FILA Fabbrica Italiana Lapis ed Affini SpA

MIL:FILA

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the F.I.L.A. First Quarter 2024 Results Conference Call.

As a reminder, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Luca Pelosin, Chief Operating Officer of F.I.L.A. Please go ahead, sir.

[Luca Pelosin, executive]

Good afternoon, everyone, and thank you for joining us on this call. Unfortunately, Massimo Candela cannot attend the call, so I will have the honor to present F.I.L.A.'s first quarter 2024 results.

Let me focus on a few highly strategic aspects. This is the first quarter following the IPO of DOMS. The rationale of the IPO is fully confirmed. On one hand, we confirm that F.I.L.A., ex DOMS, is a cash cow, as you see from the Q1 results. On the other hand, we confirm that DOMS [indiscernible] share price is more than 2x versus the IPO price. If you remember, we paid EUR 41.4 million to get a 51% share of DOMS. From the IPO, we received EUR 69 million cash, net of tax and fees. And the current 30.6% stake is valued at EUR 370 million, so not a bad deal.

Let me focus more on the new F.I.L.A. without DOMS. Our business is very stable. We are back to high-quality brands in defensive markets that are linked to long-term trends and demographics. We have very resilient financials with stable and growing revenues and EBITDA since 2019, a highly cash-generative business. We generated EUR [ 150 ] million of free cash flow to equity in the last 3 years, so an average EUR 50 million a year. Much lower leverage, bank debt now is just above EUR 303 million versus more than EUR 400 million a year ago.

Financial asset, with DOMS stake, worth over EUR 370 million in addition to [ receivables ] strategic value in terms of industrial and commercial opportunities. And we have also many potential upside from optimization of efficiency and production footprint.

We have to discuss also about the extended with us management implementation in Dixon Ticonderoga USA. I need to clarify next that this is a one-off and temporary impact. We went live beginning of March. And we had a much longer fine-tuning learning curve than expected, but we will talk about EWM later.

In terms of guidance for this year, this EWM issue is unfortunate, but our business is solid and the markets are good. We prefer to be realistic on 2024, based on this implementation. So 2024 revenues are expected to be flat.

We are, however, benefiting from improved margins and I am confident in confirming guidance on EBITDA on last year. By the same token, we are confident in confirming guidance on our free cash flow to equity in a range between EUR 40 million and EUR 50 million.

In terms of Q1 results, we consider Q1 excellent. Unfortunately, EWM implementation brought some disruption in the numbers, which are clearly, as I said, one-off and temporary. North America was 4.7% over last year in February. Europe is back to growth and, as we expected, margins are up thanks to better margin mix and efficiency. Cash flow was very strong in Q1. DOMS absorbed a lot of cash, especially for CapEx, as we informed already in the previous calls.

As I said, the financials have been negatively impacted by some disruption from the introduction of the SAP Extended Warehouse Management. This tool will certainly make our U.S. distribution centers more efficient and more profitable, improving the quality of the deliveries to U.S. customers, which is key to have a solid growth also in the future. The [indiscernible] was supposed to be [indiscernible]. We never had an issue in the past. I do remember [ Sofia ] already announced when [ we'll ] be not anymore supported after December 2025. We have [ one ] implemented in many production and distribution entities. So the road map for the EWM implementation is a must-have for this reason. However, we did have a submission that emerged suddenly on the go-live, as I said. So many orders were partially blocked in the second half of March. I can tell you the situation in staff is now much better. And in April, we are back to the normal operations in our distribution center.

Just for your information, EWM was also implemented not only in the 2 distribution centers, but also in the 2 production plants where no issues were coming from this implementation.

Another important information for you, we have appointed an U.S. Chief Operating Officer for Dixon Ticonderoga USA. This person is named Steven Boyea that was already part of the company for some years.

So summing it all up, Q1 figures show a distorted situation. Revenues in North America are well below our expectations. We will have never thought of minus 20%. As I said, it's one-off and temporary. Europe is back to growth, and this is very positive news after 2023 with a lot of destocking. Mexico is also growing double digit. [ For the ] quarter, Central/South America is suffering from the Argentine pesos and the negative impact will be continuing in all of 2024. [ We all ] show a much better story with a solid strengthening of margins in North America and Europe, lot of efficiencies and the mix [ effect ].

Free cash flow is excellent. We are up EUR 50 million compared to last year. This is a [ maximum ] difference. You can now appreciate that DOMS had a cash flow [indiscernible] absorption, but this is natural considering how much it was growing. And net profit is at 5x last year, and we have not even included DOMS profit in Q1 as they have not yet been published.

Now I leave to Cristian for more details in financials.

[Cristian Nicoletti, executive]

Okay. Thanks so much, Luca. And of course, it will be a pleasure to be the [indiscernible] as CEO of Dixon USA is a very important [indiscernible] at the moment.

Before I start with the presentation, I'd like to take a few minutes to illustrate some material changes in how we will be communicating going forward. The consolidation of DOMS, following the IPO, F.I.L.A. is no longer consolidating DOMS. We now account for the 30.6% participation under the EBITDA method. In the P&L is the line, financial income. Consequently, all of our revenue, EBITDA, balance sheet, cash flow are now shown without DOMS.

We have, however, made an effort to provide all 2022 and 2023 revenue and EBITDA figures with and without DOMS so that you can understand how the F.I.L.A. business has performed. All the quarterly data is available -- are available, sorry, in the appendices. Also note that, given that DOMS has not yet approved it in its Q1 results. Flat 30.6% share of its net profit is not included in Q1 results. we will have a catch-up in Q2 and later in the year. In June, we will increase profit for Q1. In September, we will include the profit for H1. In December, we will include the profit for full year. The main reason is because the financial -- the fiscal year for DOMS is March. Consequently, we have 60 days and the Board will approve DOMS' results at the end of June.

Regarding the IFRS 16, you will also see that we are focusing on the IFRS 16 results in line with our quarterly and annual report. We are going to simplify the reporting to align it with common market practice and also to ensure that the analysts and investors are able to conduct a clear evaluation of which EBITDA and which net debt to consider to be in line like-for-like [ with or ] without IFRS 16.

In any event, [indiscernible] provide both [indiscernible] and without IFRS 16 in order to provide continuity on the results. [indiscernible] quarterly [indiscernible] EBITDA is provided with and without the IFRS and with and without DOMS for the last 2 years. All these information are available in appendices in the presentation provided.

The new format of quarterly presentation, due to [ both ] changes, we are forced to change the content and the format of our quarterly presentation. As you will see, we have many more details in our reporting performance, and, in particular, revenue and EBITDA also with currency adjustments for each geographic area. Clearly, we are happy to take suggestions for further improvements. But meanwhile, we think we have made a huge effort.

And last but not least, as already announced, VME a few days ago, going forward, F.I.L.A. will be assisted by [indiscernible] we are expecting to be our [indiscernible] are Pietro Masera and Daniele Ridolfi, who many of you know from [indiscernible] [ group ]. They can be reached in [indiscernible] contact because we have provided a few days ago.

Let's now move to presentation, to Slide Page 3, with the highlights on Q1 2024. [indiscernible] highlights have been discussed by Luca and we don't need to [indiscernible]. Of course, if you need some information, we are fully available to answer you.

Let's now move to Slide 4, snapshot of Q1 2024 results. This is a new slide and there to focus on the key financial metrics for the quarter. And clearly, each of the variables will be discussed in much more details in following slides.

The decline in revenue is basically -- sorry, [indiscernible] North America for the reason we discussed, but Europe is back to growth on comparable [ FAs ]. Also, the [ centers ] of America with Mexico continuing to grow with double digit.

Adjusted EBITDA with IFRS 16 showed a margin expansion from 51.1% to 60%. And [ EBITDA ] improved efficiency coupled with a positive mix asset of our sales. As you see, the improved margins are consistent in North America and in Europe.

[ The net ] profit [indiscernible] from EUR 1.3 million to EUR 6.5 million even before taking our share of DOMS' net profit, as said a few minutes before. And the net debt has declined by EUR 103.5 million versus a year ago, of course, thanks to the IPO of DOMS coupled with strong cash flow and despite the more or less EUR 30 million [indiscernible] dividend we paid in January 2024. We are part of the [ plot ] of this cash generation.

Let's go -- let's now move to Slide 5. This is also a new slide which highlights the results of F.I.L.A. business, ex DOMS, over the long term and which is [indiscernible] used for in the [indiscernible] and the [indiscernible] of our cash flow generation. As you can see, revenue and EBITDA have consistently grown through the years. We have been growing at a slight higher pace. And also, we are providing information with the IFRS 16 impact.

Most important, please focus on the right side of the slide, which show our free cash flow to equity generation in the last 5 years. In total, it's an average of EUR 50 million per year. And note that it also exclude DOMS until 2023. However, as we have discussed in the past, DOMS had a negative impact on our cash flow, clearly has invested significantly in CapEx and the net working capital to sustain its growth. So that's why we are quite confident in reaffirming our target of EUR 40 million to EUR 50 million for free cash flow in 2024.

Let's now turn to Slide 7 with all details on core businesses. This is our new licenses with all details by geographic in [ Euros ] and also on comparable FX basis. A lot of information is here [indiscernible] present in a way which allows you to quickly understand our -- how we performed.

Let me provide a quick commentary on the key trends in the quarter and which are summarized on the right part of the slide. The group, overall, a net decline of 11.2%, which, however, improved to negative 7.8% on a comparable FX, which is now detailed by region.

North America, we already discussed this and not relevant currency effect. Europe, as you can see, the good news is that, on a comparable currency basis, the growth was plus 0.4%, and the strength is due a number of factors. [ In part ], they are restocking in 2024, as announced at the end of 2023, which followed the [ destocking ] in 2023, together with [ SEC ] and the mix effect. However, the results suffered from devaluation of the Turkish lira, although the impact is not so material.

Central-South America, the currency effect is much stronger and the negative effect from Argentina is quite strong. As you can see [indiscernible] about [ 3.6 million ], and is due to the devaluation of the peso at the end of 2023.

Please refer to the end of the presentation. We have all the details of currency and you will see that the Argentina peso traded an average of EUR 202 in Q1 the last year. The average was -- now the average was is [ EUR ] 900, more or less. So unfortunately, it will impact our Q1 2024.

On the other hand, Mexico is doing very well with double-digit growth in local currency, plus an affordable currency effect when translated into euro. Asia and rest of the world is geographical [indiscernible].

Turning on the next slide, EBITDA, the [indiscernible] the previous one with a lot of detail for geographic plus the margin. Note that the [indiscernible] are on IFRS 16 basis. However, up in this, we have [indiscernible] seems like [indiscernible] with and without IFRS side by side.

Now we can comment on mainly the trend. On a group basis, the decline was only 6.2% compared with 11.2% of revenue. And note that, on comparable FX, the decline will be only 1.4%. This clearly leads to an improvement in the margin, which will increase from 50.1% to 60.0% in 2024. As discussed earlier, the improvement in the margin is according to the business and is extremely positive.

South and North America improved from 14.3% to 16.1% and Europe from 13.9% to 14.4% despite Russia, which basically not operational. The only region in which margin declined is Central-South America, in part due to the Argentina peso and in part due to the operation in the Dominican Republic, which was basically not operational.

The following slides are much more detailed in terms of financial, so the comment can be much more brief. Slide 10 is a detailed review of the income stated. I'd like to focus on a couple of aspects below [ EBITDA ].

Firstly, note that we have not restated the full P&L without DOMS , but we have provided Q1 last year including DOMS and a separate column with only on DOMS [ by itself ] that you can understand its contribution.

As you take a [ look there ], financial expenses have declined considerable and it's due to lower indebtedness, improved the margin ratchet, a repayment of Mexican pesos. The group net profit increased to EUR 6.5 million compared to EUR 1.3 million in the last year, in both cases, excluding DOMS. As mentioned earlier, note that Q1 2024 results had 0 contribution from DOMS, but not because it's the results, but I'll highlight that again, but because the results have not yet been made public and approved by the company. The shareholders of DOMS will approve the results at the end of May. For Q2, Q3 and Q4, however, we show net [indiscernible] problem [indiscernible] results take place after results.

Let's look at Slide 11. This slide has the details and cash flow statement, consistent with the presentation in the past, only difference is that we start from adjusted IFRS 16 EBITDA and [indiscernible] reaching the same results on free cash flow. You can see Q1 2023 DOMS -- with DOMS, sorry, and Q1 2024 without DOMS. The differences are fairly evident, and we have highlighted that in commentary on this last [ year ]. The most important factor is that free cash flow to equity is much higher than the last year. It's improving by more or less EUR 40 million on adjusted basis. And quite important is this [ occurred ] despite a lower EBITDA. This is mainly due to the fact that DOMS absorbed a lot of operating pressure to support the growth. I remember here that, in the first quarter of 2023, DOMS purchased a land to increase the production for more or less EUR 8 million. In effect, the [ auto flow ] for both net working capital and [ net ] CapEx is much lower this year. In 2023, there was a very large investment, as you see.

The CapEx for F.I.L.A. will still be lower to the consolidation of DOMS and we confirm our expectation for 2024. By the end [indiscernible] talking, we have lower rent payments, lower taxes, lower interest expenses and it all element positive for free [indiscernible] generation.

Last but not the least, note that the IFRS 16 rent payment declined for EUR 1.2 million. And you'll see that, the next page, it leads to a lower amount of your existing debt.

Let's now look at Slide 12. Just to comment on net bank debt and net financial position, notably a change from Q1 2024 versus Q1 2023. The net debt declined by EUR 103.5 million. The not organic part is the flow from DOMS' IPO and the dividend that will be housed in January 2024. But the organic part is our cash flow generation, which was exceptional for EUR [ 67.9 ] million. As mentioned earlier, the IFRS debt declined by EUR 10 million to EUR 65 million to the lower rent in particular in USA and Central/South America, considering also the consolidation of the DOMS.

And finally, the leverage ratio is only 2.8 [indiscernible] and the Q1 has particularly high working capital needs consequent [indiscernible] our seasonality period. So we are progressing quite well in terms of the leverage, confirming our expectation on the end of 2024 for EUR 40 million to EUR 50 million of free cash flow generation.

The last page, 30, shows our balance sheet. In March of 2023, we have DOMS and in March 2024 without DOMS. Not much to say here. The difference between the 2 are mainly to the consolidation of DOMS, some impact of [ ACP ] as well, as Luca mentioned before, which leads to higher inventory, considering also that for us net working capital is proven by [indiscernible]. Clearly, this value reflected [indiscernible] and we [ stocked ] inventory to enter the coming back-to-school period that will come next month.

Let's now turn to the next and the last [indiscernible]. Also, this slide is new and currently relevant given the very material valuation of our 30.6% stake in DOMS. Clearly, we cannot comment on DOMS' financial performance, and particularly forecast it. However, this is all public information, which you can [ pull assets ] from its website and from other sources as Bloomberg of [ access ]. We can, however, provide some information to help you to accessing the value of the stake and how it compares with underlying results. Consequently, we have provided the following data from FactSet -- the consensus estimates for sales, EBITDA, EBIT and the net profit for 2024, 2026, and the other line for [ CAPS ].

DOMS is clearly growing at a very strong pace, and you can get an idea of how much profit we can include in our results coming from the next quarter. I repeat again that we are on a different time table for the quarter. In June, we have only 1 quarter.

The consensus target price and recommendation, which indicates 5 local brokers with an average start price which is roughly in line with the current share price. And note that they all have buy underlined, buy recommendation. And finally, a reconciliation of a value of F.I.L.A. participation in euro, which is at about our EUR [ 370 ] million instead of our EUR 150 million considering that we have not evaluation market.

I will now finalize the presentation with a comment and also note the material [indiscernible] which I mentioned before. Now we are ready to take our questions for the Q&A section. Thanks so much.

[Operator]

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Niccolo Storer of Kepler.

[Niccolò Guido Storer, analyst]

I have a few. The first one is on your guidance, if you can tell us which assumptions you made for what concerns the FX contribution, given the big impact, big negative impact, you have had in Q1?

The second question is on working capital evolution, if you can tell us how much the EWM rollout has impacted working capital in Q1?

The third question is on net financial charges. I see that, compared to previous year, you have had an improvement of more than EUR 6 million. And I was wondering if this is entirely due to pure cash financial charges or if, in the line, you also have some noncash FX contribution or derivatives or whatever. And that's it for now.

[Cristian Nicoletti, executive]

Related to the guidance, I confirm that, in our budget, we have considered the Argentina peso devaluation. And at the moment, we are roughly the same exchange that we are considering at the end of 2024.

I think your -- the last question related to interest. Let me say that the impact, as you see properly, are 2 different impacts, interest, lower interest, and FX impact. The lower interest more or less are EUR 3 million, more or less, are mainly in Mexico and U.S.A. The main reason for this decline is, if you remember that, at the end of 2023, we had used the proceeds by DOMS [indiscernible] Proceeds of DOMS to repay part of the [ lower USC ] more or less for EUR 20 million. And on the other hand, we have closed the external credit line, expensive external credit line, in Mexico. That percentage is [ 60 ]%.

We are in line with our budget, with this decline, hoping that the next year -- next quarter, of course, we have further benefits from the decline of the interest rate for [ SOP ] and [indiscernible].

2024 will benefit also, the lower margin [indiscernible] more or less is 0.5% that we have seen at the end of June, the other one, 0.5% at the end of 2023. For the [ conference ], you remember the 1.8% or 1.8, sorry, leverage. Of course, this benefit will be full in this [ third ] quarter.

[Luca Pelosin, executive]

Yes, we expect the additional inventories at the end of March and this has to be absorbed during BTS. You know very well that the first quarter is very low sales while April, August is very strong due to the BTS. So we expect to realign the stock as we budget for 2024.

[Operator]

The next question is from Alessandro Cecchini from Equita.

[Alessandro Cecchini, analyst]

I have some questions. The first one actually is on the impact due to the SAP implementation, if you could elaborate a little bit more. How much was the sales that you lost in March? And in your opinion, how much you are recovering already in April?

My second question, that you basically modify the guidance for the year. You were expecting low single-digit growth. Now it's stable. But this is due to, I mean, ForEx or entirely due to the U.S.? Because if it's a one-off that -- I mean, it can be a recovery through the year. At the end, we should not have a negative impact for the year. So just if you clarify this.

My third question is you are working well. Europe -- Europe is slightly up. So I would like to have your view for the current quarter or for back-to-school in Europe in terms of turnover. And you worked very well on margins. So just if you can elaborate a little bit more about the drivers behind this?

And my last question is if you can elaborate a little bit more on the shareholder agreements that F.I.L.A. and DOMS -- between F.I.L.A. and DOMS, if you can provide us more color?

[Luca Pelosin, executive]

With regards to the impact of EWM, we have lost, as we have seen, [ 21 ]% sales in March. We [ actually ] recover some of these orders. Additional recovery is expected to happen in the next weeks. There will be part of this sales loss that will be permanent. At the moment, it's very difficult to estimate. But clearly, we gave priorities to customers who have needed our goods to supply the customers and more precise. Our business is made for education by 2 different kinds -- type of customers, the historical education customers who are working as historically, I mean, building inventories and using buffers to supply the consumer and the retailers who are more in line with sales. I mean, they don't have a lot of stock to manage their sales, net sales. So we gave priority to these type of customers, and we made the historical education customers offering more for replenishment.

The good news is the order portfolio for BTS to be very positive in this moment.

And if I can, if I may, I will reply also to your third question about Europe. There is a lot of positiveness in our customers about the BTS. As you know, all customers destocked a lot during 2023 and didn't rebuild a lot of the stock also during the first quarter of this year. But the order portfolio and the customer expectation for BTS is very positive. So for the U.S. market, there is a more scientific base in how customers are predicting sales. For BTS in Europe, it is more a sentiment of our customers. But as I said, the view is positive.

And returning to your second question, with this order portfolio and with the distribution center working as expected, some sales will be lost. It will be a one-off for 2024, but not all. We didn't supply during the month of March.

[Cristian Nicoletti, executive]

Okay. Thanks, Luca. Just to [ reiterate ], we have -- you can see the U.S.A, we have also another preview about the Europe. And we confirm the positive trend and previewed the sales at the end of April. This is important information that we can provide because, after the last year, we had negative impact. We have [ fourth ] period by period to improve the total sales in Europe. And we can confirm the continued growth in Central/South America, in particular in Mexico.

Related to preview at the end of 2024, we confirm stable because we are prudent about the information provided about the U.S.A. Consequently, the growth, they're expected grow decreasing partially offset what is an initial expectation for 2024. But we can confirm [indiscernible] that we confirm the results on EBITDA expected for 2024, the better margin, and in particular the consistency with [ interest ], the growth of net result, considering that today, again, we have not [ resulted ] DOMS and a strong cash generator, our expectation.

About the margin, the first quarter, as you mentioned, we have a good margin, the margin in all areas of world, thanks to the organization, better organization, reorganization, that we have provided [ USC ] and the part of Europe and the better mix, and in particular U.S.A. because, if you remember, the last year, we have applied the price increase more or less at the end of March. In 2024, we have the full impact of this increased price increase. And at the same time, the beginning value [ of the ] inventory lower than what we have at the end of 2022. Because, if you remember, in 2022, we had a very strong increase of energy at the other end. That will reduce, of course, for the next year, the margin, but not in 2024.

[Luca Pelosin, executive]

To reply to your last question, we are working with the other [ one's ] promoter on the shareholder agreement. One of the main targets is clearly to strengthen our industrial and commercial cooperation. At the moment, discussion is very positive, but have not [ realized ]. So we [indiscernible] market as soon as the shareholder agreement will be signed by both.

[Alessandro Cecchini, analyst]

So just 2 clarifications. So if I understood correctly, in the U.S., you lost year-on-year same ForEx, roughly EUR 50 million, EUR 60 million. This was more or less the impact of the [ sub ].

And then the second, if I understood you correctly, you expect a positive organic growth in Europe for the second quarter. So just if you could check these statements.

[Luca Pelosin, executive]

Sales, I confirm the number. As I said, we are confident to recover part of this loss. And for Europe, yes, we confirm what Cristian said.

[Cristian Nicoletti, executive]

I confirm that, in April, the information, positive to grow.

[Alessandro Cecchini, analyst]

Okay. And then maybe on the Niccolo question, maybe on the ForEx side, on the financial charges, minus EUR 3.9 million probably was -- Niccolo was asking the split between pure financial expenses and ForEx or hedging, something, not, I would say, recurrent, if you can provide it.

[Cristian Nicoletti, executive]

Okay. The details, let me give you the details. One second. And about it is the pure financial interest impact, you can see on the page of the cash flow that, if we analyze the net financial expenses, more or less, I said before are EUR 2.5 million lower interest [ is in ] the U.S.A., Mexico [indiscernible] reorganization, let me say [indiscernible] [ debt ] the end of 2023. And the other part are related to the FX conversion and the other one are related to mark-to-market and amortized costs that are [ on the end ] of the business cycle.

[Operator]

Thank you. Gentlemen, there are no more questions registered at this time. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.

[Luca Pelosin, executive]

Thank you, everyone, for joining us during this call. And we are available for further questions, if you have it. Otherwise, next call.

[Cristian Nicoletti, executive]

Bye. Goodbye, everybody.