F.I.L.A. - Fabbrica Italiana Lapis ed Affini S.p.A. (0QIQ.IL) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the F.I.L.A. First Half 2025 Results Conference Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Cristian Nicoletti, Group CFO of F.I.L.A. Please go ahead, sir.

Ladies and gentlemen, good afternoon. I am Cristian Nicoletti, CFO of F.I.L.A. Group. The Group CEO, Massimo Candela; and the Group COO, Luca Pelosin, who will also participate in today's conference call. Let's start with brief overview on our financial results for the first 6 months of 2025. I would like to underline that these first 6 months were characterized by challenging condition in U.S. consumption, reduced government funding for secured tariff impact and negative ForEx effects. Despite this market condition, F.I.L.A. achieved stable profitability mainly thanks to effective cost containment. Let me add that the leverage ratio is comfortable and permits the company to face current challenges with a comfortable and solid financial base. I will now draw your attention to Slide #7, where we illustrated the core business sales. In the first half of 2025, core business sales decreased by 5.6%, deficit on comparable ForEx basis core sales would have been merely 3% lower. The main currency effect was due to U.S. dollar and Mexican pesos weakness. This results from lower consumer demand and reduced government funding for schools in the U.S. and U.K. Central and South America, however, posted positive growth mainly driven by a very positive performance in Mexico. Let's move to group profitability on Slide 8. Adjusted EBITDA at EUR 65.4 million, declined by 7.7% compared to the first half of 2024 with a negative impact pro forma effects of around less 3%. That said, it is important to underline EBITDA margin was broadly in line with 2024, 20.8%, supported by ongoing operational efficiency. Please turn to Slide 10 on adjusted net profit. In the same way, adjusted group net profit stood at EUR 22.5 million, down from EUR 32 million in H1 2024. Let me remind you that each one net profit results includes the contribution for participation bonds for just January, March 2025. The decrease in adjusted net income was the result of approximately EUR 7 million of ForEx losses. Please keep in mind that these are not cash items. On Slide 11, we highlighted the development of free cash flow. Free cash flow to equity stood at EUR 70.1 million versus EUR 40.3 million in H1 2024. This reflects some degree of seasonality in the first 6 months, which consists of working capital absorption including EUR 2.5 million of tariff related effects and EUR 2 million for closure of production site in China. Cash flow reflects also EUR 5 million of higher CapEx and some negative ForEx impacts. On the other hand, we underline a significant reduction in net interest expenses of EUR 4.7 million. Let's move on to Slide 12. As of June 2025, the net financial position stood at EUR 288 million. This was EUR 80.3 million reduction versus end of June 2024, many thanks to DOMS disposal. I want to take the opportunity to make a couple of comments on our outlook for year-end. Firstly, we confirm a free cash flow to equity range of EUR 40 million to EUR 50 million as for year end, despite a reduction of revenue and EBITDA. Given the challenging U.S. consumption condition, currency and tariff effects. Secondly, H2 2025 organic performance is expected to be broadly in line with last year results for the same period. Looking ahead, new tariff policy in North America may present positive tailwinds. Thanks to significant geographical diversification of F.I.L.A. production footprint and less competition from U.S. private label market, whose products are mainly made in China. Lastly, looking forward to medium term, a reduced macroeconomic instability and a clear tough outlook, makes us confident on the recovery of revenue and profitability. F.I.L.A. confirmed its strategy to consolidate its leadership and long-term prospects, while maintaining a solid financial position to size potential market opportunity and assure shareholder remuneration. Thank you all for your attention. We are now ready to take your questions.

[Operator Instructions] First question is from Isacco Brambilla, Mediobanca.

A couple of questions from my side. The first one is on full year guidance and the implied outlook for the second semester. We come from a very tough second quarter, while you are envisaging overall flat trends in the coming semester. So if you can give us a bit more color on what's driving confidence for a sort of a sharp improvement? And also, if you add any color on current trading exit speed to June or enter speed into July, you could share with us? Second question is on net working capital. Cash absorption was more driven by receivables, if I see correctly, rather than inventory. So if you can elaborate a bit more on what's going on within receivables and also if you have any benefit related to U.S. dollar devaluation that is impacting inventory in this semester.

Massimo Candela, I can answer the first question. Maybe you can answer the second question. So concerning the expectation we have for the first for the second semester, what we see is that for the second half, we do expect numbers comparable to last year's second half. So what we think that what has happened in the first semester is almost consolidated. And now the situation is slightly improving. We -- this is confirmed these days by some improvement we see in the level of orders and some information on the back-to-school that is giving us some positive signs. The macroeconomic situation, we don't think is going to improve a lot. Just take an example, just 1 week ago, Trump has announced the 25% tariff with India, not yet confirmed. So the situation remain extremely confused, unstable. Our customers have a very limited view. And in United States and in U.K., the government budget for schools has been substantially reduced in the area of 15% compared to last year. So this is clearly impacting our numbers in short term. But what usually happen is that if the schools have less availability to buy products, that is something that happens suddenly. The consumers need anyway our product, and they tend to move to go to the retailers or to e-commerce players to buy our products. So there is a kind of shift in the consumption. And of course, we should see this positive effect during the course of July, August and September. And I do confirm we see some of this shift. Of course, in our view, we cannot consider because we don't have enough information, what will be the final level of tariffs. As of now, we are exempt in Canada and in Mexico because we are compliant with the USMCA deal. But this situation is still not consolidated because Trump has given 90 days to Mexico to reach a certain target and then it's not clear what will happen. So we do confirm the view of the second semester based on the information that we have today. Thanks Cristian?

Isacco, thanks for question. Please go to Page 11. Relating charges in net working capital, we align, we are aligned with respect to H1 2024 [indiscernible] for EUR 7.1 million. It may be due to tariff. It will be in the first quarter -- first half 2025, more or less of EUR 2.5 million and EUR 2 million from the closure of production site in China. We have the main apart from difference with respect to 2024. Relating to the other part is due to inventory considering more or less for EUR 3.5 million, related to decrease of our sales. Let me see that for receivable and the payable, the other part of it, as discussed before are quite in line with respect to 2024. Other point that when we show the cash flow statement, the each line are without FX effects.

Next question is from Niccolò Guido Storer, Kepler Cheuvreux.

So the first one, if you can comment a little bit more on actions on cost you have taken during this first 6 months, which have allowed you to basically to keep a good profitability notwithstanding relevant drop in revenues? And maybe if you can give us an update on your plan to close several plants that you told us a few months ago, if you can give us an update. And second question is on net debt. If you can quantify the benefit in the EUR 289 million you reported of weaker U.S. dollar, so translation of debt in dollar to euro.

And with regards to your first question, in terms of group organization, I will confirm that we are close to the complete closing of our Chinese -- one of the 2 Chinese plants in [indiscernible]. We have already finished to ship the remaining goods and for the asset to the other subsidiaries there. And that the building will be returned to the landlord by the end of September. I do confirm one of the 3 plants in the U.K. Middlewich, has been moved completely to the main facility in Bracknell or maybe at the beginning of this year. And we just announced the closing of our second small plant including a second warehouse in north of U.K., which will be moved by the end of the year to the main plant, main warehouse, close to London. We are also in process to organize strongly one our clients subsidiary in this community. We managed the different actions to bring back the this company to a level of profit which is in line with our standard. Also [indiscernible], which was another plant included in the first phase of the organization has been already shrinked and the full process this organization will end in the next few months. For this year, these are the main reorganization in place. We have others in pipelines, which will happen between end of this year and the next year. Meanwhile, mainly due to these tariff completely implications, we are shopping more than the best around the world to find the best of service far any raw material or materials. And, clearly, we are also challenging all our vendors to more reduce cost, from what regards the purchases. On the other side, there are other many fine tuning in the, I can say, small organization, and I could say, in all our companies mapping the gain of the process, finding additional process efficiency with the aim to have a cleaner structure, which could manage it in a better way in our business.

Nicolo, rate EQ FX on net back debt. The positive impact on Netflix and USB is more or less EUR 7.5 million per euro positive effects on liability in U.S.

Maybe a follow-up on pricing. Can you update us on possible price increases yet to be applied in the U.S. following tariffs?

Massimo Candela, we have just implemented a price increase in the North American market. For the moment, we don't think we are going to ask for other price increases. In reality, for 2026, we had a project to move some production to India. As of now, we have been forced to freeze this kind of synergies or efficiencies until we don't understand what will happen with the tariffs. We have a very important alternative in Mexico, but the decision with India will be taken soon, not today. So we have no clear idea of where we are going to land. So as of now, we do not expect further price increase beyond the 6% that we have implemented starting August 1.

Next question is from Alessandro Cecchini, Equita.

I take one by one in terms of questions. The first one, in a recent interview of your company, maybe you spoke about potential combinations agreements with DOMS. So if you can elaborate a little bit more what are the options? So just to have a better view what are the potential agreement between you and DOMS. This is my first question?

There is nothing more because as of now, we are talking only of medium-term strategy, not short-term strategy. So there is nothing new. The only comment I can make is that these international turbulence and complication in the macronomical world are clearly changing the environment in which we are working. And despite a difficult first half, F.I.L.A. remain the most solid and from a competitive point of view, the strongest player in our business. And we see around us a lot of companies struggling. This -- I can confirm that F.I.L.A. in the future will be protagonist in the reorganization of our business. Dom as of now, there is nothing to disclose above what I said already.

Okay. In terms of organic performance, in terms of top line growth, we saw, of course, already some anticipation that Europe was minus 7% organic in the second quarter, while North America was minus 10% in the second quarter only. So just if you provide us some color, I mean, your expectation for this quarter, so third quarter that is very important, if you expect more flattish trend for these 2 geographies. So if you can elaborate a little bit more on your feeling about this.

I think we said in the beginning. So we do expect a second half that will be more flattish. The problem we have faced during the first half, unfortunately, all the turbulences happening during the back-to-school because if the same turbulences happened, let's say, between September and December, they would have affected us much less. But the dense of craft with the tariffs started when back-to-school was beginning. So that's the reason he has injected so much uncertainty, so much confusion with our retailers, with their supply chain, with our supply chain. So unfortunately, the situation looks worse than what is really now. We do confirm the second semester will be flattish because under normal circumstances, we would be probably more positive. But I think that this tariff strategy will generate a recession in the United States. I don't know when, but sooner or later, we will have to deal with the difficult situation. We know that many businesses are ready to increase prices. So not only us, we did this 6% price increase, but almost every consumable product is going to face price increase. And it's hard to believe that the consumer will continue buying with same trend they did in the last decad. So when we say the second half will be flattish, we start to consider a very weak market ahead of us in North America. And inside the flattish, we consider also the difficulties that U.S. economy will have to face. For what Europe is concerned, the situation is difficult, especially in U.K. because in the rest of Europe, the situation is more stable. In U.K., we are facing a very downtrend, very strong downtrend in sales and strong reduction in budget for schools. In medium term, this will evolve in more purchases from the family with the retailers like it happened in Italy, in which the budget for school is close to 0. So, we are already used to this kind of problems. In U.K., the situation needed to stabilize. So the big delay in Europe is very much related to what is happening in U.K. Again, we start seeing some signs of recovery also in U.K. So we have a better -- realistic better situation in the second half of the year.

Okay. And about I said about the tariff environment. We are still pending, of course, on Indian business. But just to elaborate a little bit on this. Is it possible for you -- I believe that now already you have probably shipped everything for the back-to-school to U.S. So it's tariff probably or something to digest for 2026 if there are additional tariffs. But it's potentially possible for F.I.L.A. to manage the U.S. business through Mexico and Canada and just a little bit of Europe. So given the fact that I believe that probably Mexico and Canada, they will continue to have 0 tariffs. So just to understand if it's possible, if it's something that you are reminded. So just if you can elaborate a little bit more on this.

Yes. It is definitely possible to manage the business under the condition that we see today. Of course, the decision against the India has taken out of the table a huge opportunity for us to have a strategic growth in United States because giving 25% to India put India more or less in a comparable situation to China. We are going to adjust our assortment. We are going to have more Mexican origin products, more made in U.S.A. because our plant in the United States is still working. From Europe, if the tariff at the end will be 10%, we don't see a big impact in our in our ranges. So it's doable. It's sustainable. Again, I repeat what I said already in January, the real problem of the tariffs is that my personal view is that the U.S. economy will fall into recession. In terms of sustainability, our product can easily sustain a 10% tariff from Europe or even a 25% tariff from India. What is difficult to sustain is to understand how deep will be the recession in United States. And here, I think nobody can have a clear view neither on the recession nor on the level of the exchange rate of the dollar. Because anyway, United States represent for us 55% of the group turnover. And when we consolidate a weaker dollar, of course, we consolidate less turnover and less EBITDA. So we really don't understand where will be the new level of exchange rate between the euro and the dollar. The situation, I repeat, I try to answer again, is sustainable as of now. With Mexico, it was like this until a few years ago because India was not a supplier for us. It was too small and not ready to supply United States. So for the moment, it does not touch a big portion of our business. So we need to understand what will be the final scenario, and we will adjust accordingly.