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 Full Year 2024 Results Web Call. [Operator Instructions] Today's conference call is hosted by Mr. Massimo Candela, Chief Executive Officer; Mr. Luca Pelosin, COO; and Cristian Nicoletti, CFO. Mr. Nicoletti, please go ahead.

Good afternoon, everyone. I am Cristian Nicoletti, CFO of FILA Group, and we are very satisfied with our results for 2024. Core sales coming at EUR 612.6 million less 2.8% on organic base. The decrease in revenues was largely due to one-off factor, the implementation of SAP EWM in North America and unfavorable currency effects in South America, coupled with macroeconomics [indiscernible] in the last part of the year. One more positive notes, Europe performed well through the year. Coming back to growth, EBITDA increased to EUR 118 million in financial year 2024, plus 7.2% versus 2023 level with an impressive acceleration of 41.5% in Q1 (sic) [ Q4 ] alone. The performance is the result of continued focus on industrial efficiency and optimization of our product mix. Group reported net profit at EUR 81.8 million in financial year 2024, which includes DOMS placement and significant decline in financial expenses. Adjusted net profit grew by plus 32.3% versus 2023 level to EUR 40.9 million. Free cash flow to equity was particularly strong, reaching EUR 68 million, which is EUR 8 million higher than in financial year 2023 and well above our expectation. The net financial position at EUR 181.1 million at the end of 2024 with EUR 122.3 million net reduction versus financial year 2023 despite EUR 36.5 million of dividend in 2024, thanks to the strong cash flow generation and disposal of stake in DOMS. Net bank debt, EUR 124.5 million in financial year 2024 versus EUR 229.5 million in financial year 2023. The Board proposed to [indiscernible] EUR 40.9 million ordinary dividend with higher payout comparative to the guidance, thanks to the strong free cash flow and sales placement of 4.57% stake is DOMS. We are confirming our guidance for 2025. We expect a low to middle single-digit revenue growth, mid-single-digit adjusted EBITDA growth, assuming constant currency and tariff and free cash flow to equity between EUR 40 million and EUR 50 million range. Our dividend payout ratio will remain in the range of 20% and 40%. This slide provides a visual summary of our financial performance for the year. I want to highlight a few key points. Core businesses at EUR 612.6 million, negative 2.8% on organic base. As already mentioned, on organic base decrease in revenue, mainly due to SAP EWM rollout. The impact on foreign exchange fluctuation was negative by a few percentage points, mainly to devaluation in Argentina Peso and in Turkish Lira. EBITDA increased to EUR 118 million in financial year 2024, plus 7.2% versus 2022 level. Please note the EBITDA margin jumped from 17.1% in 2023 to 19.3% in 2024, more than 2 basis point greater results. Group net profit at EUR 81.8 million in financial year 2024. These results clearly include the economy benefits from disposal of 4.75 percentage in bonds. Adjusted net profit grew to EUR 40.9 million in 2024 from the EUR 30.9 million in 2023, an increase more than 30%. Related to the NFP, we highlight a decrease of EUR 122.3 million after EUR 36.5 million as dividend. Free cash flow to equity at EUR 67.7 million. Cash-in from DOMS EUR 80.7 million. The core business sales in the last 5 years show a CAGR of 1.9% and adjusted EBITDA of plus 3.2% more than proportional and free cash flow to equity over EUR 240 million as cumulative free cash flow to equity. We are available for any question about the results of FILA 2024.

[Operator Instructions] The first question is from Niccolò Storer, Kepler Cheuvreux.

[Foreign Language] Two questions for now. The first one is, if you can comment on your evolution of North American and European sales in Q4, apparently both regions have deteriorated sequentially, Europe probably moved into the negative territory. So what has driven such a deceleration? And what is the entry speed into 2025 that you have been experiencing. The second question is on tariffs you basically confirm your guidance at same tariffs, but in reality, we know that tariffs from U.S., China, to -- sorry, from Mexico and China to the U.S. are already a reality. So what's the situation? What's your exposure? And what is the EBITDA at risk here?

Niccolò, thanks for your questions. We don't have particular comments on the sales of Q4 because I think we at -- we -- particularly in North America, when you have election period, you have always kind of instability, everybody was waiting the results, the consequences. So I think that after the good first 3 quarters, we simply have not push further even for a better year. And everybody was more interested in what was happening in 2025. You know that we have such important customers that their decisions on stocking and destocking can have a huge impact in the fourth quarter, I would say, it was kind of a neutral year. In the first quarter '25, we can anticipate to you that we are going to have a very positive first quarter. But in total transparency, we have to neutralize the effect of last year. If you probably recall in March 2024, we had the implementation of the new warehouse management, so new software. We had 6 weeks problems. So from the first week of March until the second week of April, so we already see that our first quarter will be very strong. But for the moment, we can comment that the year is looking like our expectations. Concerning the questions -- and the same, by the way, for Europe. Concerning the tariffs, first of all, I cannot agree with your comment. So when you say that Mexico and Canada, the tariffs are already in place. I do not agree and frankly speaking, my personal opinion is that tariffs with Mexico and Canada will not be confirmed, but this is just personal. So in -- we have confirmed the guidance so far for 2 reasons. Number one, as I mentioned several times, we have a very complex supply chain. And we always said that this was a strong competitive advantage from FILA -- that cost, by the way, but give us a certain kind of flexibility. And we do confirm that we will be ready in a few months as soon as we will understand the final strategy of the new president, we will be ready to adjust our cost structure. So we do not expect really negative consequences or just minor. In terms of 2025, we have confirmed the guidance because you probably remember that we had an important seasonality. So as of the second of April, the majority of our products are already in-house. So really, the impact on 2025 will be minor and probably only after August when we will have the replenishment. That's the reason why, for the moment, we feel confident that we will not have an impact on our margins. Different is that if we see some initial signs of weakness of U.S. economy. If this will be confirmed, I would rather see a weak last quarter of 2025, while we have already good visibility on the second and third quarter that are the most important and these quarter confirm our positive view. So the back-to-school is looking positive for 2025.

Maybe a very quick follow-up. When you say that you are ready to adjust your cost structure in a few months, it means that you are basically moving production out of Mexico to India.

That is one option, of course, not the only option. Please remember that Mr. Trump is talking of proportional tariffs. So I think he's still questioning also the tariffs that are in place in India against U.S. good. Why, for example, in Mexico, there are no tariffs against the U.S. goods and the same for Canada. So I repeat that India is our first option, by the way, the company is growing and is supporting us more and more. So it will become the most important hub we have worldwide, but I repeat, I don't think that with Mexico and Canada, we will experience tariffs.

The next question is from Alessandro Cecchini, Equita.

The first one actually is on financial charges. So you had a very, very good work on this. So at -- I mean, P&L level, we can say that we had EUR 26 million of financial charges, while at cash flow '23, including IFRS 16 cash out. So given your deleverage, that is very good, can you, I mean, provide maybe a sort of indication for net financial charges reduction in 2025. This is my first question. My second question is that about still India. First of all, I would like to better understand how much was the sourcing from India on total group sales in 2024. So I mean, out of EUR 600 million of sales, so how much coming from India? And what are your expectation the ramp-up in 2025. And I mean, it's not about this, but is strictly related to the fact that when you expect to start to sell DOMS products in Europe to increase your offer? Instead -- my third question, is that still about free cash flow. So you -- you were very successful in reducing net working capital on sales below 40%. So I would like -- that was a target that some years ago probably was something very difficult to reach, but you were able to do that? So I would like to understand if this is something that you can continue to do over the next 2 years. And finally, it's just an technical question. So you had the DNA that -- I mean, the last quarter was minus EUR 50 million versus a run rate of EUR 10 million in the third quarter -- first -- third quarters of the year. So I would like to understand if you had some special extraordinary write-down, et cetera, just to understand this pickup in the fourth quarter.

I propose to analyze my answer using the cash flow on Page 11. The 2024, we analyzed the free cash flow to equity over the performance of the last year. As you analyze it correctly, we have a positive cash generation in net working capital. And our expectation for 2024 is -- 2025, sorry, is a stable generation in net working capital, considering that FILA at the moment is in reorganization phase. Relating to net financial expenses, we have a decline of EUR 8.3 million for interest related to our senior facility agreement, is a great result. I confirm that on the end of 2024, FILA has not external credit line. At the moment, FILA is using our proceeds received by the placement of DOMS to work to efficiency of our net working capital. And in some cases, to have a positive cash-in for interest for these proceeds. Our intention for the 2025 is to continue this trend. Our expectation is further [indiscernible] between EUR 3 million and EUR 5 million interest lower than the results of 2024.

With regards to India, we repeated many times, India, we have many opportunities from this very big hub. At the moment, we are not serving much from DOMS. Let's say, we are approximately at 5% of our COGS. The ramp-up for the future is related to your second question. I mean DOMS introduction in the country covered FILA Group. We are introducing the selected DOMS product line in Europe during this year. And we are preparing everything for U.S. for 2026. We expect sales for the current year not to be relevant because the timing of the customer selection is normally between May and September of the latest for the following year. So we expect a much stronger sales next year. And clearly, the volume we purchased from is related also to how much we will be able to sell for DOMS product. In addition to other production relocations that are still ongoing and on pipeline. So I will confirm our target is to reach step-by-step the purchases from DOMS and the value is also related to our commercial success in DOMS introduction. With regards to net working capital, we have been working very well, I believe, this my opinion during the last 2 years despite all the challenges. Indeed, if you consider in 2024, we improved the net working capital despite the sales down compared to 2023. There are other actions to do better. But at the same time, due to DOMS introduction and the planned entrance in other minor markets, there will be working capital inventories, which will be needed to boost the sales in the projects we are developing. So all in all, plus and minus, our expectation is to have a stable working capital.

Alessandro, can you repeat the fourth question because we did not get.

Yes. Of course, it was on depreciation and amortization that for the full year was EUR 45 million. So basically the fourth quarter, we had EUR 50 million D&A rather important pickup versus minus EUR 10 million roughly during the first 3 quarters. So just to understand if you had the special extraordinaries on write-down, et cetera, adjusted to account this and to consider to better analyze, estimate what could be the number for -- regular numbers?

Yes, in the last quarter of 2024, we have a subordinary break off due to the some intangible and tangible assets for more or less EUR 4 million.

EUR 4 million.

More or less, yes. We will have all details that is about the nature of them in our financial statement that will be published in the end of the next week.

Okay. And finally, more strategic, if I may, on the -- so you are -- I mean, on capital allocation, you are paying, I mean, some, I would say, extraordinary dividend thanks to, I would say, the good -- very good free cash flow and cash in from India. I would like to understand if you think that you can, in the future, also consider I mean, something regarding buyback, more evident than, of course, the 1%, that you have in the press, of the capital and maybe what is the M&A market at the moment, if you see something, I mean, in the emerging market, something that you can add to your portfolio to increase maybe exposure to fast-growing markets and so on.

So Alessandro, if you read the different press we have given now an indication on dividend policy. We have given an indication also of buyback, which means that it's not one or the other, but it's going to be both. And thanks to the fast deleverage, I think FILA is -- a little bit in the features of our business. One day, we start looking again into M&A opportunities. I don't think nothing will happen in shorter term because, as I mentioned several times, today, the price expectation of the sellers are not realistic. And I would like to add that there is too much uncertainty related to tariff strategy in United States, for us count 55% of the global revenues. So I think that M&A will come back to be a priority immediately after our leverage will go towards 0, and we will have more clear idea on the tariff strategy. What is important is that if we go back 3 years ago, when we had our business plan, and we gave as a priority, the deleverage, we can fortunately say that we are even in advance versus our projections. So the company is continue targeting a strong deleverage in order to be ready to take the opportunities that in 2, 3 years, would come, for sure, will come. The business is definitely too fragmented. And for sure, there will be important opportunities in the future 3, 5 years.

The next question is a follow-up from Niccolò Storer, Kepler Cheuvreux.

Quickly on DOMS governance. I read some documents from DOMS with some details on your shareholders' agreement. And it seems that you do not need to remain necessarily at the current level to name the Chairman of the company. And also, if we look at other rights such as been entitled to an affirmative vote on certain matters, you need just 20% and not 25% of the capital. So my question is, do you think that -- with this in mind, it's possible to imagine FILA further lowering its taking DOMS towards 20%?

First of all, let me highlight that we have 26.1% and not 25%. Today, 1% of DOMS is more than EUR 20 million. So that is -- second, you are right, the shareholder agreement will be completely being published after the shareholder meeting in May because it's an Indian law that the shareholder agreement has to be approved by the Board and immediately after by the shareholder agreement. So we started to publish the main content because the Board has given its approval. I do confirm that the relevant participation is 20% and not 26.1%. I will be nominated Chairman of the Company. So theoretically, we have the possibility to dispose this 6%. Practically, as you probably have seen, there is one of the important synergies we have with DOMS is that in the future, we could make synergies also in M&A. There are important targets in which we can -- they can have industrial synergies, while FILA can have commercial synergies. So until the strategy will not be completely clear, so I would say, in the next 2, 3 years, I think to have a relevant percentage in DOMS can be extremely important. In the future, I think the 2 companies will be more and more connected. The strategy will be more and more overlapped. And so we will see if we want to take the opportunity to dispose to dispose that share. For sure, the combination FILA DOMS in this moment represents an exception in the world market because we are in the most competitive market in the world in terms of production, a country that just recently signed a good agreement with Europe, so to produce in India will be extremely efficient. Same for United States United States has a very positive approach with India. Just in the last 2 weeks, they have substantially reduced the tariffs from United States in cars. And this will be followed by other businesses. So Modi has clearly said that he does not want a trade war with the United States. So the fact that we are very well established in India is definitely a competitive advantage. So I think that what we have done so far, it's an important step, but it's going to be much more in the future. So only when the strategy will be clear we can dispose this 6%.

The next question is from Isacco Brambilla, Mediobanca.

I have two. The first one is on CapEx, which were, again, quite limited this year, should we assume a similar level in [indiscernible] actually, should we assume a similar level in 2025 or maybe some increase of some million euros compared to the EUR 30 million of 2024. Second question is on gross margin. You had a significant help to your profitability on this item. So after the good results of 2024, is this incidence of COGS sustainable for this year? What are you assuming in your margin guidance for 2025 from this item?

Thanks. With regards to CapEx, this year, we will record some investments, we didn't implemented in the last year. So for 2025, we do expect to invest up to EUR 20 million, the majority of this CapEx are intended to improve the efficiency, in combination some cases, to have FILA Group more sustainable, which means sustainability which is going together with the efficiency, I mean, cost efficiency or cost reduction.

Concerning question number two, gross margin, Isacco. We are -- so first of all, you have to know that the budget of this year is, by definition, difficult to be completely predicted because when you invoice 55% of the turnover in North America that is -- has a historical level of uncertainty. It's definitely difficult homework. At budget level, in order not to make mistakes, we have put a stable gross margin. In reality, after the 2nd of April, there are scenarios in which our supply chain can have an important competitive advantage. Just let me make an example. Today, if you make the picture of what is happening in North America, we have 2x 10% from China, 0 from India, 0 from Mexico and 0 from Canada. So we produce in Canada, Mexico and in India. Our competition is in China. So if the situation will remain like it is today, we are going probably to beat the budget and we are going probably to increase gross margin. After the 2nd of April, we can be more precise. We have budgeted, I repeat, a stable gross margin because from one side, we have already imported substantial amount of products for the back-to-school 2025; and second, we have enough flexibility to move and to manage the problem that tariffs will create in order to keep our gross margin stable. I hope my answer was clear.

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

Talking about maybe Mexico that I mean, you had a very, very good 2023 performance. 2024 was -- I mean, lower than usual. Could you better highlight the current framework in Mexico, considering that probably maybe I am wrong, but probably Mexico is imposing tariffs to Chinese products for the local market. So for you could be nice to have this. So just to understand what you are seeing in the market, current dynamics and in terms of orders and back-to-school, but also in terms of a competitive landscape?

It's very interesting because Mexico is becoming a very important portion of our cake. So far, so good Mexico is performing well also in 2025. What you just described, so a possibility that Mexico will impose duties on China is for FILA, of course, the ideal scenario. Why is the ideal scenario? Because we almost do not have competition from domestic market. We are a strong leader our competition come exclusively from China. But here, we have to make 2 comments. Number one is the official import in which if Mexico established is 20%, definitely, we are going to be in a very comfortable position, probably will be able [indiscernible]. And second, the unofficial import that is huge. Huge so far, I mean, this is historical. This is not now or last year. And by the way, this is the main reason why Trump has threatened the tariffs with Mexico. So Trump is tired of Chinese product vested in Mexico. An official import in our business is a huge percentage, and the positive thing is that the new President, Claudia has promised us during a meeting with our organization, business organization of stationery manufacturer has promised that she will start fighting illegal imports and illegal retailers and illegal market. And this is starting. So it's not only a problem of the 20%, but also it's political problem. If really Mexico start to fight illegal import, we are definitely in a very nice position. The next few weeks will be crucial because if Mexico find an agreement with the Trump and with Canada in order, as Claudia has mentioned, a strong unified Central North American market, we are in the perfect position. Everything else we need to see what will happen. For sure, in the first 2 months of 2025, our customers in Mexico has recorded this attack against illegal import. And this is helping us tremendously because they know we are very well established. We are solid that we produce in Mexico. So it's a very interesting development of the history. And hopefully, we will enjoy the situation.

Okay. And in gross -- your stable gross margin expectation -- what is your assumption for pulp, that's pulp price, that -- so I don't know, but it's extremely volatile, but what is the context for this raw material that could be interesting for you, of course, -- important for you, sorry.

So sure, as of now, consumption is weak in a difficult macroeconomic situation. So if part is volatile because the suppliers try to speculate on the price it's difficult, they are able to sustain, but I can ask Luca what we budgeted for pulp, Luca?

At the moment, and we are below our budget assumptions, despite in the last 3 months, indeed, suppliers have been able to raise by $50, $60 per ton each month. As Massimo said, consumption mainly in Europe is weak. So they are leveraging better. There are still some logistic issues, which are helping suppliers. Someone is closing the facility for maintenance. But as I said, we budgeted this cost increase at the moment, we are, I cannot say well below budget, but we have still a lot of margin to have -- to close the year within our budget assumptions. And luckily, we use more short fibers compared to long fibers and the price pressure likely is more on long fibers.

[Operator Instructions] Gentlemen, there are no more questions registered at this time. I turn the conference back to you for any closing remarks.

So if there are no further questions, I thank you for attending this call. And I think we are going to meet soon in different opportunities and places. Thanks and enjoy this weekend.

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