Intercos SpA

MIL:ICOS

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos Group Full Year 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Renato Semerari, CEO. Please go ahead, sir.

[Renato Semerari, executive]

Thank you very much. Good evening, everybody. Very pleased to speak to you today. In a year marked by unexpected disruptions coming on top of the expected supply chain instability. Intercos achieved very strong results. Q4 came in better than expected and allowed us to close 2022 with net sales at plus 24% versus a year ago, plus 19% at constant rates; adjusted EBITDA at plus 20% versus a year ago with a 14.6% margin; adjusted net income at plus 25% versus year ago; and net debt climbing for the first time the EUR 100 million threshold and closing at EUR 91 million with a low 0.74 leverage on EBITDA. Also, good confirmations on the ESG front with the EcoVadis rating coming back again with a platinum medal putting us in the top 1% of companies in our sector on a global basis.

Based on the above results that you can see summarized on Page 4 of our presentation, we will propose to our shareholders assembly the distribution of EUR 16 million in dividends with a payout ratio of about 36% of net profit.

Now zooming on the Q4 results. If you move to Page 5, you will see that in Q4, we have achieved a plus 27% net sales growth, plus 22% at constant rates, with a 15.6% EBITDA margin, which is clearly an acceleration versus the previous quarters of the year. This traced to fixed cost absorption linked to volume as well as to the pricing activities we've carried out in the course of 2022 to compensate as much as we could inflation.

Let's now look at net sales results in more details. If you turn your page, you will find our results by business unit. Q4 saw Make-up continuing on its fast pace and Hair & Body accelerating, while Skincare continued suffering from the China issues. Make-up confirmed weighing over 65% on total sales, while Hair & Body gained weight over Skincare thanks to the impact of the delayed projects we mentioned from semester one and also the first quarter of production for Dolce & Gabbana.

Make-up record in the quarter a plus 30% increase over a year ago to close the fiscal a plus 31%, which, I judge, a very, very strong result. The Western world, EMEA and U.S., were the main drivers and thanks to the excellent performance of emerging brands and multinationals that we will see in a moment. Hair & Body went up to plus 47% to close the fiscal at plus 24%. On the other hand, Skincare register a slight decline which led to a modest growth in the fiscal at plus 2%.

Moving to the next page. You will see the results by region. Q4 was marked by the exceptional performance of EMEA followed by Americas. EMEA went back to 50% of total sales with America at over 30% in terms of weight. EMEA went up by 38% in the quarter to close the fiscal at plus 24%. Americas grew 29% in the quarter, closing the year at plus 34%. Asia was flat in the quarter, closing the year with a double-digit growth at plus 10%, given the difficulties of the year, I judge as a very strong result that, in our case, was clearly led and tracing to the Korea exceptional performance in the year.

Moving to our customer types. Emerging Brands confirm their role as growth drivers, now weighing over 40% of total sales. Multinationals also displayed double-digit increases, reducing, however, the weight to 44% of total. Retailers lost share of total sales, and this was mainly tracing to retailers from China that affected the overall result of this cluster of clients. Q4 was marked by exponential growth of Emerging Brands at plus 71%, which closed the year at plus 45%. Multinationals confirmed their double-digit pace with Q4 at plus 13% and fiscal at plus 19%. Retailers registered the first negative quarter of the year, minus 10%, still closing the fiscal slightly positive.

I now pass the stage to Pietro, who will take you through more details in the financials.

[Pietro Oriani, executive]

Good evening, everybody. So now let's give a closer look to the P&L and the cash generation of the group in this fiscal year. As already pointed out by Renato, we had an incredible year with sales up 24% on prior year, plus 19% on constant currency, but also what is very important to point out that even on value-added sales, we basically had the same growth with a plus 23%. We had a wonderful acceleration in the last quarter with sales up 27%, 22% at cost currency, and basically, this growth was mainly achieved through an increase in volumes. And we have been able to grow in all geographical areas and in business units. And we are back to a level which is much higher than what we have achieved in 2019.

Also very important to point out is the gross margin that we have been able to keep basically flat on -- versus a year ago at 21.4% that gave us the possibility to achieve EUR 122 million of EBITDA growing 20% on prior year. Also, what I would like to point out is the result that we have achieved in adjusted net income. Adjusted net income was at 51.3%, so 6.1% on sales.

And this is also thanks to the financial expenses that remained basically flat versus a year ago, thanks to the favorable condition that we have on our credit lines that we have hedged back in 2020.

Very important also is the cash that we have generated in the year. The cash conversion is at 30%, and this gave us the possibility to reach a low level of net debt, below EUR 100 million, with a leverage ratio at 0.74.

If you flip the page to Page 10, you can see the profitability by business unit. Make-up was -- had an incredible year. We have been able to increase the EBITDA generated in this business unit by 34%. And this despite the inflation that we had in all of the supply chain difficulties that we have to go through.

Strong sales that we have generated gave us the possibility to absorb better all of our fixed costs, and we have been able to increase the profitability up to 15.7% of sales.

Skincare was basically flat. It was following in terms of profitability and in terms of EBITDA generated. And this followed basically the same result that we had in -- on sales.

Hair & Body. As you know, we have Hair & Body is mainly skewed to contra manufacturing. So here, we are much more exposed to all of the variations that we have in product mix, production efficiency and also the hit that we might have from the cost of energy increasing.

For this reason, here, we had the downturn in the profitability. Though it is important to point out that in the second half of the fiscal year, we have been able to generate a positive gap versus year ago with plus EUR 1.1 million that decreased the negative gap that we had versus one year ago.

If we give a look to the cash flow. Cash flow, we generated EUR 36 million of cash plus EUR 6 million versus a year ago, and this despite the higher level of CapEx that we incurred in -- during this fiscal year. As already announced, we are increasing the level of investments in the group. We have increased the CapEx by EUR 12 million and also despite the higher absorption of working capital also due to the increased level of inventories that, on the other hand, allowed us to being able to generate production and income.

Okay. If you turn the page, we're now going to look at the outlook and guidance. Overall, I must say, and I'm really scared to say it for [ caramantic ] reasons, that the picture ahead looks certainly better than what we had last year at the same point in time in the sense that, yes, there are clouds about possible recession, but it looks like it could be faster and less intense than what was predicted at one point.

Yes, we're going to still have inflation, but it looks like, at least from a raw materials and energy standpoint, especially in U.S. and Europe, the inflation peak has been reached already. We need to expect wages going up. That, for sure, but that should be a more predictable kind of inflation going forward than the one we have been witnessing in the past 12 months. Also the great absence of 2022, which is China, now that the COVID measures have been released, should allow us to see a rebound of the Chinese market, especially in the second semester of the year.

So this looks a global environment that leave us quite optimistic about the future. First of all, we said it several times already, but I want to underline it once more. We are in an industry that has always shown resilience during economic downturns and we believe that our diversification in terms of market segments, customers, geographies will allow us to benefit from this resilience.

The second point is that in the past 12 months, we've been able to show our pricing power, and therefore, we have been increasing prices twice in the course of the year. Since we expect that we know that wages are going to go up, we just concluded all the negotiations for a further price increase that will become visible starting Q2 of this year that will allow us to offset the impact of wages increases that we are expecting.

And last point is that as anybody in this industry, we are very happy about the reopening of China. The rebound of the Chinese market will help the industry to grow and will help also Intercos to grow, especially in consideration of the fact that we still have ample room for improvement in terms of market share in China. So we look at China as a growth engine for Intercos in the future.

Given all this and given the trend of order intake that we have had so far, we are giving guidance in terms of net sales for fiscal '23 at constant currency to grow between plus 8% and plus 11% versus fiscal '22. As I said, we have kept seeing orders coming in at a very strong pace. We have not seen any significant slowdown, and you will see that in a second. On the other hand, I still believe that we will see a softening of order entry at one point in time because the -- we have a lot to digest in terms of order book, and we need to shorten the lead time of deliveries to our clients to regain a very sustainable position in terms of service.

If you move to the following page, you will see the trend of order intake. The last number you saw, I think, was related to the period, September, October 2022, which where we had EUR 109 million worth of orders, excluding Hair & Body. In November, December, we registered the all-time high in terms of order entry on a bi-monthly basis, reaching EUR 123 million and followed by a still strong EUR 112 million in the period of January, February. So there was a peak, but the peak was not followed by a sharp decline. It was followed by another strong bi-month.

I must also say that the forecast, as you know, the Hair & Body business is not on a firm purchase order system, but is based on rolling forecast. When we look at the rolling forecast in Hair & Body, we also see a very positive evolution for our business there.

If you turn to the next page, you will see the status of our order book at the end of February. We have in our books orders for EUR 327 million. This is a 3% increase versus the order book of last year, very solid. Again, we need to work and we are working hard to digest a bit of this order book, which is still higher than what it should be to provide clients with the speed to market that they are expecting in our industry.

I think that, that's all on our side. We are ready to get questions.

[Operator]

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

[Anna Frontani, analyst]

Renato, Pietro Andrea, and congratulations on the results. I would have three questions for you today. The first one, if you can please quantify the contribution from pricing and volume to your top line growth. I appreciate Pietro said it was mainly volume driven. But if you have the numbers, it would be super helpful.

And second question on the supply chain. If you can provide an update on the lead times. At the time of the 9 months results, you said that you didn't see an improvement, but that you were better equipped to deal with the status of the supply chain. My question is, has anything changed?

And then the third question is related to the health and sustainability of growth in Emerging Brands. Because we have seen a lot of successful story when it comes to Emerging Brands in the past years. But it is also true that recently some smaller influencer, TikToker brands have taken some steps back. Can I ask what do you see from your side and how potentially Intercos would be affected in case of these beauty influencer brands falling out of fashion?

[Renato Semerari, executive]

Okay. In terms of [ top line matters ]. first of all, thanks for your questions. All in all, the -- sorry. All in all, answering to your question, our growth was mostly volume driven. All in all, pricing accounted on a global basis at 4% of the total. So it's a limited impact all in all. So volume has really been the hero for us this year.

Supply chain lead times. Well, things are not really improving in terms of lead times. They have improved substantially in terms of reliability of supplies. Now we are able to start shortening the lead times to our clients thanks to the inventory we've built and a more predictable arrival date of raw materials and packaging materials.

If your question is, though, are we back to a normal delivery time to client, the answer is no. We are still a good 3, 4 weeks longer than what we should have. That's why I'm saying that we're working hard to shorten this lead time. We don't believe that the industry can stay with these lead times for long. So we need to find ways to be more reactive no matter what, no matter how long the lead times of -- for raw materials are to be faster in producing and delivering to our clients. So we are working on that. We are doing improvements. We are not yet where we should be.

Emerging Brands. First of all, I forgot, and I apologize for that, to mention that as of Q1 of next year, you will see some movements in the brackets of our reporting between multinational and emerging brands and retailers to reflect what has happened in the past year or so with multinationals buying certain emerging brands. Not to name anybody, Charlotte Tilbury has been bought by Puig, Chantecaille has been bought by Beiersdorf and so on and so forth. And at least one important retailer took a different distribution avenue and went to a multi-brand distribution channels in certain geographies. So we will move from retailer to emerging brand.

Obviously, when we will present you the last of quarter 1, we will do a reconciliation of what it was of the past so that the numbers you will be seeing are comparable.

But coming back to your question, Emerging Brands, we are not seeing any weakness in the emerging brands we are -- all in all, we are following. Yes. So there are a couple of Californian emerging brands that are not as growing or successful as they used to be. But in the meantime, we had other emerging brands that have grown significantly and are still in a very positive phase.

As you know, we are quite picky in terms of what are the emerging brands we decided to work on. We tend to select the ones we believe have the highest potential. Obviously, we have done some wrong choices in the past. But by and large, we have been pretty accurate, and we've been spotting the right ones. Also, now that China is reopening, we are expecting some of the most successful emerging brands that are working with us to go massively into China, into new regions, especially into China.

We know that because they request are -- us all the regulatory documentation needed for the Chinese registrations. So we know this is coming and is real. So am I afraid of what is going to happen in fiscal '23 in the emerging brands? No, I'm not. Will we have some emerging brands suffering? Yes, for sure. But all in all, I think that the roster of emerging brands we are serving is very solid. I hope I've answered to all your question.

[Anna Frontani, analyst]

Yes. So very clearly.

[Operator]

The next question is from Kate Rusanova of UBS.

[Kate Rusanova, analyst]

I have three questions. So first of all, a quick follow-up on the potential of Western emerging brands in Asia. Is this more of a medium-term ambition or we can already see some material benefits to that in 2023?

My second question is related to the Dolce & Gabbana partnership. Do you now have more visibility on the potential size of this opportunity? How material was it in the fourth quarter? And since packaging was a considerable cost component for fragrances, how do you expect this to impact the operating margins for the group? Did it already have an impact on Hair & Body division in Q4, margin-wise?

And lastly, continuing on margins. In your outlook, you do not talk about profit development this year. Why is that? Are you comfortable with the current consensus for 40 bps adjusted EBITDA margin expansion year-on-year?

[Renato Semerari, executive]

Kate, thank you for your questions. Western emerging brands in Asia. As I said, we know who is going because they need a lot of documentation to do the registration. Some of them are already present but in a very marginal way. I'm expecting them to start pushing and investing with consumers and marketing activities to expand in China now that things are opening up.

Do I know how much is that going to weigh? No, it's too soon to assess. As you know, China is just back from the Chinese New Year. The market is still a bit wobbling. I think the first moment of truth will be the big e-commerce event of mid-June. We will see there if the brands have restarted investing in marketing and promotional efforts in a serious way. And we will see what is the stance and the attitude of these emerging brands at that point.

But in terms of pipeline alone, having new brands coming into such a large market of -- like China cannot have a negative impact on us. It can only be positive. Then obviously, the more they invest, the more they grow, the better for us. But that's a bit too early to assess.

Dolce & Gabbana, I always said, since we signed the contract, that we were expecting Dolce & Gabbana to be in the top 5 -- top 10, sorry, of our clients. It's confirming that the forecast we have from Dolce & Gabbana is absolutely in line with that forecast. Is not going to be even at the bottom of the top 10 list. It's going to be higher up in that scale.

I won't give you numbers. Again, it's a brand that works with rolling forecast. So it's not like for Make-up and Skincare where I can give you a precise figure that cannot be withdrawn, but the forecast is very interesting. So we're very happy about that. And yes, margin is going to be impacted because of the packaging costs. In Dolce & Gabbana case, that will certainly have an impact on the profitability of the Hair & Body division and will also have an impact, and we said it also back in when we met last time, right, as I remember. November, it's going to have an impact on the profitability in general of the company this year.

So yes, we should be expecting normally a margin improvement linked to the volumes growth that we are expecting. This will be largely offset by this impact in a good proportion. So we do not expect a margin expansion in the proportion of what you are, what you just mentioned, 40 basis points. We expect it to be lower than that.

[Operator]

The next question is from Rashad Kawan of Morgan Stanley.

[Rashad Kawan, analyst]

Congratulations on the results. Just a couple from me. The first is on China. Can you tell us how you performed there in Q4 and the full year? And I know you talked a little bit about the dynamics this year, but maybe talk about what you're seeing so far in Q1 in terms of dynamics. I know in the release, you talked about the expectation of growth being second half weighted. Should we take that to assume that your overall kind of 8% to 11% organic growth guidance to also be kind of more second half weighted?

And just kind of in the same vein. I mean, with Korea being such a strong performer in 2022, do you expect that to continue this year? And maybe if you can remind us how big Korea is in your portfolio. That's the first question.

And the second will be a lot briefer. I promise. Just maybe talk about if you're seeing any signs of premiumization trends slowing down or whether things are still continuing in terms of premium versus mass and masstige.

[Renato Semerari, executive]

Thank you. I'll tackle first your first question, which is a bit more than one question. China ended the year with single-digit decline in the region of minus 6%, minus 7%. Honestly, I don't have here the result of the quarter. But all in all, I just saw the results of COSMAX. We did a lot better than them in China. So -- okay. Sorry. The quarter was minus 9%, and we ended the fiscal minus 7% in China. On the other hand, Korea grew 40% in the fiscal with -- in Q4, there was also double-digit up.

Now I finish with Asia and I'll then talk about the phasing of the guidance you just mentioned. We expect next year, China to rebound, as I said. We expect Korea to consolidate the growth of this year. So Korea, we expect to see still growth from Korea but more in the single-digit zone than the plus 40% of this year, which was abnormal in terms of growth. So we need to consolidate and move on.

So all in all, we expect Asia to be again in double-digit zone with different drivers, this time driven more than by China than by Korea.

Going to the phasing in reality, we will see more growth in the first semester than in the second semester. So it's going to be an upfront growth more than a growth that is skewed to the second semester. I know that China, and I just said that China will help in the second semester, but reality is that the base we have because of the first semester of last year is a lot easier than the base we have in the second semester. For that reason, we expect faster pace in the first semester than in the second semester.

I hope I've answered all the points you raised in the first question. I'll come to premiumization or down -- trading down in the market. No, we have not seen any sign of any of that. Reality is that if I look at, for instance, the market data from U.S., which still is the market we look very closely because it's the #1 market for color on a global basis, mass market -- makeup in mass ended the year at plus 10%, if I remember well. In prestige, it ended at plus 18%. So there have been no real signs of trading down so far when we speak with clients. And this is the week where we're going to see more clients because of Cosmoprof here in Bologna, and we have our own beauty event starting tomorrow. So I will know more at the end of this week. But the reality is that with all the clients we've been speaking, we are not seeing any signs of slowdown in the market in general.

I hope I've answered everything. Otherwise, we...

[Operator]

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

[Mikheil Omanadze, analyst]

I have three. The first one is on the pricing. So in very broad terms, what is the magnitude of pricing actions that you have taken this year that will start from Q2?

The second question is on your top line guidance. Doesn't your comment around the Dolce & Gabbana potential size mean that this plus 8% to 11% like-for-like guidance is rather modest for the remainder of the business? I presume that incremental Dolce & and Gabbana sales for three quarters are in the guidance, right?

And then the third question will be around the order book. I was just wondering what sort of order book, as at the end of 2023, does your like-for-like guidance imply.

[Renato Semerari, executive]

Pricing, we have done at an average of plus 4% in the Western world. It's a lot lower in Asia is in the region of plus 2%. I'm always talking reorders. I know that I've said it several times, but when you do your math, it's important that you consider that this only touches 70% of our sales because new projects are priced when they come. So this is the pricing that we have agreed on average with clients. Clearly, there are -- not all clients are exactly at the same level, but on average, this is what you should have in mind.

Yes, Dolce & Gabbana, obviously, is in our guidance. The remainder of the business, as you say, is not going to be small. In reality, Dolce & Gabbana is going to be an important client, but I can swear that is not enough to make our plus 8% or plus 11% guidance. So we need to grow a lot more than that with a lot more clients. Remember that every year, we have some clients that go a bit of the charts and have very high growth. We had a couple of them this year that performed even better than what we are expecting Dolce & Gabbana to the lever. So all in all, we are expecting growth from a multitude of clients, not just Dolce & Gabbana.

And the last question, I'm afraid, I've not understood. In the order book at the end of 2023, I have no clue on where it's going to end. There are different ways to look at it. To be honest, I hope to see the order book lower than what it is today. I hope it's going to be smaller for the simple fact that, that will mean that we've been able to reduce lead time of deliveries to client, and we've been digesting the backlog that we had accumulated in the most difficult months of the year.

Then if the order book goes down because we don't have orders anymore, obviously, I'm not going to be happy. But if we have an order inflow that overall remains strong and consistent, and we end with a smaller, even significantly lower, order book than what we have today, I will be a happy man and I will be spending a lot less time with our clients to calm them down because they're waiting from product. So I can only give you hope or my personal hopes more than what is going to happen. That one, I'm afraid I cannot give you an answer.

[Mikheil Omanadze, analyst]

That's very helpful.

[Operator]

The next question is from Francesco Brilli of Intermonte.

[Francesco Brilli, analyst]

A couple of questions from my side. The first one is on Skincare. I was wondering which kind of recovery are you assuming on your guidance for 2023 for this segment of Skincare. And if you are seeing some improving trends even in the first month of 2023.

And then the second one is on pricing. You mentioned a 4% average pricing positive impact in 2022, assuming the carryover of the increases of last year and the additional one for -- to offset the wages, should we assume something similar from pricing also in 2023?

And the last one is on M&A in light of the very low leverage ratio that you have, if you're accelerating or assessing closely some potential targets right now.

[Renato Semerari, executive]

Thank you, Francesco. Skincare guidance, we -- as you know, we do not give guidance by business unit. It would go a bit too much into details. Obviously, we have an objective to speed up the growth of Skincare. As you know, we had very strong performances of Skincare in 2020 and in 2021. So aside from what has happened in China, it's quite physiological that you need to consolidate to a certain level before you can and reaccelerate. We are obviously looking at the reopening of China as an enabler of a faster pace of growth in Skincare.

So ideally, we would like to go back to the pace we had in the [ two consecutive years ]. That's going to be what we work against. It's all dependent on how quickly things will move also in China and the speed and reactivity of that market.

Pricing, no. I mean, the 4%, again, I repeat myself. If we had 4% in the Western world and 3% in Asia on reorder, which is 70%, it's clear that you're not going to have, on a P&L point of view, a 4% impact on the top line. Is going to be more 2.5% to 3-something percent in terms of volume. So the growth will still have to come mostly from volume orders. And this is what we work to get. It's our objective every single year. And this is going to hold true for 2023 as well.

The third point of M&A, yes, you're right, our leverage ratio is low. We always said we are interested in M&A. We will always be very, I would say, actively looking at opportunities that are right for us. So we will be even more so now that we have an even lower leverage than last year.

But to be honest, I would be lying to you if I would say that we didn't do acquisitions in 2022 because we had leverage. We were already in a low leverage position. So it's a matter of the right conjunction between the opportunities that come to the market and our ability to have a competitive bid that is not overtaken by someone more aggressive than us.

So we hope that, again, and I said it in the past already, I hope that the raise of interest rates, the cost of money that isn't that low as it used to be would make especially private equity countdown in terms of price tags that they put on M&A opportunities. But yes, we will be looking at them.

[Operator]

The next question is from [ Beltran Palatrello ] of [ DLTV ].

[Unknown Analyst]

Renato, Pietro and Andrea, I have three, if I may. I remember our first meeting in Madrid December of last year. You were saying -- you were stating that you were willing to increase prices maybe 6%, 7% and maybe the increase would be 5%, 6%. I want to hear that the price is not only increasing 4% in Western and, too, in Asia, but it's -- well, I would -- willing to know how the conversations went.

I mean, the second question, I think your medium- to long-term target is 20% of EBITDA margin. When will we start seeing, let's say, the EBITDA margin increase?

And then the question just to understand the return of the growth. Apart from the maintenance CapEx, let's say, the growth CapEx that goes over there, what returns -- what organic returns does that CapEx have?

[Renato Semerari, executive]

Okay. Good evening, and thanks for your questions. On pricing, I don't remember exactly what we said and what we were referring to in terms of price increases. As you know, we had done two in 2022, one at the beginning of the year, actually at the end of 2021, beginning of 2022. Then we did the energy surcharge at the end. So all in all, I just stated March was the price impact on the total of the P&L.

Remember that we always have this, a bit of a disconnect because when we talk about price increases, we -- it's natural for us to think about reorders. But I recognize that it's not as obvious to you that we're only talking about a portion of what we do, a large portion, but still not the totality of it.

So as I said, the pricing impact this year was 4%. This is the P&L impact of the price increases, which means that the reorders was higher than that. And it was not happening in one go. It was 6 months of distance, one from the other. Now the new price increase that we have negotiated, it's going to enter into [ force ]. It will have, largely speaking, around 3% impact. The negotiation has not been easy, but not because we were raising prices again. It's that because we were raising prices when the first signs of inflation having reached the peak on certain elements like energy, like transportation and things like that.

So there was a bit more reluctancy from clients saying, but now things are going better, things are stabilizing. Why are you raising prices again? So we had the usual discussions. We explained them the wages impact, that it's natural when you have inflation like this in the economy in general, it's obvious that you need to raise your salaries to retain your talents. And at the end, I must say that it went through pretty well. We didn't have any major fight with any client. So it went pretty well.

The second point you raised is when are we going to reach 20% EBITDA margin. I wish I knew, and I had a date to give you. Obviously, we are working every year to improve our profitability. Last year, we had a huge impact from the production inefficiencies. We had impact from inflation volatility and part of inflation that we hadn't anticipated like energy spike linked to the war. This year, we will have an impact that has been consciously taken and it was driven by the decision to take on board the Dolce & Gabbana business. That will have a dilutive effect on our P&L and on our margins.

We are still convinced that we took the right decision because we are still a small company. We still need to grow and growing top line always comes with a high priority in our decision-making process. So we expect margins improvement this year is not going to be what we would have ideally love to show you because of this dilutive effect, but we should see some basis points of improvement this year.

The last point is about CapEx. I don't know, Pietro...

[Pietro Oriani, executive]

Okay. Return on invested capital. We come from a return on invested capital that we had at the end of 2019 at close to be 16%. Obviously, we went down during the COVID period to 8%, and now we are on a trajectory of increasing the return on invested capital. Today, we are at 12%, and the target that we have is to go back to the old ratios that we had back in 2019.

[Operator]

[Operator Instructions] The next question is from Roberto Casoni of Otus Capital.

[Roberto Casoni, analyst]

I have -- it was a very interesting Q&A session. Most of my questions have been answered I just had the last one. I mean you keep talking about price increases, and you keep reminding us the price increases is on reorders. Now given the fact that, if any, there -- I know that you're trying to grow top line, but there is a clear trend among emerging brands as well as China reopening. I just want to understand how is your pricing -- the level of competitiveness when discussing on a new project.

So I'm talking about the remaining 30% of your P&L, but it's actually, there's a new project, a new product. And given the fact that you're possibly not the largest worldwide, but you're becoming one, clearly, a point of reference. There are not many that are able to execute globally in the way you do. I mean -- how can we expect better conditions? Is there a time for you to impose better conditions when it comes to discuss new projects with customers, either new or old customers? And how is the competition in this moment behaving from this point of view?

[Renato Semerari, executive]

Roberto, thanks for your question. Pricing competitiveness, you're touching a sore point. We have never been competitive, to be very blunt. We are known in the market for better innovation, better quality and higher prices. And that's our positioning, and that's witnessed by and/or demonstrated by the fact that our percentage of prestige in our total sales is clearly a lot higher, almost double the market split. So the ones -- the clients that are really fiercely competing on price tend not to come to us. We tend not to go to them because we know the [ rhythm is much there ].

This said, if you look also in the mass market arena, brands are coming to us, not the cheapest mass market brands, because they know they get better products all in all, in general. Now it's clear that if someone wants a standard gloss, it will likely not come to us. There are competitors that are cheaper than us that can provide you with the standard gloss at a cheaper price. But that's not our positioning. That's never been our positioning. It will never be our positioning.

Is this cutting out the part of the market from us? Yes, it is, especially in China, where, as you know, most of the local brands are fiercely competing in the mass market arena on price, and we tend to be the right supplier for them. We target much more the prestige segment, the masstige segment or the higher mass market price points. And that's why you have Chinese brands that have done a very deliberate strategy, where they buy their standard portfolio from Chinese competitors that are a lot cheaper than us And they tend to buy from us some unique products that allow them to be advertising on a higher ground to project a better image for their brand. So that's a reality.

Have I seen more competition in pricing this year? No. I've seen it probably in Asia. I think that especially our big Korean competitors have been a bit more reluctant to raise prices than what we've done. If I'm not mistaken, COSMAX just published ending the year with a 6% EBITDA margin. That tends to show the fact that they have been not particularly active on pricing, but there could be other reasons behind the numbers. And I've not studied that well enough to give you an answer. But all in all, pricing competition, we've always had, especially in China, but we also had it in the Western world. We are not worried by that.

What we are really keen to do is to have a clear idea of what are pricing points every brand can afford so that we can propose to them formulas that are matching their cost of goods target. That's the key. Then if the cost of goods target is too low for us, we'll be very frank and transparent, and we'll tell them to them.

[Operator]

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

[Renato Semerari, executive]

Thank you very much. everybody. Thanks, and speak to you soon, I guess.

[Pietro Oriani, executive]

Thank you. Have a great evening.