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

Good afternoon. This is the conference operator. Welcome, and thank you for joining the FILA Group 9 Months 2025 Results Web Call. [Operator Instructions] At this time, I would like to turn the conference over to Massimo Candela, CEO. Please go ahead, sir.

Good afternoon, and welcome to F.I.L.A. call. So the year-to-date results as of the end of September, in absolute value, they are not brilliant. While in relative value, I have to say that we are pretty satisfied of the way we have managed the storm that we have experienced starting February 2025. Unfortunately, we can talk only a little bit about business and a lot about the macro-economical situation. But let me remind you that when we started the year, we had an exchange rate euro-dollar around $1.03, $1.04. And suddenly, we experienced the strong devaluation of the dollar until December not one single bank was expecting such a devaluation. No need to mention the problem of the tariffs. We will enter into details later. But for a company that is exposed -- for a group that is exposed for more than 50% of its business in the United States, the way tariffs have been managed and the unpredictable way, I would add because every week, every month, the tariffs have changed has created unbelievable instability in our supply chain. The situation in Mexico. Mexico have been strongly influenced by U.S. trade policy, forcing Mexico to increase substantially the tariffs with the Chinese product, also in our business. This has generated an uncontrolled unprecedented amount of illegal products, unfortunately, during our back-to-school. So if you recall, probably you remember that until June, so until the first half, Mexico was running ahead last year. And then the market has been flooded by illegal imports. This situation has been discovered by the government just recently, I would say, during the month of October. And finally, the government is stopping these illegal imports, but the damage on the third quarter of Mexican company has been great. Fortunately, in Europe, the situation is more stable and slightly better than what we were expecting. Last but not least, India just announced an extremely strong first half because for them, the end of September is -- represent the first half of the year because they closed the balance sheet at the end of March, showing another growth of -- in the magnitude of 25%. So despite this incredible difficult situation, in which let me remember that all our supply chain has been dismounted and recreated and dismounted again for several times with the tariffs coming back and forth from Mexico, March, April and then from India back and forth and then up in August to 50% and then with Canada back and forth. So this situation has generated so far up to $9 million unbudgeted cost. Just this should explain the difference versus the forecast. And tariff means cash, cash deposited in the custom as soon as the product arrived touch United States. Also, this explains the magnitude of our cash generation that now still we consider very good, but in the low end of the band that we have anticipated for the year 2025. So I'm not hesitant saying that we have the miracle to reach these results. And before moving to numbers, I have to confirm that we have different sources telling us the situation is little by little going back to ordinary course of business. So we do expect not in 2025, the last quarter will be in line with the rest of the year. We are quite optimistic to -- for the year 2026 because we see the things little by little going back to a normal situation. So I ask Cristian to anticipate some the main numbers of our first 9 months, and then I will wait the questions. Thank you, Cristian.

Thanks, Massimo. Welcome. Let's start with a brief overview of our main financial KPI for the first 9 months of 2025. I will now draw your attention to Slide #7, where we illustrate the core business sales. In the first 9 months of 2025, core businesses decreased by 3.6% on comparable ForEx basis. The main currency effect was due to U.S.A. dollar and Mexican peso weakness. This results from lower consumer demand and reduced government funding for SKUs in U.S. and U.K. Central and South America posted a decline in Q3 due to the negative performance in Mexico, which suffered the stronger competition from illegal imported school products now under further restriction from Mexican authority. In this quarter, the positive news is Europe, up 2.4% Q3 2025. with a positive performance in France, which benefited from commercial reorganization. Let's move to group profitability in Slide 8. Adjusted EBITDA at EUR 94.2 million declined by 4% on comparable FX and tariff basis. That said, it is important to underline EBITDA margin was broadly in line with 2024 at 24%, supported by ongoing operational efficiencies. On Slide 11, we highlight the development of free cash flow. Free cash flow to equity stood at negative EUR 32.3 million versus EUR 0.1 million in 9 months 2024. This reflects the working capital, including EUR 8 million of tariff-related effect and EUR 3.1 million for the closure of production site in China. Free cash flow to equity reflects also EUR 12 million of CapEx and EUR 3.9 million negative ForEx impact. On the other hand, we underlined a significant reduction in net interest expenses of EUR 6.2 million, which reflect the net debt reduction and better working capital management. I will take the opportunity to make a couple of comments on our outlook for year-end. Firstly, we expect a free cash flow to equity in the region of EUR 40 million as for year-end. This is remarkable given the continued macroeconomic instability with respect to the currency tariff and government fund reduction for this group, especially in US, which is expected to recover in 2026. Looking ahead, the new tariff policy in US present positive tailwinds, thanks to the significant geographical diversification of F.I.L.A. production footprint and less competition from the other [ US ] players whose products are mainly made in countries strongly affected by tariff increases. Thank you for your attention, and we are ready to take your questions.

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

I have three questions. Maybe I go one by one so that everything is more clear. First one is on Latin America and Mexico. So this year has been challenging reading from the press release and from your statement, Massimo looks like probably the worst is behind, which is the timing we should keep in mind for seeing an improvement in the performance of the region, hopefully coming back to positive growth. Is 2026 already a year which you see growth from this area?

The answer is simple and not simple. I mean, we have now seen that the custom started to completely block the legal imports which is creating clearly on the ground, on the floor, we see these products start to ending. They are not -- little by little, they are not anymore available to the final consumer. So if government will keep their promises because we are in regular contact, all the association represented by all Mexican manufacturers plus the main distributor in Mexico have met with the ministry in Mexico. They guaranteed us they will watch carefully the border situation because this regards many other businesses. As you know, China is flooding the entire world, not only Mexico. This is a problem for Europe and for many other countries. But in Mexico, this has become illegal because they don't pay the duty. So we think that based on the actual situation, we are going to see a normal 2026 because the effect of this product little by little is going to expire. So this is what we see today. We are dealing with Mexico. So it's a very interesting country from the business point of view. We talk about 34 million kids entering the school every year. We see -- we can see a regular rate of birth, which is very important. The government seems to go along with Trump policies and Trump has been very clear if you want to have a trade deal with the United States, you have to stop China entry. Let me remember you that in Mexico, as F.I.L.A. in Mexico represent -- sorry, respect completely the USMCA deal agreement is compliant. So we do not pay tariffs when we export into United States. So we are -- hopefully, we are not going to experience the same problem that we have experienced in 2025. So the expectation for 2026 are positive.

Fine. Okay. Moving a bit north. Looking at the U.S., can you give us a sense of how inventories are at your customers? And generally speaking, how the market has taken price increases that you have adopted and I guess also some of your competitors in the past month?

So the inventory is at the lowest historical level because customers have so much uncertainty that they have so much uncertainty from a different point of view. We are seeing unemployment rate growing. It's unclear the full effect of the inflation and the impact this will have. You know that statistic has not been available in the last 40-plus days due to the shutdown. And so many customers due to unpredictable tariffs have decided to reduce the investment in our business. So the inventory is low. We are receiving in the last, let's say, 2 weeks, some good news. So we have seen that a new trade deal has been signed with China. We have seen -- we have confirmation from official sources that a trade deal with India is ready to be announced even if it will be effective for the sources I have from February. So it will not be immediate. With Mexico, the situation seems stable, thanks to the war Mexico is building up against Chinese imports. And last but not least, the school business. If we analyze in detail our business, 100% of the negative numbers we have in United States, which is something around 8%, 9% versus last year, 100% is related to school supplies. What happened is that after COVID, the budget for schools have been increased, was more generous. And unfortunately, schools have invested a lot in overhead, in salaries, in consultancies and so on. This has been suddenly cut overnight by Trump in the month of February, March. So the situation has been extremely unstable, while we have clear information that for our product, the situation will go back to normal. So next year, we will see normal consumption, while this cut in budget will be dedicated more to overhead, again, to salaries that was born during the post-COVID period. So all in all, plus the normalization with India that for us represent now the most important source of products and this kind of normalization of tariff because you can see except China, the rest of the world is affected by 15% more or less. We think that we will go back to normal course of business. Thus we are positive for 2026.

Okay. Perfect. Last question is on India. Last week, you were anticipating some interesting projects also on the side -- on the future Seven side of the business. In the meanwhile, we have seen some articles out on speculating a bit on the future of F.I.L.A. and DOMS. So generally speaking, just wanted to hear your thoughts on the, say, partnership between the two companies and the structures of the two listed [ vehicles ].

So yes, I also read the article because I was not involved. I think that the timing, it's really a bit nonsense because just a couple of days before, we announced a very important project in India with the agreement of DOMS, so the CEO of DOMS. We all consider the JV in India for backpacks and for wallets extremely promising. The market is strongly growing, strongly demanding backpack. We are going to come in the market in the same way we came with DOMS, with innovative range, innovative material, innovative design, innovative patent. And so we are all extremely positive in the future results of DOMS and Seven combination in India. So in order to give you a more precise answer, DOMS for F.I.L.A. is an asset. The family that represent 44% in DOMS and myself that I represent 40% interest in F.I.L.A. and a little bit more in voting rights. We have a very industrial soul. We have -- we always act with medium, long-term strategy. The moment in which we see the strategy to lose ground for whatever reason, of course, we will enjoy and we will liquidate DOMS participation. But as of now, I think the news that came out are a counter sense because we just announced a new joint venture with really great hopes of being successful. we are just enjoying because if it's true what we read on the newspaper that the new tariff agreement with -- between U.S.A. and India will be 15%. This will make India extremely competitive against China, which will allow us to become more aggressive in U.S. market. I think that to dispose the share of DOMS is a counter sense. But -- so the day that the strategy will not be any more consistent, for sure, we will dispose the share of DOMS.

The next question is from Niccolò Storer of Kepler.

The first one is on cost savings measures that you've been implementing. I see that EBITDA margin in both the U.S. and Europe has remained overall stable in Q3, in particular. So focusing on Q3, if you can explain which actions you have undertaken or if you have had any other sort of tailwind supporting margin stability. The second one is on what to expect in Q4, in particular for North America in relation to pricing? Are you going to -- are we going to see price increases to counter tariffs? Are we going to see any impact from shutdown on demand? And looking ahead to 2026, did I understand well that you are expecting cut to federal budget to shift from, let's say, stationary item to other items. And so you can have more, let's say, or people could have more funds available to purchase your products? And last question is on below EBIT items, in particular, all the financial cost that we see between EBIT and pretax profit. The implied figure for Q3 is extremely low. If my math is right, we are talking about EUR 3 million versus cumulated EUR 25 million in H1. And so if you can detail a little bit more on how this number comes out, putting together all the different items which are forming it. So interest expenses, the contribution from DOMS, FX and whatever is in this line.

Luca, can you answer question number one, please? Cristian?

The reorganizations within the group in this period of time, we have closed already some plants and downsize others. So these are the major projects that we accomplished there, whether slimmer group in terms of the structure, in terms of fixed cost. And in addition, there are many other minor projects both in terms of reorganization or in terms of constant OpEx cost reduction. You can see in these first 9 months, CapEx, where have been higher compared to last year, and there are half of the CapEx, which are related to machine or to bumping orders are intended to insert some productions or ever more efficient machine that we have a lower cost. It's a combination of that between an extraordinary reorganization and ongoing projects because it's never ending story to have a result as low as possible [indiscernible] to stay at the level we targeted.

Thanks for your question related to financial impact. Okay. As you said correctly, the main items that impacted this line are dividend that happened in Q3 and that appear in the before closing. The FX are stable. The net amount in Q2 is more or less the same in Q3, we have not an impact. We have an increase of the net results of roughly EUR 0.5 million more or less. The lower impact of the interest between Q3 and Q2. And the other one, the positive interest on deposit of US. They are the main effect that realized the good results for our financial -- net financial expenses in...

Sorry, how big was the dividend from DMS?

0.5 million.

Concerning question number 2, Niccolò. So let me repeat, as per our sources, the trade deal with India is a deal done. It's just a matter of time. So we are building up our budget based on a 15% tariff. So if we put together the situation with Mexico, with India and with China for 2026 in North America, we are not going to increase prices, which is a good news. Our supply chain show once more to be extremely efficient. Concerning 2025, in order to partially compensate the tariffs, we have increased prices. We have announced the prices as of month of July, but those price increases took into effect around the month of September. So the year has a limited positive effect. But this allows you to understand how we have been able to keep in percentage the EBITDA, which I think has been a tremendous achievement with this instability, with this weak dollar and with the tariffs in place. So for 2026, we do not expect price increase. Last part of your question, what do we expect from the fourth quarter? We don't expect anything special. As of now, the year is going towards the end in a very normal way. I don't expect any surprise compared to the other -- to the actual 9 months. it's a very normal fourth quarter.