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

Good afternoon. This is the conference operator. Welcome, and thank you for joining the FILA First Half 2026 Results Web Call. [Operator Instructions] Today's speaker are Massimo Candela, Group CEO; Luca Pelosin, Group COO; Cristian Nicoletti, Group CFO; Steven Boyea, CEO USA, Dixon Ticonderoga. At this time, I would like to turn the conference over to Cristian Nicoletti, CFO of FILA Group. Please go ahead, sir.

Good afternoon, ladies and gentlemen. I am Cristian Nicoletti, CFO of FRA Group. Let's start with a brief overview of our financial performance for the first half of 2026. First, I would like to highlight that H1 2026 confirms the indication provided during the first quarter results, specifically a sustained growth in operational performance, particularly in Q2 following the consolidation of Seven Group and the progressive shift of the business seasonality towards the center quarter of the year. On an organic basis, excluding negative FX impact, group EBITDA increased, delivering very satisfactory profitability levels. It is worth noting that the net impact of tariff was only EUR 2.7 million at the EBITDA level in the first half of the year, while considering that 2025, 2026 period, the economic and financial impact of the tariff will be 0, completely neutral. Moreover, FILA Group also increased its financial flexibility following the successful completion of the debt refinancing and the ABB for 7% stake in bonds without compromising the company governance structure. We're also pleased with our free cash flow to equity performance. Excluding the cash absorption for the Seven Group of around negative EUR 70 million, free cash flow to equity stood at negative EUR 43 million, showing an improvement of EUR 27 million compared to H1 2025. Regarding the net bank debt, the decrease at the end of June reflects the strong cash flow generation and the disposal of the stake in DOMS for EUR 73.8 million. This more than offset the acquisition of Seven Group, its bank debt, dividends and buyback. Finally, today, the Board of FILA agreed the distribution of an extraordinary dividend of EUR 0.46 per share which will be approved in September and paid in October. On top that our share-based share buyback program continues with around 468,000 treasury shares purchased today out of the total 1.3 million shares authorized by shareholders' meeting. Moving on the Slide 8, where we look at the core business sales. In H1 2026, core business sales reached EUR 343 million, up 12% on a constant FX basis and including EUR 44.3 million of Seven Group contribution. The organic growth was positive in Q2 for 2.1% on a comparable FX, reflecting the shift of the order towards in Q2 in North America and in Europe, the latter as a result of the new commercial strategy. Meanwhile, Center South America were down 11.9% at a constant FX, still suffering from the weak economic environment in Mexico, further impacted by competition from illegally imported school products. Let's now turn the group profitability on Slide 9. Adjusted EBITDA came in at EUR 75.9 million, up 20.4%, which includes at EUR 8.6 million positive contribution from Seven Group. recovering from the negative 3.4% recorded in Q1 2025, driven by its Q2 seasonality. Importantly, excluding Seven Group, H1 2026 adjusted EBITDA grew by plus 2.9% on a constant FX basis. EBITDA margin reached 22.1%, expanding from H1 2025, thanks to ongoing operational efficiency and the net tariff impact EUR 2.7 million, which is the result of the tariff refund for EUR 8.2 million and the reversal of inventory sold for EUR 5.5 million. Please turn to Slide 11 for adjusted net profit. Similarly, adjusted net profit, including Seven Group rose to EUR 37.9 million, improving from EUR 22.5 million in H1 2025, driven by better operating performance and lower net financial expenses, mainly thanks to the positive FX impact, EUR 13.5 million between H1 2026, H1 2025. Reported net group profit increased to EUR 59.3 million versus EUR 9 million in H1 2025, including the capital gain of disposal of 7% stake in DOMS. On Slide 12, we detail our free cash flow generation. Free cash flow to equity stood at negative EUR 60.3 million, consistent with the standard H1 seasonality and improving versus the negative EUR 70 million H1 2025. It is worth noting that excluded the nearly EUR 17 million negative contribution for Seven Group. Free cash flow to equity improved year-on-year by around EUR 27 million, affirming the strong cash generation profile of FILA core operations. Let's move to Slide 13. As of June 2026, the net debt stood at EUR 209 million, a decrease of EUR 35 million compared to June 2025. This change was primarily driven by the positive cash flow generation of the period and the disposal of the stake in DOMS. In conclusion, turning our full year outlook. We confirm our full year guidance. We expect double-digit growth in both revenue and adjusted EBITDA alongside positive organic growth. Free cash flow to equity is projected between EUR 40 million and EUR 50 million with a target dividend payout ratio of 20% to 40% under normal business conditions. Thank you for your time and attention. We are now happy to take your questions.

The first question is from Isacco Brambilla of Mediobanca.

Two questions from my side. The first one is on current trading. The second quarter showed positive organic growth both in North America and in Europe. Just wondering if you can share any data on the first part of the third quarter, whether these supportive underlying trends are continuing as we approach the back-to-school campaign? Second question is on Seven just a clarification. You mentioned, Cristian, the EUR 17 million negative impact from Seven. Is it free cash flow or net working capital absorption? And final question is on full year outlook for free cash flow. Just wondering which are the underlying assumptions on CapEx and net working capital backing your guidance on free cash flow?

Thank you, Isacco, Massimo Candela. So concerning the first question, we have in this call, we are happy to have the presence of the CEO of North America. So I will answer for Europe and rest of the world. He will answer for North America for the third quarter. Concerning the 2 remaining questions, Cristian can answer to you. So Steve, would you like to start talking about North America, please?

Certainly. Again, this is Steve Boyea, the CEO of Dixon Ticonderoga. So we had a very good shipping month in July comparing to prior year. Both U.S. and Canada shipped double-digit increases in gross sales. The sell-through that we are seeing, basically, we see customer sell-through through the third week of July, which is still not the peak of back-to-school shipping. The last week of July and the first 3 weeks of August are the key weeks. Overall, the industry is starting off a little slow on sell-through, but our performance is better than the industry. For example, one of our largest retail customers, the sell-through of our product through the first 3 weeks of July are up 5%, and they are very happy with that. So a real good start to the third quarter.

Yes. Thank you. Concerning Europe, Europe is a little bit behind United States as our back-to-school start generally at the end of August, so a little bit premature. I think that the improvement trend that we have seen in the second quarter should be confirmed. Of course, we were a bit concerned due to the situation in Hormuz, but the second quarter is showing very good resilience, very good cost control that we have been able to apply. So I do expect a third quarter in line with expectation, thus positive. Cristian, can you answer the other 2 questions, please?

Yes. Of course. Thanks, Isacco, for your questions. Related to the absorption of the group, the EUR 70 million is related to free cash flow to equity. Consequently, you called the EUR 60 million that is absorption in H1 2026, will have an improvement of this amounts. Related to the guidance, we confirm our guidance of free cash flow to equity at the end of the year between EUR 40 million and EUR 50 million. But of course, at the moment, we are reasonable to be in upper guidance at the moment for the information at the moment available. Related to CapEx, we confirm the initial evaluation of EUR 20 million for the full year 2026 and the change in net working capital in a general assumption for EUR 10 million as discussed in the previous call.

The next question is from Alessandro Cecchini of Equita.

The first one, actually, it's on capital allocation. You had an extra dividend for about EUR 23 million, but I will say you had a very positive cash coming from DOMS at EUR 74 million. So just to understand what is your view about the delta in terms of capital allocation priority. So this is my first, then I make the others, but I will start with this.

So thanks. In terms of capital allocation, we are living in a very unstable moment. It will be interesting to see what will happen in the macroeconomic situation. So as of now, we want to be -- we want to deleverage FILA Group as much as possible because we have the perception that in 2, 3 years, some transformational project can become reality. So in short term, we have 2 main priorities to reduce as much as possible debt in United States. Apart that the CEO is doing an extremely good job. Interest rates are pretty high. And even more in Mexico, the cost of debt is extremely high. They have a very high peak season. So we want to reduce as much as possible the cost -- the cost of debt we have in that area.

Okay. Very clear. My second question is about Seven. So of course, for us is new the seasonality of the business. So we need to better understand the trends, in particular in terms of EBITDA. But if -- so looking at the second quarter, so for the year, for instance, I was just wondering in the past was around EUR 14 million -- EUR 14 million of EBITDA for the year. So looking at this second quarter, we are ahead of these targets or we are in line given the seasonality of the company?

Thanks. First of all, I think we made a mistake not being very clear starting from the first quarter because the seasonality of Seven is definitely different because they go directly to retailers. And I remember you that this will be something that characterize also FILA in the future, both in Italy and in Mexico. So our seasonality is going to go more towards the second quarter. The performance of Seven as of now is slightly better than June '25, but it's very much important to see the sell-through. And I explained 5 minutes ago, our back-to-school is starting the last week of August. So as of now -- Yes. We have some very first positive signs from customers that are telling us they are reordering because they have a nice sell-through. But frankly speaking, this cannot be considered an average. It's just a first sign. So we are positive to say that Seven despite the difficult market in Italy is going to have a pretty good year in '26 comparable to '25.

Okay. Very helpful. And back to the previous questions about -- so the trend in third quarter. So probably I missed your view about Mexico, I mean, the Central South America because, I mean, second quarter was very tough, minus EUR 90 million with a very relevant loss in terms of EBITDA in terms of year-on-year. So second half is easier comparison because I mean the crisis started, if I'm not wrong, in the second half of last year. So just to understand which is the current dynamics that we are seeing in the market? And finally, just to recap on the U.S., it is possible to see U.S. to be mid- high single digit in the third quarter or I understood wrongly the messages.

Steve, can you please answer the question about U.S.A.?

Yes. So the third quarter, I think July will be stronger than our August. So I think that is going to normalize between those 2 months. But I would say mid-single-digit increase in revenue over last year is definitely attainable.

So for Mexico, the answer is a little bit more elaborate. I would like to remember you that last year, this period, we have shut down Chinese operation for the reason that we have shared many times. As every extraordinary project, especially when you touch production, there are some unforeseeable problem, and we have absolutely fallen in this situation, there has been a strong delay in implementing all the equipment, all the machines in our plant in Mexico for different reasons. This has generated, number one, extra costs. Number two, important delays in production that has affected also domestic sales because Mexico should have been forced by us to respect deliveries to Europe, which, by the way, anyway have been delayed by 4, 6 weeks. So Mexico is going to make up some difference in domestic market because now they have the production in place and they can supply orders that they couldn't supply by the second quarter. We have had also big problems of learning curve. This was more predictable because in the past, when we moved to China, we had exactly the same experience. So very high level of waste, quality problems. The learning curve is going to become flat in the near future, I would say, for next back-to-school. This year, we have paid consequences. So if you put together, delay in deliveries in domestic market, delay in shipping to Europe, very high level of defective product. Learning curve is still very steep. Difficult market due to illegal import. Of course, we really hope that Trump will be able to put all the pressure to Mexican government to stop illegal imports because they feed this illegal import, clearly for economical reason. Mexico is still a difficult country in which we operate. But definitely, the worst is behind because the production now is showing important improvement.

And lastly, if I understood correctly, so basically, the net tariff of the current 2026, if I understood correctly, so excluding, of course, reimbursement or previous is close to 0 or 0, I understood correctly.

Yes. I mean when we say 0, it means that if you start from the tariff when they have been applied last year, I would say, around April '25. And if you consider the reimbursement that we have been able to get, the impact will be close to 0. This year, 2026, the positive impact of the reimbursement is around, Cristian, EUR 2.5 million, correct?

EUR 2.7 million.

So this year, the positive impact has been EUR 2.7 million.

Okay. So just to understand because the EUR 5.5 million, if I am correct, is due to tariff applied to inventories linked to 2025 and the reimbursement is due to 2025. So if we exclude this, basically, we are -- so the message that you are basically not paying tariff now, so in your current business or very, very limited.