected business unit due to its geographic skew to Europe and U.S., which were more impacted by the cyber-attack and the fact that the complexity of its production process needs heavy assistance from systems more than the other business units. Hence makeup registered a minus 13% decline at current rates, weighing 58% of total sales in the quarter.

Hair & Body declined by only 2%, reflecting the underlying growth trend, especially of fragrances and also the simpler production process relative to Make-up. Skincare conversely reported an excellent plus 23%, mostly driven by Asia and the easier production process. So Asia was really the hero that allowed us to grow in Skincare.

Moving now to regions. The most affected region, as already mentioned, was Americas, which recorded a minus 16% decline. This was due to the severity of the cyber issues plus the heavy skew to make up of this region. EMEA was the second toughest, closing at minus 8% for the same reasons just elaborated for Americas, but helped a bit by Hair & Body and Skincare in the region.

Conversely, Asia recorded an excellent plus 24% result with both China and Korea in double-digit growth. As a result, Asia weighed on total sales in the quarter got to 20%.

Moving now to the sales by customer type. Emerging brands were once more the best performers, recording a plus 15% growth and now reaching 46% of our total sales. This cluster was mainly driven by the Asian clients. As I said earlier, Asia was a bit a happy island in this difficult quarter. Multinational retailers had instead similar declines respectively at minus 18% and minus 21%. Multinationals paid the toll to their makeup plus Western world sourcing skew, while retailers also suffered from their slower than others pace registered in the last years.

So moving now to our outlook and guidance. Well, overall, the market trend remains positive with Europe displaying across the board, growing pace in both prestige and mass market, as well as growth in both volume and price. U.S. has softened, especially in volume and mass, also driven by the fact that the Walmart wall reset delayed to May means a delay in initiatives launches. And as we all know, Walmart weight on mass market for U.S. is pretty heavy at around 30%.

We keep a positive outlook for the year as we always expect a slow start in the year and a better second semester, especially for U.S. Asia remains positive, especially thanks to local brands in China that continue gaining market shares and also thanks to the impressive growth of the Douyin E-commerce platform.

Also, we remain very positive on our innovation results. As you know, innovation is the #1 pillar of our business model. And during the first quarter, we had very positive indication from Cosmoprof, which is the main fare of the beauty industry for the year, which has been a very successful fare for us with over 400 clients met and with very positive feedback on the trends and the products we presented.

Also, we remain positive about the underlying outsourcing trend, which are getting new confirmations, not only driven by the continued growth of the emerging brands, but also driven by multinationals that are relying more and more on partners like us. And I think that the Estée Lauder outsourcing decision for powders production is a confirmation of this trend.

In this context and given the fact that we have now -- in our back, the cyber issues that affected our first quarter, we remain confident to confirm our guidance of 2024, a plus 6%, plus 8% range versus a year ago, which would make us outperform the market once more.

Now as usual, I want to go a bit deeper into the order entry path because on top of what I have already spoken about, there is, I think, further good news looking more granularly at the orders intake trend. As you saw at the beginning of the call, the trend is extremely positive, but it's even more so if we consider that in the last 3 bimonthly readings we've been recording all-time highs one after the other. The second good news is that makeup is registering records one after the other. And as a result, as we have already said, we have, today, the highest ever order book, which is 12% higher than a year ago. And it's in double-digit growth for both Make-up and Skincare.

I think that covers what I wanted to highlight for this quarter, and I'm ready to take on any questions from you.

[Operator]

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

[Kate Rusanova, analyst]

So my first question is related to your profit outlook for the second quarter. Since you are expecting to fully recover the lost sales, is it fair to assume that you will also recover the EUR 8.1 million of lost EBITDA as well? And for the year as a whole, are you still striving for some margin improvement considering the positive mix from prestige customers that is expected to materialize in H2?

My second question is related to your partnership with Estée Lauder. Can you provide any color on the potential size of the deal when you expect to see the first sales to be recognized in your P&L? And whether this partnership will be margin accretive?

And lastly, my question is on the emerging brands in Asia. Would you be able to provide some color on the profile of those customers? Are they mostly in mass, which categories they are mostly in and whether they are margin accretive for you?

[Renato Semerari, executive]

Thanks a lot for your question. I'm trying to go as fast as you speak also in writing them down. Okay, let me start with the profit outlook on Q2. Expect the profit profile to be certainly a lot better than quarter 1 and also clearly above last year. Now recuperating all what we've lost in Q1 will be difficult, I think, also because we had to bear extra costs. Again, this is a very important point to underline. When you do not have assistance from systems. It means that you need to do a lot of things from manually.

And then you need to reregister whatever you've done manually on systems. This generate extra costs that are not going to be recuperated simply because the volume comes back. So that is a one-off cost that will remain, I'm afraid. And so that -- at least that part will not be recovered, I think, certainly not in Q2. We'll see how the things evolve for the second semester and how much we can profit from the mix swing in favor of prestige. But I would be very, very surprised positively, obviously. If we were able to recuperate everything in the quarter 2, I don't think it will be the case and it's not reasonable to expect that.

In terms of gaining margin on the year, I still -- I'm optimistic. Certainly, I'm expecting margin improvements in the second semester when this change of mix will come into effect in terms of revenues. So on the second semester, certainly yes, then we will see what ends up being the case for the total year. But what we are betting on is a second semester that sees margin going up.

Estée Lauder deal, I want and I cannot give a dimension of how big it is, is not going to be massive. I want to say that. It will depend a lot on how Estée Lauder goes and many other factors. It's an effect that will come into play in next calendar year in fiscal 2025, but it's a good business to have.

Again, I cannot say whether it's margin accretive or not. It's too much detail on a listed company. So 2 listed companies actually. So I won't be able to give that. It's a good business to have, all in all.

And I think it's -- what is the most important for me, it's a clear sign to the market and when you have to rely on an external partner for an entire category of your business, you come to Intercos, I see -- I think it signals something to the market and to the other clients as well, which is a very important point.

The emerging Asian brands, they're especially Chinese, there is also some Koreans, but it's fundamentally Chinese. They tend to be in the upper range of mass or in the lower range of prestige in the famous masstige kind of category. To be honest, I think we've already mentioned that China is a -- let's say, a margin weakener in our mix of countries. So it is -- if you look at it on a global basis, it is a margin-accretive business, yes.

Then relative to other Chinese clients, it's all relative. But all in all, it's a good business. I hope I've answered as much as I could.

[Operator]

[Operator Instructions]. The next question is from Francesco Brilli of Intermonte.

[Francesco Brilli, analyst]

Just a couple of questions from my side. A quick one on the orders -- in the record orders registered in the last observation if you can provide us a flavor on the percentage of the prestige within the bulk of the make up for this, we can see in the chart?

[Renato Semerari, executive]

Yes. Is that the question? Do you have a second one? Or you want me to answer the first one first.

[Francesco Brilli, analyst]

Yes, please go on with the first, please.

[Renato Semerari, executive]

Okay. Well, the mix is coming back to a 50-50 ratio. You may remember in the best years, we were slightly more skewed to prestige for Make-up. We went down significantly more in the range of 45, 40 -- in-between 40% and 45% of prestige last year, especially in the second semester. Now we're coming back to 50-50, which is what I think it's a much better mix for sure. And on the long run is where we like to be because we always like diversification in our business model. So we always want to be pretty balanced in terms of which segments we're serving.

And I've spoken about the order entry, not the portfolio of orders because there, there is -- Okay.

[Francesco Brilli, analyst]

Okay. And then the second one I had is just curiosity. If you have some insurance or something that we should consider as a positive factor going forward following the cyber-attack. That you can cover part of the losses?

[Renato Semerari, executive]

Yes. We...

[Pietro Oriani, executive]

Francesco, this will be treated as a one-off as we are treating the direct cost related to the cyber-attack. So we are still seeing -- checking with the insurance company, but then it will be treated as a one-off, of course.

[Renato Semerari, executive]

We really hope it's going to be a one-off. We don't want to go back to this at all.

[Operator]

[Operator Instructions]. The next question is from Tilly Eno from Morgan Stanley.

[Tilly Eno, analyst]

Very glad to see the strong underlying performance of the business despite everything faced in the quarter. I just had a quick follow-up on your EBITDA outlook for the full year. You've given a very helpful bridge on Slide 5. So would it be fair to assume that the EUR 6.2 million of lost EBITDA that was related to volumes could be recovered in the remainder of the year. And then that EUR 1.9 million related to the production inefficiency is the sort of unrecoverable part and sort of if that's a fair way to interpret those data points?

[Renato Semerari, executive]

Tilly, yes, I think that the volume part is what we are targeting and what we want to get back for sure. The production inefficiencies, as I said earlier, is something you cannot rewind on things that you had to do. So that is probably the toll that we have to pay for the mess that the cyber-attack generated.

Obviously, it doesn't mean we put a cross on anything. We'll try to do our best to do better and try to recover as much as possible on anything we've lost. But the -- with the visibility we have today, it's obviously the volume related part of the EBITDA that is the most obvious to recover.

[Tilly Eno, analyst]

Very clear. And then just one more on your sales guidance for the full year. Given your expectation to recover the top line in the remaining quarters. And given how strong the order intake performance is, what's sort of holding you back from raising that sales guidance for the full year?

[Renato Semerari, executive]

Well, it's a bit difficult to raise the expectations after a quarter that has been what it has been. Consider that to do a plus 6% to plus 8%, it means we are betting on a plus 10% to plus 12% in the 9 months to go, which is, I would say, a very good pace, it's about twice as much of the -- it's a bit more -- a bit over twice as much of what the market is going to do.

Obviously, if we keep a rate of plus 19% till the end of the year, we will -- we will do better than that. But I don't think that it would be reasonable to do it now. We need -- the year is still very long, and we'll need to see what happens. But bear in mind that we are telling you from now on, we're going to be doing plus 10% to plus 12% for 9 months. Which is not marginal, I would say.

[Operator]

The next question is from Molly Wylenzek from Jefferies.

[Molly Wylenzek, analyst]

I have a couple, if that's all right. Should I interpret the plus 5% market growth estimate as a small upgrade from your full year release, 4% to 5%. That's the first one.

Second one is just if the order book level is, to some extent, inflated at the moment due to the backlog of Q1 orders that you need to sort of catch up in Q2 due to the cyber-attack.

And the third one is just on Pietro's resignation. Sorry to see you go, Pietro. Just how far are we into the search process? And do you have any sort of time line on that?

[Renato Semerari, executive]

Molly, thanks for your questions. The first question is -- yes, I mean, we -- it's difficult to predict where the market is going to end, but it's between 4%, 5%. I think that is what is legitimate and what is confirming with the data we have to date.

The second question you raised, sorry, I forgot that.

[Pietro Oriani, executive]

The order book.

[Renato Semerari, executive]

The order book. Well, there is -- there is a bit of backlog, obviously. So there is an element of that. But what is -- the most important thing I always look at is the pace of the order entering because that is telling you what the clients are demanding and is the indication of how successful are the products that you've given them in the past for the reorders and how good you are in generating new projects.

Yes, there is a bit of backlog, and this is normal, although April was back to, let's say, a normal month in terms of revenues. But the fact that there is a big backlog, there is a little bit of inflation there for sure.

Coming to Pietro, I am the saddest in the room here to be very frank. Pietro, how much I like working with him. I think that after 13 years, we cannot crucify him for wanting a new adventure. We are nowhere for the time being because he gave his notice today. So we're going to be starting as quickly as we can, but it's not even 24 hours elapsed from the news. So it's -- it's very fresh.

[Pietro Oriani, executive]

But I'm remaining for 3 months.

[Renato Semerari, executive]

But he's remaining for 3 months. So we have a bit of time. Otherwise, I would have crucified him. But -- so we have 3 months to run and see how to organize ourselves.

[Molly Wylenzek, analyst]

Okay. Thanks very much for that and thank you, Pietro, for all the help over the years.

[Renato Semerari, executive]

He will be still in the next quarter release. He will still be here, with a suit case though.

[Operator]

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

[Renato Semerari, executive]

Thanks a lot. Thank you and good evening to everybody.

[Pietro Oriani, executive]

Thank you. Thank you everybody. Bye-bye.

[Operator]

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