Intercos S.p.A. (ICOS) Earnings Call Transcript

Good evening. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos First Half 2026 Financial Results. [Operator Instructions] At this time, I would like to turn the conference over to Renato Semerari, Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good evening, everybody. In a global context still marked by geopolitical tensions, currency headwinds and the beauty market slowly recovering its historical growth pace of 4% to 5%, Intercos came back to growth, registering a quarter 2 with solid results, both at top and bottom line level. Summarizing the key highlights. Regarding top line, Q2 was the best-ever second quarter of our history at EUR 285 million, a 5% growth at constant rate. This result allowed us to close the gap versus 2025 accumulated in Q1. The first semester was only 0.5% below a year ago. Important to note that such a result was achieved despite the decline of the Packaging component of our revenues. As such, our value-added sales, i.e., net sales minus Pack, resulted in first semester down by 0.9% at reported rates, which means low single digit up at constant rates. This was done without depleting our order portfolio, which remained up mid-teens versus a year ago, thanks to continued strong order intake. As for EBITDA, Q2 was our best-ever quarterly result at EUR 47.5 million with a margin of 16.7%, which was 16 basis points better than a year ago. First half was, therefore, at EUR 72.6 million, with flat margin at 14.2% on net sales or 17.9% on value-added sales. EBITDA was helped by Prestige segment, which was up 4 percentage points over a year ago, and the Pack component reduction, which was down by over 1 percentage point. As for net debt, we also were down by over EUR 10 million, actually EUR 12 million, after having covered for the buyback, share buyback expenses. Our strong cash generation led leverage to go down to 0.80x EBITDA versus last year 0.87x. So summarizing our financial results that you will see in greater details with Vittorio in a few minutes. Second quarter saw sales up by plus 4.9% on constant FX, plus 4% at reported rates, with an EBITDA of EUR 47.5 million, up plus 5%. Margin was at 16.7%, an improvement of 16 basis points versus a year ago. First half reported sales at EUR 512 million, minus 0.5% versus a year ago or minus 2.4% at reported rates. Value-added sales were minus 1% at current ForEx and low single digit up at constant rates. EBITDA at EUR 72.6 million with 14.2% margin, in line with a year ago or 17.9% on value-added sales. Net income was up by 33%, thanks to reductions in financial costs and tax rates. Net debt down by EUR 12 million despite share buyback equivalent to EUR 16 million. Moving to sales details now and starting by revenues by business unit at reported ForEx. Make-up second quarter was down by minus 1.4% over a high base of a year ago of plus 13%. So this means it was basically flat at constant rates. There are a couple of important points to underline to fully understand the underlying trend of this business unit. First, the Pack component was sharply down. As such, value-added sales were up at mid-single digit rates at constant rates. Second, the performance accelerated throughout the second quarter, exiting the quarter at a very fast pace. First semester closed at minus 3%, again, on tough comps. Last year, we grew 18%. Again, value-added sales were up low single digit. Prestige clients were clearly up, while Mass suffered. EMEA region was the best performer, followed by Americas. Asia was down after years of double-digit expansion, driven by market dynamics that I'll elaborate in a moment. As for Skincare, second quarter was down by 3.4%. Also in this case, on top of the currency headwinds, Pack component went down, so value-added sales were low single digit up. First half was down by 9.5%, with Asia growing, but Western countries offsetting this growth. Hair & Body reported an exceptional plus 27% in the second quarter, driven by European clients, especially in fragrance. As such, first half closed at plus 5%, in this case, also helped by the Packaging component. Moving to revenues by region. EMEA was up plus 10% in the second quarter, driven by Prestige clients in both Make-up and Hair & Body. Emerging brands took back their growth driver role after 1 year of multinational lead. First semester, therefore, ended at plus 1% after the difficult first quarter. Americas closed the second quarter slightly positive, plus 1%, overall in line with the beauty market volume dynamics. Prestige multinational clients were the best performers. First half resulted as such, down by 4%, also paying the weak dollar toll. Asia was the most challenging region. Here, we witnessed a comeback of the Western brands who gained shares back from Chinese brands. Hence, in our numbers where we post only our sales to local clients, you see a decline in reorders. As such, after years of double-digit growth and against tough base, we recorded a minus 5% in second quarter and minus 8% in the first half. Also, this region was impacted by currency headwinds, especially in Korea. Moving to client clusters. In general, this year, we see the reverse picture of 2025. Multinationals, which were growing at double-digit pace last year and that, therefore, had tough comparables this year, closed the second quarter at minus 2% with American Make-up clients performing well, but Asian Skin and Hair clients declining. The first half ended at minus 8% versus last year when we had recorded a plus 18% growth. Emerging brands conversely took back their historic driver's seat. In the second quarter, they grew by plus 13%, driven by Asian Skincare and European Hair & Body. In the first half, they registered a plus 6% growth. Retailers also went back to a negative trend after an extremely high 2025. Specifically in second quarter, they posted minus 14% versus last year plus 20% and the first year closed at minus 19%, offsetting last year equivalent growth. I now pass the mic to Vittorio, our Chief Operating Officer, who is acting as CFO at interim, to take you through the financials.

Thank you, Renato. Good evening, everybody. Going to the economics of the first half. As we saw in the first part of this presentation, the top line went down 2.5% at reported rate and 0.9% on the value-added sales, going at the constant rate in the positive territories, which is a good sign of our value-added sales. Going to the gross margin. We have been able to increase the gross margin percentage of 36 bps, thanks to the mix and the execution of the operational efficiencies -- we are executing our plan. And thank you to the lower packaging rate, which is 1 point lower than comparable to last year. This drove to an EBITDA of EUR 72.6 million, which is 2.6% lower of the last year or EUR 2 million, but we recorded the highest quarterly adjusted EBITDA on the Q2 at EUR 47.5 million or plus 5% compared to last year. So 16 bps increase year-over-year at 16.7%. If you go at the net income, we have a very positive progression at 33.3%, driven by a positive impact of the financial items that last year was driven by the headwinds of the ForEx and a lower tax rate that is from 45.5% last year to 34.7% this year, thanks to the -- influenced by the intercompany dividend that has not been yet distributed and the mix of the different countries profit. Going to the business unit EBITDA, we see a progression of the Make-up of 9%, with an increase of 180 bps, and this is thanks to the Prestige part of our business that is growing and a positive impact in the EBITDA of this category, so increasing 180 bps at EUR 53.2 million. Going to the Skincare -- the opposite. The decline in top line and the underabsorption driven by the fixed cost drove the 24% drop or 300 bps lower EBITDA margin compared to last year despite in the second quarter, the client mix is rising towards the Prestige sales. Going to Hair & Body. We saw a 25% reduced EBITDA compared to the last year or 280 bps. This is mainly driven by the contract manufacturing weight within the category that historically has a lower marginality and a higher weight of packaging within the business unit. Going to the operating cash flow and the net debt evolution. As anticipated, we had a strong cash generation, thanks to the level of the working capital management. And so we posted an EUR 18.6 million progression compared to the last year. So H1 EUR 26.2 million operating cash flow. If I take out the CapEx, so the conversion rate is 75%, which is a good sign of the cash generation. The reduced financial expenses and the reduced tax drove to a cash flow before dividend distribution and buybacks at EUR 13.3 million, that is a progression of net EUR 32.4 million compared to the same period of last year. We then go to the buyback that absorbed EUR 17 million cash and the dividend distribution, EUR 18 million. And then we had a EUR 22.2 million cash absorption in the first half compared to EUR 36.8 million of the last year. This is driving our net debt at EUR 122.7 million, including IFRS 16, compared to EUR 134.4 million of the last year with an improvement of EUR 12 million -- roughly EUR 12 million that is driving our leverage ratio down to 0.80, compared to the 0.87 of last year with this generation. Thank you.

Thank you, Vittorio. Moving forward. So overall, as you know, the geopolitical scenario is quite complex and very volatile. Despite this, Beauty is overall well-oriented and realigning to the historical trends of 4% to 5% growth. Now this being said, which is obviously good news, not everything is perfectly aligned, I would say, with what we would like to see, we would love to see. First of all, in Europe, the trends are pretty positive in both volume and price. But Make-up, which is our strongest business unit, is performing below Skin and Fragrances in general. So we would like to see Make-up getting a bit faster. U.S. is up high single digit, but it's mostly price-driven. So we would like to see more volume contribution to the growth of the market. In China, in spite of a softer-than-expected 618 e-commerce festival, it's performing in positive territory. Obviously, this market share shift from local brands to multinationals -- Western multinationals -- helps us in the other regions of the world, but it doesn't on the Asian entities. In this context, which we think is going to be confirmed in the second half of the year, so we expect the market to end in between 4% and 5% of growth. We have achieved in the first half results that are in line with our original expectation. Q2 saw an acceleration throughout the quarter. The order book is in the mid-teens up versus a year ago despite this Q2 revenues acceleration, and orders inflow remains strong. Actually, if I look at last month, it's more than strong. It's a record month. And on top of this, the Hair & Body forecast from clients is stronger than our original expectations. All in all, we -- all this bodes for a strong acceleration of sales in the second half, which was already forecasted and communicated as a backloaded year, and this is confirming and everything is aligning to that. Based on this, we confirm our forecast, which is in line with the current net sales consensus, which is in line and is in the range we had communicated at the beginning of the year in terms of guidance for 2026. So everything is moving along expectations. I thank you for your attention, and we are ready to take your questions. Thank you.

[Operator Instructions] The first question is from Andrei Condrea from UBS.

Two from me, please, if you don't mind. Firstly, you've reiterated the guidance on net sales. However, if we think in terms of EBITDA, how should we look at it given that Packaging has declined as a percent of your sales? And what are your expectations for that part going into year-end? Secondly, just on Skincare, obviously, operating leverage played quite a sizable role in the 300 basis point margin decline. But could you help us breaking it down a bit further? Just trying to understand why margins were so soft in the division.

Thank you, Andrei. I will answer to your first question, and then Vittorio will answer to your second question. Yes, I mean, in the EBITDA, in first half, you see 2 movements. On one side, you had a positive coming from Prestige sales going up and Pack going down. The two are, as you well know, well-related because usually Prestige brands deliver us their packaging. They don't ask us to buy packaging. On the other hand, the growth of Hair & Body, as you know, is dilutive. This is the business unit that has the lowest margin. So the 2 components kind of offset one another. Going forward, we had forecasted the Pack component, which had gone down significantly last year to remain overall stable in the course of the year. Now looking at -- especially looking at the Hair & Body forecast from clients for the second half, I think that we will see in the second half either stability versus a year ago and a slight increase versus the first semester in terms of percentage weight.

Okay. If I look at the Skincare question, Andrei, so the main drop in EBITDA compared to last year is driven, as anticipated before, by the fixed cost absorption on the legal entities where we sell -- where we produce Skincare, particularly the portfolio has been -- the execution has been soft due to the level of the orders. And so the level of underabsorption drove -- principally drove the drop on the EBITDA in the H1.

The next question is from Tilly Eno from Morgan Stanley.

I have 3, if I may. The first is on Make-up, where you saw an increase in the Prestige SKU helping profitability. Would you expect that mix towards Prestige to persist? A.k.a., are you still seeing that in your order intake? My second question is on Skincare. You saw the order book for Make-up and Skincare progressively accelerate even further. Could you give us any kind of color between -- in terms of the dynamics between Make-up and Skincare within that? A.k.a., you've previously spoken about expecting a pickup in Skincare in H2. Are you still confident in that? Or is it more about the other business units driving the full year? And then my third -- final question, please, on China. You mentioned in the outlook that you would expect a progressive comeback of the local Chinese brands. Have you seen any early signs of those comebacks? Or is this more just something that you think will naturally happen as a course of business?

Thank you very much for your questions. First, you talked about Prestige clients for Prestige orders for Make-up. When we look at the portfolio on hand, Prestige remains very strong. So we do expect Prestige to stay high in the second half of the year as well. The second point you mentioned is the order book between Make-up and Skincare. Well, Make-up is, as I said, in the first semester has been led mostly by growth in the Western Hemisphere. This is still the case in the second half. For Skincare, it is the opposite. It's Asia driving. Asia is positive and Western is below. Now what we expect is to see a comeback, as you said, of China clients, especially in Skincare in the second half, so a further acceleration there. As you know, the lead times, order lead times in China, especially in Asia in general, but in China, especially, is a lot shorter than in the Western world. So in Make-up, we see -- we have a richer order book than in Skincare, and that could simply be related to the fact that the transformation time is longer than what you see in Asia and China. So typically, a brand that needs goods for October, November has already placed orders in the Western Hemisphere is not yet in Asia and in China. Now coming to your last question, early signs of local brands accelerating in the second half, we do not have anything tangible. When I say anything tangible, are firm orders. What we hear though is their will to gain shares back during the Double 11 event. So everybody has been quite surprised after a couple of years where they were winning to see the comeback of the Western brands. They all declare their desire and their eagerness to come back and react to this escalation of Western brands. So it's not only our assumption, it's what we get qualitatively talking to the local clients. Now obviously, we need to see orders inflowing at an accelerated pace to, let's say, solidify this intention, and this is going to come towards end of this month, early September. I hope I've answered your questions.

The next question is from Molly Wylenzek of Jefferies.

I just want to push you a bit more on Make-up and the order book. As you just mentioned, the order book is mostly Make-up. You've been talking about record levels since, I think, November of last year. Good to hear that Make-up is now ex-FX, ex-Packaging back into mid-single digit growth. But can you talk us through sort of the acceleration you expect into the second half? And I'm not sure if I missed it, but just your expectations around Packaging in the second half as well to get towards maybe a net sales number.

Okay. So for Make-up, we spoke about an acceleration happening at the end of last year. I must say that this acceleration is further accelerating, especially in Make-up. Actually, it's mostly focused on Make-up during this early summer month. So we really see traction coming in Make-up and mostly driven by the Western Hemisphere, mostly coming from Prestige. Prestige was up significantly in the second quarter for Make-up, also for Skincare, but especially for Make-up. When we look at the order book we have on hand, we see similar dynamics. So let's say, the weight of Prestige versus Mass is very similar. So we cannot predict what is going to be exactly at the end of the year, but the indications we have in our hands point to the same direction. So all in all, we expect to go in that direction. On the other hand, let's not forget that what is more of a "surprise" is the fact that the forecast we are getting on the Hair & Body business unit is ahead of our expectations. So that is good news in terms of top line, as you will know. But you also know that that is a bit dilutive in terms of EBITDA margins going forward. Sorry, just to complete, this Hair & Body part that I just mentioned will drive up a bit the percentage of Packaging component on the total net sales. It will not be driven by Make-up, I think. It will be driven by Hair & Body.

The next question is from Aron Adamski of Goldman Sachs.

I have 3 questions. First, a follow-up on Skincare. How would you expect the Prestige Skincare performance to evolve into the second half of the year? I think you commented on Make-up. And how -- also, how should we think about the performance from multinationals in the U.S. and Europe in Skincare, as that appears to have been weaker? Second question is on China. I just wanted to follow up on the comments regarding the fightback of the Chinese local brands and their willingness to regain market share. How would you expect that to play out in practice? Would you expect them to become more promotional? Or would you rather see a pace of innovation to accelerate? And just to finish on China, it would also be great to hear your perspective on the trends we've seen so far in July, if you have the read already. And then the last quick question is just a technical one. Can you remind us of your expectations for this year for finance costs and the effective tax rate?

Aron, thank you for your question. Sorry, I'm writing them down because otherwise, we forget them. Skincare, Prestige for the second half, we are seeing them moving in a good direction, not a great direction. So we clearly see a difference so far between Make-up and Skincare in terms of Prestige clients and multinationals. I think that Skincare -- well, I think, I know Skincare has been mostly driven by Asian clients. And I think this will continue to be the case in the second half. As you know, there are a few brands in Prestige territory from the local brands. Now one example is, for instance, in China, Maogeping. Maogeping is one of the few Chinese brands that performed well during the 618 festival. So we keep thinking this brand will continue to go well also in the second half of the year, but there aren't that many. So I think that there will be a shift in the total panel of Skincare sales, there will be a shift towards masstige and a bit of mass simply because it will be more driven by Asia than the Western world. From the China fightback, I think that it will be -- most probably, there will be an escalation in promotional. Innovation, yes, but they always had innovation. It requires a push to get the trial going. And when the Western brands are pushing hard to gain share back, they have an inherent advantage that is driven by their brand image. So getting a great offer from YSL or another luxury brand from the Western is tough for them to compensate. So they need to sharpen their pencils to do better in that respect. So yes, I would expect them to go up, to answer your questions. July read, we don't have yet, sorry. We have seen data from the -- up to the end of June. We have seen a read up to the end of July for U.S. market, but not from China. For the finance and tax question, I delegate to someone who's better equipped than me.

Thank you, Renato. So I start from the tax rate to the ETR. So we expect to have the ETR normalizing at 30%, 31% as per consensus because we know that the effect of the dividends is temporary. So in the H1, we anticipated before. On the finance cost also here is depending, of course, how the ForEx will move in the second half. But we do expect here to stay in the range of EUR 12.5 million, aligned to the consensus.

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

Sorry, just a quick one from me. How do you see the inventory level in the system, in the market? And so to what extent can this, say, ensure a consistency of the fast growth you are expecting in the next few months? If you can comment on it, please?