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 First Half 2024 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.

Good afternoon, everyone, and thanks for joining us on this call to present FILA first half results 2024. As you could appreciate, in the press release, we do confirm that we are satisfied with FILA Group performance, especially with what is concerned to profitability and cash flow generation, particularly this last one has become a priority since in late 2019, we acquired Pacon, and we reached, I remember, EUR 570 million bank debt. We clearly gave a full priority to the cash flow generation. I think we can clearly say that we are happy with the results that we are reaching. I would like to talk also for a moment about DOMS, our asset, Indian asset that continue to have a spectacular performance, both in economical and financial parameter, but also in the Indian Stock Exchange. I will then indicate 2 minute later before leave the word to Luca Pelosin. I have a couple of notes. So based on these results, we are happy to confirm the guidance we have given for 2024. And I think this is important considering how unstable is the macro economical situation. So I would like to remember, we do expect single-digit growth for EBITDA and cash generation -- free cash flow generation between EUR 40 million and EUR 50 million. So another good year of strong cash generation. I would like also to take the opportunity to announce that the next 12 November, we are going to host the Capital Market Day and with our third quarter results. So of course, details will follow. Before again leave the word to Luca Pelosin and Cristian Nicoletti, I would like to give you some more information about DOMS. And starting from this half or from this second quarter, we're going to report on a regular basis, not only the value of DOMS as an asset in terms of value of the share, but also in terms of market performance and potential M&A strategy. So we have gone public, if you recall, during Christmas 2023 at the price of INR 790. I remember the first day, the value of the share jumped almost 100%. Currently trading today is around INR 2,400. So from the day of the IPO, it's 3x, almost 3x. We have invested originally EUR 41 million, which means at today's price, we have made almost 13x our investment. Today, the value of our asset, which is, we hold 30.6% of the company. So we are the largest single shareholder, is worth between EUR 470 million to EUR 500 million, which is really an extremely important value. So the sales, the company has ended 2024, they closed the year in March with INR 3 billion with an EBITDA of INR 2.7 billion and a net income of INR 1.5 billion. For next year, the consensus see the company to grow more than 20% to INR 19 billion, EBITDA to grow to INR 3.2 billion and net income touch below INR 2 billion. This is extremely important because as I have mentioned several times, FILA owning 30.6% will consolidate the net income, which will have a substantial income [ ascension ] impact. We have -- in the first half, we have consolidated the first quarter results, the first quarter net income of DOMS, so until 31 March, 2024. Then for some more details, Mr. Nicoletti is available to give you all the explanation. So I thank you for your attention. I leave you -- I leave to Luca Pelosin the responsibility to talk about the following points.

Thanks, Massimo. Good afternoon, everyone. Let's now move to Slide #3, which contains the first semester highlights. Overall, we are quite satisfied with results, as Massimo just explained, marked the stronger sales improvement in the second quarter, which posted a strong recovery versus the first quarter. If you remember, the first quarter was in fact impacted by the one-off introduction of the SAP EWM in North America. And as announced, it was a one-off event. Second quarter was still slightly negative due to the latest delivery delays from the Dixon warehouses. These delays have been almost completely recovered with the month of July, during which the branch turnover grew by approximately $4 million compared to the same month of 2023 and as well as because of the reorganization of our offer towards business with better margin. Good news in Europe with accelerated each growth pattern. And also, Mexico is performing well, although Central South America is still impacted by the devaluation of the Argentinian pesos. But EBITDA is the real good news for the second quarter. We have been saying for a while that we are focusing on industrial and commercial efficiencies through product mix. And as you can see now, the EBITDA margin continues to improve. On an IFRS basis, EBITDA grew by 5.6% in the first semester with a strong acceleration to 11.5% in the second quarter alone, and this is by far the most interesting result in this presentation. Excluding IFRS, the result would have been even better given that we have terminated some lease facilities. And also free cash flow to equity is stronger. Despite the first semester is traditionally leading to a cash outflow due to customary working capital dynamics, 2024 is better than 2023. In 2024, in fact, we absorbed almost EUR 8 million less cash than in 2023. And this is the combination of a number of factors, as Cristian will show you in a few slides. But the clear message is that we are increasingly comfortable with our targets for the full year. Guidance and the Capital Markets Day, as Massimo indicated, we are confirming all our guidance targets for 2024 and we'll host our Capital Markets Day in the November the 12th, in which we provide a lot more flavor of our strategy and our business and our targets. We can now move to the following Slide, #4, with the snapshot of our first semester results. This slide provides a graphic recap of our results in the first semester. I'd like to highlight a couple of factors here. In core business sales, the impact of FX is negative by a couple of percentage points, which are mainly attributable to the devaluation of the Argentinian peso and the Turkish lira. Regarding EBITDA, please note how the margin jumped from 19.1% in last year to 21.3% this year, 2 percentage points is a great result. Adjusted net profit had an incredible performance. Even if you strip out DOMS, it increased from EUR 19.8 million last year to EUR 30.5 million this year, so an increase of about 50%. Cristian will explain better in the presentation. Last but not least, net debt is down by almost EUR 100 million compared to a year ago, largely due to the cash-in from the IPO of DOMS, but also thanks to organic cash flow and despite the ordinary and extraordinary dividends that were paid in the first semester of this year. We can now go to Slide #5 where you can see consistent long-term growth for FILA Group. This is my last slide. And you can see how with respect to EBITDA and free cash flow, we are well in line with our historical trends. This slide highlights our strong characteristic as the cash cow with resilient top-line and strong cash flow generation. Clearly, this will be one of the reference points for the guidance we presented in the Capital Markets Day, and I look forward to such date. I now leave to Cristian, and thanks for your attention.

Thanks, Luca, and good afternoon to everyone. Before I start with my section of the presentation, let me take a few seconds to confirm some material changes regarding our revised financial communication. The consolidation of DOMS. Unless otherwise stated, all the numbers are ex-DOMS, which is no longer in FILA consolidation perimeter. As regards net profit, there is a 1 quarter time lag. So FILA's H1 net profit includes only DOMS Q1 results and not yet approved June results. The financial year to 2024 for FILA results will include all 12 months of DOMS' net profit. About the IFRS 16, we are focusing more on the IFRS 16 results in line with common market practice. Anyways, in the Appendix, we reported EBITDA without the IFRS 16. In Appendix, we have provided a reconciliation of 4Q figures for 2022 and 2023 with and without the IFRS 16 and with and without DOMS. Let's now move to Slide 7 of the presentation which details on core business sales. This is our new Slide 6, and we are providing all details of H1 and Q2. Let me provide a quick commentary on the key trends in this quarter and I'll focus on the constant currency results for H1 and Q2. About Group level, overall, a net decline of negative 3.5% for H1 to the introduction of SAP EWM, which however, improved to negative 0.4% in Q2. About North America, the improvement is substantially here. Recall that in Q1, we declined by 21.1%, whereas in Q2, we bounced back to negative 3.0%. As Luca indicated, the slight contraction is due to the latest delivery delays from Dixon warehouse, delays that were almost completely recovered with the month of July. Also, revenue were impacted by the reorganization of our offer towards businesses with the better margins. About Europe, good news here. Given that the growth improved from plus 0.4% in Q1 to 2.2% in Q2, and this is thanks to a number of the factors, restocking in 2024 and the mixed FX. On a reported basis, we continue to have an impact from devaluation of Turkish lira. About the Central and South America, this region continues to be driven by growth in Mexico, while there is a feasible impact from Argentina. Asia and Rest of the World are fairly marginal. So I won't turn into details. Turning on the next slide, EBITDA. This slide follows a similar logic to the previous one and note that all the results are impressive on IFRS 16 basis. Now we comment on the key trends about Group level. Improvement for Q1 to Q2 is massive considering that Q1 EBITDA declined by 6.2%, but bounced in Q2 growing plus 11.5%, bringing the overall H1 results to plus 5.6%. Similar effect for the margins, which in Q1 were 60% jumped to 25% in Q2. So overall, if we look at the half year results, we are improving on EBITDA margin by also 3 percentage points compared to last year. About the North America, this is where you see the bulk of the improvement. If we just look at the half year results, H1 2024 grew plus 8.3% compared to H1 2023. And this is in spite of a contraction of 10.3% in sales. Consequently, in 2024, the margin improved by 4 percent points, growing to 23.1% versus 19.1% last year. Europe also improved its margin quite substantially and is even more meaningful given the trend in sales was similar in Q1 and Q2. Trends for the Rest of the World are less material also because Central and South America is impacted by Argentina peso and EUR 0.7 million losses in Dominican Republic. The following slides are much detailed in terms of financials. So my comments can be much more brief. Slide 10 related to income statement. Financial expenses have declined considerably and is due to lower debt, improved margin ratchets and the repayment of loan in Mexican peso. The Group net profit increased to EUR 32 million compared to EUR 23.7 million. However, the contribution of DOMS in H1 2024 is EUR 1.4 million for only 1 quarter, whereas in 2023, it's EUR 3.9 million for the full half year. In any case, as Luca mentioned, before we excluded DOMS, the net profit grew about plus 50%. Regarding non-recurring items, we have seen the impact over the last year. Related to Slide 11, we show a cash flow statement. Ratchet cash flow statement difference are fairly evident and we have highlighted them in the commentary of this slide. Overall, we are better compared to last year by EUR 7.9 million. It is the [indiscernible] method. All the key methods improved, mainly CapEx and financial expenses. The only aspect we have an absorption of cash is related to working capital considering that in H1 of last year, we had a very stronger result. This is mainly due to Argentine's peso for the backlog in North America and these groups be shipped out and invoiced. We would have [indiscernible] and lower market and capital absorption. Last but not the least, note that the IFRS 16 rent payment declined by less EUR 1 million. As you'll see in the next page, this leads to lower amount of your IFRS 16 debt. Let's now look at Slide 12. Note the change of Q1 2024 versus Q1 2023, which Luca highlighted before, this is due to the cash flow from IPO net of ordinary and extraordinary dividends we paid in H1 2024, also thanks to our robust cash flow generation. As mentioned earlier, the IFRS debt declined by about EUR 10 million to EUR 65 million due to lower rents. And finally, the leverage ratio is only 2.7x. So we are progressing quite well in terms of the leverage. Thanks a lot for your attention.

[Operator Instructions] The first question is from Isacco Brambilla with Mediobanca.

3 quick questions on my side. The first one is on current trading in the third quarter. If you can comment on the underlying trends you are observing maybe with a focus on North America, if you can? Second question is on Central and Latin America. Top-line performance remained positive in the second quarter even if slowing down compared to the strong trend of the first quarter. Can you help us understand the outlook for the second half if it will be just mid-single-digit growth as in the second quarter or the strongest we have seen at the beginning of the year? Last question is on net working capital. The change compared to the first half of 2023 was not huge. Anyway, net working capital absorption was above last year. Could you tell us how much of the roughly EUR 90 million absorption was related to North America, let's say, the temporary issues you had in the first month of 2024? Even a rough idea would be helpful.

With regards to the current trading, as you clearly know, the second semester is mainly driven by the back-to-school sales. And at this moment it's a little bit too early to understand how sell-out will be in the different geographical areas. As far as we can see for the moment, we can confirm our guidance for the full year. With respect to Central and South America, if you remember, we have been really focused on generating good sales with good margin. And this is also reflected in the margin of the Group. So we are not boosting sales artificially, but we are following what customers are really needed there to restock or to replenish the warehouse. So I can consider what is happening in the second quarter and normal trend that could happen every year. With regards to your last question, I'll leave it to Cristian.

Okay. Related to net quarter absorption, we have -- first of all, we have highlighted that the last -- the compared semester of 2023 is a very strong less absorption. You remember that we realized a plus EUR 60 million of less absorption with respect to 2022. Consequently, we attend that we consider normally that we have this trend in the first quarter -- in the first semester, sorry. And I can confirm you that main issue that realizes this absorption is a temporary effect of Dixon USA. Roughly, I can confirm you that the amount that we realized in the next quarter should be EUR 6 million. The temporary effect, more or less, it should be EUR 6 million. Today, we can confirm our expectation around the year that we consider stable net working capital respectively closing in 2023. Of course, the Group considering the temporary delays for Dixon USA taken much attention of purchase and the management of the inventory for the close of June 2024.

The next question is from Alessandro Cecchini with Equita.

The first one actually is about a follow-up on trends covering trading. You stated that in July, North America was up EUR 4 million year-on-year, you could a little bit better maybe to quantify in terms of year-on-year growth in North America? And if my calculations are correct, to reach a flattish top-line for the year, you need to execute high-single-digit top-line growth in the second half. So it's a good acceleration in the second half. And we know everybody that the third quarter is very important. So basically, you are saying that you are very confident on the third quarter top-line growth. And I remember that you declared a very good impression from a European back on score. So if you can elaborate a little bit more on these 2 topics. My second question is said about gross margin that improved very massively in the second quarter. Just -- I know that the paper prices are down, particularly in the first half and started to decline last year, end of the year. So I would like to better understand if the paper price was a big driver of this or not? And my last question is on D&A. Sorry, it's more technical, but in the first quarter, you had EUR 8 million. In the second quarter, you had EUR 12 million. So a much important increase quarter-on-quarter. So if you could elaborate a little bit more the one-off or what happened?

Thanks for the questions, Alessandro. For sales expected for the current year and the third quarter -- better than third quarter, I can confirm that at the moment, both in North America and in Europe the order portfolio is good. We are very happy about this additional amount in -- with a positive trend. We have said in the last presentation that everybody was expecting a very nice back-to-school increase of sales in both geographical areas. As I said before, sell-out is good at the moment and Europe is good. But the real information of the trend would only come from the lead and the replenishment [indiscernible] so that Europe we are going to receive in the second part of August and in September. With regards to the North America, we posted last conference call that part of sales this year would have been [indiscernible] in 2024 because of the delays that we accumulate in March. But as we said already in the last conference call, we cannot measure how much the impact would be because of the BTS. At the moment, we are positive with the numbers we can see. With regards to your second question on margin, I can confirm the better margin not at all coming from price increases, because this year, we didn't increase, with a very few exceptions, our sales prices, but it's more driven by the huge, I can say, activities or project we started already, I can say, post-COVID 3 years ago. We have been saying many times that our plans have been for a better for the mix and the re-assessment -- partial re-assessment of our offer towards products with a higher margin. And this is the result of what we have been implementing, let's say, starting mainly in 2023. In addition, we have been as usually performing different efficiency projects in our supply chain. And more will come in the next years to have the Group performing well also from operations which will help the margin to stay at the highest level possible. For the third question, I'll leave -- Cristian reply.

Related to depreciation and amortization in H1 2024, the breakdown is depreciation for EUR 5.6 million about tangible assets, EUR 6.6 million related to intangible assets and the right-of-use EUR 5 million. Total amount of EUR 70 million for H1 2024. Relating to first quarter 2024, we had depreciation for tangible assets EUR 2.8 million, intangible assets of EUR 3.1 million and right-of-use for tangible assets EUR 2.5 million. Total amount EUR 8.5 million more or less is the double that we realized in H1 2024.

Okay. So I was just wondering because the total D&A that I read in your press release is EUR 20 million, so close to EUR 20 million. So a very big increase in the second quarter, but maybe we can elaborate a little bit after that. I have another question on the U.S. So under your logistics hub is now it's running at full speed. So if you can add more color on the operations of the hub, so just to have your feeling about this?

Alessandro, sorry [indiscernible] your the question take care of that H1 2023 is including DOMS. And consequently, is the result with DOMS. Without DOMS, of course, it's more or less quite in line. If you're considering the contribution DOMS in H1 2023 is more or less EUR 3 million.

Alessandro, you asked about more details on the Dixon hub. I would like to give more detail on the SAP EWM because this tool was implemented not just in the distribution centers, but also in production. And in fact, the reality, the disruption in the logistics happened just in 1 of our 3 distribution centers. The other 2 have been not really impacted by inefficiency because of the characteristics of the deliveries that are managed in these 2 halves. In 1 half that is the hub who manage educational school products, we have been facing some disruptions. We changed a little some specification of the implementation, understanding that some decisions were not the real good for this kind of logistic activities. And we also have reinforced the organization of hub. And I can confirm, at the moment, all the KPIs we have been implementing since the beginning of showing efficiency is much better than before. The latest delays have been caused by the mix of deliveries, because as you can understand, due to the disruption happened in March, we gave preference to full truckloads and big orders and we have been working with priorities with customers. So these delays have been managed customer-by-customer. And the delays have been reduced in terms of number of days in delay heavily. Clearly, there are some customers who have not been impacted by these disruptions. So for just to give you a few examples, Walmart, Target, Amazon, Michaels has not at all been impacted by delays. The higher delays happened in traditional educational customers. These are the customers we classified as wholesalers in Europe. So it's just a part of the business for the company. But I can confirm, at the moment, we are really happy about the improvements that have been achieved in the last 3 years.

The next question is from Pietro Nargi with Intermonte SIM.

I have 3 questions. The first one is about your full year guidance. So do you still expect revenue to remain almost stable year-on-year, while on the EBITDA side you expect the EBITDA to increase mid-single-digits? So if my calculation were correct, this would imply revenue to increase mid-high-single-digit in 2H, while EBITDA to remain almost flat or slightly below year-on-year. So if you could give us more color on this? So your approach is quite conservative or if there is other reason behind this? The second question is on the Indian market. So you said before about the strong performance of DOMS both in terms of financials, but also in terms of stock exchange. So to this point, if you are considering any extraordinary operation on DOMS? And the last question is on CapEx. In the 1H, you invested roughly EUR 3.9 million in CapEx. So if for stage could be a proxy for the full year or otherwise what could be an estimate or forecast for the full year?

Okay. Thanks for your question. Let me say that relating to the guidance, we confirm what we wrote an insight in our presentation. And we also used the Capital Markets Day the next quarter to give some point considering that we have the end back-to-school. But we confirm that in terms of revenue, mid-single-digit adjusted EBITDA and free cash flow between EUR 40 million and EUR 50 million at the end of the year. I'll take the last question, the CapEx. We confirm our expectation at the end of the year for EUR 18 million roughly. And we realized in the second part of the year residual amount with respect to the actual capitalized in H1, 2024. With regards to your second question, I can confirm DOMS is strategic for FILA Group, both in terms of industrial and commercial regards. So we have not any plan to have an extraordinary operation with this company.

[Operator Instructions] The next question is a follow-up from Isacco Brambilla with Mediobanca.

Two quick follow-ups. The first one is on Europe. We have seen a steadily improving trend over the past couple of quarters. Could you elaborate a bit more on drivers? Is this, say, broad-based improvement across countries or maybe some sub-region or country contributing more? Second question is, if you can remind us if there is any additional work to be done over the next 12 months on EWM module or sub in other centers of FILA Group?

With regards to Europe, I can confirm that current results are comparable in all the countries where we are present. So there isn't any specific trend different in one country compared to the other. So we are really happy to see in a market that is not really blind with these results. With regards to EWM, it was not our choice to implement the announced the EWM. But probably you know SAP announced already 2 years ago that EWM will be not supported anymore until the end of 2025. Before implementing EWM in Dixon U.S., we implemented in plants of France without any consequence, any disruption. We are implementing the same also in the other plants where we don't see any potential disruption. So North America is really an exception on our plan of implementing EWM in our different plants.

[Operator Instructions] Gentlemen, there are no more questions registered at this time.

If no other question, we thank you everyone for attending this presentation and we look forward to seeing you in the Market Capital Day. Thanks to all.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.