Good evening. This is the conference call conference operator. Welcome, and thank you for joining the Intercos first half 2023 results conference call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Renato Semerari, Chief Executive Officer of Intercos. Please go ahead, sir.
Thank you very much. Good evening, everybody, and thanks for attending our call. Q2 has been another very strong quarter, actually, our highest quarter ever in absolute terms, allowing us to close first semester 2023 with very strong results. However, the Q2 has also shown a clear change of business dynamics, which have started to have an impact on business, and we will go more deeply into this one later on. All in all, after 18 months across our listing on the public exchange, we have grown Intercos size by 40%, both in sales and EBITDA, and I must say that we're pretty proud of these results we got. Let's start with a snapshot of our key semester data.
Net sales closed first semester at EUR 488 million, which is a 33% increase over last year, with a slight FX headwind, especially in the Q2 , as we will see. Value Added Sales, which are, I remind everybody, net sales minus the value of packaging, went up about by 28%. Adjusted EBITDA was at EUR 67 million, a growth of 39%, with an EBITDA margin of 13.8%, which is a 57 basis points increase versus last year. Margin over Value Added Sales was at 17.2%, a gain of 129 basis points over the first semester of last year. Adjusted net income was at EUR 27 million, a growth of about 30% versus last year.
Aside from the financial result, I'm very happy to share some news on the ESG front, and in fact, we've been awarded by the UN Association for Refugees, an award for the activity that we do in Europe to help integrating refugees in the world of labor in our countries. Coming back to financials, net debt, which was influenced by two sizable one-off items, was at EUR 123 million below last year level, and reaching a leverage of 0.87 over Adjusted EBITDA, which is, again, an improvement of 0.31 x EBITDA versus last year. Going a bit more in the details, going into the Q 2 results. Q 2 saw a growth at current rates of +31%.
As I said earlier, we had a bit of Forex headwinds, so constant rates growth was at 34%. Adjusted EBITDA was at EUR 37.5 million, with an EBITDA margin of 14.8% and a slight dilution versus last year margin of 50 basis points. If I look at the Value-Added Sales in the quarter, they grew 27%, and our margin over Value-Added Sales was at 18.3%, in line with last year. I won't repeat the results of the semester, because we already saw them in the previous slide. Let's now deep dive on the sales results, starting by looking at the results in terms of top line by business unit. All business units registered double-digit growth, both in Q2 and in the semester.
Hair & Body has been the fastest growing in both periods, 89% growth in Q2 and 70% in the first semester, thanks to big new clients and high growth also of well-established clients. Makeup also kept a fast-growing pace. In Q2, it grew 23%, and in the semester by 29%, with all regions and client types performing extremely well. Skincare went back to double-digit increase in Q2, + 12%, which allowed the view to land the semester at + 10%. As you may remember, in Q1, we had grown at high single digit numbers. As a consequence of the different growth rates of the different business units, Hair & Body now weighs 23% on total sales of Intercos, while Makeup remains over 60%. Moving now to the top line results by region.
Also, in this case, I'm happy to underline that all regions displayed double-digit increases in both Q2 and semester one. Namely, EMEA was the fastest growing region, with a very even growth of over +45% in both quarters. All clients types and all business units displayed strong performances, but obviously, the key drivers were Hair & Body and Makeup. Asia was the second fastest region in the Q2 , up +19%, thanks to China coming back to double-digit growth, and thanks to Korea maintaining the very strong traction we have witnessed in the past 18 months. This led semester one to a strong +18%, with both China and Korea in double-digit territory.
Americas, which has been the fastest growing region in the past 18 months, confirmed its fast pace, +16% in Q2 and +22% in semester 1, mainly thanks to the growth of emerging brands and multinationals. Finally, looking at the results by client clusters. All clusters have been growing a double-digit pace in Q2, while in the semester we had the slight exception of retailers growing at high single-digit pace. Emerging brands remained the high traction cluster, achieving +68% growth in Q2 and +62% in semester 1. Both mass and prestige channels displayed high growth, with a skew from US and EMEA from a regional standpoint. Now, emerging brands have reached 40% weight on our total sales. Multinationals grew by 15% in the quarter and +22% in semester 1.
Again, all views were growing, and the original skew in this case was EMEA and United States. Retailers accelerated in in Q2, +15% after Q1 of stability. This allowed this cluster of client to reach a +8% at the end of the semester. The growth was mostly driven by EMEA, in this case. I'm now passing the microphone to Pietro for the financial results. Thank you, Renato. Renato already commented extensively all of the sales dynamics. Now for me, it's worth to underline the performance that we have been able to achieve in constant currency, especially in the Q2 of the fiscal year, where we had our sales growing at a +33.8% at constant currencies versus 31.3 at reported currencies.
Once again, this growth was mainly driven by volumes, with price effects, basically at 1.4% on a year-to-date basis. We have been able to achieve EUR 67.4 million in EBITDA, growing 38% versus prior year, with the Q2 being, as already mentioned by Renato, the highest level, the highest absolute level for the group. Profitability has been grown from last year. We have now at a 13.8%, growing 57 basis points. Even better is the result that we have been able to achieve in EBITDA on Value Added Sales, growing from 15.9 last year to 17.2 current fiscal year, with a growth of 129 basis points.
Adjusted net income grew by EUR 6.1 million, at +29.6%, thanks to the higher EBITDA and the better tax rate. This was partially offset by the financial expenses that last year in the first half, benefited from positive currency fluctuations. For me, it's worth to remind you that despite the higher cost of the money, Intercos is not really suffering of it, thanks to the fact that the senior financing has been hedged at the beginning of 2020. Therefore, our interest expenses linked to the debt are remaining basically flat. Net debt, in the period increased by EUR 32 million.
We are now at a level of EUR 122.7 million of net debt. This growth, the increase was due by EUR 14 million of dividends that we have paid in the period, and especially for a non-cash driven financial liabilities that we have booked in accordance with the accounting policy IFRS 16, linked to some rents renewals that we have in the group. Mainly, the renewal of the plant that we have in US and an additional plant that we have in Poland. Now, we have already commented the EBITDA at group level. Now, if you look at the performance by business unit, important to point out that all of the business units growth grew in the first half.
Exceptional result is the one that we have been achieved by Hair & Body, that basically doubled the EBITDA, growing 93%, and this, thanks to a 140 basis points better profitability coming from increased production efficiency, better production planning, and obviously leveraging on the new contract that we have been able to take. Makeup, EBITDA increased by 36%, thanks to higher volumes and the better investor productivity, that allowed us to increase the profitability by 50, 76 basis points. Skincare increased as well by 8% in absolute level, though with a lower profitability, due to a different customer mix, compared to the one that we had last year.
Now, if you look at the operating cash flow, this amounted to EUR 7.4 million, though this was affected by higher CapEx, including a EUR 23.5 million of IFRS 16 accounting impact. Real operating cash flow generated by the group was EUR 30.9 million, excluding the accounting effect. This positive result was achieved thanks to an improved working capital management, with trade working capital ratio on sales improving from 21% prior year to 18% in the current year. Trade working capital absorption was mainly due to increased level of receivables following the sales growth, though with an improved DSO. We also have been able to maintain the level of inventory, the value of inventory, at a stable level.
Cash flow before dividends is instead negative, mainly due by less favorable exchange rates, higher taxes, and an exceptional cash out related to the finalized settlement of issues that we already approved in 2021. We look at the increased level of net debt in the first six months of the year, equal to EUR 32 million, EUR 14.4 million were due to dividends distributed, and EUR 20 million deriving by the accounting effect related to IFRS 16. Okay, thank you, Pietro. We now move to the future, looking at what we expect in the near future. The macroeconomic environment is showing a mixed picture. On the positive, the industry shows resilience, especially in the Western world, especially in Europe. China is recovering growth. Inflation is more predictable and has slowed its pace.
On the negative, growth rates in US are slowing down, China growth is still below expectations, and the monetary policy easing is not yet there. We can look at the glass as full or as empty, depending on how we are, and I would say that the same kind of mixed picture is on our side. On the positive, we have strong order book and new projects inflow, which is extremely strong. On top of that, we see no signs of pricing risks, so we are, no client is, challenging the price increases that we've done so far. On the negative, semester two will have very high comps.
You will remember that semester two of 2022 saw a big increase in our top line linked to the first phase of backlog absorption from the supply chain disruption that we witnessed in 2021 and beginning of 2022 as well. On top of that, as we already mentioned, we have an unfavorable mix in terms of business units. You've seen Hair & Body, which is our lowest margin business unit, growing the fastest, and also a mix that is changing in favor of food service and mass market brands.
Based on that, and based on the fact that in semester one, we have seen growth, which has been better than our expectation, considering the high base of 2022, we confirm our guidance for the year, which we always indicated as a front-loaded year. Before we get back to our normal growth trajectory, we expect a second semester of consolidation with performances in line with last year. In particular, net sales are expected to slightly increase compared to the second semester of last year, while Adjusted EBITDA, we expect it to be in line with that of last year. To conclude, I would like to show the usual order book trend. Order inflow continue to be strong for Makeup and Skincare.
I remind you that we do not monitor the order intake for Hair & Body because of the different business models with rolling forecasts and different freezing rules by client, so very difficult to read. For Makeup and Skincare in the past six months, we have established our highest semester ever, despite we register a double-digit decline of reorders, which was more than offset by exponential growth of new projects. To give you an idea, our mix between reorders and new orders has moved from a 70%, 30% ratio to 60/40, which is clearly unusual. This leads to an order book of over EUR 300 million, which declined only 10% versus last year, despite the impressive acceleration of our orders execution in the past 12 months.
This concludes our presentation, and we are ready to take on your questions. Thank you.
This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on their touchtone telephone. To remove yourself from the question queue, please press Star and Two. Please pick up the receiver when asking questions. Anyone who has a question may press Star and one at this time. The first question is from Rashad Kawan from Morgan Stanley. Please go ahead.
Thank you, and, and good afternoon, Renato and Pietro. Congrats on, on the results, and thanks for taking my questions. A few from me, please. First one, on your updated guidance, just quick clarification. When you say EBITDA being similar to H2 of last year, I mean, I'm assuming it's on an absolute basis, right? If it is, that will suggest your EBITDA margin will be flat for the year versus last year. If you can just kind of break that down, is that a combination of both, you know, mix as mass accelerators versus premium, and also Hair & Body impacting the mix as well? Then just the second question around just mass accelerating versus prestige, is that a dynamic you're seeing specifically across one or two of your multinational customers, or is it more broad-based?
I know some of your customers are quite exposed to Asia travel retail, so wondering if they're not ordering as much in the prestige category, and that's part of the dynamic you're, you're seeing there. Thank you very much.
Thank you, Rashad. Let me first answer to your second question. Yes, there is a clear move in reorders, where we see prestige reorders suffering a lot more than mass. I think that what you mentioned about travel retail and Asia in general has a big part of the game here, for sure. I also have the sensation that during the period of crisis of supply chain, prestige were more careful in increasing their inventory levels to protect their fill rates. Therefore, now they are the ones that are rationalizing their inventory faster. Yes, we see mass growing faster, although we do not see a real change of trend in terms of sell-out. I'm talking now on the Western world.
Between prestige and mass, we are seeing reorders, checking, you know, suffering a bit more. That dynamic, then it's difficult for us to understand how much is influenced by Asian travel retail, but that, again, I believe it has, it has an impact. Coming back to your first question, I mean, Yes, you're right. It, it's, when, when I said flat in terms of EBITDA in the second semester, I'm referring to the absolute figure. That's exactly right. Of course, in giving you this guidance, we are factoring in this change of mix in both of the business units and also clients that are, you know, impacting all the business units in reality.
Thank you very much.
Thank you, Rajad.
The next question is from Kate Rubanova from UBS. Please go ahead.
Good afternoon, Renato, Pietro, and Andrea. Thank you for taking my question. First of all, I wanted to check on your full year growth outlook. Just to confirm, when you talk about a slight increase over the previous year, do you refer to reported growth or growth at constant currency? With quite resilient order intake data for Makeup and Skincare and continuous contribution from Hair & Body, what is driving such a cautious outlook? Do you see the risk of destocking in the coming months to kind of materialize a bit more in the numbers? I wanted to ask about your gross margin. It was down 10 basis points in H1. Just wondering whether that was mostly due to the higher portion of packaging, if you can provide more color on that.
If you can, a little bit about it with the numbers, like on the Value Added Sales. Lastly, I wanted to talk a little bit more about the Hair & Body division. Do you have any visibility on how the sell-out is progressing for Dolce & Gabbana? Do you see any extra inventory in place? Basically, I'm just trying to understand what sort of growth normalization we should expect in the second half of the year for the business. With a very strong contribution from Dolce & Gabbana, it's hard to see how the rest of Hair & Body division is progressing. Maybe you can also tell us what the growth rate for the Hair & Body division, excluding Dolce & Gabbana, was in first half.
Lastly, if I remember correctly, at the time of the IPO, you were talking about kind of low to mid-single digit growth for Hair & Body division in the medium term. With such a strong asset in your portfolio now, and with fragments markets booming, do you see this medium-term growth potentially accelerating to a high single digit rate? Thank you.
Thank you. Thank you very much for your question. You always speak super fast, so I try to follow, to follow and keep track of your question. No problem. No problem. I'll start from the end. Hair & Body, what is the visibility we have in terms of sell-out? I think it is a bit early days, at least for what Dolce & Gabbana is concerned. Now, I want to be very clear, our growth in Hair & Body is not just connected to Dolce & Gabbana, it's connected to other new clients we have taken on board. Again, also in the fragrance territory. So clients we didn't have last year, and that's coming and are growing very nicely.
Now, if I could tell you the name, you would know that their sell-out is pretty good because they are reporting their sales as well. You know, in general, as you know, the market has seen a surge of the fragrance segment, which was unexpected, and that is way above the expectation of everybody. We are getting a lot of benefits from that because of the new clients, because of Dolce & Gabbana. Again, but also, you know, clients we previously had, and we had prior to the acquisition of Cosmint in fragrance arena, are growing very significantly. This being said, the growth that we are having in Hair & Body is not only connected to fragrances, but also, other segments are growing very nicely and to be very clear, above our expectations again.
Dolce & Gabbana, as I said, I think it is still early days. I know that their fill rate of the pipeline of distributors and retailers is not over yet, we will need to see what happens next year. I think that for the whole of this year, we will be seeing strong numbers coming in from Dolce & Gabbana and from all the players of fragrances. I hope I've-- although I didn't give you numbers, which I know that you really would like, I, I hope I've given a, a bit more color on that part of the business. The second, the point that you raised was related to the growth of packaging, if I followed it right.
Yes, you know, we had a significant shift, as I said, from free issue to full service, so to clients that are asking us to buy packaging. As a matter of fact, in the semester, our top line has grown 33%, and our value-added sales have grown 28%, and this clearly shows that the component of packaging has been growing. As I've always said, and I will repeat it, it's not something we like per se, but again, I must say that on the other side of the coin, which is the positive side of the coin, it's the benefit of our diversification.
If we didn't have about 50% of our portfolio in mass market and therefore, in full service, we would have suffered a lot from the decrease of the orders in prestige, which we were able to compensate thanks to our diversification. We need to take the good and the bad when they come, you know, when prestige grows faster, obviously, we are a lot more happy. When we see mass compensating and offsetting prestige, in this case, you know, growing 33%, it's over offsetting, and reality prestige has been growing as well. This is important to be underlined in an important way, in double-digit way, but mass has grown faster.
I think that it plays to the strength of what we've built over the years of having a diversification and a balanced portfolio of clients that allows us to perform well relative to market, no matter what happens. About the... I, I heard a question about our cautious outlook. Well, you know, in reality, this is something I've been repeating, I will be repeating it again. We have been, in the past 12 months, into, allow me to say it, and please do not take it negatively. We've been in a abnormal growth because we've been absorbing the backlog of orders. You remember, and you've witnessed, you know, very regularly, the fact that our order inflow was growing a lot more than our output for at least a good 12 months.
We've, we've had the benefit in the second semester of last year of a major increase in our sales. A part of that was related to the digestion of part of this backlog, which we have completed digesting in the first semester of this year. To be honest, if I look at it from a pure business performance, repeating the performance of last year without the backlog digestion, it means that we are growing in an organic way, in, in, in the same, compensating the, the effect of the of the backlog of last year. All in all, the reality is that our business is organically growing also in the second semester.
Aside from that, we expect a slight increase in our sales in the second semester. I want to underline that because, you know, I'm not saying you that we are going to the higher part of the guidance we gave you during last call. We're probably, I mean, we think we're gonna do a bit better than that, so growing a bit faster than the top line guidance we've given. On the other hand, we need to be cautious in terms of giving the projection because of this mix change, which is a reality, and I don't know how long it's gonna last.
When I look at the orders that are present in our group, I see this change of mix, and it's correct that you know, that this is happening and will, will happen in the next six months. I know that I'm always accused to be cautious, but, you know, if I, if we do better than that, I will be the happiest in the world to be wrong. I think you had another question about reported versus, I think it's, you know, the answer is.
No, I think you answered it. Yeah, mm-hmm.
Yeah, it's, it's reported growth, I'm, I'm talking about, yes.
Yeah. Thank you. Just to follow up, would you be able to provide the growth margin level based on that Value Added Sales?
I, I didn't get it, sorry. The, the growth margin?
Growth margin based on Value Added Sales.
No, the growth margin, we, we don't, we don't disclose it.
Anyway, anyway, Kate, you can calculate it, because you take, you take out all the packaging components from the top line, and then you end up with a growth margin, but on a lower, on a lower number in terms of top line.
Yeah.
Thank you.
Thank you, Kate.
The next question is from Anna Font-Fontani from Berenberg. Please go ahead.
Ciao, congratulations on the results, and thank you for the presentation. Actually, two questions. The first one, if you, if you can, provide some color on how does July look like in terms of order intake? Again, maybe if you can give some idea how prestige versus mass orders were in the flat month. Then the second question is related to the increased production efficiency that you mentioned. Were this efficiency just driven by a better supply chain environment, or did you take some internal actions to make this happen?
Anna, thanks a lot for your questions. July orders intake, I won't give you the number, you will see it in together with August, as usual, but I can tell you that has been strong, and has kept the growth pace we have seen so far. In total, July orders were absolutely in line with the growth trajectory we've had so far. We are very happy about that. In terms of prestige versus mass, I will confirm what we just said. Prestige is the one growing less, so it's, you know. Telling suffering would be a lie. It's growing, but it's growing at a slower pace than mass market.
Again, I think that, as Rajad said at the beginning, we're still, still paying a toll for travel retail and Asia in general, but also digesting the excessive inventory they built over the supply chain crisis. Unfortunately, we do not have visibility on when things will go back to normal in terms of the orders, but I would like to underline once more that first of all, I'm super glad about the increase of orders we are seeing, which is way beyond my expectation. Because this is orders, repeated orders for the future, so this is extremely positive. The flow of projects we are winning is not over, it's continuing.
Again, this is again, a testimony of the strength of our innovation and, and that the underlying business, aside from short-term adjustments and things like that, things are going well. I'm super happy about that. Production efficiency is that I mentioned earlier, is coming from both the factors that you highlighted. Certainly, the capacity to plan productions in a more efficient way is giving us productivity advantages. On the other hand, we are in a cost program to improve ourselves day after day. We have automation projects that have gone live, we have other efficiency measures that are being put in place and are paying, you know, very good dividends. In terms of productivity improvements, we are getting actually a bit better results from what we had budgeted ourselves.
They're, they're, they're doing very well. I'm very happy about the results, we are, we are getting there. Last but not least, I think that our centralized buying team is doing an excellent job and has had a very, very strong first semester, bringing us, you know, good negotiations and good rates from the suppliers, and also increasing the average payment terms with them, to a more, you know, to a better, to a better environment for us. All in all, I'm pretty satisfied about the three components of, you know, industrial and buying efficiencies.
Thank you very much. Sorry, just, another question maybe for Pietro. Can you remind us on the CapEx plan?
Yes, sure. If you remember, we have this expansion plan that basically is covering, starting in the current fiscal year, 2023. It will go on next year and also the year after, 2024, 2025, will be the highest year in terms of expenditures. We will have to raise the level of CapEx at a level of in average, 7.5% on sales, starting from the increase will start from this year.
Thank you very much.
Thank you, Anna.
The next question is from Misha Homannagy from BNP Paribas Exane. Please go ahead.
Hi, Aldo. Hi, Pietro. Just one question from me, please. You just mentioned that you expect H2 to see, only slight sales growth before you return to a normal growth trajectory. Can you please remind us, what that growth trajectory is, and whether you expect FY 2024 to be in line with that growth trajectory? Thanks.
Hi, Misha. Thanks for your question. Well, what, what we said is that we have the ambition to grow twice as fast as the market. This is what we said during our roadshow. This is, if I look back at the 10 years prior to COVID, we had an average growth rate of 10% a year, so it's in the high single digit, low or low double digit territory. This is what we've proven capable of doing in the past, and this is what I judge to be our, let's say, normal trajectory. Now, clearly, after the IPO, things have gone in a much better way.
You know, if you asked me at the time of IPO, would I expect 18 months after the IPO to be at + 40%, I would have never said yes, never, ever. You know, I think that having a semester of consolidation before we go back to our normal trajectory, it's pretty normal. I hope I've answered to the question, Misha.
Yep, very clear. Thank you.
Thank you.
The next question is from Rashad Kawan from Morgan Stanley. Please go ahead.
Hey, guys. Thanks for letting me back in to squeeze one more question in. I just had a question on China. You know, you're talking about, you know, you -- the commentary is, it sounds cautious in terms of the recovery path and what you're seeing. You grew double digits and obviously on pretty weak comps in Q2 of last year. Maybe can you talk a little bit about what you're seeing on the ground there, when do you expect things to improve over the next few quarters? I think that that would be helpful. Thank you.
Okay. I think we need to make a distinction between what is happening in the market in general and what is happening to us. In the market in general, we are seeing growth. Things have improved progressively from the beginning of the year to the end of June. Clearly, I think that many of us were expecting a faster acceleration after COVID from China. This has not happened. I've spent 15 days in Asia with 10 days in China 2, 3 weeks ago, so I have quite a fresh memory of that. I think that overall, what I sense is that there is cautiousness after COVID in the Chinese public opinion. I think that they've seen the government to take very harsh decisions.
They have- they are a little bit worried about how the government can steer direction for the country. I've seen a higher propension to pay back mortgages rather than buying luxury goods in general. You know, it may, may be, you know, an anecdote, but I never heard about mortgages when I was visiting China in the past, and a few people I, I, I spoke to mentioned it very clearly. There, there is a bit more cautiousness in the spending behavior of the Chinese consumer. This being said, the recovery is there, is progressive, it's not exponential, and I personally believe we will be seeing that throughout the year. I've seen, by the way, also commentary from L'Oréal that goes along those lines, which I personally adhere completely.
In the market, what we're seeing is that there has been. You know, I've seen over the past 30 years, periods where the Western brands are growing faster than the local brands, and then periods when the local brands are doing better than the Western brands. I think we are in a period where the local brands are doing better than the Western brands, and that is, it explaining also why we were growing double-digit so much faster than the market overall. You know, we have clients, we have done an excellent job in the past year to acquire new clients, new Chinese clients, and this is obviously helping us in the 1st semester of this year. Will that continue? I don't know.
I, I think that the progressive opening of China, the comeback to travel, will inevitably help Western brands that are more prestige than the local brands. I think that certain Chinese brands that have taken market shares in the past 15 months will stay strong for the, you know, in the short, medium term. This is a bit what I've seen in China, and I'm not worried about the growth path of China in the mid or long term. I think that before going back to the trajectory, it, it will take a few more months.
Thank you very much.
You're welcome.
As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. Gentlemen, there are no more questions registered at this time.
If there are no more questions, I think we can close the call. Thanks, everybody, for having attended to it and for your attention. Thank you.
Thank you. Thank you. Thank you all.
Ladies and gentlemen, thank you for joining. The conference is now over. You might disconnect your telephones.