Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Intercos First Quarter 2022 Financial Results Conference. 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 the Intercos Group. Please go ahead, sir.
Good evening, everybody. Pleased to be here to present and then discuss with you the results of our first quarter. As you all know, the first quarter has been marked by a number of events, not very positive, to be honest. Everybody knows about the geopolitical turmoil in Europe, which added further issues in the economic world. Also the lockdowns in China due to the COVID pandemic and the zero-COVID policy has put further turmoil in the situation, especially in terms of consumption in China, but also in terms of supply chain disruption on a basis that, as you well know, and we discussed it, several times in the past months, it's far from being rosy.
In this context, Intercos performed in line with our expectation, at least. I won't comment on your expectations, but I know well our expectation with a very solid top-line growth and an EBITDA growth, which is in line with the development of the top line. I'll pass the comments to Pietro. Pietro will start the presentation of the results, and I will come back in a moment.
Thank you, Renato. Good afternoon, everybody. We ended the first quarter with sales at EUR 175 million, which is a growth versus prior year Q1 of 21%. On a like-for-like basis, meaning on a constant currency, our growth has been 18%. Solid EBITDA generation. We are growing also in this case by 20%. We have reached an EBITDA of EUR 19.1 million. That brings us the possibility to have an EBITDA margin at 11%.
The growth was very positive with American and European customers, and also we are very satisfied with the performances that we had in skincare and the makeup, which is continuously having or showing the recovery after the year of the COVID crisis. Renato will show you afterwards the results by categories of products, by customer types, and also by geographies. The cash generation, our net financial position is at EUR 155 million, which is an improvement versus prior year first quarter by EUR 46 million. A deterioration on December last year that is caused by the absorption that we had from the increase in inventories and increase in receivables.
Basically, the increase in inventory is coming from our choice of increasing the level of certain categories of raw materials and packaging in order to cope on one side with the high level of sales that we are foreseeing in the next months and quarters, and also in order to cope with the lack of availability of certain products. We have increased the level of security stock. On the other side also, as already mentioned by Renato, we have to cope with the supply chain disruption. In certain cases, we do have still some difficulties in finalizing completely the production that is causing an increase in the level of work in progress or semi-finished products.
Now, we can go, Renato, to look at the performances by categories and customers.
Thank you, Pietro. I'll start by giving a bit more details on the revenues by business units. Makeup is coming back, and it's coming back to its pre-COVID levels. As you may remember back in 2019, makeup was accounting for 64% of our sales. In quarter one, 2022 is at 62.5%. The thing which is, I think, very important is it is the first quarter that we've beaten the corresponding quarter of 2019 in makeup, which is super good news because it means that we have reached the waterline level of 2019. Looking at the performance by business unit in terms of growth rates, skincare grew 37% versus a year ago, makeup 24%, while hair and body was up by 3%.
This 3% is still penalized by the comparison with the previous hand sanitizer phenomenon. If I exclude the hand sanitizer, it was up 14%, also this division in double digits. Now going a bit more into the details, makeup up +24%, was driven evenly by U.S. and Europe, and also evenly by multinationals and emerging brands. Prestige was slightly faster in terms of growth versus mass while we saw a decline in direct sales. Direct sales are the door-to-door channel, as you may remember. Skincare at 37% was mostly driven by EMEA again. Also U.S. helped quite a bit. Emerging brands were clearly the driving force, also even if also multinationals were up.
Also in this case, we had a slight skew towards prestige in terms of growth rates. If we now go to the revenues by region, here we see EMEA standing slightly above the 50% of our sales. America is continuing to gain traction and gaining weight on our total sales, while Asia has lost a bit of steam. I will come back on this one in a second. In terms of growth rates, Americas has been leading the pack, +32%. This has mostly been driven by emerging brands, but also multinationals contributed to this. Also, in this case, a slight skew to prestige versus mass in terms of growth rates. Both were growing, but prestige a little bit faster than mass. EMEA, very strong growth at +20% as well.
Here we saw good performances from countries such as Italy, U.K., and France. Big growth coming from emerging brands, but also retailers did pretty well. Also in this case, we had both prestige and mass growing, but prestige again growing faster than mass. When we come to Asia, the situation is a bit more complicated, quote-unquote. We have a mix of results that are a bit different, with Korea growing extremely fast, partially offset by China suffering a bit and other Asian countries doing pretty well. China has moved from being the engine of growth to a bit the brake in our expansion in Asia.
This is not too much of a surprise knowing that, in the quarter, we have seen lockdowns in different regions, in different cities of the country, and the fear of COVID expansion has reduced foot traffic in the stores a bit across the country. Obviously, the situation at the peak with the lockdown of Shanghai that impacted March in a very clear way. In terms of results within our client types, multinationals have been the driver of growth, which were on the opposite a bit offset by retailers that declined compared to the past year. Moving now to the performance by customer type, we see the continued expansion and progression of emerging brands with retailers losing a bit of weight.
As you can see, the growth rate of emerging brands has been spectacular, +43%, but also multinationals performed very well at +15%, with retailers growing a bit below the double-digit bar at +9%. Good performance across the clients type. Clearly, emerging brands are seeing a lot of traction, and this is, I think, a very good news for the company in general. Moving to the outlook and guidance, we are highlighting four news. All in all, two are good, two are bad. I will be mixing them so that you don't, you're not left with a good or a bad flavor. The first, I will start with the good news.
The week of April 25th, so it's very recent, saw the physical reopening of Cosmoprof, that, as you know, is the biggest fair in the world for beauty. This has followed our beauty event, which has started in March. We have welcomed over 150 customers from multinationals to emerging brands, and so we had the occasion to be physically meeting with a lot of clients. Some of them we had not physically seen for a long period. Very positive Cosmoprof outcome. I was honestly expecting a lot less traffic, a lot less clients, especially because there were few Americans traveling, but especially we couldn't expect any Chinese customer and very few Asian, given the situation in that part of the world.
Moving to the bad news, we are continuing to observe with great regret the situation and the evolution of the situation in Ukraine. The evolution of the war is leading to a high level of volatility in terms of energy cost, and this gives again poor visibility on what is gonna be the inflationary impacts going forward, both on our direct costs, but also on raw materials and packaging materials going forward. Obviously, the other negative news has been the progression of COVID in China with the first in Hong Kong and then in China, and especially with the lockdowns.
I must say that the most worrying one is the lockdown of Shanghai, both because of the impact on the local consumption, which as you know, is very important, but also because it puts a further cloud in the supply chain storm that everybody is well aware of, especially the congestion at the Shanghai port is something that is not gonna ease up the situation in terms of supply chain, and that we will certainly prolong the issue in terms of supply chain normalization. This is clearly something that is not going to help anybody in our industry and well beyond our industry, I would say.
We do believe and we're convinced that our strong position in other regions of the world will help us to actually gain market share compared to other competitors that are more exposed to that region and to those phenomena. The other thing that helps us a lot is the incredible growth that we're seeing in Korea, and that helps us to rebalance what is happening in China. Also the fact that the Chinese market and the Chinese consumption is very skewed to skincare. For once, it helps us because we are more skewed to makeup, so we're gonna be suffering proportionately less of what is happening in the country. This being said, there is the last news, and this is very positive.
We continue to achieve an incredibly strong order intake and I will show that in a moment to you. Our order book goes from strength to strength and this obviously is an excellent news. All in all, balancing of the news that we have and the context, the general context, together with the results that we have had in the first quarter, we confirm our expectation that was communicated to the market that foresees growth for 2022 in a range between 10% and 15%. This factors in the supply chain complexities that we are navigating through. If you move now to the next page, I go a bit more in detail with the order intake progression.
As you can see, we continue to go from record to new record. March, April has marked a new all-time high in the history of this company. Again, this is only makeup plus skincare, so there is no hair and body because we are in a rolling forecast system, so it's less clear the situation there in terms of orders intake. But you can see that, with EUR 120 million, we have reached a new record which beats the record that I spoke to you about in our last call, which was January, February of 2022. We continue to not seeing a softening of orders intake.
This leads us moving to the next page and last page. Our order book, which is 47% above 2019, is actually even higher versus 2021. It's an extremely strong order book at EUR 344 million, where you can see that the chunk in makeup is extremely higher than we've ever had. We have all the means to do a fantastic year. It's all a matter of being able to convert this into production and invoicing as soon as we can possibly do that. We remain confident about the year despite all the clouds that we've been speaking about. I think that we will continue to see progression that is very positive for the company. That's all on our side.
We're more than happy to welcome your questions.
Thank you, sir. Excuse me, 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 your question, please press Star and Two. Please pick up the receiver when asking questions. The first question comes from Kate Rusanova of UBS. Please go ahead.
Good afternoon, all, and thank you for taking my questions. My first question relates to your profitability. If I remember correctly, during the full year results presentation, you mentioned that you do not expect any significant margin movements this year. I'm just wondering if that is still in place considering the most recent developments in the commodity markets, and whether you think you can meet or exceed the EUR 100 million EBITDA profit achieved last year. Also, maybe you can share with us whether there is any seasonality in your profits and whether Q1 is typically a low margin quarter for you. My second question is on the partnership with Dolce & Gabbana. Would you be able to provide any potential range for the size of the deal?
When will it start beginning to benefit your sales, and when do you expect a full impact? Is it fair to assume that the expansion of fragrance category will also result in a positive mixed benefit to your hair and body operating margin? That's all for me. Thank you.
Thank you so much for your questions. I hope I will answer all of them because there were two, but there were many inside. In terms of profitability, I confirm what I said last time. We expect to perform in line with the profitability of last year. Again, ideally, with top line growth double digit, we would normally expect to see margin expansion. Because of the situation, the inflation, and especially the volatility of the inflation and the lack of visibility on what is going to happen next, we've told you that we expect to have a year of stability. We are confirming that, and the first quarter is confirming that. We are walking the talk, if I may say, in this respect.
We still believe that is gonna be the case, and obviously, that means that we will be above EUR 100 million because, you know, by sheer math, it will mean we will be above EUR 100 million. In terms of-
First quarter, like normal.
The first quarter. The first quarter is always the lowest quarter for a number of reasons. First of all, the output in the first quarter is always impacted by a slow start in the year, which is pretty typical. January is always the slowest month in the year. In general, if you compare with the highest quarter, it tends to be either the Q3 or the Q4.
If you do the math and see the gap in outputs, in net sales that we had in Q1 versus Q4 of last year, you would see that with the sheer numbers of gross margin, we would get back to the profitability more or less that we had in last fiscal year. Also consider that we tend to be a bit conservative maybe, but you know, at the beginning of the year, we provision things like, just to give an example, the rebates we have agreed with clients, depending on the level of sales that they achieve, are fully booked at the beginning because we don't know how things are going to develop.
Typically, you know, we start in the year with, you know, full provisions and all the rest. In the course of the year, when we start seeing, you know, clients that start diverging significantly versus the rebate rates, they tend to be corrected, and to release part of the provisions. It has always been, in the five years I've been here, and I know also the previous history, the first quarter is always the lowest margin quarter, in the year. I think I've covered everything. I talk about Dolce & Gabbana. Dolce & Gabbana is, again, it's a bit difficult to give you a precise guidance on what to expect. In the midterm, we expect this to be a very important client.
Now, we need to bear in mind to remember that the contract will go into full force in 2023. We will start some productions in Q4 of this year, but they are more, let me say, extended industrialization productions to be sure that when we start in January 2023, everything is smooth and oiled. In this year, the impact will be marginal, or if not zero, but it would be very marginal. As you know, the agreement that Dolce & Gabbana with Shiseido is that they will be supplied by Shiseido for the till the end of 2022. Going forward, we expect Dolce & Gabbana to become a significant client. In 2023, it will depend on how much stock Dolce & Gabbana will inherit from Shiseido.
Depending on how equipped they are in terms of inventory, 2023 will be more or less important than the going year. Dolce & Gabbana will be a significant business for us. You're right when saying that if fragrance grows faster, it's gonna help in terms of mix, in terms of profitability for the company. This is correct. Again, you won't see this happening this year. I hope I've answered to your questions on this.
Yes. Thank you.
Thank you.
The next question is from Martin Deboo of Jefferies. Please go ahead.
Good evening, Renato and Pietro, Andrea. It's Martin Deboo from Jefferies.
Hi, Martin.
Hi. Hello. Two questions from me, one on the cost versus price environment and one on Shanghai port. On cost versus prices, can we just get an update from you on how well, where we are on cost inflation and price recovery? You said you got 5% pricing through. We're looking for more in the summer. Can you update us on that? Secondly, what sort of inflation are you seeing in your raw materials basket and, you know, how's that trending relative to your expectations? That's the first question. Second question on Shanghai port, it's more from the supply side than the demand side. What are you buying in terms of components that are coming through Shanghai? Just to help us understand what the vulnerability is.
Secondly, what sort of mitigation strategies are open to you to manage the supply side of the business away from Shanghai dependency? Those are the questions. Thank you.
Cost versus price, the major deviation we are seeing is related to the energy cost. There is a slight deviation in terms of raw materials and not really in packaging. I would say that the deviation versus our expectation in terms of cost of material is in the region of 1% difference. The energy is playing very differently by region. The region that is most affected is Europe. Yes, we are starting discussions with our customers.
To be honest, we are going to do something which is a bit of creative solution, if I may say it, in the sense that we are asking clients to compensate the energy cost gap versus the pricing scenario that we had through credit notes. Debit notes, sorry. Debit notes at the end of the month. We're not doing a let's say a regular change of list prices, 'cause that will take longer and it's from an administrative standpoint more complicated. While through debit notes, we can charge them the extra cost on energy, and this will come and give us an impact every single month.
This will bridge us to the beginning of the summer when we will publish the list price increases, anniversarizing with a bit of anticipation, the price increase that we announced in July last year. We basically want to bridge the moment when we change all the list prices again. We do it in a way that it impacts all clients, all the orders, including those that are older than the normal. It has a higher impact on our P&L than if we were changing the list price at this moment on the new orders. This is the action that we are putting in motion. It's very early days. We have started the discussion with clients, and so far, we haven't received any hysterical crisis, I would say.
I wouldn't say that is expected, but they were kind of expecting a move on our side in that front. Yes, we are acting on it. The Shanghai port situation is clearly what worries us the most out of the Shanghai lockdown. Now, there are a number of things that are being done. First of all, we are moving to the Ningbo Port, which is the closest to Shanghai that is open. For the most urgent things, we are moving to air shipment, negotiating agreements with the clients for the extra costs that are related to that.
We are trying to minimize the impact in all the possible ways, finding, you know, either other ports or other means of transportation to try and mitigate the impact of that as much as we can. Packaging is the number one issue, and it's true for the packaging we buy, but it's also true for the packaging that our clients are buying and then delivering to us. It's that is the number one category. Then you have silicones, where the mitigation is obviously to go through all the different distributors around the world. The fact that we are present with plants in different regions of the world allows us to buy in in the exclusive distribution distributors in different parts of the world.
It's, you know, a constant effort from our buying teams to go find where alternatively we can buy the same raw materials elsewhere. Those are the main elements of it. Clearly, we shouldn't forget that we have plants in China. There we found carriers that can ensure, and we actually found a carrier that allowed us to have inbound of components to our Chinese plants even during the Shanghai lockdown. It is not impossible to receive the components. It further complicated it, if I can summarize it in few words. Nothing is blocked, but it's a bit more complicated than before to get access to components.
That's very useful, Renato. Thank you.
Thank you, Martin.
The next question is from Pinar Ergun of Morgan Stanley. Please go ahead.
Hi. Good evening. Thanks for taking my question. I have a few around the order book and the order intake. Growth in the order book year-on-year appears to be driven by makeup, whereas skincare has stayed relatively flat. Is the supply chain dynamics to blame here? I mean, are there different supply chain dynamics between products where you're finding it may be more difficult to fulfill orders in makeup relative to skincare? If you can give us a bit of color on that'd be helpful. We're also seeing makeup order intake growth slow month-on-month. It was flat in March to April. Is that a function of reorders slowing down as a result of the backlog in orders? Similar question on skincare order intake.
Skincare order intake in March to April was roughly 20% lower year-on-year. If you could maybe help us out a little bit more on what's going on there, skin, makeup, the different dynamics of why are we seeing this kind of slowdown, that'd be very helpful. That's one theme. The second one is on your customers. It's an easier question, actually, is on your customers. Are you seeing any signs of down trading in the markets, or are your clients changing orders in expectation of a consumer downtrade? Because you were just mentioning that premium prestige is growing faster than the rest. Do you expect that to be the case for the rest of the year? Thank you.
I'm afraid I've lost you halfway. Can we retake it one by one?
I'm so sorry. It was a very long question. I apologize.
No. There were many different questions inside, so I've lost you.
I know.
You were speaking quite quickly.
Okay.
The first one you asked, if I understood well, was the order book, skincare versus makeup. Is that correct?
Yes.
Yeah.
Skincare is pretty flat. It's all driven by makeup. Do we have different supply chain dynamics between the products?
Yeah. I don't think it is that much driven by difference in supply chain dynamics. The reality is that it's driven by the weight of skincare in Asia and therefore China. That has an impact in there more than anything else. The dynamic in terms of supply chain are unfortunately very similar. The weight of China on the skincare business unit is definitely higher than the one in makeup, and that explain a bit the gap. But also we shouldn't forget that skincare has been consistently growing. It has grown almost double digit in 2020. It had a strong growth in 2021. Growing on growth is always a bit more complicated.
For makeup, we are still in a catch-up mood versus where we were in 2019. There you see more of an acceleration. That is driving the different behavior of the two business units. Those are the two factors, China on one end, and the fact that makeup is an acceleration to recuperate and go back to the 2019 levels and above that, while skincare has been growing in a much more steady and consistent way.
I guess the follow-up on that is why is the makeup order intake growth slowing month-on-month? Is that because of the backlog in your order book?
I don't see a slowdown month-on-month. I see the curve going, you know, from July, August 2021. It has been steadily progressing. In reality, we have not seen any slowdown. Yeah, if you look at March, April 2021, was that the moment when. I'm sorry, I'm using not very technical data, but that was the month, the bi-month when stores were reopened and we had the rush in. All in all, if you look at makeup alone, even towards March, April 2021, March, April 2022 was up. We do not see a slowdown in makeup. There is a slower progression, so they are growing at-
That's what I meant.
Okay.
Yeah, that's what I meant. Yeah.
Yeah, you know, the day you reach very, very high levels, you know, here we are talking about record high after record high. You know, I would sign to have this to the end of the year. You know, you never have such a steady growth rates, always growing faster and faster. It would be fantastic, but I've never seen it in my life, to be honest.
Okay, fair enough. I guess the bottom line is you are not seeing any impact of, you know, supply chain issues in the order intake. You're still getting the order intakes. It's just impacting the shipments and.
Absolutely. No, I'm saying it with surprise because I would have expected by now to see the impact of, you know, delays in deliveries slowing down the new orders of clients. I still believe it will happen because it's, you know, the sheer logic of it. If I've not received the previous order, I'm not gonna issue a new order. That is what I think will happen. I've been wrong for four months in a row now, so we have not seen it yet, but sooner or later it will happen.
Okay, this is great. Are you seeing any signs of down trading in the markets, or are your clients changing their orders as a result? Would you expect premium to keep outperforming?
No, I think that the premium segment has been a bit slower to restart, and especially talking about makeup. We've seen encouraging NPD data from U.S. in the makeup sector. We continue to expect to see continuation of that. To be honest, what is particularly encouraging and it shows in our Q1 number is the emerging brands performance. These are brands that are in expansion. They have geographical opportunities still. And we have, you know, a major advantage in terms of share of wallet with these clients. The fact that they are continuing to display a strong growth is extremely encouraging going forward.
Okay, excellent. I'm sorry, I have one final one, and then I'll shut up. Wouldn't you, given how strong the start of the year has been, would you characterize your top line guidance as conservative, or is there just too much uncertainty now to know at this point?
I will repeat what I said because I'm still convinced of what I am saying. If we were in a normal year, the guidance in top line would be very conservative. The reality is that we are not in a normal year, and unfortunately, every month is bringing new news confirming that. I think that our guidance is realistic and kind of balance of the uncertainty and the difficulties that we are seeing and that we will continue seeing in terms of supply chain with an extremely positive business development in terms of orders, projects, clients, all this is extremely positive. You know, since we know that, we are very conscious of the difficulties in converting all this into production, we wanted to be realistic since the beginning.
That's why we're not, you know, devastated by the news in China 'cause we knew that we were going to go through a difficult year in supply chain. We factored that in since the very beginning. This gives us the confidence to confirm what we told you since day one. Now, I can tell you that if every month we have a new war and major ports in lockdown, maybe they are not. Maybe we have not been sufficiently realistic. We factored in the negatives that we were seeing and the kind of unexpected news we may get. You know, you may call it conservatism.
I think it's realism and again, I said it from the very beginning, if those issues didn't exist, we would do a fantastic year.
Very clear. Thank you so much.
Thank you.
The next question is from Mikheil Omanadze of BNP Paribas Exane. Please go ahead.
Hi, Renato and Pietro as well. Thank you very much for taking my questions. I have only two very quick ones. If you could please, at least directionally, provide us with the split of price and volume in Q1. The second question would be on your orders. You historically have provided the split on reorders versus new orders. How has that fared recently? For instance, in Q1, what share of your orders was reorders versus the new ones? Thank you.
I'm sorry, but I won't give you a precise number on the price volume. There is also mix that is playing a factor. The reality is that the price impact on the first quarter is limited. I think it's below 5%, it's gonna be in the range of 4% probably. The vast majority is volume driven. Actually, if I look at the development of the different technologies that we have, we are seeing a lot of growth in dry powders, and this means that in terms of mix is requiring even more volume to deliver EUR 1 of the previous mix of the mix of last year.
The volume growth is very high and is actually higher than what you're seeing in terms of net sales growth. There is a very high volume increase. The second question you asked.
Orders versus reorders.
Orders versus reorders. What we're seeing is a split which is very much in line with the averages that we used to have. It's always in the region of 70/30, more or less. 70% of reorders, 30% of new projects. We are not seeing a major shift in this trend.
That's very clear. Thank you.
Thank you.