Earnings call transcript: Intercos Q4 2024 reports modest revenue beat

Intercos Spa reported its fourth-quarter 2024 earnings, revealing a slight revenue beat against market forecasts. The company’s revenue reached $284 million, surpassing expectations of $283.55 million, leading to a modest stock price increase of 1.14% during the open market phase. Subsequent trading saw a 1.12% decline, with shares closing at $14.32. According to InvestingPro data, the company maintains a GOOD financial health score of 2.84, supported by strong cash flow management and moderate debt levels.

Key Takeaways

• Intercos’ revenue slightly exceeded forecasts by 0.16%.
• The Hair and Body segment showed strong growth with a 39% increase in Q4.
• Expansion of production facilities in China and Korea is underway.
• Challenges persist in the Chinese market and U.S. retail volumes show a slight decline.

Company Performance

Intercos demonstrated stable performance in the fourth quarter, with net sales reaching €1,065 million, marking an 8% year-over-year increase. The company continues to outperform market growth, leveraging its global footprint and strong position in emerging brands. With a market capitalization of $1.45 billion and revenue growth of 4.57% over the last twelve months, Intercos shows resilience despite challenges in the Chinese market and declining U.S. retail volumes. InvestingPro analysis reveals the company is currently trading above its Fair Value, though analysts maintain positive outlook with upside potential.

Financial Highlights

• Revenue: $284 million, slightly above the forecast of $283.55 million.
• EBITDA: €143.3 million, a 4% year-over-year increase.
• Adjusted net income: $57 million, flat year-over-year.
• Net debt: Below €100 million, with a leverage ratio of 0.68x EBITDA.

Earnings vs. Forecast

Intercos reported a revenue of $284 million, beating the forecast of $283.55 million by approximately 0.16%. This modest beat reflects the company’s consistent trend of meeting or slightly exceeding market expectations.

Market Reaction

Following the earnings announcement, Intercos’ stock saw a 1.14% increase during the open market phase, rising to $14.22 from $14.06. However, the stock price later declined by 1.12%, closing at $14.32. This movement aligns with broader market trends, where minor earnings surprises often result in modest stock price adjustments.

Outlook & Guidance

Looking forward, Intercos has set a net sales growth guidance of 5-7% for 2025, aiming to outpace market growth. The company remains focused on geographic and customer diversification, with ongoing expansion plans in China and Korea expected to be cost-neutral. Analyst consensus from InvestingPro strongly favors the stock, with price targets ranging from $16.85 to $21.06, suggesting potential upside from current levels. The company’s next earnings report is scheduled for May 28, 2025.

Executive Commentary

CEO Renato Semerari emphasized the company’s ability to consistently beat market trends, stating, "We’ve proven the ability to beat the market trend consistently over the years." He also highlighted the importance of innovation during crisis periods, noting, "During crisis periods, clients look for innovation even more."

Risks and Challenges

• Continued challenges in the Chinese market without signs of recovery.
• Slight decline in U.S. retail volumes.
• Slower growth in the European market, shifting from double-digit to low single-digit growth.
• Potential impact of global economic uncertainties on consumer spending.

Q&A

During the earnings call, analysts inquired about the impact of packaging on costs, potential outsourcing opportunities, and expansion plans in Korea and China. The company addressed these concerns, emphasizing the stability of packaging costs and the strategic benefits of plant expansions.

Full transcript - Intercos Spa (ICOS) Q4 2024:

Conference Operator, Chorusco: Good afternoon. This is the Chorusco Conference operator. Welcome and thank you for joining the Intercost Group Full Year twenty twenty four Financial Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions.

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

Renato Semerari, Chief Executive Officer, Intercost Group: Thank you very much. Good evening, everyone. I’m glad to start saying that fiscal ’twenty four, which had such a rough start due to the cyber attack of February ’twenty four, has ended in a strong way with quarter four confirming our double digit pace for the third quarter in a row. This allowed us to cross the bar of EUR 1,000,000,000 for the first time. But let me start by summarizing our key results.

So in terms of net sales, we closed €1,065,000,000 which is a plus 8% growth over a year ago, confirming our capacity to grow faster than market at almost twice the pace of the market. The second point which I would like to underline is our performance in Asia. We’ve been growing in the fiscal by plus 24% with both China and Korea performing at exceptional rates plus 28% and plus 31% respectively, which you would recognize is quite an exception in our industry this year. Third, our EBITDA landed at million plus 4% versus year ago with a margin on value added sales, so without the cost of packaging gaining 13 basis points versus a year ago. Despite the fact that in quarter one, we had a very rough start with EBITDA minus 30 versus the previous year.

So in the second semester of the year, our EBITDA margin on value added sales gained 90 basis points. Fourth, our adjusted net income ended at $57,000,000 overall in line with a year ago due to unfavorable tax mix by country. Fifth, the net debt was below $100,000,000 further reducing our leverage to 0.68 of our adjusted EBITDA. Excluding the debt related to IFRS 16 accounting principle, our real debt is a million. Sixth point, we will propose to our shareholder assembly the distribution of 19,000,000 in dividends equal to about 39% of our consolidated net profit.

Let’s now go deeper into the results. Turning page, I would like to underline the business trend by quarter. The first point that I would like to underline is the fact that we had double digit growth in both top and bottom line since quarter one. So quarter one, as I said, was a rough start. From there on, we’ve been growing double digit in both top and bottom line.

Second point, which I think is important to underline is that the sales pace accelerated throughout the year quarter after quarter, we’ve been gaining traction ending the fourth quarter with a 14.5% growth over a year ago. And the third point is that if we look at the growth pace of EBITDA in the nine months has been growing slightly faster than our top line. So by now, you’ve seen our quarter four posted a plus 14%, both in terms of top line and adjusted EBITDA. It is worth underlining the difference in marginality between the EBITDA on sales and the EBITDA on value added sales. As you can see in the year, we have a contraction of our EBITDA on net sales.

Conversely, when we look at it on value added sales, as I said, we have 13 basis points of gain, thanks to the second semester where we recorded this 90 basis points improvement in marginality on value added sales. And this gives you a clue, an immediate clue on the entity of shift towards full service. So sales that include packaging in our business, which creates a significant variability in our overall marginality. Let’s now look at sales by business units. The fourth quarter was led by double digit growth of both hair and body and makeup, while skin suffered due to high comps of the year ago.

Going more in details, makeup, which represented at the end of the year 58% of our total sales, grew 13.4% in the quarter, thanks to the strong performance of Asian and European clients, both multinational and emerging brands, with also prestige clients showing a significant expansion. This allowed makeup to end the year slightly positive, a plus 3% despite the big drop of the beginning of the year due to the cyber attack. In terms of skincare, which represented 16% of our total turnover, the fourth quarter was negative by $6,000,000 bearing in mind that last year, the fourth quarter for skincare saw an increase of 40%, so very high comps for this business unit in the last quarter of the year. In the fiscal, skincare grew by 6%, mostly driven by local Asian brands. Last but not least, Air and Body representing 26% of our total turnover grew also in the fourth quarter at a very fast pace, plus 39%, thanks again to the traction of the Fragrance segment and also the Odorants and then the fiscal a plus 20%.

So a second year in a row where we see Air and Body growing at a very, very fast pace. Looking at the sales results by region, the fourth quarter was pushed by Asia and European actually EMEA double digit progression with America turning to a slight positive result. This brought us to close the year with Asia and EMEA at double digit rates. So looking one by one every region, EMEA represented 52% of our sales, increased by 23% in the fourth quarter, and this was thanks to both multinationals in makeup and emerging brands in air and body, and ended the year a plus 10%, a very strong performance in the European market. Americas, 20 8 Percent of our sales has been the difficult area for us this year.

It closed the quarter at plus 2%, mainly thanks to multinationals in makeup and the year ended at minus 6% paying a heavy toll for the cyber attack, which affected especially this region, but also a market that has been slightly declining in volume since eighteen months now. Asia, 20 Percent of our sales scored once more in the fourth quarter, a double digit increase of plus 13% and ended the year a plus 24% mostly thanks to local clients despite the fact that throughout the year, the China market as you well know, has been slightly declining. Last, let’s see sales by customer cluster. Emerging brands have been the engine of growth since years. But in the fourth quarter, I’m glad to say that also multinationals had a comeback, while retailers kept struggling throughout the year and including the fourth quarter.

So the fiscal at the end was exclusively led by emerging brands with multinationals flat and retailers down. Looking at them a bit more in detail, multinationals represented 45% of our sales for the first time clearly below the weight of emerging brands. In the quarter, multinationals grew 7% and this allowed us to close the fiscal more or less in line with the previous year. Emerging brands represented 48% of our sales and yet another strong quarter growing 28% and this allowed us to increase by almost 100,000,000 in the year versus the previous year with a growth of 24%. Retailers was down once more double digit.

This was in a large proportion driven by the difficulties, the financial difficulties of one client that was very important in 2023. And we saw a decline of 11% in the fourth quarter, which led to a total year of 18%. This part of the business is shrinking over time and now represent only 7% of our total sales. I’ll now pass the mic to Stefano, our CFO, to go deeper into our financial results. Good evening.

Thank you, Renato. Good evening, everybody. Just few chance to draw your attention on some financial highlights summarizing the main results in 2024. So after looking at the P and L, after a double digit growth in ’twenty three that was plus 20%, in 2024, the company continued its expansions path, recording an equally significant revenue growth of around 8%, a growth that doubled the market growth rate. Intercost then reached a new sales record, surpassing the billion mark, also thanks to the strong performance of our Asian subsidiaries in China and Korea, as we have already discussed and presented by Renato.

Regarding the EBITDA, the revenue growth in sales translated into an EBITDA increase of over 4% reaching €143,300,000 adjusted, whereas the reporting number is 133.8% and the EBITDA adjusted is equal to 13.5% of the group’s net revenue rising to 17.5% when compared to the value added sales, which better reflects the added value generated by sales. For a clear evaluation of the EBITDA results, it is important to highlight the specific dynamics it experienced throughout the year. As commented early in this call, after the first quarter in which the company saw a negative trend compared to the previous year was minus 30% due to reason unrelated to normal operational management. The next three quarters showed a double digit growth, allowing the company to recover most of what was lost earlier. Aside from the impact of the cyber attack, the EBITDA margin was slightly lower than the previous year by 45 business points, partly due to the increased share of packaging in the revenue mix that customers requested our company to manage and due to a significant increase in the business from the air and body business unit, which in any case contributed very positively to the creation of corporate profits.

Coming to the net income, during the 2024, the company revised its financial structure by renegotiating some credit lines to secure the necessary liquidity for its ongoing investment program. As a consequence, the financial management generated net financial expenses for about million with an average financial debt of million. Given then a group tax rate of 32%, the final net income result was million after adjustment for some extraordinary income components of million. Coming to the EBITDA flow by business, results by business units, we see here a positive performances for the skincare is plus 6%, mainly driven by the performance of local brands in Asia and the contribution of multinationals in The U. S.

The performance of Air and Body business unit plus 25% was also very positive, continuing to benefit from the strong performance in the fragrance market and the personal care, mainly deodorant. The adjusted EBITDA of the makeup business units stood at million, slightly lower compared to last year. It is worth noting that the makeup division was the most affected by the cyber attack, largely recovering the second half of the year as mentioned, which caused significant operational efficiency now results. As for the lower profitability, it was mainly due to the higher share of full service revenue model compared to the pre issue revenue model. Let’s have a look then at the cash flow and the net debt.

The positive economic dynamics just mentioned translated into an operating cash flow of EUR 57,100,000.0 after capital expenditure of EUR 65,100,000.0, which shown an increase of EUR10 million compared to EUR23 million due to the expansion project at the production plants in China and Korea. We see also positive changes in the net working capital of EUR1.7 million. To note that the components of the trade working capital show the improved turnover ratio compared to the last year with DSO at fifty two days and DPO at one hundred and ten days. Finally, the net cash flows stood at million after dividend distribution of million positively contributing to the net financial position, which ended the year at million before the effect of the IFRS 16, where the latter with an impact of €42,600,000 bring the total net debt to €97,700,000 To conclude, it is worth noting that the leverage ratio of 0.68 times EBITDA was lower than the figure recorded at the end of twenty twenty three, which was 0.73 despite an increase in investment aimed at supporting industrial expansion plans and thus long term revenue growth. Renato?

Thank you, Stefano. Let’s now look forward. First of all, let me draw a bit of a picture of the global market. In general, the global market didn’t start very well in fiscal twenty twenty five. In general, China is not showing signs of pickup or recovery.

U. S. Also is still showing slightly downward trends from a volume retail numbers. Although the last reading is actually showing the stabilization of this trend, but let’s say in general is still not picking up the way we would like it to see it. And Europe, which has been the most resilient region across 2024, has moved from the beginning of twenty twenty four from double digit numbers to low single digit growth rates.

So in general, the market is not at its best. We think that the second semester will be better, but the beginning of the year clearly is not doesn’t show any run bit, let’s say. On top of that, you all know and we are all reading and following what is happening in the geopolitical situation and the trade wars and also this is adding uncertainty in the market, which is certainly not helping. So after I’ve been gloomy enough in my summary, let me say that despite all this, we remain optimistic about the future. And we do for three key reasons.

The first is that we’ve proven the ability to beat the market trend consistently over the years and also in 2024. We’ve clearly done that. Second, we know that the key clients in general during crisis period tend to look for innovation even more than during the normal times because gaining market share becomes the name of the game during these periods and also during crisis that are more, let’s say, outsourcing interests in general from brands. So this could lead to some nice opportunities. The third is that in terms of protection from the trade wars, we believe that aiding a global footprint put us in a much better position than most of our competitors, but also most of our clients.

So we think that our global footprint is going to be a competitive edge in a period of trade wars. We are convinced that diversification, which has been a key strategy for the company so far will be even more important in 2025 and even farther than that, especially the geographic diversification that I was just now mentioning. So based on all these and based on the projections we see for the market, we expect a total year for the beauty industry at plus 4%. And based on that and what we expect, despite the fact that since IPO, our company has grown 50%, we believe firmly that we will grow faster than market also in 2025. And as such, we are giving a guidance in terms of top in terms of net sales between 57% in terms of growth.

Now moving to the order intake, as you can see the last five months, January, February showed the posted a new all time high with $144,000,000 of order entry for makeup and skincare. I remind all of you that in this, we do not have air and body, which is working on a rolling forecast basis. The other good point is to underline the fact that the driver of this growth is makeup, which as you know is our bread and butter. So we’re very happy to see makeup posting rolling twelve months growth of plus 6% over the previous twelve months. So clearly, period after period, we are growing our average order entry, which is pretty natural because you’ve seen our top lines going in that direction as well.

In terms of order portfolio, it’s a bit of a tricky comparison here. It is a very strong portfolio. It is slightly below the one of year ago, but this is easily explained by the fact that last year, the portfolio was inflated by the month of February, where we recorded orders, but didn’t push out the sales because we were stuck with the cyber attack. So it is as if we are comparing ourselves this year with a year where we had one month more in the portfolio because we could not ship what we had digested. This said, I’m also telling you that this is the last time we show you and we keep visibility on the order entry for some I think good reasons.

We are the only ones in the market doing it. By doing it, we are exposing ourselves to unnecessary competitive tensions because we are telling everybody what’s coming for us. We do not see the ones of our competitors. And also from time to time, we’ve been confronted with some negotiations with clients that are linked to the disclosure of our data that is not necessarily helping us in negotiating with important clients placing important orders. I do believe that in the past four years, you’ve learned, you’ve had the opportunity to know us better and I hope that you have a sufficient level of trust to believe in the guidance we’re giving to the market and we hope you understand our reasoning behind this decision.

That would be all on our side and we would be ready to take your questions.

Conference Operator, Chorusco: Thank you. This is the COSCO conference operator. We will now begin the question and answer The first question is from Anna Fronthani of Berenberg. Please go ahead.

Anna Fronthani, Analyst, Berenberg: Hi guys. Thanks for the presentation. I have, let’s say, 2.5 questions. The first one relates to the packaging impact on profitability. What are your expectations for 2025?

Or maybe if we want to put it in another way, will the incidence of full service sales be lower in 2025 compared to 2024? And then the half question, which is sort of related to

Conference Operator, Chorusco: the first

Anna Fronthani, Analyst, Berenberg: one. If I’m not wrong, the ENG contract should sort of change at the end of twenty twenty five. If this is the case, what kind of impact are you anticipating, probably lower contribution to sales but better profitability? And then the last question, Renato, you touched it during the presentation on the outsourcing trends. In 2024, we’ve seen a Stellar transitioning to use some of their production of cosmetic powders that they were producing internally.

Have you seen this happening with other clients? And generally, how how is the outsourcing trend going? Thank you.

Renato Semerari, Chief Executive Officer, Intercost Group: Joanna, thank you very much for your questions. First of all, what is going to be the trend in terms of packaging, full service and all that? It’s very difficult to predict. I must say that I’m not expecting good news in the sense that I think that there will be stability in terms of split of sales, because in reality, the clients that gained traction in the past two years are using that business model and I do not see major changes to that with the exception of Dolce and Gabbana that starts and I’m bridging to your second question, that starts buying some components on its own. So it’s moving from, let’s say, complete full service model to an hybrid system where they buy certain components and ask us to buy the remainder still.

So that will probably have a slightly positive impact, but it’s not that massive to show a big difference in the total numbers on a yearly basis to be honest. Coming to the last point, are we seeing outsourcing opportunities? Yes, there is nothing that is close, let’s say. There are lots of discussions that are clients that are at different stages of their reflection of what to do next and whether to move with certain type of outsourcing. No one is picking tires to go full blast into outsourcing.

But by segment, yes, there are interest. There is there are a couple we are actively working with, but we do not know yet whether they will end up taking that decision or not. So it’s a bit soon to assess, but it’s interesting to see that the move of Estee Lauder (NYSE:EL) has triggered curiosity on the topic and there are others that are analyzing the opportunity.

Anna Fronthani, Analyst, Berenberg: Thank you very much.

Renato Semerari, Chief Executive Officer, Intercost Group: Thank you, Anne.

Conference Operator, Chorusco: The next question is from Tilly Eno of Morgan Stanley (NYSE:MS). Please go ahead.

Tilly Eno, Analyst, Morgan Stanley: Hi, good evening. Thanks for taking my questions. I just have two. So the first one is, you mentioned in makeup that sales to Prestige customers were up significantly. Could you just clarify, does that refer to Q4 specifically?

Or is it just sort of a normalization of lapping last year’s Prestige destocking? But otherwise sort of what is driving that? And then the second point just on the expansion of your plants in South Korea and China. Could you just update us on the impact of increased capacity? And is there any near term impact on profitability that you would expect as you ramp up scale within those plants?

Thanks very much.

Renato Semerari, Chief Executive Officer, Intercost Group: Hi, T. Lee. Thank you for your questions. So the expansion we’ve seen in makeup from prestige clients, it’s certainly a bit of a mix of the two. We have seen an expansion of business with prestige clients.

Obviously, the fact that the base was not at its very best helped also in percentages terms. But as you’ve seen from the other entry, the in this movement for us in makeup. So in generally speaking, the trend is good and we hope it’s going to continue. It’s coming from different parts. It’s both European, American, prestige clients and is related to in a good chunk is related to foundations to the complexion category where I had announced you, I don’t know whether you have that a long memory because you see a lot of different companies, but I told you that we were putting a significant effort in R and D, especially in Korea to develop new formulations.

So we are now are investing the fruits of this effort. So it’s coming from that and it’s both related to Asian assortments for products like cushion and more, let’s say, global product forms in the foundation category. So it’s a good pace. I hope it’s going to continue and we’re going to you can bet on the fact that we will continue pushing in that direction. Korea and China plant expansion, there will be obviously from the increased capacity, there could be a slight impact, but it’s going to be negligible in the global scheme of things.

First of all, because having more square meters doesn’t mean that we’re going to keep and hire people and move all that kind of things. That will be done progressively when we get the orders to be produced. There will be a bit more heating because it’s a larger surface and things and lighting probably, but it’s not going to be a massive cost increase. So you can trust us that the cost increase will be going hand in hand with the sales increase that are needed for those plans. So if there is a slight extra cost related to those plans, it should be offset by many other productivity projects we have we are working on.

I hope I answered to your questions,

Tilly Eno, Analyst, Morgan Stanley: Yes, great. Thank you very much.

Conference Operator, Chorusco: The next question is from Kate Roussaintrava of UBS. Please go ahead.

Kate Roussaintrava, Analyst, UBS: Good evening, Renata, Stefano and Andrea. My first question relates to your growth outlook for the year. So I appreciate the beauty market is slowing this year, but given the easy basis of comparison in Q1 and the fact that many brand owners are signaling the clear pickup in their innovation rate this year, I was surprised not to see the upper end of your guidance being at 8%, which I think where the consensus currently stands. So can you maybe explain the relative caution for the year? Is it mainly due to the lack of visibility in the second half of the year?

My second question is related to your margin guidance. It would be great if you can explain some of the key moving parts that will shape your margin performance this year and a guess on which of these moving parts you do not have good visibility right now? I appreciate you already talked about the packaging contribution, but maybe you can provide some context to the 90 bps expansion on value added sales margin in H2. And lastly, on the contraction of your skincare business in Q4, I understand the comparison was tough, but then your order intake in recent months is also lower versus last year. So it would be helpful if you can update us on your market share progression in this business and any other factors that we need to be aware of for 2025?

Thank you.

Renato Semerari, Chief Executive Officer, Intercost Group: Thank you, Kate. So let’s start from your first question about the outlook. Well, as I said, the entry point, which is the data points we have today are not so encouraging in terms of market trends. We hope second semester would be better, but who knows. And to be honest, the one thing that worries me the most is the short term impacts and the volatility of the market that may be triggered by schizophrenic U.

S. Political behavior. Sorry, I’m not masking too much that I’m not a big Trump fan, but the way he started his administration, it’s not leading to an easy way to manage business for especially for industrial companies like us. So we need to be cautious because the environment, it’s what it is. Then it’s true that we have a first quarter that has easy comps.

It is also true that is the smallest quarter in every single year. So unfortunately, it’s not an easy comp on an important quarter. And it’s true that we’ve had the second semester of this year was yet another very, very strong quarter. So I would be very happy to be wrong once more and I would be very happy to be able to push in the course of the year the guidance a bit up, but we need to be transparent and honest in what we think it’s realistic at this point in time in terms of growth. Again, please remember that since we listed the company, which is three years ago, yes, we’ve been growing 50%, so way above any market rate.

So I said it at the end of twenty twenty three that we should be expecting a few years of growth, but a more moderate growth. We cannot think that we’re growing super fast every single year. There must be some consolidation at certain points in time. Now then, if the upper end of our range is seven and eight or eight, frankly speaking, I have no clue and there isn’t such a difference. But the moment we see that the horizon gets clearer and we have better visibility, we’ll update everyone on what we think it’s becoming possible.

Margin performance, well, the key trigger here is and you’ve seen it in the course of the past year, the mix plays a super important role. We’ve had a in 2024, we had a strong year in terms of productivity projects. Aside from quarter one, which was a complete mess, we did super well from that point of view, but the mix has been a major factor so far. So I think that we have yet another list of projects in terms of productivity that will certainly bring benefits and I’m ready to bet on them. What I cannot bet on is the mix.

I hope it’s going to turn more in favor of us, but this is something that it’s a bit too early to say. Last point you raised is on skincare. You’re absolutely right. We have kind of flattened a bit out in terms of trend and order entry shows it a little bit. Again, skincare we’ve been coming from many years of growth, including twenty twenty skincare was the only business unit that displayed growth of 8%, if I remember correctly.

In the year, what we are seeing is Asia is continuing to be a strong region for our skincare. We have a bit flattened our trends in the Western part of the world. And to really make moves, significant moves in terms of market share in skincare, I think that we need to solve our never ending U. S. Dilemma.

We need to have a plant in U. S. To go grab the business that is there coming from emerging brands in skincare. I expect 2025 to continue seeing growth of skincare, so I expect an acceleration in the coming months. But it’s true that we had a movement of pause in the Western part of the world with our skincare and we need to reignite a bit of energy there.

A good evening. Thank you. Thank

Conference Operator, Chorusco: you. Goodbye.

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