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

Good morning, and welcome, everyone. Thanks for joining us for today's meeting and presentation. To start, I would like you to introduce our top management team. Starting from my right, the extreme right, Mr. Piero Frova, EVP of Marketing Worldwide for Stationary; Nicoletta Marsi, EVP for Fine Art Worldwide; Luca Pelosin, the CEO of FILA Group with responsibility on organization, operation, supply chain and systems. On my left, Cristian Nicoletti, CFO of the group; Francesco Maniglia, EVP of the Commercial Strategy in Europe and North American market; Francesca Cocco, our Investor Relations. As per organization, I would like to ask you to prepare all of the -- prepare all the Q&A session and to wait until the end of the presentation. So we will open a dedicated session. Before giving the speech to my managers, I would like to spend 2 words about the plans that you have visited today. So here, FILA was born here in Florence in 1920. Unfortunately, due to COVID in 2020, we could not celebrate the 100 years. So this year, we are going to celebrate 103 years since the birth. This plant is pretty new compared to the history of the company. In fact, it was necessary to evolve and invest in a new and larger plant when in 1994 FILA acquired Adica Pongo. Adica Pongo is very much known more by Italian people, is known with the brand DAS Pongo. It was a company founded in Florence. So in fact, it was a combination between 2 local companies, both of them struggling to survive. So we thought it could make sense to acquire their business that was located in Florence. Unfortunately, in the historical plant of FILA, there was not enough space. So we found this area. And strategically, we have decided to dedicate this area to all the products that are capital intensive, as you probably could appreciate today during your visit. Then in the presentation, you will understand that the multiple production sites we have around the world are mainly divided by capital-intensive or labor-intensive productions. Okay. So for the moment, I stop here, and I don't know in the order who is starting. Piero?

I'm going to start. Thank you very much for coming. As Massimo saying, I'm Piero. I've been working for the group for a long time, more than 25 years. And along with Nicoletta, we are going to bring you to the marketing communication and product strategy of the group. Okay. Some basic facts. We try to be scientific clear. So these are some basic facts of our market. Of course, again, we will be at your disposal for any further question after the presentation. Mainly, this is the point. The market is -- even it's quite old, old the market is still very fragmented. There are still many players. Even if we consider there are a few players we have a barrier EUR 300 million of revenue stream. In the School business, there are at least 10 players above that and another more or less EUR 100 million below or EUR 300 million. When talking about Fine Arts, there are only 2 players that are over EUR 50 million and above EUR 30 million below it. As said, this market is quite characterized by historical brands. There are many brands. I guess you see some of them, but most of you are Italian. So when talking about DAS [indiscernible] there are many brands that not only in Italy and other countries are deeply rooted in the mind in the conscious of consumers because they grew up with brands. If we consider that -- we are one of the most recent companies, 100 years, but there are companies like some of that we have in the portfolio that has 500 years for histories, Canson, Arches. So we are talking about companies with a long history. Another important point is the significant presence of the growing presence of the private label in the list this year. And this is more or less happening in those markets that are dominated by the moderating channels. Good example is North America first of all, France, U.K. and Germany, less where the model channel are less present. Considering the market with the exception of COVID that changed completely the dynamics, we consider the market to be quite resilient and quite stable comparing to the most [indiscernible] factors or trends. The only probably the most relevant point that can change the dynamic story is very important and significantly is the demographic dynamics. So the birth rate from one side and the aging of the population. This is more or less happening in countries. Just to give you an idea, if I can, there are still a lot of kids and don't misunderstand me. All of in where there are, if I consider, kids from 2 to 14, there are 2.2 billion kids, so still a long way to go. But in some countries, there is a reduction in that. Another important fact is the distribution. Capillary distribution through all the channels and all the markets is essential. Francesco will be more clear about the importance of the distribution. Growth of the e-commerce. We can talk about e-commerce, but it's clear that the growing e-commerce is everywhere. The ubiquitous net is hitting everything. And this, in our opinion, is important because in some way, enlarge widen the distribution. Why did progress because there are more space on digital than what can be displayed physically in the store, in the brick-and-mortar stores. So more companies can participate online than that are our physical presence. we have -- we are giving you the best estimation regarding the market dimension, considering that it's not so easy to have completed 4 elements. But based on estimation and some external sources, we consider the 2 business units, School & Office around EUR 10 billion of revenues and the Fine Arts EUR 1 billion of revenues. To clarify, when talking about Office, because is, we are referring to products, consumable products use at office or school, pens, highlighters and something. So nothing else that regards office printers, office, whatever is. I'm talking about our [indiscernible].

Okay. So I'm Nicoletta. I've been working in the finance a long time with my marry first and after the acquisition of Myer, I joined the FILA Group. So FILA operates globally through a wide range of brands, developed internally or acquired over the years according to the expansion strategy. We consider we the brands a very strategic asset, and we are committed to strengthen the recognitions and values of the iconic brands. The portfolio includes brands that are historically rooted globally -- or that are iconic in the country of origins. As you can see here, we are showing a dataset of pencils that has been present and linking generations in Italy as well as the that [indiscernible] is an iconic product for -- of the French students. And what makes FILA unique is that we are the only global players that own a wide portfolio of brands, offering to consumers of all ages from little children, from toddlers to professional products covering all techniques to express their creativity. The group also includes a selection of products for office and industrial --

As Nicoletti was saying Sorry because I need some. We have a high portfolio of brands, more than 25, And we -- while when discussing about Fine Arts, the brands we have are almost global brands that are sold all over the main countries. When talking about School we categorize the brands in 3 main clusters -- geographical clusters. So we consider the global brands that are -- that have a very strong position in their market, but further opportunity to grow. Good example could be, again, GIOTTO. GIOTTO is one of the most important brands sold in Europe, sold in Asia, sold in South America. I guess, you saw the DAS. I don't know if you've seen the production of DAS. DAS is another global brand, and LYRA. LYRA is an important German brand that is considered global. Then there are some continental regional brands that has a very strong presence locally. But again, in the reference market, but again, some potential to grow. A couple of good examples, one is Ticonderoga. Ticonderoga is our best brands or at least one of the -- our best brand for in USA. And the other one is Doms, we still consider that continental, but is today one of the most important brand we have. And then we have some local brands that are rooted in specific countries, not sold elsewhere. I'll make it simple. GIOTTO is a good example for modeling in Italy where the writing instruments are mainly sold in Italy, and there are others, for example, in Mexico that in South America. That's the way we categorize the brands. Okay. In this slide, you can see the breakdown by the, let's say, product categories, the on sales of their main product categories. I'm talking about the school and office. We have 3 main categories that are the color and drawing, the school paper and the drawing. Color and drawing is the most important, is accounted 32% of the total revenues. And the main families are, of course, the color pencil that are above the 10% followed by the paints. Then we have the school paper that is more or less 27% of the total, and that is equally divided between school -- paper used at school, paper use for leisure and crafts. Last but not least, really important is the writing that is 24%. But consider that inside the writing, we have the graphite pencil. We are counting to the writing session even if it can be used also for drawing. The pencils are 20% of the total. So the graphite’s very very important. Then we have another couple of families, the crafting and the modeling that you just saw. Okay. So not only we sold the market, we saw a little bit how the market is split, but now let's go a little bit on products. we talk about brands. We said brands are essential, but what makes the brands important Products, quality products. So we formidly believe that the quality in -- investing in quality, in research and development on products is essential to keep the brand alive over time for years and to keep being in touch with our consumer. So I'll take just 3 examples. I don't pretend to read everything, but drastic 3 examples, okay? Pencils. Pencil is, as we said, more or less 30% of our business. So what makes the pencil different? What makes the pencil unique? Of course, the wood is essential. So from -- we say from the to the pencil we respecting to the forest, so certification, quality protocols. I have example, I don't want to show you, but sharpening, everything that is related to a pencil is essential. The leads is the core of the pencil. of course, the softener of the but at the same time, has to be resistant why kids that when they're write. So the lead is the core. The yield, the best pigments. Specifically formulation related to our target, what I'm trying to explain is saying, we have pencils that are addressed to kids early childhood, so have a very soft lead because it's easy for them. Why we have pencil for young adult or even professional where the leads is much more dry because they are doing -- using different techniques, meaning that the quality is not necessary, the same quality. The important is the quality, the right quality for the right target. The look and feel, again, making it the pencil is not difficult, making a good pencil, a nice pencil, meaning in printing, perfect in printing, perfect in has to look nice because when you buy a pencil, you are not just buying something that you use, you buy such thing that you love. Last but not least, and this is true for all our products, and I guess with and their teams, you already see all compliance. I'm not going to repeat that by compliance to the main safety regulation around the world. Markers, I think you saw the production -- just now the production of our Markers. Again, very important point. Inks, water base or whatever essential. So the pigmentation, intense color, long lasting, a good example resistant is normal, happens not only to kids that you leave the cap, okay? And then he doesn't write any longer. That's not true, okay? We had product that resist more than 2 weeks without the cap and this is extremely important. Over what is related to the nibs there is a wire, meaning the nibs has to be perfect, as to guarantee the reservoir is the perfect ink flow between the reservoir and the nib in order not to lost any single drop of ink it lasted till the end Then of course, we have all the safety regulation, ventilator cap. The plug is perfectly in order to avoid that the kids can take it off. So again, regulation. Plastic. I think they explained to you that we are already working on regenerated plastic, but we need to guarantee that this product doesn't dry out at all from the barrel. The other important family are all the, paints color. So we have divided paints and finger paints. And again, looking mainly about with children dense in rich color, super washable formulas because moms are quite sensible to the fact that the kids can have spots on the site, so washable from hands, from clothes. Compliance with the regulation again. A huge number of colors. One point I want to mention is that's why you have samples. I'm not teaching products to you, sorry, but I would like to explain to you. Design. All these -- and I think maybe you saw something. All design, these are 2 good examples of paints and design are made by us, meaning starting from the starting from the drawing patenting, producing, molding. So not only the products, but the way we present the product. So this is part of our DNA. Okay. Let's go to another topic completely different about the market shares, okay? So we saw brands, which is the products, market share. Let me say in advance that not easy again to have a perfect vision of the market for a simple reason there. Not all the main market research companies cover all markets or all categories. I make some good example. JFK is a German one and are those that are used. But these are quite precisely in those markets where the modern channel is very present, but not at all in markets like Italy, for example, where they are no other channel. Anyway. So the market share we are giving to you are estimated by us and the existing researchers. So I'll give you some examples. We consider when talking about euro, we consider, when I say GIOTTO, I mean, the school product, we have a market share between 18 -- sorry 18% and 20%. In France, we that Nicoletta just showed to you, the market share is very relevant, is between 50% and 60%. Even in Spain, the market share of the paper, I'm talking about the school, is important. you will say just mentioned. 50%, 55% of market share. Believe me, we sell a lot of pencil in U.S.A. So it's a very important market share. Again, in U.S.A., the construction paper that is a business about EUR 50 million. We have a market share of about 25%, 30%. India, Massimo can be more precise than me, but India is a market share that we consider between 25% and 30% of today market. Then we have Mexico. Mexico is a relevant country. They have many local brands, example that people don't know [indiscernible] Don't say anything to you, but for them are important. And we had a very strong presence in Mexico in terms of market share. Last point on market share is a private label How much is the market share of the private label? It depends on the category. Again, it depends on the products. Products that are really commodities have a higher market share, other than maybe for children is less. But we average consider the market share of the private label between 20% and 25%, 30% roughly. Massimo, is it correct?

Correct.

Okay. So we will now have a look to the Fine Arts. In the slides, you can see an overview of the Fine Art global strategy. We are the only group manufacturing the 4 main categories, means paper color, including paints and pencils, brushes and compasses. Quality wise, the market is segmented in 4 main categories: professional; premium; student and entry. Every brand is positioned with a different product assortment in every segment, and we have a clear price positioning and channel strategy. see. So as regards the weight on sales of the product categories, the bigger category for FILA is the fine art paper that has a weight of 62%, including a variety of different papers where the water color family is the biggest, is the most relevant in our portfolio, followed by fine art color, which has a 17% share. And the biggest family is followed by oil and watercolor. In this slide, you can also see the estimated market size for every product category. Okay. It's a big challenge to explain you in a few minutes what a quality for a fine art paper means and is because we have many different types of paper, including water solar, drawing, sketching markers. And there is a different -- there are different quality requirements for every paper type. The main ingredient, you can see them in the slide, but what makes file very different from the competitors is the expertise of our 3 paper mills, Arches and Canson, that have more than 1,200 years of heritage in total. And in particular, -- that was founded in 1492, is the worldwide reference of professional water color paper, the dream of every artist. So cotton and mold made production are qualitative and distinctive elements of a watercolor paper providing a very good stability and a high water absorption and all other elements like texture, marking, sizing are elements that characterize the difference of every paper. As regards the fine art colors, here are the key features that determine the positioning and the quality of every product. Every element can vary according to the target consumer we are referring to. An example is like fastness that is a very important element for professional artists because it guarantees the conservation over the time. It's less important for a student range. So you will see big ranges, including a wide assortment of color in the professional ranges, whereas student ranges that are smaller, sold at one price, sometimes including imitations of expensive colors. As regards the Fine Art market shares, there are no official data provided by the main survey companies. The estimates are based on internal analysis from companies aggregated data and from trade associations we are a partner. So the biggest market share above 50% is on the fine arts paper, including 5 major paper brands. Then the Fine art brushes has a market share between 15% and 20%, including Pinto and thanks to Princeton that is a leading brand in the United States. Fine art color, the market share is smaller, is between 10% and 15%. However, we are -- we have in the portfolio 3 brands that are market leader like Maimeri in Italy, so the market share in Italy is much bigger as well as in the Daler-Rowney in the U.K. and Lukas in Germany. The market share of fine art pencils is still, let's say, below 10%. It's the smaller category that we have in the portfolio. What are the key drivers of our brand and marketing strategy? Strengthen brand values as much as we can against competition and private label, increase the brand awareness through cross-selling and cross-marketing activities. Our strong brands are, in many cases, a big support to brands that are less known in some specific markets. So thanks to the activities that we do, that we promote the stronger brands are drivers of the weaker brands. We define a long-term brand product channel strategy, developing concepts that are easier to be sold with the aim to support the sales team in the management of the complexity of our product portfolio. You will see in the next slide some example of concepts in the 2 -- in different markets.

There are different market depending on the category of the market of the channel and the kind of stores we can pass from this station store, a small one where we have a different On the left -- sorry, on the right, you can see the mass market at the offer or the one during the back-to-school season that for the school products is essential. Other are specialized retailing chains. The same more or less most important the back-to-school is, of course, for the Fine Art.

So here, you can see the complexity of a fine art retail store with a huge range of products, a lot of open store, both of colors of paints and papers. And in the bottom part of the slide, concepts that we have developed for nonspecialized retail or mass market. So different ways of presenting our products, different selection of products, mainly in sets that are typically sold in this channel. Now last but not least, in every country, we manage about 15,000 SKUs. Our strategy foresees to rationalize as much as possible our SKUs, reducing overlappings, discontinuing products that are not in line with the strategy that have low margins or poor rotations. But of course, we also develop analyzing the market. we develop products covering areas that are not or partially covered. And also, we work on quality upgrades, improving marginality of the products. And An important element is to concentrate on sustainability as well, developing products that are more sustainable.

I think they already shown something here in some markers and other projects that goes exactly in that direction. Okay. We saw the product, we saw the market quite swiftly, but now we take some example of the communication strategy because all of that then has to be addressed to our consumers, okay. Again, we start with a base effect of the basic assumption that the relation between products for growing coloring products starts when you are child and long-lasting relations starts when you're child and goes on. I was joking. I was counting how many of you have in your hands. It's a little bit of a joke. I mean somebody says this product is that, no. They are mainly still using all of us has a pen or a pencil in the hands. So absolutely right, we were discussing and remember yesterday about the digital. Anyway, the point is that products start as a child and go for their life. And we cover with all products starting from every childhood to professional. What we want to do through our marketing activities, our main aim is to create a long-lasting relationship between our brands and our consumer is what is called the life journey. And how we try to do that. We try to do that building experience or creating value for our consumer, where through all touch points. We have listed here some of the many touch points where we enter in with our consumer. So all the education. When I say education, not necessarily in the school, but activities for education, the leisure, just spending time drawing, coloring and painting. The point of sale that, yes, digital is important, but trust us point-of-sale are still quite present. So the point of is another point where we can make activities the profession and the culture. All touch points are covered or we try to cover all touch points with quality level actions, quality activity, quality is essential for doing that. I think we make some examples. Digital, this terrible world is quite used now in the marketing. The digital activities are what we consider activities proposed different target made partially digital. Everything is digital and is physical is called digital. I make just -- what we do? We try to inspire to kids and to our target. Just a couple of examples. A nice video, but. [Presentation]With New York 40,000 ways. It's a different way to sell a pencil, to promote pencil to children. The power of this pencil, pencil is much bigger than the product itself. So this is what's done to promote the pencil in schools Nicoletta, would you.

Yes, maybe I can tell you two words on the art education program a program we run in the U.S. We work with 6 after educators who organize training to art schools and universities. We meet during the years about 3,000 students and we explain how to use the product, how they are made and what are the main features.

This is another video nice. we call second life project is a project that we are delivering in school to explain to kids not to waste things. They are quite sensible and careful about that. This is -- we call upcycling this. I show you. [Presentation]

example, no video, don't worry. An example of the activities we do. So we have digital activities, of course, And -- but we also have the digital lab is example of that number, where kids can play with And then we have the DAS market. This is a consumer show we did with DAS.

Then we collaborate with influencers and ambassadors who share the passion for our brands and products. They are seen as very important and reliable preference from the end users. We work with them online and offline. Ambassador really become a part of our, let's say, marketing team because they are the ones talking to the consumer. An example of a video of an important ambassador for our digital fine arts paper is a good photographer. [Presentation]

They just had a few examples to show you a different voice because every ambassador really represents different products and brands.

We have also some important partnerships because a partner with important institutional and solid culture, partner is essential for us. I don't -- we had, for example, a couple of examples here. I skip the video. So quite a relevant one, where we have thousands of kids coming. We have one important partnership with [indiscernible] both as a patronage but also we're making activity with the kids and other example. And we do that in all major countries. Then we have an [indiscernible] contest. So we produce and we participate [indiscernible] contest or activities, both for trade so for our customers and both for consumer. I'll make an example of this is our last participation to the... [Presentation]

A contestor, [Audio Gap] in London, where we sponsor giving free products to the winner. An artist that has paint and art work a set time frame.

Last but not least, we have charity actions. So sustained communities, but not only them, and with partnership with very important. Some example, [indiscernible]. We sustained the [indiscernible] and then we have another really important in U.S.A. with the Kids In Need Foundation. It's a foundation that supports unfunded schools and teachers in order to donate products that they can afford. So this is our journey. We try to be quite synthetic. I would like just to close everything because I would like to show the last video, not this one, because we talk about pencils. So I have a lot -- because I don't know how many of you have here seen the production of pencil. This is our production in China. [Presentation]

So thank you very much. Now...

Thank you.

Thank you. Now I ask the -- next turn is Francesco. Francesco [indiscernible] the sales and distribution, linking of what we said to -- what in reality happens in the market. Thank you very much.

Thank you, Pietro. Good morning. I am Francesco Maniglia, Group Chief Sales Officer. It's a pleasure for me to share with you the most significant highlight of year 2022 and first closing of year 2023 results. And also two relevant commercial and strategic improvement, which will help us to achieve our goal in the next few years. I would like to provide you with an overview on the business performance on year 2022 and Q1 2023. As you can see in the first chart, in 2022, there has been an improvement in business growth compared to 2021. We have already seen the different trends about the geographical areas both for 2022 and first Q 2023. In particular, we have seen a significant growth in Asia and South America. Below, you can see the performance on the sales by geographical area. In particular, it provides a more detailed description of the before mentioned improvement in terms of sales, weight, the rich continent. North America, around 42%; Europe, around 31%; Asia, around 16%; South America, 10%. As you can see, Asia and South America growth compared to the 2021. About the Q1, as you can see in this chart, in Q1 2023, there has been an improvement in the business and organic growth compared with Q1 2022. More specifically, we have seen a positive trend in Asia, in particular, India and Central and South America, in particular, Mexico. In the Q1, we've seen a rebound of North America. I would like also to underline that this general trend continues in the Q2. Below, you can see the performance of sales by geographical area. In particular, it provides more detailed description of before mentioned improvement in terms of sales rate and for rich continent. 41%, North America; 29%, Europe, 18%, Asia; and 11%, South America. In conclusion, as I said before, the contribution of different geographical areas is partially in line with the one that we have seen in the Q1 2022. Before examining the channel's performance, I would like to explain the main elements which are driving our business in every geographical area. The main aspect about the 2022 geographic area sales trend. In Asia, demographic, consumer and education growth. In Middle East and South -- in Middle and South America, market share acquisition, thanks to our branch performance and dynamism. This, because the dimension of our companies, is more than the majority of our competitors. About North America, we estimate a 5% growth, in line with the past year, due to the improvement of the service rate, fine art growth and better performance from some very important key customers. In Europe, it's early to draw some conclusion about the Q1 loss compared to the prior year. This loss is the result of a delay in the back-to-school orders. Anyway, we expect to recover this gap by the end of back-to-school period. We had this delay in particular in U.K., Italy, F.I.L.A. Nordic and Spain, around minus EUR 2.7 million. In order to complete the overview in terms of results, I would like to give you a highlight about the Q1 channel performance. In development versus 2022, except the e-commerce, which mainly comes from Amazon and which represent about 85% of our business on this channel. In general, we expect the trend continues to be positive in every channel. Furthermore, I would like to highlight the channel on which we have major development expectations. In the course of this presentation, I will also point out how the strategic and commercial change will impact on these channels. I would like to share with you the strategic channel to build out business growth, retailer, school and office supplier and wholesaler. On following 3 specific channel, we expect, in 2023, a growth rate between 2% and 4%. I would like also to give you a parameter in terms of channel gross margin, e-commerce and retail around 52%; wholesaler school supplier and mass market, on average 46%, 47%. Before moving on these 2 strategic points, I would like to provide you with a highlight on Amazon Europe as in the U.S.A., the dynamics are the same. Amazon relevant growth during the pandemic period. Amazon 2022 versus pre-pandemic plus 94%. This growth confirmed that we had a relevant change in terms of e-commerce purchasing of our segment of products on the post-pandemic period. We are not able to clearly forecast the weight that Amazon will represent in the next year for FILA. In Europe, in terms of revenue because they actually manage the business through an algorithm. This is a very big problem that us create the relevant Amazon overstock issues. We are working to better understand to concrete Europe Amazon annual average turnover in the next year. Amazon should be considered as a mere business opportunity of not permanent. To provide you an order of magnitude with Amazon, we have a gross margin of about 52%. In order to complete the e-commerce overview, I would like to share the results of our market analysis. The other pure e-commerce players are very small compared to Amazon. Our e-commerce customers achieved medium results our competitors with e-commerce platform achieved low results. FILA already built the project. We consider this opportunity for the future, for the moment, we would like to avoid to compete to our customers. Please let me now set out the before mentioned 2 strategic and commercial actions, which will contribute to the achievement of our profitability and growth goals. We would like to enhance our unique brand portfolio through 2 strategic improvement aspect. Sales force reorganization on the European perimeter, gap reduction between the product strategy put in place by the international marketing and the current execution. With regard to sales force reorganization on the European perimeter, this action will allow us to have an utmost focus on the most relevant business unit, Fine Art and school and office. So us to take better advantage of our brand portfolio in order to catch in this way every possible business opportunity. I would like to start with the sales organization background. The strength of our brand portfolio is an asset that distinguish us from competition in every market. On the other hand, we need to manage an operative complexity each branch manages on average, 4 business units, 15 brands and 50,000 SKUs and 4 sales channel. In the meantime, marketing department already started with a relevant SKU simplification. Main business unit are Fine Art and school and office, both must be developed to their fullest potential. Last but not least, our branch sales force manager our tier portfolio. They focus on the historical business unit, missing some opportunities in other ones, excluding Dixon USA, where we have already in place 2 specific sales force organization. Sales organization, objective and action. Main objective enhanced brand portfolio by focusing on each business unit, priority on Fine Art and school and office create strong sales team competence in order to manage each business unit with the right approach. Main actions in order to create 2 specific sales force for both business units, we need to make a market assessment in order to define our priority per business units in each country through an analysis about business unit market share and potential growth that we will help us to define the necessary investment in terms of people. Scope European branch timing assessment 2023, test in the selected branch 2024 rollout in 2025. Main expected results efficient brand portfolio management, close the gap in the market in the weakest business unit versus potential improvement in the market share and drive incremental sales and margins in every channel. With regard to the second strategic aspect, the issue here is how to better support our sales force in order to be productive in accordance with the marketing product strategy. The main objective will be reduction of the current gap between the product strategy and the execution. In order to achieve this objective, we need to develop a tool that we will guide our sales force to sell the most performing assortment in accordance with the marketing global strategy. Product strategy execution background. We are in a very competitive environment. Customers are focusing more and more on price, very often leaving aside the brand awareness quality and service. Despite everything, we had already increased the price to all our customers, excluding Amazon Europe, shipment blocked for about 2 months I expect and I offer to unlock the Amazon shipment in June in order to recover the estimated delay around [indiscernible]. We are choosing different battles field than the price in order to ensure our business and our profitability. We want to improve versus competition in order to build a solid relationship with our customer. Our key account from seller to consultant based on quality and service. Currently, our execution is too far from our product strategy. Therefore, we must cover this regard. Starting point, connect marketing product strategy to channels and customers in order to improve our execution. Product strategy execution through the new tools, sales objectives and action and expected results. Main objective, reduce the gap between the product strategy and the current execution and improve our channel distribution, in particular, retail and Fine Art, chain for the Fine Art business unit, mass-market, wholesaler and school supplier on the Fine Art business on the school business unit. Move customer focus from price to product quality, sell-out performance and inventory reduction, improved sales growth and profitability driving product mix. Improve sales team visit in terms of efficiency in order to spend more time to focus on new prospects. Main actions, Salesware product strategy, the new tool, we will support our commercial consultant team in the following 3 stage: customer visit planning, visit preparation and the execution. Salesware that will allow us to simplify customer management, reducing the gap from the product strategy and the current execution, prepared sales visit and monitoring, execution and results based on the trend business analysis and selected KPIs. KPIs definition that allow us to manage the customer according to the group strategy and goals. Sales team involved in a training section rollout in the selected European branch February 2024, go live in Europe scope end of 2024. Main expected results acceleration growth estimate extra plus 5% on the already existing expected growth within the European perimeter. Sales account, deep preparation and better customer management, the transformation for sales to consultant. Customer visit efficiency and effective on negotiation on top opportunities on the selected KPIs and visit timing reduction by 30% with positive effect on rule compliance. Improve our consumer partnership due to the loyalty, the acceleration of the sellout and inventory reduction. Before concluding this presentation, I would like to share with you the impact that see 2 relevant strategic change will have on the sales channel with higher growth potential. Our -- the new strategy will impact on the potential channels. Retailer and Fine Art chain reduction of the gap between the product strategy and execution, improvement of customer sellout and inventory optimization, 30% improvement of our time visit best focused build a solid customer relationship and the acquisition of new customers. About school and office supplier and wholesaler through the product strategy tool, we will guide them per channel and customer to improve the assortment for their customer and order the acceleration, the sellout and reduce the inventory. With this new approach, we will better control our business through the wholesaler, reducing the gap of our product strategy. I would like to underline a new channel that we will represent a very relevant opportunity, DAS, [ Dario Sala ], and so on. New potential channel through the product strategy tool, we give the them the most performing assortment. We started in Italy with excellent results in terms of sellout. We have already started to create a synergy in order to push the same business in Europe, in order to develop this new business opportunity. The next country will be Spain. In conclusion, I would like to underline that our goals and change will be able to differentiate us from our competitors. This allows us to grow in accordance with both objectives and profitability. Thank you for your attention. I give the floor to Luca Pelosin in order to proceed with the operations of the day.

Good morning, everyone. Luca Pelosin here in Fila for the last 23 years. So I have seen already the transformation of the group. I will not go through the entire presentation because it's late and because I see some of you already tired here. So I will not try to annoy you. So I will give you some highlights. So I start from production. We consider ourself different from our competitors and unique and actually, we are really unique in our sector for a simple reason. We produce everything we offer to our customers through -- thanks to our 22 plants around the world. And our model is to be vertically integrated. It means we started from a single raw material to have a finished product. We have seen the example of pencils, but this is the integral for any of our product. We don't trade nothing. The traded products are less a single digit in terms of value for the group. It means we produce everything in-house. Why we have this business model canvas because we want to control cost from one side, so we can decide what cost should have each single product relating to the required quality by our marketing team. So having the full control of production, we can achieve achieved this target. We have 22 production plants around the world. Basically, our plants are specialized to make some product. For instance, you have seen modeling materials here DAS is a perfect example. We produce here for the entire group. For sure, we have a backup in other plants for many key products. We offer to our customers to offset potential issues or constraints which could come in a specific country. There is one exception, which is represented by [ Dams ] India, where we have the largest plant in the group and where we produced all the products we produced in all the other plants for a simple reason, we consider ourselves to be successful in India because we offer European or Western quality with the Indian cost. So it is a really important local present in terms of manufacturing because we can fit the desired target price and our market share growing. The other major plants are located in Mexico. Mexico is producing basically for local sales and for the U.S. market. We have 2 important plans also in United States where we basically convert school and Fine Art paper. The 3 [ news ] in Europe, 1 in U.K., 2 in France, where we have also converted department, a very nice plant, where we produce chalks, which is a relevant product in terms at least volumes and marginality and the other is located in U.K. and the plant we have here in Florence. We sell our products, thanks to our local distribution centers. So we cover the 33 branches thanks cover the market in terms of delivering customers throughout our distribution centers. This is important because I show you the complexity we have to manage supply chain-wise, making everything in our plans and distributing thanks to our distribution centers, we operate directly with our distribution center. There is only one exception, which is represented by Italy for historical reason. We have a partnership since the '93 and we outsource our logistics and distribution activities. Focus should be indicated to the Annonay Hub. We opened the new distribution center in Annonay in 2019. We moved the all the products we are offering to European customers. And from our hub, we are distributing directly the customers in Spain, Portugal, France, Benelux, Germany and Italy Fine Art because a school, as I said, is managed by DHL. So it is an automatic for each subsidiary is getting the order from the customers. The hub is delivering the customers directly and automatically, we have the intercompany invoice and the invoice from the subsidiary the customer. We historically invested around EUR 20 million per year. For the next 3 years, we intend to invest more. A big part of the additional CapEx will be assigned to India to sustain the forecasted growth for the next years. We are going to double our plant beginning next year. Investments are intended to make update in the equipment to look at efficiency, to produce new products to be more sustainable. These are the main key drivers. Part of the CapEx have been assigned to our IT road map, probably some of you already know, we launched a DNA project in 2016 and the revenue [ attitude ] and part of the project was related to a group RP to better control and drive the business. Since 2016, we implemented SAP and all the related tools even subsidiaries. The next one will be Mexico. It's the biggest major subsidiary who is still missing the SAP drive and since 2016, we are -- we invested around EUR 15 million in this project in line with our original estimation. In the last 2 years, inflation was a big issue for all the industries. One of our main raw material used in the group is pulp shorten fibers, not just because we moved these fibers into paper, thanks to our mills, but also because we buy all the packaging of our product that are the rebate of pulps. As you can see in this graph, during COVID time, the price went down significantly. In 2021, the cost reached the pre-COVID levels, but in 2022, as all the other commodities and utilities price went up really a lot. The peak was in October last year, just to give you a number in 2022, the average purchasing price was 37% more than the average of the previous year. The same trend is -- was an -- is for U.S. because at the end, all the suppliers are international suppliers located mainly in Brazil and the other Europe. The softwood cost trend was really similar to the one we have seen for Europe. The same trend happened there or all the other commodities. Just one example, you have seen here, producing markets we start from polypropylene and pre-COVID the average price was around EUR 125. In 2022, we experienced to be over EUR 2 challenging to fund materials to be supplied by our vendors. The prices start going down at the end of last year, and we are now comparable to the COVID price. Another big part of our cost because we have 22 plants around the world, and we have 33 distribution center or a little bit less in our 32 branches is related to the inbound freight. You can see here a graph for the cost of containers from the different services delivered to U.S. I represented U.S. because they managed to import more than 700 containers a year. So this is a relevant cost for us. In 2022, from Shanghai, for instance, we reached a peak of more than $21,000 per container, while the pre-COVID price was below $4,000. And luckily, the cost went down to the pre-COVID level already in the second part of last year, unfortunately, and due to the BTS, back-to-school peak, the first semester is the period where we import more. So we didn't take a lot of benefit from last year cost reduction while this year, costs are much lower compared to 2022. A similar trend, you can see a similar trend from the other countries. In average, we returned to the pre-COVID level. Still, we are missing to see this trend for the shipments from Europe to U.S. the excuse is related to the word, but I don't know if it is true or not. Last year, I know working capital is a relevant element for you. Last year, we decided to overstock for us -- also for us. Last year, we decided to overstock our distribution center because in the previous 2 years, we experienced a lot of issues in serving our customers -- and in many cases, we have been obliged to have plenty of shipment with incremental inbound cost and not knowing what COVID, the inflation or whatever could happen could give in 2023, we decided to be on stock in advance compared to our historical trend. So the inventory level part of the net working capital, relevant part of the net working capital was worse than our original budget for this year, one of the new priority is to improve as much as possible in net working capital and to have the inventories well managed. Piero, Nicoletti, Francesco already told you about our strategy to have rationalization of our offer to not spread throughout 1,000 SKUs our offer and the final effect is to have additional stock in the warehouse, but there are other levers, we have already switched on and referring to a better forecast. I say that we produce everything we produced in 22 plants. If it is in forecast, not as much as possible accurate, the risk is to have the inventories going up. So we have a big attention on how each subsidiary is forecasting sales for this year, we officially implemented a quarterly meeting with each subsidiary where we analyze the finance consensus demand, which, in reality, is deeper closing of the year to understand if our view of sales is in line with the actual intake all the corrective actions to have the inventory not growing or to be better managed. On the other side, we are fine-tuning all the MRP setting because COVID broad sales completely different by product family or product category compared to the history. And when we want to serve good our customers to be on stock, safety stock planning delivery time. I don't know you with all these elements but different tuning is part of the actions. So we have taken a weather the inventories going down. In 2022, net working capital was 39.6%, we expect to have a very good improvement in 2023, but it will be just the start. Focusing in North America because, as you know, Dixon U.S. was the subsidiary who more suffered from the strong and fast inflation also because it is not easier as it is for the other accounts to move customers because increase having in front of us strong retailers like Amazon, Walmart and all the others. So our target is to bring back the subsidiary to the historical levels of profitability. We already made effective the separation between school and Fine Art also physical. So we have today structure and offices, plants and distribution centers, which are dedicated for each business unit because customers are different, and the customers are expecting to have a different treatment, I can say, so we have now in place EVP and VP dedicated each single subsidiary. We launched different initiatives, thanks to our more commitment with this subsidiary. We are taking the leader of the company. When I say we, it means I mean all of my colleague officers, to drive the company and to have the company returning to the historic level of profitabilities. So I said we have a very long action plan, more than 70 items. We have redefined targets, commitments culture of working with more the, let's say, European style, and we are now implementing this strategy. Part of the rationalization is related to brands. You can see here how many brands we have been managed there also because Pacon is coming from an M&A acquisition at buying other companies in U.S. So for more than 20, 25 brands, the aim is to end with not more than 10 brands. Also, net working capital is very important for U.S. So what we already did, we already reduced the distribution center from 4 to 3, and we have a target to be more efficient within the end of the year with a dedicated there. Project customer simplification, office simplification, [ area ] make or their way to manage the private label that we produce for customers. We launched a different initiative. One of the most important that we return back to the historical level or better profitability is the price excellence intended to have a better margin. So for U.S. team, having products sold with a low margin was a part of the business. It is not for us we're challenging them to have any product below a certain threshold of margin to discontinue the product or to increase price. All right. I try to be as fast as possible.

Okay. Thanks, Luca. I am Chris Nicoletti, the Group CFO. And we can analyze the Q1 2022 results. The main KPI and the financial performance considering that we already discussed the share that is result during the previous meeting. The adjusted core business yields were approximately EUR 180 million. plus 7.6% in comparison with Q1 2022. Asia, Middle South America and North America guided this performance, especially highlighting us to grow in India plus 35.5% comparison to Q1 2022. The adjusted EBITDA was of EUR 24.3 million, plus 7.4% in comparison Q1 2022, with a positive performance in Asia, Middle South America and North America. Adjusted EBITDA equal margin equal to 13.6%, almost in line with Q1 2020 is better than the foreseen to the positive effect generated by sales price increase. The adjusted free cash flow to equity at negative EUR 55.5 million instead of a negative EUR 29.6 million in Q1 2022, show an absorption in CapEx for approximately EUR 10 million related to India for supporting its growth and higher financial expenses for approximately EUR 4 million and temporary negative effect on the net working capital. About the free cash flow, we can confirm between EUR 40 million and EUR 50 million of free cash flow to equity. We have tend an improvement on net working capital, mainly to the inventory stock decrease despite an increase of CapEx substantially to support the growth in India and to mitigate as much possible the continuous increase of variable interest rates. Actually, we have completed the European cash pooling project that have involved Italy, Spain, France and Germany company. This company having cash flow structure leaded by FILA headquarter. The cash flowing permits to FILA to decrease the bank expenses and to generate the efficiency in cash availability reduction, the SPC credit line and obtaining better bank condition. Also, the financials status -- the financial status our senior facility agreement give us the opportunity to use the central revolving credit line to be used for financing the Fila companies, saving the higher local interest rate. Relating to the structure, I want to highlight that the 35% of the EBITDA variable is under pressure of actually trend of interest rate, the group work each day is to try to minimize this impact using the source -- financial source at quarter level. That are the main target of the group to work on this mainly KPI.

As much possible short.

Sorry. You should have a dedicated section talking about sustainability, but due to time constraints, again, I will try to be fast and to give you some highlights. FILA Group always operated in a sustainable way for us, environment, people, communities, products were part of our targets to be the best-in-class in this regard. Many consultants told us that we didn't market in a good way, whatever we have done in the last years. So we decided to be a little bit more effective in terms of the way we present ourselves in terms of sustainable group. So we launched -- or we approved in 2020, the 5-year strategic plan, and a big part of the strategic plan is related to the sustainability plan. We make reference to 8 pillars, which are sorry -- which are linked to all the SDG goals. We have a sustainability action plan for all the related pillars. We have a full commitment of the group to sustainability targets. You know much better than me that people are one of the main pillar and one of the main assets we have on the group. And as I said, part of the action we took, and we have in our sustainability plan is related to pillar. I already said that we always work in a sustainability way. So we try to not have waste and to recycle internally whatever possible, you visited this plant this morning, for instance, for the plastic raw materials. We use all the scraps. I'm not talking about [ May or ] the polypropylene coming from renewable resources. In case we are not able to reuse internally. We sell our scraps some customers who made this in for us. Last but not least, I forgot to mention the commitment is reinforced by the fact that we have signed to the [ Steering ] Committee, the sustainability responsibilities. We have a [ steering ] committee made by some file offers at quarter level, and we implemented local committees in all the major subsidiaries to have a track of all the action foreseen in the sustainability trend directly to each subsidiary. In the last, not financial information, we disclose better our sustainability targets for the next year. I think you already know this target because this is a public information. I recap very, very quick. Our aim is to reduce the CO2 emission by 2027 by 50%. Also considering that we are not considered Energy Group because our consumption are not relevant. We also have the target to reduce by 20%, the water consumption, mainly in our mills, but not just there. The plan is to have all the plants in the group certified 14001 environment and 45001 safety. We plan that to increase in the next couple of years by 10%, the training hours to our employees. And considering the entire super chain is more and more a focus also from the authorities we aim to extend the accord of candidate to our suppliers and the procurement by 2024 to all the vendors who have, let's say, a turnover with us over a very low threshold. I was very fast. Thank you.

So before moving to the Q&A session, I would like to summarize a bit what we just heard in our presentation. And I think we had the chance recently to meet. So I'm not going to give you any extraordinary news, but it's important with the explanation that the team has given to you, I think you better understand why we are consistent and positive on the 2023 outlook. So the outlook say that we do expect a single -- a mid-single-digit growth, but more than a proportional growth in EBITDA, the reason you have found that you see in the presentation the cost trend is really going down. The -- we have implemented as expected, the price increase that we have announced several times last year. The efficiency, the diversification we have in the market. So it's true that we have competition from private label, but private label is targeting undiversified production, [ unmet ] product, low prices, we are targeting differentiation. We have established a strong communication with our consumers all around the world. And we can do this and we can guarantee this long term, thanks to our fully controlled supply chain. So this guarantee us innovation and the marketing mix advantage that several times, I mentioned that today, maybe you have a better idea why this competitive advantage is sustainable in long term. I think we have mentioned about cash flow generation. I think this is important because we are in May, we do confirm that the cash generation expected remain between EUR 40 million to EUR 50 million, why we do confirm, first of all, after 5 months, we start seeing consistency in our expectations. Number two, the trend of cost is helping us, in the beginning of the year was difficult to identify really the trend, not in the magnitude but in the period. So we could expect the period is helping us because this is happening during back-to-school. So we will track the majority of the cost reduction. And we are going to guarantee this good cash generation despite we are going to substantially increase the CapEx. So this is extremely important. This is not going to reduce cash generation, but we are going to keep this healthy cash generation to further reduce our leverage and guarantee a strong growth, especially in Indian market. As we were talking about India, I would like to repeat what I already said. The market -- the market in the next 5 years is expected to grow on average, the market in India on average by 50%, while our company is expected to go in the area of [ 100 to 200, 20% ] and 30%. So as it has happened in the last 10 years, we are lucky because we are working in a very dynamic market, but we are definitely beating the numbers that the market is generating. We are beating competition and the company is today probably a leader, an undisputed leader, at least in terms of innovation and profitability. Maybe not yet in terms of turnover, but this will come soon also thanks to the large investment we are -- we have approved. Yes. We are -- as you all probably have understood, we are analyzing different opportunities in the market India, as you all know, has been discovered by the financial community just recently, but fortunately, we are in India now for 12 years. So we were there -- we entered India in 2011. We have always been extremely positive about the country despite we have to manage the problems in, during COVID period that was very poorly managed by the local government. So India is giving us a huge opportunity but it's going to need a substantial amount of financing our strategic idea is to remain involved in the country, keeping the governance and the strategic direction for the next decade. But we have decided to allowed the company to become independent from FILA Group in terms of financial resources because this company will absorb a huge amount of resources while, in FILA, we have 2 different priorities. Number one, to reduce the leverage number two, sooner than later, restart our M&A -- our M&A opportunities. During the presentation, you had the chance to see how fragmented is our market. Very briefly, I can tell you that the market situation is quickly evolving in our favor. The reason is very simple. FILA is, in fact, an Italian company from a legal entity point of view, but in reality, we do more than 70%, 7-0, of our turnover in North America, Mexico and India. So this, I think, we did a great job. We have been also lucky, really. But U.S., Mexico and India are really the market where you have to be in this moment in our Fine Art and stationery business. We compete with large competitors, some of them larger than us that are their markets are more focused in Europe or limited to North American market. This will quickly worsen their profitability and their cash generation. So we do expect unique opportunities in the next 2, 3 years. That's why after we -- let's say, we manage positively the COVID period and the -- so-called the inflation period that arise in 2022, I think we need now to start thinking strategically and to be ready in 2, 3 years to become, again, protagonist of the next M&A session that again will come sooner than later. I think that you have heard a lot from this 1.5 hour presentation. I would like to move to Q&A session, if any, of course. And we are available for your questions. Thank you.

Someone has to start. So I'll start with two questions, actually. Going back to the first presentation. I wonder if you could give us a bit more detail about the SKU reduction. Do you have a target? I think you said there are 15,000 SKUs in total, I'm not sure if that was fine art and school and office. But I mean, where do you want to get to? And does it concern 1 brand or business area more than another? Is it just a general housekeeping that you haven't done for a while? And then if I ask the second question on the same. So my second question would be I wonder if you could quantify the marketing budget that you spend every year? And how you allocate it -- what priority you give to the different brands? I mean does half of it go on the global brands or just a little bit more detail on how you spend your money.

No, we have -- what we said is that we manage 15,000 SKUs per country. It doesn't mean that it is the number of total SKUs that we have in the group because there are specific SKUs and specific brands that are local. So in fact, every subsidiary has an average of 15,000 SKUs, including fine art and school and office SKUs. So if I put them all in total, I should say that we are above [ 60,000 ] in total, then we rationalize mainly all the overlappings. I can tell you what happened in the fine art. All brands had products that were produced and traded items, all the traded items have been almost discontinued, and we focused on the original DNA of the brand. So to give you some examples, we have Maimeri, Daler-Rowney and Lukas, 3 main color brands where Daler-Rowney was already producing all categories of products. So when Maimeri and Lukas head in the portfolio in the past, brushes, painting knives, canvases, these were all discontinued and we selected 1 brand that was in the origin already manufacturing in the 4 categories. So this was a way of rationalizing under 1 main brand. Then we try to reinforce the values of every brand. So Maimeri is for color, focused on color. If there is any development, is on color. And Daler-Rowney covers all segments. So we have, as you have seen, a complete portfolio covering the 4 categories of fine art products. I don't know if I reply to your question. It's a way or another example could be with the acquisition of Arches, some of the Canson top-quality products were, let's say, discontinued in favor of the integration of Arches in the portfolio of trends. Okay.

Yes, for the school, it's a little bit different, but the concept is the same. We don't have a so huge range because when you go to fine arts, you just thinks about the spare colors. Single colors, we have at least 100 and more than single items. When going to school, we don't have this debt. So we are removing what is not, in reality, moving well or that can be -- is not interesting and reducing line that we are no longer interesting at the group level and try to concentrate on the real important items. One point essential, Luca can confirm, you've seen the production, consider -- take this marker, for example. This marker, we started the same in U.S.A., under different U.S.A., brand. So which means that we don't change almost anything, but the print and the box. So also, this is a SKU rationalization, tried to avoid to multiply it and duplicate what we have. This could be a little bit different. Luca showed very well the situation of Pacon. You have seen we have a full array of brands today, sub-brands that came from acquisition, and we tried to move them through 10 fundamental brands. And in this case, we are going to reduce seriously what I said, they are [indiscernible] -- honestly won't have a long life. Coming to the budget of marketing. More or less, the total spending on the marketing in percentage is 2.5% to 3%. We include in that all activities directed to consumer and trade. Of course, we are investing more and more on global brands and brands that has a potential of growth. And is -- we do so both above-the-line activities more and more digital because, as you know, the digital has really changed. It was considered that on the total spend in the digital today in terms of advertising account more than the 50% of the total spending. So we are moving to digital for two simple reasons. Cost less, not so as it was at the very beginning, but cost less, and this can be much more focused on your target. So digital activities that takes like social, digital or in general and also the so-called below-the-line activities. You saw the show, we are investing a lot still in the trade because we believe our customer are still very important for us to reach the consumer. So we do display, we do activities on the point-of-sales, all of that. But more or less, it depends on the year, 2.5%, 3% of the total investment. Apart of any capital related, of course, to the market and these are not included in that.

We're discussing about OpEx cost. And it's important also to highlight that the main area where we have this budget, this is Italy, considering that we have the quarter and CFO that organized the marketing, defined the line and the strategy that we have followed. And the other part is U.S.A. considering the volume of business and in Canson, France. Three main area where it's concentrated in our budget, discussing about OpEx. Of course, changing during the last 3 years, considering that we come from period of COVID that our activity is limited, of course. Considering that, we are recovering. But in these years, we are resilient about this activity considering that we are charging to achieve our target.

I have two questions. The first one is taking into consideration the families of those products you have. Is it possible to produce a ranking by profitability from top to the bottom, giving or not giving the detailed percentage of profitability, or just the least from top to the bottom. And if you believe that the ranking you will produce is similar for your competitor? Or if there is some peculiarity? And then the second question is, if it is possible to know what is the percentage of the business in U.S. which is done through private label business.

Second question is easier. In private label, U.S. is around 10%. Probably is -- probably going down in the near future because since we took over directly the execution of the business plan. We have put some rigid rules that our former American management did not respect. So we are going either to improve working capital and profitability. We think we're going to reduce a little bit the percentage of private label in our turnover starting already from 2023. For the first question, don't ask me to give you specific numbers, but I will be very close to the reality. The most profitable business for us is still pencils, and this is valid also for our competition. What you don't know because you needed to be an expert of the business is that the real manufacturer offenses that are, at the end, the real leader in this world are very few despite you see a huge number of brands that are selling pencils, majority of them are just a trading pencils. So the real strong leader in the world are today, probably #1 in the world is F.I.L.A., followed by the German Faber-Castell and also for them, pencils is top profitable product, followed by a Chinese manufacturer. Immediately after pencils, we have paper. Paper for us, we call them niches because you know that the profitability of paper declined quickly, the more you move towards [indiscernible] and mass consumer, but we are not definitely in that area. And we are not even competitive in that area. So we couldn't, very simply. Third is markers and color markers in terms of profitability is still important. And then going down, you find modeling material. This is very much similar to -- when you analyze competitor that are manufacturers. So the complication from an external analyst is to differentiate because if you look at the company and a brand, you don't understand why, for example, F.I.L.A. is substantially more profitable than direct competition. And the answer is the supply chain. So our supply chain is completely controlled by us. And -- but this is a little bit of a secret or a strategy that we decided in mid-90s to grow, become international and to grow only through fully controlling the supply chain. While I would say majority, if not all of our competitors decided to copy our business model, but they tried the simplest way, which means outsource, go in China, put an umbrella brand and answer to our proposal quickly. So the problem is that this approach is not defendable in long term. Because what happened is that all the Chinese, Indian manufacturer, Indonesia manufacturer, as soon as they open a market through a brand, they immediately started to supply the private label exactly the same product. So this is extremely important to understand our business because we produce unique products with unique features. What is very important to maintain the success is to give to the consumer a measurable advantage. So a measurable, what does it mean? It means that you should respond to the request of the consumer every day when we wake up. We have our subsidiary in Australia and then we wake up in Europe, and then we will cut in the United States. Our marketing team, our sales team talk with our consumer via digital, via physical meeting with [indiscernible], we are meeting the teachers. And we have to respond to their request and their expectation, giving value to our products. But one thing is to develop internally a product, launch entering the market, have a diversification from the product table, for example, and get a unique price advantage compared to the competition. Different is, you have to respond to a request. You go in China, you ask the manufacturers to produce what you want and then after 6 months, you find this product everywhere in the world, and this [indiscernible] the differentiation. So this is the main reason why F.I.L.A. has guaranteed a substantial better profitability than the competition. This is the reason why we have suffered during from COVID and not only COVID, from pre-COVID because we made the largest acquisition in North America, but we didn't have time to restructure the company. We entered in COVID, and after COVID we entered the inflation. So for this external elements, it was very difficult for us to manage properly the supply chain and the working capital. At the end, we have decided even if the market does not like this, we prefer to keep the service to keep our margin and our differentiation and when the situation will stabilize, which happens in 2023, by the way. So we will enjoy a very good year this year. We can start working, looking for better efficiency. It was a very unstable environment where we have worked in these 3, 4 years. And our approach is very much often targeting long term. So many times, I understand we are analyzed on a quarterly base. Unfortunately, this is not our mentality because we want to protect consumers that we talk since centuries, some companies have centuries and they are extremely reliable, extremely reliable. So -- and loyal to our brands and the performance of our product. And this only can explain why we have a substantial better performance. I can anticipate to you that 2023 will be a milestone in the future because analyzing the presence in the market we are going to see really a differentiation in performance between F.I.L.A. and our competitors. And this will speed up the strategy that in the future, we are going to implement but we will have the opportunity to discuss further. But 2023 will be a key year for us because we will be able to improve working capital, to generate cash, to improve profitability and we are exposed to the best market in the world. In this moment, Mexico is overperforming. India is overperforming. United States probably will be the most important market in the world for us in terms of growth this year, even better than India. I know that everybody is waiting for some news in India that will come soon. And it will be very important news for F.I.L.A., but still the best market in the world in 2023 will be in United States. Alessandro?

Immediately, about your last point, U.S., the best-performing country this year. I presume that you are talking about EBITDA rather than the cash generation, okay. My first question is about inventories. So we know that all the key clients are wanting to reduce inventories. You wanted to reduce inventories. So how you are so confident about the fact that you can reduce inventories this year and likely next year. My second question is that about India. If you can share with us some time line on your process. And you are targeting about 14% of EBITDA margin. I would like to better understand the starting point of this year, 2022 in terms of margins. And finally, my last question is about still North America, when we expect to have the first tangible benefits in terms of margins. If I am not wrong, last year, you lost 300 bps against the average that you had in the past. So just to have a time line on this -- your expectation in the U.S.

So if it is okay, as Luca is in charge of the United States since January, I ask him to answer and then maybe I will integrate with some colors, if you like.

In terms of inventories, as I already said, we overstock our distribution center. The inventory reduction is coming from a better management of the sales forecast first. The very deep analysis on private label. We have the aim to move really private label through a made-to-order and not to stock products that are branded for our customers. We are also targeting -- we have seen there is a brand rationalization. So we -- we have a specific project related to get rid of our inventories for all the products, which will be discontinued. So with these 3 actions, the aim, as I said, is that whether the U.S. inventories are going down. On the other side, we should remember, in 2022, inventories going up and not just in terms of volumes but also in terms of value because with the strong inflation, the same volume had a higher value. We have seen this year U.S. is getting benefits for not more than from cost -- also from cost but from inbound freight cost, which in any case are a part of the cost of product. This is in terms of brand. So it is true customers are destocking. We experienced daily orders to be over the expectations because we believe customers already reached a stock level, which cannot be lower than today. We have a daily contact with customers to better understand their expectation and to be able to deliver what they will require from the back-to-school without having the inventories going up because we don't know what they would like to buy. It is not easy, but it's an exercise we are doing. I can't remember the other questions. Margin improvements. I believe Massimo already gave you this reply in other meetings because the last price increase enter in place at the end of -- at the beginning of this year. As I said before, 2022 was very poor year in terms of profitability for U.S. because despite we pushed our managers there to implement price increase during '22, they entered [indiscernible] later and not at the level that was required. We realized clearly the needs to bring back the price of the level which could give us the profitability we want. And starting from 2023 January, we implemented price increases. There are a few exceptions related to some contracts with some customers where we have a new planogram enter in place in the middle of the year. And by the way, we are still now in negotiation with some customers for all the products which are below a certain threshold of profitability. So we are asking mainly for private label, but not just for private label. We are fighting to have the prices at the level we want. Otherwise, we stop selling, we start delivering the product. So we expect the subsidiary to return performing at the, let's say historical level. Big recover will happen in 2023 for all what we said, it still start.

I forget, I already mentioned this when we had a meeting, but I repeat. Last year, the last price increase that was implemented in July, in fact, did not show any impact until the end of September. And then for the reason that we mentioned and that customers started heavily destocking. Really in 2022, the price increase of July have impacted, I mean, in a marginal way our income statement. So the good side of 2023 is that we are going to have the full effect of July price increase and that will be added to January price increase. So the reason why we are positive for this year is that costs are going down as we expected and price have been accepted as we expected. So it is very important because when you judge a company, I think you cannot judge during COVID period or an extraordinary inflation period. You should judge the company the way the company manage the expectations. So I think we have clearly announced that we would have implemented a price increase based on our estimation of cost reduction that probably are going even further more than what we estimated, but this is not under our control. And this is the reason, not only of the first quarter better than what we were expecting. But the fact that our estimation for 2023 are improving every month. To answer your second question about India. In India, there is a unique situation again. Every time if you are brave, you can take risks, but you need to be lucky. And of course, we are very lucky. Because in India, there is a conjunction of positive elements. So you have an extraordinary high level of rate of birth. India just became the first population in the world. But not only the first population but also the youngest. Second it's an Anglo-Saxon country. So very much different in terms of culture, very much different from China. It's more or less a democracy which help a lot in terms of investment in culture. It's from a strategic point of view, a country that has positioned itself in a perfect way. So they are a friend with everyone and enemy of no one. So the final result of this is that United States is pushing hard to have them, India on their side. Thus, for example, our exports from India to United States is growing very much against the Chinese import. But in the same time, in India, we are enjoying extraordinary cost reduction because Russia is pushing a lot of sales in terms of oil, raw materials, gas that they are not able to supply to other countries, particularly Europe at extremely competitive cost. So the reason why margins are increasing is because we are enjoying cost lower than expected and we have implemented a price increase during the 2022 and early 2023. Plus we have an operating leverage because when you -- the turnover grow between 30% and 40%, fixed costs do not grow at the same percentage. So we are enjoying an operative leverage. I would say a lot of positive things that are happening. I invite you not to think that we are only lucky, but we did some nice choices 10 years ago when we decided to invest in Mexico, in India and in the United States. So it's not just in case that we see our competitors stacking of difficult 2023 due to inflation, margin erosion, low consumption in the market while we are going to announce probably an extremely positive year from every point of view.

[indiscernible]

The IPO, as I said, is one of the options we have on the table. What we have decided is that we have -- we start from the end. The end has to be that F.I.L.A. will keep the governance of the company and the strategy because we wanted to stay in India for long term. And we have decided F.I.L.A. should not use its own financial capabilities to support India. We estimate India will need probably hundreds of millions of -- let's say, sources or financial support in the next 2, 3 years. So we think that either we decided to stop investing in all the rest of the world, and we concentrate everything into India, which could be a decision. It's not my decision. It's not my decision for two reasons. Number one, India is still a country in which you are a guest. Even if you're owner, you are a guest and you have clearly seen what happened in China when they take different approach from Western countries. Number two, it's a country that, on average, works with lower margin than United States and Europe. And three, we clearly see unique opportunity to aggregate in the next 3 years in Europe, in Central and South America, with probably higher return of investment because if you make acquisition in India, you are risking to pay a multiple of 30x, 35x EBITDA, while in Europe and North America, you can buy at 6x, 7x, 8x EBITDA. So if you consider this decision, so we will keep the governance of the company and the strategic direction but we need a financial partner who can be the partner. The partner can be the market for a private equity or an Indian family or another company. The decision will be announced in the next 3, 4, 5 weeks. And what is extremely important that the market has clearly not understood the value of our Indian investment. Probably the market has not been helped by the disaster of COVID because India suddenly -- I remember April 2020, the company invoiced turnover was 0. I remember the statistics -- our statistic we received from them, 0. So it clearly is difficult with 5,000 employees to have 0 turnover. And the government told us, you cannot fire and you have to pay salaries. So the market clearly did not appreciate the problem we had and the opportunity now we are having. So the value that we have invested in India in 2 consecutive times, more or less EUR 40 million, and we are talking of an asset that it's probably close to EUR 0.5 billion now. So this will be soon disclosed and will have a strong impact on our financials. It depends on what will be our final decision.

Relating to a question about inventory. Considering the first quarter 2023. We liked that we absorb less than Q1 2022 about inventory, considering the comparison between the period and negative cash [indiscernible] in net working capital is mainly due to the payment of the debt of 2022, considering that we have inside this value of 10% of inflation at higher receivable considering the increase of 7% of the sales. In other part, we have preserved the first quarter 2023, with the inventory from China considering that last year, China is closed with the lockdown about the COVID. In projection, it's important also to highlight that inventory in India is continuing to grow. At the moment, India is 0 inventory. In the future, the projection is not only the CapEx, but also to increase the inventory because at the moment, we are -- order invoice, order invoice to point to understand the flow of the inventory for Q1 and the trend at the end of 2023.

Question, if I can. First of all, congratulations because what I really like is because of the quality of your product, also new arts are now available, the photography is fantastic now. Printed -- because of your paper, it didn't exist before. You mentioned, of course, the brand is really important because of the quality I think that for brands like yours, quality is quietly for granted. I would have a question because it's quite difficult to be a brand today because of [indiscernible] but also -- is also a threat. So do you see any risk in terms, for example, sustainability? If I have to look at your business, paper is water consumption, pencil could be risk cutting, I don't know, the injection of plastics. So we noticed brand, we couldn't imagine the last time -- last month for [indiscernible] in Zurich or for Coca-Cola, they injected a lot of plastic in countries where they are not able to manage. In this sense, do you see a risk for you? Do you see a product development in this sense in terms of research and the new solutions? Or is something that is so limited because it's something so useful and is not an issue for F.I.L.A., this kind of...

Fortunately, the two most profitable category of product we are in, that represents more than 50% of our turnover are 100% ecological and friendly with the environment. So pencils are using wood and we generally use wood or sources that is planted or recycled. So it's really an ecological product. By the way, the reason why pencils are growing in terms of consumption, is because there is a substitution for two reasons: cost less compared to pens and it's completely ecological. So for -- and when I say ecological, I also mean that we start using water-based lacquer instead of solvent base. So it's really a clean product for long term. Unfortunately, we were -- I remember when I started in early '90s, F.I.L.A. was the #30 in the world for pencil production, now is #1. So a historical business, really historical. We go back a couple of centuries for competitors, that we have been able now to control and to control means that we control the sources of the wood down to the brands. Paper is more or less the same. First of all, the most profitable product we are in for paper do not use wood or cellulose. We use cotton, cotton fiber. And water -- yes, we need to manage. Clearly, after this month, the risk has gone away suddenly but could be a problem. The strong advantage of our paper is that it's almost impossible to meet the -- or to copy our quality because the quality of our paper is a combination of the quality of the air, together with the quality of the water we use and sometimes the know-how of our workers that are trained inside. I remember when I was a competitor of Arches, I tried everything and more than everything to copy their paper, result, 0. And now we are in the wonderful position to own Arches and the follower in the world, which is [indiscernible]. So that's why we enjoy very high margins and unique quality. But when I say unique, it's really unique. You cannot go to India and China and copy our product because the water is different. The air is different. The paper is different -- the raw material, the base is different. So we are protected by a differentiation that for our user is key to a point in which sometimes they even don't care about the price they pay because they want our products. I think for our future, we will try to collect some more of unique brands that are strong and profitable around the world that today we do not have. So this will be part of our M&A strategy, to collect more and more unique brand. And it will be, from a certain point of view, easy to integrate them in our offer because we are established in almost 100 countries with our subsidiaries. So when we buy a brand, we immediately can distribute and have under control the margins and price position. I don't know if there is something else to add.

For the product I actually talk, we have the chain of custody in place. So in terms of sustainability, this is not a threat for us. If we talk about water consumption, we have, yes, the goal to reduce by 20% the water withdrawal because in reality, our mills are consuming not more than 15% of the water withdrawal from the river. So our sustainability plan is to reduce the water withdrawal from the river in terms of consumption will stay the same. But this is something also required by the local authorities for sustainability reasons but we say our protection is there. For markets, it will be a little bit more challenging because plastic is plastic, but we have in place since years now, R&D working to use our plastic coming from renewable resources or to use plastic recycled...

In packaging. We have substantially reduced plastic...

We removed already, the packaging -- the plastic packaging from all our products. This was something we didn't disclose in -- probably never, but we used to have a lot of plastic packaging. Today, it's all carton box, which are made by recycled paper, by the way, because all our packaging is made by recycled paper. So -- it's a little bit more a threat. but at the moment, there are no substitution. So if you want to have the 9 kilograms for the nibs or for the plug, you need pure raw materials. It's challenging. We are working on it since a long time. And -- at the moment, we didn't get effective results, but a lot of improvements.

Michele Baldelli from BNP Paribas. I wanted to know how much of your sales is not local for local. I mean the imports coming from India to Europe, India to North America or something like this. So what is not local for local by continent. And attached to this, how much is the logistics cost that you had in 2022. Will the independence of the Indian subsidiary have an impact on it because there are intragroup sales to the other companies. So a little bit of background around this. And second question relates to these possible independence of India. I know that from India, dividends should be tacked if exported to other countries like Italy. So I was wondering, will any money coming from these operations will be kept in India, partly will come to Europe, U.S. or anyway will be exported? Will you be in the need to pay tax on it? What's the background?

So the cost of transportation, if you take out paper, that we produce locally for obvious reasons. And by the way, we produce only very high added value paper, the cost of transportation for our product is very low. So when you talk about -- and it's indifferent, either you talk about pencils or sketch marker or wax crayon, the amount you can put in 1 container is a lot of value. The cost of the container, you have seen has gone down to EUR 3,000, EUR 4,000 per container. So divided by the quantities you can put in the container, the cost of transportation is around 3% on average. So very low. The percentage of export from India and Mexico is still low. So the great majority of the production in India is for domestic market, in Mexico is for domestic market. And generally speaking, we touch more or less 20% of their turnover towards export. We would like to have more, but this is the reason why we are investing so much in India. A little bit less in Mexico because we needed to feed some of our plants in China. The reason why we increased so much the capacity in India is to try to move more production over there because we are extremely competitive. But we will need 12 to 18 months to finalize the investment. We just -- as you know, we just bought the land, 45 hectares -- 45 acres, not hectares. And that will almost double the number of workers. Today, we have 5,000 workers. We have reached 10,000 workers in the site. Thus, we will be able to produce and export more towards different countries. I don't recall the second part of the question.

It is related to the possible transaction for the Indian subsidiary if money will be raised as let's say, it seems. Will you be keeping it in India? Will you be restoring it? And if you will restore part of the money, you will need to pay taxes on it? Because I know that dividends -- the dividends from Indian subsidiaries if restore that to Italy, Europe, anyway, should be taxed if I'm not wrong.

So we have already received dividends from India several times. We have paid 20% back in India.

Yes. But then if you get a capital gain from the sale of a stake, then?

We estimate 0 of the impact on capital gain, also because we have since 2011. But we can check.

We will confirm this. When we finalize the operation, we analyze properly what is the correct way to follow because depend on what we are is completely different.

Francesco is hungry. So I would like to talk for another hour, but she says, I am hungry, you have to stop.

Excuse me. If you want, we have a little [indiscernible] there. There's the book we printed for 2020.