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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FILA Full Year 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Massimo Candela, Chief Executive Officer of FILA. Please go ahead, sir.

Good afternoon, and welcome, everybody, to our conference call for results of 2023. I think we are here to celebrate an extremely positive year. As you could read from our press release, we have experienced an interesting growth in the top line, of course, mainly focused on India, North America and Mexican, so North and Central America. Also, the profitability has been significantly good. In fact, we had an adjusted EBITDA that has grown roughly 10% versus 2022, but that has been influenced by a negative extraordinary effect. I'm referring particularly to the devaluation of Argentinian pesos that has accounted for more than EUR 2 million, negative EBITDA. And also, we had another EUR 3 million negative EBITDA coming from the exchange rate in particular. We have experienced a strong decrease of the dollar versus euro during all the year 2023. So in fact, at the comparable exchange rate and without the Argentinian effect after the election, we would have reached almost EUR 126 million EBITDA from the operative -- from the operative activity. I would also like to highlight the extremely high cash generation. So we have gone more than -- we have touched more than EUR 60 million free cash flow, which I think has been a record result for the recent history of the group, not mentioning the EUR 69 million of cash that we have generated after the IPO of our controlled Indian subsidiary. So all in all, an extremely positive year, thanks to positive management of working capital. The reorganization of North America has generated -- has brought back the company to the profitability we were expecting when we acquired Pacon in 2019. And as I am mentioning, Pacon, I would like to take the opportunity to remember that the company with -- including year 2023, has generated free cash flow in the last 5 years of EUR 250 million plus almost EUR 70 million coming from the disposal of the shares of DOMS during IPO. So we are talking of EUR 320 million that has allowed us to bring down the ratio EBITDA NFP to 1.7x, which I think is the target that at least in the last 4 years, we were targeting, we were expecting as absolutely necessary in order to support the future strategy of external growth. For what 2024 is concerned, clearly, the most important and most relevant thing is that we are going to deconsolidate Indian operation, Indian assets. Despite the integration with this company, DOMS will grow substantially in the coming months. In fact, FILA Group considering the problems we are seeing in Europe due to the reduction of rate of birth have decided for a 3 years plan of reorganization of European operations, enjoying the extreme competitiveness of India from one side. And from the other side, our 40-plus subsidiaries around the world will start to distribute the Indian -- made in India products to allow for range -- to allow us to be more and more competitive in our environment that is going to become more and more challenging. The situation of the market is characterized not only by -- especially in Europe by a low rate of birth but a decreasing rate of birth but also by wide population of competition still struggling to survive but still there. So the business is still very much fragmented, which, in short term, could be a problem. In the medium -- long term definitely can become an opportunity. So I think that as of now, I prefer to go to discuss in detail the results of 2023 and then with the session of Q&A, we can enter into more details. Thanks.

Welcome . Good afternoon to everyone, and we should have received the presentation, and please go to the first page. Revenue. Adjusted core businesses sales were EUR 779.2 million, plus 1.9% on financial year 2022 plus 6.3% at comparable FX rate. North America confirmed expectation registering an organic growth of 1.8%. Center and South America was plus 29.6% and in particular, Mexico outperformed. In Asia in particular, the group posted plus 30.9% performance led by growth in India, contributing significantly to group results growth. Thanks to the strong performance, particularly in the school office segment, more than offsetting the European performance characterized by weak market, strongly influenced by the high cost of the money, which was generated, an important destock effect in 2023. The contribution of the Indian market in 2023 in particular was EUR 134.3 million. EBITDA. Adjusted EBITDA in 2023, excluding IFRS 16 effect was EUR 121.1 plus 9.8% on financial year 2022, plus 10.4% at like-for-like exchange rates, thanks to the improvement in North America, Asia and Central and South America, despite the contraction in Europe. The adjusted EBITDA will add approximately 1 point -- sorry, EUR 125 million as comparable FX in 2023 budgeted FX adding also the EUR 2 million related to devaluation in Argentina. Adjusted EBITDA was 50.5% with a significant improvement of 110 basis points on financial year 2022. The increase is mainly to the positive effect generated by price increase to the [indiscernible] in North America and to the results obtained for the value action actually in place implemented on [ processing restructuring ] costs as well as working capital management. The contribution of India market in 2023 internal EBITDA was EUR 25 million. EBITDA in 2023 Argentina [indiscernible] is negative for more or less [ EUR 2.2 million ], impacted by currency devaluation. The net profit. The total adjusted net profit, excluding the IFRS 16 impact was EUR 40.6 million. This value was significantly impacted by higher net financial expenses at EUR 31.2 million compared to the month of the same period of the previous year, of which EUR 29.2 million, mainly related to the increase of variable interest rates and to the increased taxation. The reported net income was EUR 180.5 million at December 2023, the adjustment of net profit in 2023 for EUR 140 million, mainly related to IPO of DOMS and related to the consolidation for EUR 154 million. The net bank debt. The net bank debt was EUR 229.5 million with respect to EUR 351.6 million in 2022 with a decrease in last 12 months of EUR 51.2 million for operating activities, plus EUR 69 million for IPO financial receivable by DOMS. Looking at adjusted free cash flow to equity. The proceeds from transaction in India and the free cash flow to equity at EUR 60.3 million, EUR 29.8 million in 2022, enabled to further reduce leverage ratio to approximately 1.7x at the end of 2023, with a net financial position, excluding IFRS 16 mark-to-market at EUR 226.7 million. The increase was mainly to the higher operating cash flow generation and the lower capital absorption of EUR 46.3 million, partially mitigated by higher CapEx for EUR 13.6 million, mainly related to Indian investments. We highlighted that the group registered EUR 29.8 million of interest in 2023, highlighting that the group maintained the target that is more or less EUR 30 million, considering the significant increase of variable interest rates. We highlighted that at the end of 2023, we have used as a part of the proceed of IPO DOMS to close for EUR 20 million tranche of senior facility agreement and in 2024 we will reduce other EUR 20 million of not efficient external credit line. In particular, in Mexico, considering that in Mexico, we are more or less [ 50% ] of interest rate. Also we have completed a cash pooling projection. The whole activity as a target to reduce the bank cost of bank at total interest rates, particularly for the reduction in the total amount of credit line -- external credit line. Thanks a lot.

Now we are ready for the Q&A session.

Thank you. This is the Chorus Call conference operator. [Operator Instructions] The first question is from Niccolò Storer with Kepler.

I have a couple of questions. The first one is on EBITDA. You mentioned this FX effect. You mentioned Argentinian pesos. And I was wondering how much of this effect is a Q4 effect and how much is something that we have already had in the previous quarter to understand a bit the dynamics of Q4 profitability which has been weaker than Q4 last year, which in turn was extremely weak compared to previous years. So basically, I want to understand if the EUR 4 million of FX are all condensed in Q4? Or if not, what has impacted adversely profitability in Q4? The second question is on your cash generation guidance for 2024. If you can guide us through the main drivers of this cash generation you expect in particular what should we expect on working capital and CapEx? And the last one on Europe and profitability in Europe, 2023, you lost if my calculations are right, some 4, 4.5 percentage EBITDA points in EBITDA. You lost also more than EUR 10 million in turnover. You mentioned the plan of restructuring European operation, if you can tell us something more on that. Thank you.

Thanks, Niccolò. Sorry for the second part of the question, maybe I will ask you to repeat. So concerning the EBITDA, the answer is very simple. The fourth quarter has been substantially better than last year. So I don't understand how you can say the quarter has been worse. Last year, we had a quarter of EUR 14 million EBITDA. This year, we had -- until September, Argentina was positive for EUR 800,000. And at the end, after the election of President Milei and the devaluation, Argentina lost EUR 2 million. So we have EUR 3 million negative effect. So altogether, this quarter has been plus double digit versus last year. These are numbers and not opinion. Concerning 2024, I started mentioning that we are now talking of the perimeter ex India. So the situation, we can summarize in a few words. The growth will come back to a single-digit growth, so a moderate growth. The EBITDA in percentage will be higher. And this year, we are going to enjoy, of course, the advantage of the recovery that we do expect in Europe. Last year, we have suffered from an unusual level of destocking. I have spoken with many customers and many of them were heavily understocked. Why? Of course, because of the high cost of the interest rate. In this moment, the expectation we have for 2024 are confirmed by the trend of turnover we have had until February and by the level of orders that is in line, if not better than our expectation. For the United States and Mexico, the situation is definitely easier than Europe. First of all, in United States, it's difficult to have destocking process because customers are mainly big retailers. And usually, they don't stock too much. There is not a problem of negative rate of birth. We still see a very strong and very demanding market in Mexico and not only in Mexico, but also in South America. So the expectation for 2024 are, as I said, for EBITDA, a slight advantage from the operative leverage, recovery in Europe, a stable growth in United States and Mexico. And we started talking our strategy of reorganization that will regard mainly European assets. And thanks -- with this reorganization, we are going to enjoy our investment in India. So we will enjoy the extremely strong competitiveness, the fact that in India, the learning curve now is almost flat. They are ready to support us with our so-called European quality with Indian cost. And this will be -- so you will start to see some first effect in 2024, but more important in 2025 and 2026 in which we will reduce the breakeven point in Europe. As we said, in many other meetings, cash generation ex India will not change because 100% of our cash generation is made in Europe and in the Americas. So we do expect cash generation as in line with what we had in the last 5 years on average.

The next question is from Alessandro Cecchini with Equita.

The first 1 is about organic growth that was in the -- only in the fourth quarter was minus 14% in Europe, so worse than third quarter, I can understand. North America, if I am not wrong, minus 5% in the last single quarter and Central and South America plus -- more than 50%. So if you could better explain the weak trend in North America minus 5% in the fourth quarter, while if you could explain very strong performance in the South America. This is my first question, then I go on, but I leave time now to answer to this.

Thank you, Alessandro. So the strong performance of Central South America, it's easy to explain. Remember that the season, the back-to-school is in the opposite season. So the back-to-school in South America is generally the peak season, starts in November and ends in January. In South America, the demand for our product is positive. All the 3 subsidiaries, by the way, were doing extremely well until September, and then we faced problem all in Argentina, but for macroeconomic reasons. So generally speaking, South America has had a very positive 2023 for school product in general, not only for FILA because I read some comments of our competitors and all of them have experienced a very good 2023 in South America. In Mexico, I think, I said many times we did a great job during COVID. And now the company is really outperforming, is a strong leader, is generating cash, as you have seen from the figures. There is a very strong demand of our product we produce in Mexico. We have [ Wood ] in Mexico. We are extremely efficient. We have the most important brands in the school business in Mexico. So clearly, the company is performing extremely well. For what USA and Europe is concerned, I think, I have to repeat what I said. So just imagine that we come from 2022, in which there was an unprecedented inflation. Then you land in 2023, in which you had to run behind the different price increase. You remember, FILA has increased prices in February and then again in June 2023. Once the back-to-school was over, I think many customers to reduce their cost of inventory have aggressively reduced their orders. And frankly speaking, FILA has decided not to perform any kind of promotion. It would not make sense because we were sure to make our [ year and way ]. It didn't make sense to push the year too much. Don't forget, last point that everybody was aware towards October, November that we would have not increased prices in 2024. So there was really no reason to bringing home products in a market in which in Europe, there was a structural weakness. In United States, the customer has decided to reduce as much as possible their level of stock. In fact, what we see now in 2024 is kind of regular first quarter, but we see a very good level of order for back-to-school unusually high because clearly, customers are understocked.

My second question, so starting point now is EUR 96 million, roughly speaking, of EBITDA with a 15% EBITDA margin. So just to understand on the top line, you were very precise, low single digits. So what kind of -- I mean, if you can provide a range, of course, of margin expansion that you could expect in 2024. So sort of range, it could be very nice.

Yes. I think that, as I said, we have the advantage of the operational leverage because last year, Europe due to the extremely low level of turnover we had a problem of fixed overhead. So in a situation in which the top line will grow a couple of percentage points, EBITDA will grow more so in the area of 5%, 6% versus this year because, again, for this operational leverage. Then starting from 2024. As I said, we are going to announce a [ 30 months ] reorganization process that will further improve our profitability with a target at 2026 to go back to our 17%, 17.5% EBITDA, but we are not going to reach this in 1 year. We are going to reach this in a period of 2.5 years.

And this is a clarification. In your reported numbers, you included exactly 12 months of India, If you can say yes or not. And in terms of minorities, so you had EUR 8 million of minorities. I would like to understand how much was India. So just to understand the 50 -- the 49% of India that you had, how much was the income of this.

So Ale, I confirm that the consolidation reporting includes 12-month P&L results of India. And to be easy, the net results of India is EUR 40 million. Consequently, EUR 7.5 million are the minority.

EUR 7.5 million minorities, okay. Thank you.

The next question is from Isacco Brambilla with Mediobanca.

Three quick questions from my side. The first one is on trade working capital. I saw from the presentation, you indicated 40% trade working capital on sales on a pro forma basis. Is this a level we should see as a sort of benchmark also for 2024? Or is somehow the reorganization process you will deliver impact potential trade working capital. Second question is on leverage. If you have any internal target for leverage for 2024 based on the free cash flow generation assumption you are discussing. Last question is on financial charges starting from this EUR 8 million posted in 2023. If you can share the benefits you expect to enjoy from either a normalization of interest rates and say, lower financial exposure following the disposal -- the partial disposal of DOMS' stake.

Thanks, Isacco. So for what the working capital is concerned, 40%, we think is a -- it's a good level. But for 2024, we are targeting further improvement, another 1 or 2 percentage points. But as I have to repeat, the working capital will improve accordingly to the reorganization we are going to put in place in Europe because the moment in which you close, we have in mind to close between 3 and 4 production plants. The working capital will enjoy -- also will improve subsequently. So in 2024, we do expect another improvement. For the second question, related to the interest, it's important to highlight that in 2023, we have obtained -- we used the portion of the proceeds from India to reduce EUR 40 million of our liability -- bank liability, sorry. In 2023, we have closed EUR 20 million of senior facility agreement for the part of variable interest in total loan. And the other EUR 20 million, we reduced the [indiscernible] credit line in particular in Mexico. This is an agreement with our bank that confirmed and [indiscernible]. And in 2024, we have not considered at the moment a general decrease of interest rates because today the Central Bank of Europe is taking up clear decision about this. We highlight that in 2023, we have more or less [ on SOFR ] that the total amount is between 6% and 7%, and the EURIBOR is 5%. And in Mexico, it's 50%. Otherwise, we have a target to reduce between a range of EUR 6 million to EUR 8 million of interest for our target in 2024. The group continue to [indiscernible] the credit line [indiscernible] and working on the facility that we have at the group level because we have an agreement with the bank.

[Operator Instructions] The next question is from Michele Baldelli with BNP Paribas Exane.

I have a couple of questions on the accounting. And then also another question on this, let's say, efficiency plan for Europe. I start from this, just to understand that this efficiency plan for Europe, at what cost will it come? So are we expecting, let's say, double-digit millions to be spent anyway to restructure all these operations? And if you can provide more colors on this. Other question on the accounting related to the calculation of D&A because I see on the adjusted number, there are the EUR 30 million of D&A. Then what should I add after the contribution of DOMS in terms of right-of-use depreciation and PPA. Thank you.

Thanks, Michele. While you can prepare the second question. Yes, the efficiency plan is considering to reduce the number of -- we have [ surplus ] from a large number of plants around the world. We are talking of between -- more than 20 plants if we consider location, if we consider -- number of plants is much more. So we are going to close 4 plants in Europe. Really, the cost related is not very significant. The reason I prefer to give some details later, if not, it's easy to understand the geographical location. So the cost of shutting down this plant is something that we can amortize in 1 year of savings, let's put in this way. Related to depreciation, the total amount tangible, intangible, the right of use at the end of 2023 is EUR 42 million, of which EUR 12 million is related to right of use. Without DOMS, in other words, the pro forma depreciation and amortization will be EUR 36 million, where the depreciation for right to use is EUR 11 million. In other words, like-for-like will be a decrease of EUR 6 million expected.

The next question is from Pietro Nargi with Intermonte.

Basically, I have 2 questions. The first 1 is on CapEx. So what is your expectation for CapEx in 2024 following the deconsolidation of the Indian subsidiary. And the second question is more about your strategy, always on DOMS. So if you may consider further -- disposal or further sales of your current stake in DOMS?

[indiscernible] will answer the first one. Okay. Thanks for your question. Relating to results of 2023, roughly, we have EUR 30 million of CapEx, of which EUR 19 million are related to DOMS. The expectation for the 2024 and for the other years, the expectation of the investment for the company is more or less EUR 18 million with particular attention of [ ACG ] project in part in 2024, the group has plan to get the investment in biomass in France and the solar panel in U.S.A. and in Italy. The other one, CapEx related to improvement or revamping of the plant in Mexico and the increase of the area in Italy. It's important to highlight that we have, all in all, a reduction roughly for EUR 13 million, but the group CapEx are more than 2023 without the DOMS.

Concerning the DOMS Strategy, today, we have 30.6% of the company. So we are going to consolidate the net income starting from year 2024. We have negotiated shareholder agreement down to 25.1%. So theoretically, we have the same right disposing 5.5% of what we have today. My view of DOMS is that the company has extremely interesting project of expansion. The company will continue to outperform the market in its actual business, but also in correlated businesses that we are considering to invest. So my personal opinion is that, as of now, it would be a mistake to dispose shares as we see this company in 3, 4 years performing extremely well. Anyway, this is only a personal opinion in terms of facts. The governance is guaranteed until 25.1%. So we can dispose 5.5%, which means for today's valuation, more or less EUR 55 million.

The next question is from Sébastien Lemonnier with INOCAP.

Two questions on my side. Just the first one, I'm not sure I get everything. So regarding the reorganization in Europe, can you tell us how much annual free cash flow benefit we should get because if I understand well, we should have both a margin increase and working capital optimization. So can you try to help us, all things stable, how much free cash flow addition we should get every year? That's the first question. And the second one, which is going to be a super naive one. Given that you -- given both valuation of DOMS, but also the one of FILA Group, which probably have more like a cash cow profile. If you start to implement some industrial synergies between the Indian asset and the group, what's the rationale to keep the group being listed basically.

Yes, Sébastien. The first question is that, again, let me repeat, we cannot reorganize everything all at once, but this will be made in a period of 24, 30 months, starting from this June in which we will announce the first shutdown of the first plant. So at the end, let's say, at constant perimeter, so as of today, we do estimate a cost reduction on a yearly basis. So every year, we have less cost on a base of between EUR 5 million and EUR 6 million which will be translated into cash, of course, and a reduction of working capital of more or less the same amount. So in terms of cash generation, we do expect roughly EUR 10 million in third year. For what DOMS is concerned, but this -- here, you open an interesting point because I did not touch because I didn't want to go too far in discussions. But I think that if you analyze the business today, we have a lot of competitors that are extremely exposed to China, which for me today is an unbelievable risk. Just imagine, you wake up in the morning and you read that China has invaded Taiwan. You completely lose your supplier, your commercial relationship with China. So I think that FILA made a brilliant decision 2, 3 years ago moving to India and Mexico. And I hope you will recognize. India is giving us an unbelievable strategic advantage because India is competitive, is definitely more stable than China, has a macroeconomic situation definitely much better. So I would say that FILA has a significant competitive advantage versus competitors that, in this moment, have so many eggs in their basket. Just imagine all the private label of the big retailers are almost all concentrated into China. So the fact that we are going to move to India will give us better cost. We consider absolutely a comparable quality as of now because they enjoy our know-how. And of course, DOMS value will probably enjoy this extra turnover and extra EBITDA. But for us, it makes all the sense of the world because we are moving added value from depressed Europe to super evaluated Indian company. To take private, the company, it depends a lot on the M&A strategy because if you need financial sources to delist the company, you do not have sources for M&A. It depends also on how quick the M&A season will start. And I have the feeling that in the next 2, 3 years will start because all the European centric companies are going to struggle a lot.

That's my point, if I can just add, given the free cash flow profile of the group, which is basically Europe, South America and the U.S. and especially if you are like, let's say, EUR 10 million free cash flow per annum going forward. And given the valuation of the Indian assets, it will make probably more sense to lead consolidation through the Indian asset where basically you may have bigger firepower also considering the valuation than the one of the group listed today in Italy. That's why I'm simply asking it looks like to me there is no rationale to keep the group being stock listed as of today, and you can potentially, that's my own speculation, use the Indian asset to consolidate and then basically accelerate on the top line growth, both organic and external growth. That's why I was just asking that question...

Definitely, there are strategic thinking because I mean just 2 years ago, if you probably recall, there was many, let's say, professional analysts or investors that were claiming that India was our weakness. So as of now, clearly, India is not a weakness, and we are making a lot of strategic thinking that goes beyond the financial situation, but it touched a lot the industrial and operational organization. Today to be in India is an unbelievable advantage. I give you a number. We spend -- worker costs is EUR 1,200 per year versus EUR 8,000 in China and in Mexico, for example. And I can guarantee you there are no competitors of FILA well organized in India like we are. So I think that we are in a very good position to take the best decision. Do not forget that if we continue generating EUR 50 million free cash flow, we are going to be debt free in 4 years.

[Operator Instructions] The next question is a follow-up from Alessandro Cecchini with Equita.

Just a couple of questions. The first 1 is actually the adjusted tax rate seems to me quite higher than usual at 31%. So if you could explain if this can revert into traditional 27% next year? And my second question is more, I would say, some thinking about the -- so you are asking the shareholder meeting for another EUR 6 million of dividends. Should be better to buy back at this level than to pay an additional dividend after the already EUR 30 million dividend that you -- extraordinary dividend that you paid. So just some thinking about this.

Thank you, Ale, for the tax rate, Cristian will answer you, but I suppose it has something to do with the extraordinary income of India. For the dividend, number one, we have approved the buyback, and I think this is public information the extraordinary dividend has nothing -- was related to India. The ordinary dividend in our business plan, and it's regular in the last 6 years. So there was no reason to cancel. I mean I'm sure if you would have canceled it, you probably would have commented that we are negative in the view of 2024. So it's better not to make any change in order to avoid any misinterpretation. So we prefer to be very consistent with our tradition. For the adjusted tax rate?

Okay. Thanks, Ale. I confirm what Massimo said in other we highlight an increase of -- increased our incidence U.S.A. in particular for [indiscernible] due to the use of credit that we have consumed in 2023 are the 2 main reasons for this increase.

Okay. Was the adjusted tax rate, so in these numbers, you don't have the India?

yes.

Mr. Candela, gentlemen, there are no more questions registered at this time.

So then we take the opportunity to thank everyone and hope to see all of you in the coming days. Thank you.

Bye. Thanks a lot.