F.I.L.A. - Fabbrica Italiana Lapis ed Affini S.p.A. ($FILA)

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the FILA Full Year 2025 Results Conference Call. [Operator Instructions] Today, hosts are Mr. Massimo Candela, Chief Executive Officer; Mr. Luca Pelosin, COO; and Mr. Cristian Nicoletti, CFO. Mr. Candela, please go ahead.

Thank you. Good afternoon, everyone. I think that 2025 has been from our point of view, a satisfactory year as we have to face a lot of unprecedented and unforeseen challenges. I'm referring mainly to Central and North American market. As you know, U.S. and Mexico account for almost 60% of the FILA Group balance sheet. And as you know, many American companies has had very difficult time last year to manage the strategy of the Trump administration with the tariffs. And so despite this, I think that we have been able to achieve a very good result. Let me remember the challenges we have faced in 2025. There are three main challenges. The number one is the duties that has imposed without notice period. That has impacted sometimes our supply chain even when vessels were shipping our products. Then the cut in the school budget that is unprecedented. And this year seems to go back to normal, but was not possible to budget such a cut that has been almost compensated by a very good performance of the retailers. So consumers have shown loyalty to our brands, to our products. Mexico, we have fight the illegal imports after the government has imposed duties especially to Chinese product. We have experienced three, four months, unfortunately, during back-to-school period of heavy legal imports that started to be controlled after the months of November. And in fact, in the first quarter 2026, we see Mexico going back to almost a normal situation. So three challenges altogether that during the course of the year could have driven to a very unsatisfactory performance, which has not been the case at all. We have been able to guarantee a good cash generation. We have shown once more that even with a weak dollar, we are able to maintain the profitability. Once more, I want to repeat, our turnover in dollar is compensated by our costs in dollar. Europe has performed pretty well despite in Europe, we have to face the reduction of the rate of birth that is very well known, especially in Mediterranean countries. We are proceeding with the reorganization in U.K. that will start showing positive effect during 2026. Last, but not least, we have made what I think a brilliant acquisition in Italian market that will allow us to compensate this negative rate of birth and will probably bring back Italy to the -- our average profitability. Let me remember, we always have in mind to reach between 17% and 18% EBITDA on sales. Last, but not least, our Indian assets continue performing extremely well. We grow also in this financial year, we have a substantial growth. The last quarter, they have approved that the company has grown the top line more than 20%, reaching an EBITDA that is very comparable to FILA, which show a very efficient and sustainable business in India that will continue growing for the next following year. The cash generation at the end, from our point of view has been more than satisfactory. Let me remember that we have to face two extraordinary cash absorption. Number one, the reorganization in China, we shut down the production for the reason that we have explained several times. And the duties. The duties have absorbed just a little bit less than $10 million. As you know, there are today discussions on the possibility that we are going to get -- to receive back these duties. We really have not much more to say than what we read in the newspaper. It's something that is going on, but it's unclear what the government will do. For 2025, the duties have absorbed almost $10 million that if you want to normalize the cash generation of FILA, you just have to add to the free cash flow that we have announced today in the press release. So a very difficult year. We think that for these reasons, despite the very complicated situation in Iran, '26 seems to be a better year than '25. Just a couple of information in the history, FILA business has shown to be resilient to a recession situation. Again, our business is more related to rate of birth than strong economy or weak economy. Second element, we are not a company that consume too much energy. And I would like to remember that in France, where we have the company where we produce paper, so where we need more energy, we have implemented an alternative use of energy. So we don't use any more gas. And so the impact of the Iran crisis should be minimal, at least if the crisis will be solved within the next 8 to 12 weeks. If not, we will have to analyze the situation and understand the impact. So please now Mr. Nicoletti introduce us to the numbers -- comment of numbers, and we will be ready to answer your questions. Thanks.

Good afternoon. I will now draw your attention to Slide #7, where we illustrate the core businesses. In 2025, core businesses decreased by 3.1% on a comparable FX basis, mainly to the lower consumer demand and reduced government funding for schools in USA and U.K. The main currency effect goes to the USA dollar and Mexican peso weakness. Europe was flat in full year 2025 and up plus 4.9% in Q4 2025, confirming the positive trend already seen during the year, simply in France, which benefited from commercial reorganization. Central South America posted a decline in Q4 to the negative performance in Mexico, which suffered the stronger competition from illegal imported school products now under further restriction from Mexican authority. Let's move to group profitability on Slide 8. Adjusted EBITDA at EUR 105.2 million declined by 4.6% on a comparable FX and tariff basis, mainly reflecting lower revenues. That said, it's important to underline EBITDA margin stood at 18.4%, not far from the 2024 figures, supported by ongoing operational efficiencies. Please go to the Slide 10 on adjusted net profit. In the same way, adjusted group net profit stood at EUR 33.0 million, down from EUR 40.9 million in 2024. Let me remind you that the net profit results includes the contribution for participation in advanced [indiscernible]. The decrease in adjusted net income was a result of EUR 6.8 million of ForEx losses. Please keep in mind that these are mainly noncash items. On Slide 11, we highlight the development of free cash flow. Free cash flow to equity stood at EUR 35.6 million, significantly impacted by temporary cash absorption rate [indiscernible] tariff and China reorganization, which over the course of the year totaled approximately EUR 11 million -- it is worth mentioning that excluding these extraordinary items, free cash flow to equity amounted to approximately EUR 47 million. So at the high end and EUR 40 million and EUR 50 million guidance range provided at the beginning of the year. Looking at the performance of the fourth quarter alone, the free cash flow to equity stood at EUR 67.9 million in the line with the figure for the Q4 2024. This is an important factor because it confirms the ability to generate EUR 40 million, EUR 50 million in cash flow annually and to meet the guidance provided, excluding one-off bad debts. Let's move on Slide 12. At December 2025, the net financial position stood at EUR 138.2 million, increasing by EUR 14 million compared to end of 2024, mainly to the EUR 42 million of dividend distribution. In terms of shareholder remuneration, we decided to propose a dividend of 12.2 million, which corresponds to 37% payout ratio, at the high end of our guidance. We also proposed the authorization for a buyback program on 1.3 million [indiscernible] or ordinary shares. In conclusion there are some insight into outlook for year-end. FILA points to double-digit growth both in revenue and adjusted EBITDA, taking into account the contribution of Seven coupled with positive organic growth, assuming constant tariffs and US Dollar 1.16. Free cash flow to equity is expected to between EUR 40 million, EUR 50 million in ordinary growth. Thank you for your attention, and we are now ready to answer your questions.

We will now begin the question-and-answer session. [Operator Instructions] First question is from Isacco Brambilla, Mediobanca.

I have 3 questions. I go one by one. Maybe so it's easier for everybody. First question is on Europe. Performance has been very supportive in the second semester of last year. Just if you can elaborate more on the drivers behind such rebound. Also I was wondering whether there is already evidence of some contribution from the plan of increasing DOMS penetration in Europe in the results posted last year.

Massimo Please.

Yes, sorry. So concerning DOMS, the contribution is 0, because, as you know, DOMS is running very fast in domestic market. And despite we started selling, the company was not able to deliver on time. So we should start to see some first impact on European market in 2026. Even if we think that to see some relevant numbers, we will need two, three years. The rebound in Europe. I think it's just a better coverage, a better new commercial strategy that we started implementing in the last two years. We will start seeing also some positive results in Italy starting from next year. I would say, a better and more efficient commercial strategy. So in a few words, we are taking market share from the competition.

Second question is on Mexico. During the opening remarks, I heard signs of stabilization in the market. Is it fair to expect top line trends in Central Latin America to at least stabilize in 2026 after the weak performance of last year?

Yes, at least to stabilize or even make up little bit of the delay that we had. It's a difficult market because when we talk about corruption, in the custom, it's I mean even Trump complain about the corruption in Mexican government. You really never know what you are dealing with. For sure, the population is large. We have almost 32 million kits. So theoretically, it's a very interesting market. There is a very good sign just happened recently, the all the -- sorry, the previous Minister of Education resigned, and it was a minister that was -- that had a strategy against the school investment. It was a kind of more communistic approach. Now the new minister, which has been nominated in the last three weeks, or even more recently has decided to go back and restart a positive process in the school environment. So what I would like to say is that the influence of United States to Mexico, is creating a better environment for private initiative for private schools, for legal versus illegal. It's a process. So if we are not going to be disturbed like last year from heavy illegal imports, I think Mexico will go back to be a very interesting market. Again, as we cannot control the situation, the first semester, the first quarter is looking positive because it seems that the business is back to normal. So we are realistically confident to go back to a normal situation.

Last question on my side is on Seven. Is it fine to consider as a starting point for the 12-month contribution in 2026, the EUR 90 million revenues and EUR 40 million EBITDA disclosed at the moment of the acquisition?

Yes, I think these numbers -- so are consistent. Seven is a little bit more exposed to let's say, Iran unstable situation because they import almost 100% of their business. from Far East. So as of now, there has been no repercussions. But in the second half, we have to see what will happen with Iran crisis. The budget is a consistent budget with 2025. The weak dollar helped Seven even to increase their margins because they are net importers. FILA will definitely see experience strong improvement in terms of profitability market coverage presence, thanks to the synergies with Seven. Of course, as we finalize the acquisition. In January, we will not see anything in 2026, but we will see a very important positive effect in 2027. Just last -- one last point, please do not divide by 4 the quarter of Seven because they have an important seasonality. Their peak is even higher than FILA. So their first quarter is extremely low, while they have a very important and strong second and third quarter.

[Operator Instructions] Next question is from Alessandro Cecchini, Equita.

[Foreign Language]

[Foreign Language]

I make it in English. So my first question is about the North American business. So in the last two years, we lost around 10% of sales at constant currency. So just wanted to have your view for this year 2026, what are the current situation and your initiatives to -- I mean, to support a return to top line growth in North America? This is my first question. Sorry for Italian.

Let me remember one important information I gave you two years ago because you Alessandro are mainly referring to top line. While I remember that a couple of years ago under a strong inflation period, we have clearly targeted cash generation and margins -- average margins also because we needed to reorganize the company in a more efficient way. So I would not talk about lost top line. I would like to talk about new health, efficient and profitable top line after we have cleaned partially some businesses that we didn't like, that we did not consider core. And in fact, if you analyze the profitability of North America is really significant, is even higher than the average of FILA Group, which is pretty unusual because it's a tough market. It's a very competitive market. Still we can confirm that the healthiest business in FILA Group will remain in North America. So I don't like the year to focus on top line. We have cleaned the business now. So we do expect to restart the growth in 2026, again, in a very controlled manner. Last year, we ended the year with some reduction, but that was not really the market. In fact, we have had a very strong last part of the year because the customers that were extremely confused by Trump tariffs were destocking like crazy. The result is that we have a very empty supply chain to the consumers. And we see a very good start of 2026 in North America. So I would not stress too much the situation of top line because when you have a seasonal business like our and you started a strategy of cleaning the low-performing part of the business, you need a couple of years to reach that. But I would like to focus more on cash generation and profitability.

Very, very clear, Massimo. My second question is about the U.K. that was I mean, in 2025 was hit by budget cuts. And then I mean, in the meantime, you have decided, I mean, to refurbish, to restructure the business. So just to -- if you can highlight us what are the main things that you are doing in order to -- I mean to support the business regardless I would say, a potential return or not of budgets, school budget for 2026.

Yes, it's a good question. U.K. is a difficult market, especially after Brexit. And I think we have not done a good job -- what we have done, we have identified the main problems. And I think we are going to go back to satisfactory results in the next couple of years. Number one, the government has started to impose heavy salary increase, and this is imposed by -- as a low -- so we have had the dynamic of salaries much, much higher than what we have experienced in Europe, which has put our production our operations in 3 years from a situation of being competitive to not being competitive anymore. Number two, there has been a reduction in school expenses. This -- we have not been able to manage in advance. So we have to change a little bit our approach to the market. So all in all, what we have decided is that if this is a strategic decision of the government to create so much inflation in their domestic market, we have decided to reorganize the company. So we are going to reduce substantially the overhead in England. We are going to absorb the production in Europe from U.K. Now Europe has become more competitive and in India for entry-level range of sales. And we're going to reorganize the market as we are doing in Europe with a more centralized approach, because we have seen that the positive experience we have just occurred in Europe is giving us positive results. We are going to start from January '26, with the same strategy for U.K., so a more centralized approach, more attention to margins, less attention to top line, more attention to cash generation, payments and profitability by customer.

Okay. Very clear. My third question is that about Mexico. So Mexico was I mean, negative in terms of top line, but making calculation in 2025, we lost EUR 5 million of EBITDA more or less. So regardless of top line, you expect I mean this kind of decrease to be recovered due to more normal environment, lower, I would say, illegal products, because probably you need to follow us, I would say, the market with the price cash, I don't know, but margins were probably had an impact higher than the top line. So just to understand if a normal situation is popping up. So basically, you can recover part of this.

So Alessandro, the analysis is correct, but there are several reasons why Mexico has been affected and what we think is that the worst is behind us. Number one, domestic market, Mexico, for Mexican subsidiary, domestic market is extremely important. And the onetime effect we have already discussed definitely hurt us. We are a leader in the market in colors. And clearly, we have been heavily affected by this legal imports. There has been a couple of other effects. Number one, the down trend of sales of United States and the problems with the tariffs. United States have been able to manage the overhead accordingly. Mexico being a plant, a very sophisticated and have organized plant have not reacted properly to compensate the sales they have also less view on direct view on the market. Last, but not least is the exchange rate. As you probably know, Mexican peso has been extraordinary and record high, the government to keep inflation under control, keep interest rates extremely high. They have a policy to protect the local power of the workers. So they impose especially in the last three, four years, imposed strong salary increase and at the same time, keeping the interest rate so high, they have guaranteed a very strong power of the peso. So making the domestic production less competitive, not really against the United States. In fact, Mexico is still the best place to be for United States, but we lost a lot of competitiveness against Indonesia, Taiwan, Thailand, Vietnam, Cambodia and illegal China. So the combination of these effects has clearly complicated our life. Now the duties that have been imposed following Trump's indication, are protecting our domestic market and if the duties will be forced, so will be respected by custom, we should go back to normal situation.

Okay. And my last is on buyback. So you approved EUR 1.3 million. So is something that we need to expect to start shortly. So like a buyback or depending on other factors. So just to remind this.

I think Cristian can better answer you. Cristian, can you please answer to Alessandro.

Alessandro, thanks for your question. Of course, we start considering the technical timing for this and the lockup period considering the closing the next closing, but the program is to start considering the medium average exchange of the shares in respect to the regulation. But we start probably between the end of the beginning of the April currently the lockup period

Next question is from Niccolo Storer, Kepler.

Okay. I have a question on your guidance. You are targeting a cash flow of EUR 40 million to EUR 50 million in 2026, which was basically the previous indication. But today, you have Seven. So I understand that probably you will still have some impact from tariffs. But at the same time, in 2026, you will no longer have I guess, the China headwinds? And maybe on the other hand, the impact of duties could be a bit lower than it was in 2025, because, let's say, things are now probably much clearer than they were in 2025. So can you give an explanation to that.

Cristian, would you like to answer or?

Thanks a lot for your question, Niccolo. Rating the expectation for 2026, we have considering an absorption of inventory for the next year, more or less we consider EUR 10 million and plus roughly EUR 20 million of the CapEx to increase the automatization capability of production and plus an increase of tax payment considering the expectation of the growth and the incorporation of the Seven. At the same time, we consider stable the interest due to the M&A fund needed to buy Seven. Let me say EUR 40 million and EUR 50 million is a reasonable range for 2026.

And the impact you expect from tariffs is, let's say, comparable to the EUR 7 million of 2025. And maybe, sorry, another question, which is leading to your guidance on revenues and EBITDA. You are targeting double-digit growth for both. Is it reasonable to assume that is EBITDA is going to grow more than proportionally than revenues?

Related to sales EBITDA without Seven, we consider roughly mid-single digits. And related to EBITDA, we -- our estimation is slightly lower than 2025. Mainly for the increase of the OpEx for the market in sales promotion to support our strategy in Europe and in USA. And on the end, the impact of the tariffs that we have included in our inventory value at the end of 2025. Of course, when we sell in 2026, we have full impact in EBITDA margin. But we confirmed a good margin also for 2026.

[Operator Instructions] Next question is from Alessandro Cecchini, Equita.

Just a couple, if I may. The first one, just to maybe making the math on your expectation, just to be clear, I see that consensus on adjusted EBITDA for 2026 ex-IFRS 16 is EUR 110 million, more or less. So just to understand if it is what you are, I mean, targeting or you are considering reasonable. And my second is instead about -- still about Europe. So maybe I missed the first part of the first question. But I mean, this positive momentum, you think that could be supported also over the next months or quarters? Just to understand if this kind of plus something that was very good. It's something -- it's a good starting point, but I mean, you see a continuous momentum in market share gains in the market.

Related EUR 110 million, let me say that it's reasonable at the information available to be, of course, Alessandro because -- we estimate at the beginning of this month is EBITDA. And related to Europe, I'll give to Massimo to explain better.

Yes. Let me point out something that is very obvious. EUR 110 million is absolutely reasonable. Let me remember that more than 50% come from United States. So we have adopted the exchange rate more or less where dollar is today. So we do not expect any substantial change in the future. If this will happen, we will be forced to reanalyze our numbers. So we are considering the dollar in the area of [ 115 ] with euro. Concerning Europe, as I said during my analysis, we are very happy because we have reorganized our sales organization, our strategy, as you can imagine, we have not attached Italy because we had the acquisition of Seven that will dramatically change, and we really think in a positive way, Italian market and the same. We have not touched the U.K. yet because we are under reorganization process, and it's very difficult to apply a new commercial strategy when you are shutting down plant and you incur in problem of service. So we really think we are doing a very good job in Continental Europe. We do expect a strong improvement in Italy and in U.K. in the next 12 months. So yes, we remain positive. I don't know if you have time to analyze the situation of our competition. We are positive also because we see our competition struggling, struggling for several reasons, but I think the reason why we are taking market share is because we have started two, three years ago, this organization and we started to see positive results, including fine art. So yes, we can confirm, generally speaking, if the outlook of 2026 looks better than 2025, I would say, it's in our outlook, the confirmation of our positive view on the market.

Yes. Because actually, I made some analysis in the past. It was in 2016 that you you did this number. So excluding 2021 of the rebound of the market in Europe, so 10 years to see this kind of growth.

Okay.

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

Then I thank you for attending this meeting. And I suppose with the majority of you, we are going to meet in the next two, three days in Milan. Thank you. Looking forward to see you.

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