Good morning, welcome, everyone. Thanks for joining us for this today's meeting and presentation. To start, I would like you to introduce our top management team. Starting from my right, the extreme right, Mr. Piero Frova, EVP of Marketing Worldwide for Stationery. Nicoletta Marsi, EVP for Fine Art Worldwide. Luca Pelosin, the CEO of Fila Group, with responsibility on organization, operation, supply chain, and systems. On my left, Cristian Nicoletti, CFO of the group. Francesco Maniglia, EVP of the Commercial Strategy in Europe and North American market. Francesca Cocco, our.
Investor Relations.
Investor Relations.
Investor Relations. As per organization, I would like to ask you to prepare all the Q&A session and to wait until the end of the presentation. We will open a dedicated session. Before giving the speech to my managers, I would like to spend two words about the plans that you have visited today. Here, F.I.L.A. was born here in Florence in 1920. Unfortunately, due to COVID in 2020, we could not celebrate the 100 years. This year we are going to celebrate 103 years since the birth. This plant is pretty new compared to the history of the company.
In fact, it was necessary to evolve and invest in a new and larger plant when in 1994, F.I.L.A. acquired Adica Pongo. Adica Pongo is very much known more by Italian people. Is known with the brand DAS, Pongo, Vividel. It was a company founded in Florence, in fact, it was a combination between two local companies, both of them struggling to survive. We thought it could make sense to acquire their business that was located in Florence. Unfortunately, in the historical plant of F.I.L.A., there was not enough space.
We found this area, and strategically, we have decided to dedicate this area to all the products that are capital intensive, as you probably could appreciate today during your visit. In the presentation, you will understand that the multiple production site we have around the world are mainly divided by capital intensive or labor intensive productions. For the moment, I stop here, and I don't know in the order who is starting. Piero?
I'm going to start.
Thank you.
Thank you very much for coming. As Massimo saying, I'm Piero. I've been working for the group for a long time, more than 25 years, along with Nicoletta, we are going to bring you through the marketing, communication, and product strategy of the group. Perfect. Sorry.
No.
Okay.
Okay.
Some basic facts. We try to be synthetic, clear. These are some basic facts of our market. Again, we will be at your disposal for any further question after the presentation. Mainly, this is the point. The market is, even it's a quite old answer, the market is still very fragmented. There are still many players. Even if we consider there are a few players, we have a barrier of EUR 300 million of revenue street. In the school business, there are at least 10 players above that soglia, and another more or less 100 below EUR 300 million. When talking about fine arts, there are only two players that are over EUR 50 million and about 30 below that. I said, this market is quite characterized by historical brands.
There are many brands, I guess you see some of them, but most of you are Italian, so when talking about Giotto, DAS, Tratto, Pongo, there are many brands that, not only in Italy, in other countries, are deeply rooted in the mind and the conscious of consumers because they grew up with brands. If you consider that we are one of the most recent companies, 100 year, but there are companies, like some of that we are in the portfolio, that have 500 year of history, Canson, Arches. We are talking about companies with a long history. Another important point is the significant presence of the growing presence of the private label in the list this year, and this is more or less happening in those markets that are dominated by the modern retail channels.
Good example is North America, first of all, France, U.K., and Germany. Less where the modern channel are less present. Considering the market with the exception of the COVID, that changed completely the dynamics, we consider the market to be quite resilient and quite stable comparing to the most exceptional factors or trends. The only, probably the most relevant point that can change the dynamics, or is very important and significantly, is the demographic dynamics. The birth rate from one side and the aging of the population, this is more or less happening on all countries. Just to give you an idea, if I can, there are still a lot of kids, don't misunderstand me.
All over in the world there are, if I consider kids from two to 14, there are 2.2 billion kids, still a long way to go. In some countries, there is a reduction of that. Another important fact is the distribution. Capillary distribution through all the channels and all the markets is essential. Francesco will be more clear about the importance of the distribution. Growth of the e-commerce. We can talk about e-commerce, it's clear that the growth of e-commerce is everywhere. The ubiquitous net is hitting everything. This, in our opinion, is important because in some way enlarge, widen the distribution, widen the concurrence, because there are more space on the digital than what can be displayed physically in the store, in the brick-and-mortar stores.
More companies can participate online than those that are physical present.
Now it's my turn?
No.
No, sorry.
It's not your turn yet.
Okay.
Okay, we are giving you the best estimation regarding the market dimension, considering that's not so easy to have complete a full elements. Based on estimation and some external sources, we consider the two business unit, school and office, around EUR 10 billion of revenues, and the fine arts around EUR 1 billion of revenues. To clarify, when talking about office, because this need, we are referring to products, consumable products, used office and school: pens, highlighters, and some such. nothing else that regards office printers, office, whatever is that. I'm talking about our own products. Pardon.
I'm Nicoletta. I've been working in the fine arts for a long time, with Maimeri first, and after the acquisition of Maimeri, I joined the F.I.L.A. Group. F.I.L.A. operates globally through a wide range of brands developed internally or acquired over the years according to the expansion strategy. We consider the brands a very strategic asset, and we are committed to strengthen the recognitions and values of the iconic brands. The portfolio includes brands that are historically rooted or globally, or that are iconic in the country of origins. As you can see here, we are showing a Giotto set of pencils that has been present and linking generations in Italy, as well as the Pochette Canson, that is an iconic product of the French students.
What makes F.I.L.A. unique, across it, is, we are the only global players that own a wide portfolio of brands, offering to consumers of all ages, from little children, from toddlers to professional artists, products covering all techniques to express their creativity. The Group also include a selection of products for office and industrial.
As Nicoletta was saying... Sorry, because I need some. We have a high portfolio of brands, more than 25, when discussing about fine arts, the brands we have are almost global brands, that are sold all over the main countries. When talking about school, we categorize the brands in three main clusters, geographical clusters. We consider the global brands, there are that have a very strong position in their market, but farther opportunity to grow. Good example could be, again, Giotto. Giotto is one of the most important brands sold in Europe, or sold in Asia, or sold in South America. Das, I guess you saw the Das. I don't know if you've seen the production of Das. Das is another global brand, and Lyra. Lyra is an important German brand that is considered global.
There are some continental regional brands that has a very strong presence locally, but again, in the reference market, some potential to grow. A couple of good examples, one is Ticonderoga. Ticonderoga is our best brands, or at least one of our best brand for pencils in USA. The other one, DOMS. DOMS is we still consider that continental, but is a one, today, one of the most important brand we have. We have some local brands that are rooted in specific countries, not sold elsewhere. I'll make an example. You see Didò? This morning, it was a good example for modeling in Italy, Tratto, where the writing instruments are mainly sold in Italy. There are others, for example, in Mexico. There are others in South America. That's the way we categorize the brand. Okay.
Sorry. In this slide, you can see the breakdown by the, let's say, product categories, the weight on sales of the main product categories. I'm talking about the school and office. We have three main categories that are the color and drawing, the school paper, and the writing. Color and drawing is the most important, is account 32% of the total revenues, and the main families are, of course, the color pencils that are about 10%, followed by the paints. We have the school paper that is more or less 27% of the total, and that is equally divided between school paper used at school and paper used for leisure and craft at all.
Last but not least, really important is the writing, that is 24%, but consider that inside the writing, we have the graphite pencil, that we are counting to the writing session, even if it can be used also for drawing. The pencils are 20% of the total, so the graphite are very important. We have another couple of families, the crafting, and the modeling that you just saw. Okay. Not only we saw the market, we saw a little bit of how the market is split, but now let's go a little bit on products. We talk about brands. We said brands are essential, but what makes the brands important? Products. Quality products.
We firmly believe that the quality, in investing in quality, in research and development on products is essential to keep the brand alive over time, for years, and to keep being in touch with our consumer. I take just three examples. I don't pretend to read everything, but just the three examples. Okay, pencils. Pencils, as you said, more or less, is 30% of our business. What makes a pencil different? What makes a pencil unique? Of course, the wood. Wood is essential. From... We say from the trunk to the pencil, we're respecting to the forest. Certification, quality protocols. I have example I don't want to show you, but sharpening, everything that is related to a pencil is essential. The lead.
The lead is the core of the pencil, of course, the pigments, the soften of the leads. At the same time, it has to be resistant, the way kids go that when they write. The lead is the core. The yield, the best pigments. Specific for formulation related to our target, what I'm trying to explain is saying we have pencils that are addressed to kids early childhood, have a very soft lead because it's easy for them. We have pencil for young adult or even professional, where the lead is much more dry? Because they are using different techniques, meaning that the quality is not necessarily the same quality. The important is the quality, the right quality for the right target. The look and feel, again, making a pencil is not difficult.
Making a good pencil, a nice pencil, meaning lacquering, imprinting, perfect imprinting, perfect lacquering, has to look nice, because when you buy a pencil, you are not just buying something that you use, you buy something that you love. Last but not least, this is true for all our products, I guess with Giovanni and the teams, you already see all compliance. I'm not going to repeat that, compliance to the main safety regulation around the world are essential. Markers. I think you saw the production of our markers. Very important point, inks, water-based or whatever, essential. The pigmentation, intense color, long-lasting, a good example. Cap-off resistant. It's normal, happens not only to kids, that you leave the cap, okay, and then it doesn't write any longer. That's not true, okay?
We have product that resists more than two weeks without a cap. This is extremely important. What is related to the nibs, the reservoir, meaning the nibs has to be perfect. There has to guarantee the reservoir is tampone, that in Italian. The perfect ink flow between the reservoir and the nib, in order not to lost any single drop of ink, it lasted till the end. Of course, we have all the safety regulation, ventilated cap. The plug is perfectly firm herein in order to avoid that the kids can take it off. Again, regulation. Plastic. I think they explained to you that we are already working on regenerated plastic, bio-based plastic, but we need to guarantee that this product doesn't dry out at all from the barrel.
The other important family are all the paints, watercolors. We have divide them in watercolors, paints, and finger paints. Again, talking mainly about with children, dense and rich color, super washable formulas, because moms are quite sensible to the fact that the kids can have spots on the side, so washable from hands and also from clothes. Compliance with the regulation, again, a huge number of colors. One point I want to mention is. That's why I have samples. I'm not pitching products to you. Sorry, but I would like to explain to you. Design. All these, I think maybe you saw something, all design, these are two good example of paints and watercolor. All design are made by us, meaning starting from the idea, starting to the drawing, patenting, producing, molding.
Not only the products, but the way we present the product. This is part of our DNA. Let's go to another topic, completely different, about the market shares. We saw brands, we saw the products, market share. Let me say in advance that not easy, again, to have a perfect vision of the market for a simple reason, that not all the main market research companies cover all markets or cover all categories. I'll make some good example. GfK is a German one, Nielsen and NPD are those that are used, but these are quite precisely in those markets where the modern channel is very present, but not at all in market, like Italy, for example, where there are no modern channel. The market share we are giving to you are estimated by us and the existing researches.
I give some examples. We consider when talking about you, or we consider when I say Giotto, I mean the school product, we have a market share between 18% and 20%. In France, with Pochette, that Nicoletta just showed to you, the market share is very relevant, is between 50% and 60%. Even in Spain, the market share of the paper, I'm talking about the school, is important. U.S., Ticonderoga, I just mentioned, 50%-55% of market share. Believe me, we sell a lot of pens in U.S. It's a very important market share. Again, in U.S., the construction paper, that is a business about EUR 50 million, we have a market share at about 25%-30%.
India, Massimo can be more precise than me, but India is a market share that we consider it between 25% and 30% of today market. We have Mexico. Mexico is a relevant country. They have many local brands. Example, that people know, Metrico, Vinci, Vividel, Mapita. Don't say anything to you, but for them, are important. We have a very strong presence in Mexico in terms of market share. Last point on market share is a private label, is a question. How much is the market share of the private label? It depends on the category, again, it depends on the products. Products that are really commodities have a higher market share, other that are maybe for children is less. We average consider the market share of the private label between 20% and 25%, 30%, roughly. Massimo, is correct?
Correct.
We will now have a look to the fine art. In these slides, you can see an overview of the fine art global strategy. We are the only group manufacturing the four main categories, means paper, color, including paints and pencils, brushes, and canvases. Quality-wise, the market is segmented in four main categories: professional, premium, student, and entry. Every brand is positioned with a different product assortment in every segment, we have a clear price positioning and channel strategy. See. As regards the weight on sales of the product categories, the bigger category for F.I.L.A. is the fine art paper, that has a weight of 62%, including a variety of different papers, where the watercolor family is the biggest, the most relevant in our portfolio.
Followed by fine art color, which has a 17% share, and the biggest family is acrylic, followed by oil and watercolor. In this slide, you can also see the estimated market size for every product category. Okay. It's a big challenge to explain you in few minutes what a quality for a fine art paper means and is, because we have many different types of paper, including watercolor, drawing, sketching, markers, and there is a different. There are different quality requirements for every paper type.
The main ingredients, you can see them in the slide, but what makes F.I.L.A. very different from the competitors, is the expertise of our three paper mills, Arches, St Cuthbert's, and Canson, that have more than 1,200 years of heritage in total, and in particular, Arches, that was founded in 1492, is the worldwide reference of professional watercolor paper, the dream of every artist.
Cotton and mold-made production are qualitative and distinctive elements of a watercolor paper, providing a very good stability and a high water absorption, and all other elements, like texture, marking, sizing, are elements that characterize the difference of every paper. As regards the fine art colors, here are the key features that determine the positioning and the quality of every product, every element can vary according to the target consumer we are referring to. An example is light fastness, that is a very important element for a professional artist, because it guarantees the conservation over the time....
It's less important for a student range. You will see big ranges, including a wide assortment of color in the professional ranges, whereas student ranges that are smaller, sold at one price, sometimes including imitations of expensive colors. As regards the fine art market shares, there are no official data provided by the main survey companies. The estimates are based on internal analysis from companies' aggregated data and from trade associations we are partnered. The biggest market share, above 50%, is on the fine art paper, including five major paper brands. The fine art brushes has a market share between 15% and 20%, including Princeton, and thanks to Princeton, that is a leading brand in the United States.
Fine art color, the market share is smaller, is between 10% and 15%. We have in the portfolio three brands that are market leader, like Maimeri in Italy, so the market share in Italy is much bigger, as well as Daler-Rowney in the U.K., and LUKAS in Germany. The market share of fine art pencils is still below 10%. It's the smaller category that we have in the portfolio. What are the key drivers of our brand and marketing strategy? Strengthen brand values as much as we can against competition and private label, increase the brand awareness through cross-selling and cross-marketing activities. Our strong brands are, in many cases, a big support to brands that are less known in some specific market.
It's thanks to the activities that we do, that we promote, the stronger brands are drivers of the weaker brands. We define a long-term brand product channel strategy, developing concepts that are easier to be sold, with the aim to support the sales team in the management of the complexity of our product portfolio. You will see in the next slides, some example of concepts in different markets.
Different market depends on the category or the market, or the channel, and the kind of stores. We can pass from this. For different stationery store, a small one, where we have a different in this. On the left. Sorry, on the right, you can see the mass market, the permanent offer, or the one during the back-to-school season that for the school products is essential. Other are specialized retail chains. The same, more or less, most important, the back-to-school is, of course, for the fine arts position.
Here you can see the complexity of a fine art retail store with a huge range of products, a lot of open stock, both of colors, of paint, and papers. In the bottom part of the slide, concepts that we have developed for non-specialized retail or mass market. Different ways of presenting our products, different selection of products, mainly in sets that are typically sold in these channels. Now, last but not least, in every country, we manage about 15,000 SKUs. Our strategy foresees to rationalize as much as possible our SKUs, reducing overlappings, discontinuing products that are not in line with the strategy, that have low margins or poor rotations.
Of course, we also develop, analyzing the markets, we develop products covering areas that are not or partially covered. Also, we work on quality upgrades, improving marginality of the products. An important element is to concentrate on sustainability as well, developing products that are more sustainable.
I think they're already shown something here in some markers and other projects that goes exactly in that direction.
Okay.
Okay. We saw the product, we saw the market, quite swiftly. Now we take you, some example of the communication strategy, because all of that then has to be addressed to our consumers. Okay? We start with a basic factor or the basic assumption that the relation between products for drawing, coloring, artist products starts when you are a child, and it's a long-lasting relation. Starts when you're a child and goes on. I was joking. I was counting how many of you have a pen in your hands. It's a little bit of a joke. I mean, somebody says this product is dead. There are many still using, all of us, as a pen or a pencil in their hands.
I saw you writing, we were discussing, remember yesterday, about the digital. Anyway, the point is that. Products start as a child and go for their life, and we cover with all products starting from e-early childhood to professional. What we want to do, through our marketing activities, our main aim is to create a long-lasting relationship with the between our brands and our consumer, is what is called the life journey. How we try to do that? We try to do that building experience, so creating value for our consumer. Where? Through all touch points. We have listed here some of the many touch points where we enter in contact with our consumer. All the education, when I say education, not necessarily in the school, but activities for education. The leisure, just spending time drawing, coloring, painting. The point of sale that.
Yes, digital is important, but trust us, point of sale are still quite present. The point of sales is another point where we can make activities, the profession, and the culture. All touch points are covered, or we try to cover all touch points with quality level actions, quality activity. Quality is essential for doing that. We make some examples. Phygital, this terrible word, is quite used now in the marketing. The phygital activities are what we consider activities proposed to different target, made partially digital, everything is digital, and partial physical. It's called digital. What we do, we try to inspire, to evoke inspiration, to kids and to our target. Just a couple of example. A nice video, What will you do with your 40,000 words?
It's a different way to sell a pencil, to promote pencil to children. The power of this pencil or whatever, is much bigger than the product itself. This is what's done to promote the pencil of the in schools. Nicoletta, would you like to continue?
Maybe I can tell you two words on the art education program. Is a program we run in the U.S. We work with six educators, who organize trainings to art schools and universities. We meet during the years about 3,000 students, we explain how to use the products, how they are made, and what are the main features.
This is another video, nice. We call Second Life Project, is a project that we are delivering in school to explain to kids how not to waste things. They are quite sensible and careful about that. This is we call upcycling this. Show you this. Here are example, no video. Don't worry. An example of the activities we do. We have digital activities, of course, and but we also have the Didò lab, is example of the where kids can play with the dough, and then we have the DAS market. This is a consumer show with a with the DAS.
We collaborate with influencers and ambassadors, who share the passion for our brands and products. They are seen as very important and reliable reference from the end users. We work with them online and offline. Ambassador really become a part of our, let's say, marketing team, because they are the ones talking to the consumer. An example of a video of an important ambassador for our digital fine art paper, a good photographer.
For me, photography as a medium was driven by a desire to tell stories and share my perspectives and experiences through my images, as a way to connect with others and evoke feelings and memories. I use my images to shed light on social and cultural issues, or to simply share my personal experiences. The art of photography can be used to communicate powerful messages, convey emotion, and create a sense of connection between the photographer and the viewer. As an Iranian Australian artist, I find my inspirations from various sources, including my cultural heritage, tradition, personal experiences, social and political issues, as well as global trends and movements in the art world. I often blend traditional techniques with contemporary styles to create unique and meaningful works of art.
We just add a few examples to show you a different voice, because every ambassador really represents a different product and brands.
We have also some important partnership, because a partner with important institutional, not only cultural partner, is essential for us. We have, for example, a couple of example here. I skip the video. With La Biennale Arte di Venezia, so quite relevant one, where we have thousands of kids coming. We have one important partnership with the Louvre, both as a patronage, but also with making activity with the kids and others, example, and we do that in all major countries. We have event and contest. We produce and we participate at event and contest or activities, both for trade, so for our customer, and both for consumer. I make an example of this is our last participation to the Creativeworld last year.
A contest, an art battle in London, where we sponsor giving free products to the winner. An artist that has to paint an artwork in a set time frame.
Last but not least, we have charity actions to sustain local communities, but not only them, and we partnership with very important. Some example, Fondazione Umberto Veronesi. We sustain the research. We have another really important in USA, with the Kids In Need Foundation. It's a foundation that support unfunded schools and teachers in order to donate products to those that they cannot afford. This is our journey. We try to be quite-
Synthetic.
Synthetic. I would like just to close everything, because I would like to show the last video. Not this one, because we talk about pencils, so I have a lot... Because I don't know how many of you have seen the production of pencil? Not so many.
No.
This is our production in China, Dixon Kushan.
Okay. Thank you very much.
Thank you.
Thank you. Now I pass the next turn is Francesco, correct? Francesco, we will enter more in the sales and distribution, linking of what we said, what in reality happens in the market. Thank you very much.
Thank you, Piero. Good morning. I am Francesco Maniglia, Group Chief Sales Officer. It's a pleasure for me to share with you the most significant highlight of year 2022 and first closing of year 2023 result. Also, two relevant commercial and strategic improvement, which will help us to achieve our goal in the next few years. I would like to provide you with an overview on the business performance on year 2022 and Q1, 2023. As you can see, in the first chart, in 2022, there has been an improvement in business growth compared to the 2021. We have already seen the different trends about the geographical areas, both for 2022 and first Q, 2023.
In particular, we have seen a significant growth in Asia and South America. Below, you can see the performance on the sales by geographical area. In particular, it provides a more detailed description of the before mentioned improvement in term of sales weight per each continent. North America, around 42%, Europe around 31%, Asia around 16%, South America, 10%. As you can see, Asia and South America growth compared to the 2021. About the Q1, as you can see in this chart, in Q1 2023, there has been an improvement in the business and organic growth compared with the Q1 2022. More specifically, we have seen a positive trend in Asia, in particular India, and Central and South America, in particular Mexico.
In the Q1, we've seen a rebound of North America. I would like also to underline that this general trend continues in the Q2. Below, you can see the performance of sales by geographical area. In particular, it provides more detailed description of before mentioned improvement in term of sales weight and for each continent. 41% North America, 29% Europe, 18% Asia, and 11% South America. In conclusion, as I said before, the contribution of different geographical areas is partially in line with the one that we have we've seen in the Q1, 2022. Before examining the channel's performance, I would like to explain the main elements which are driving our business in every geographical area. The main aspect about the 2022 geographical area sales trend. In Asia, demographic, consumer, and education growth.
In Middle East and South America, market share acquisition, thanks to our branch performance and dynamism. This because the dimension of our companies is smaller than the majority of our competitors. About North America, we estimate a 5% growth in line with the past year, due to the improvement of the service rate, fine art growth, and better performance from some very important key customers. In Europe, it's early to draw some conclusion about this Q1 loss compared to the prior year. This loss is the result of a delay in the back-to-school orders. We expect to recover this gap by the end of back-to-school period. We had this delay, in particular, in U.K., Italy, Finland, Nordic, and Spain, around -EUR 2.7 million.
In order to complete the overview in term of results, I would like to give you an highlight about the Q1 channel performance. In development versus 2022, except the e-commerce, which mainly comes from Amazon, and which represent about 85% of our business on this channel. In general, we expect the trend continues to be positive in every channel. Furthermore, I would like to highlight the channel on which we have major development expectations. In the course of this presentation, I will also point out how to the strategic and commercial change will impact on these channels. I would like to share with you the strategic channel to build out business growth: retailer, school and office supplier, and wholesaler. On following three specific channel, we expect in 2023, a growth rate between 2% and 4%.
I would like also to give you a parameter in term of channel gross margin, e-commerce and retail, around 52%, wholesalers, school supplier, and mass market, on average, 46%, 47%. Before moving on these two strategic points, I would like to provide you with a highlight on Amazon Europe. As in the USA, the dynamics are the same. Amazon relevant growth during the pandemic period. Amazon 2022 versus pre-pandemic, +94%. This growth confirm that we had a relevant change in term of e-commerce purchasing of our segment of products on the post-pandemic period. We are not able to clearly forecast the weight that Amazon will represent in the next year for F.I.L.A. In Europe, in term of revenue, because they actually manage the business through an algorithm.
This is a very big problem, that has created relevant Amazon overstock issues. We are working to better understand, to concrete, Europe Amazon annual average turnover in the next year. Amazon should be considered as a mere business opportunity, although not permanent. To provide you an order of magnitude, with Amazon, we have gross margin of about 52%. In order to complete the e-commerce overview, I would like to share the results of our market analysis. The other pure e-commerce players are very small compared to Amazon. Our e-commerce customers achieved medium results. Our competitors with e-commerce platform achieved low results. Fila already built the project. We consider this opportunity for the future. For the moment, we would like to avoid to compete to our customers.
Please let me now set out the before mentioned two strategic and commercial action, which will contribute to the achievement of our profitability and growth goals. We would like to enhance our unique brand portfolio through two strategic improvement aspect: Salesforce reorganization on the European perimeter, gap reduction between the product strategy put in place by the international marketing and the current execution. With regard to Salesforce organization on the European perimeter, this action will allow us to have a utmost focus on the most relevant business unit, Fine Art and School and Office. As to take better advantage of our brand portfolio in order to catch, in this way, every possible business opportunity. I would like to start with sales organization background. The strength of our brand portfolio is an asset that distinguish us from competition in every market.
On the other end, we need to manage an operative complexity. Each brand, each branch, manage on average four business units, 15 brands, and 50,000 SKUs, and four sales channels. In the meantime, marketing department already started with a relevant SKU simplification. Main business unit are Fine Art and School and Office. Both must be developed to their fullest potential. Last but not least, our branch sales force manage per entire portfolio. They focus on the historical business unit, missing some opportunities in other ones, excluding Dixon, USA, where we have already in place two specific sales force organizations. Sales organization, objective, and action. Main objective: enhance brand portfolio by focusing on each business unit, priority on Fine Art and School and Office. Create strong sales team competence in order to manage each business unit with the right approach.
Main actions: In order to create two specific sales force for both business unit, we need to make a market assessment in order to define our priority per business unit in each country, through an analysis about business unit market share and potential growth that will help us to define the necessary investment in term of people. Scope, European branch, time and timing assessment 2023. Test in the selected branch, 2024. Rollout in 2025. Main expected results: efficient brand portfolio management, close the gap in the market in the weakest business unit versus potential improvement in the market share, and drive incremental sales and margins in every channel. With regard to the second strategic aspect, the issue here is how to better support our sales force in order to be productive in accordance with the marketing product strategy.
The main objective will be reduction of the current gap between the product strategy and the execution. In order to achieve this objective, we need to develop a tool that will guide our sales force to sell the most performing assortment, in accordance with the marketing global strategy. Product strategy execution background. We are in a very competitive environment. Customers are focusing more and more on price, very often leaving aside the brand awareness, quality, and service. Despite everything, we had already increased the price to all our customers, excluding Amazon Europe. Shipment blocked for about two months. I expect, and I hope, to unlock the Amazon shipment in June in order to recover the estimated delay around EUR an half million. We are choosing different battlefield than the price in order to ensure our business and our profitability.
We want to improve versus competition in order to build a solid relationship with our customer, our key account from seller to consultant, based on quality and service. Currently, our execution is too far from our product strategy. Therefore, we must cover this gap. Starting point. Connect marketing product strategy to channels and customer in order to improve our execution. Product strategy execution through the new tools, Salesforce, objectives and action, and expected result. Main objectives: Reduce the gap between the product strategy and the current execution, and improve our channel distribution, in particular, retail and fine art chain for the fine art business unit, mass market, wholesaler, and school supplier on the school business unit. Move customer focus from price to product quality, sell out performance, and inventories re-reduction. Improve sales growth and profitability, driving product mix.
Improve sales team visit in term of efficiency, in order to spend more time to focus on new prospects. Main actions. Salesforce product strategy, the new tool, we will support our commercial consultant team in the following three stages: customer visit planning, visit preparation, and the execution. Salesware, that will allow us to simplify customer management, reducing the gap from the product strategy and the current execution. Prepare sales visit and monitoring execution and result, based on the trend business analysis and the selected KPIs. KPIs definition that allow us to manage the customer according to the group strategy and goals. Sales team involvement in a training session, rollout in the select and European branch, February 2024, go live in Europe, scope end of 2024. Main expected results. Acceleration growth estimate, extra +5% on the already existing expected growth within the European perimeter.
Sales key account, deep preparation and better customer management, the transformation for sales to consultant. Customer visit efficiency and effective on negotiation, on top opportunities, on the selected KPIs, and visit timing reduction by 30%, with positive effect on route compliance. Improve our consumer partnership due to the loyalty, the acceleration of the sellout, and inventory reduction. Before concluding this presentation, I would like to share with you the impact that see two relevant strategic change will have on the sales channel with higher growth potential. How the new strategy will impact on the potential channels? Retailer and fine art chain, reduction of the gap between the product strategy and the execution, improvement of customer sell-out and inventory optimization, 30% improvement of our time visit, best focus, build a solid customer relationship, and acquisition of new customers....
about school and office supplier and wholesaler, through the product strategy tool, we will guide them per channel and customer to improve the assortment for their customer and order the acceleration, the sell-out, and reduce the inventory. With this new approach, we will better control our business through the wholesaler, reducing the gap of our product strategy. I would like to underline a new channel that will represent a very relevant opportunity. AIS, Leroy Merlin, Brico Dépôt, Bauhaus, and so on. New potential channel through the product strategy tool, we give them the most performing assortment. We started in Italy with excellent result in term of sell-out. We have already started to create a synergy in order to push the same business in Europe, in order to develop this new business opportunity.
The next country will be Spain. In conclusion, I would like to underline that our goals and change will be able to differentiate us from our competitors. This allow us to grow in accordance with both objective and profitability. Thank you for your attention. I give the floor to Luca Pelosin in order to proceed with the other subject of the day.
Good morning, everyone. Luca Pelosin, in F.I.L.A. for the last 23 years, I have seen all the transformation of the group. I will not go through the entire presentation because it's late and because I see some of you are already tired, I will not try to annoy you. I will give you some highlights. I start from production. We consider ourself different from our competitors and unique, and actually we are really unique in our sector for a simple reason. We produce everything we offer to our customers thanks to our 22 plants around the world, and our model is to be vertically integrated. It means we start from a single raw material to have a finished product.
We have seen the example of pencils, but this is identical for any of our product. We don't trade nothing. The traded product are less a single digit in terms of value for the group. It means, we produce everything in-house. Why we have this business model canvas? We want to control cost from one side, so we can decide what cost should have each single product relating to the required quality by our marketing team. Having the full control of production, we can achieve this target. We have 22 production plants around the world. Basically, our plants are specialized to make some product.
For instance, you have seen modelling materials here, DAS, the is a perfect example we produce here for the entire group. For sure, we have backup in other plants for many key product we offer to our customers to offset the potential issues or constraints which could come in a specific country. There is one exception which is represented by DOMS India, where we have the largest plant in the group, and where we produce all the products that we produce in all the other plants. For a simple reason, we consider ourself to be successful in India because we offer European or Western quality with the Indian cost.
It is a really important local presence in terms of manufacturing because we can fit the desired target price and our market share growing. The other major plants are located in Mexico. Mexico is producing basically for local sales and for the U.S. market. We have two important plants also in United States, where we basically convert school and fine art paper. The three mills in Europe, one in U.K., two in France, where we have also converted department, a very nice plant, where we produce chalks, which is a relevant product in terms at least of volumes and marginality. The other is located in U.K., and the plant we have here in Florence. We sell our products thanks to our local distribution centers.
We cover the 33 branches, thanks, cover the market in terms of delivering customers throughout our distribution centers. This is important because I show you the complexity we have to manage supply chain-wise, making everything in our plants and distributing it thanks to our distribution centers. We operate directly with our distribution center. There is only one exception, which is represented by Italy. For historical reason, we have a partnership with DHL since 1993, and then there we outsource our logistic and distribution activities. Focus should be dedicated to the Annone hub. We opened the new distribution center in Annone in 2019. We moved there all the products we are offering to European customers.
From our hub, we are distributing directly the customers in Spain, Portugal, France, Benelux, Germany, and Italy Fine Art, because the school, as I said, is managed by DHL. It is an automatic flow. Each subsidiary is getting the order from the customers. The hub is delivering the customers directly, and automatically we have the intercompany invoice and the invoice from the subsidiary to the customer. We historically invested around EUR 20 million per year. For the next three years, we intend to invest more. A big part of the additional CapEx will be assigned to India to sustain the forecasted growth for the next years. We are going to double our plant beginning next year.
re intended to make updated the equipments, to look efficiency, to produce new products, to be more sustainable. These are the main key drivers. Part of the CapEx have been assigned to our IT roadmap. Probably some of you already know, we launched a DNA project in 2016, Drawing New Attitude. Part of the project was related to have a group ERP to better control and drive the business. Since 2016, we implemented SAP and all the related tools in 11 subsidiaries. The next one will be Mexico, is the biggest major subsidiary who is still missing the SAP GoLive.
Since 2016, we invested around EUR 15 million in this project, in line with our original estimation. In the last two years, inflation was a big issue for all the industries. One of our main raw material used in the group is pulp, short and long fibers. Not just because we move these fibers into paper, thanks to our mills, but also because we buy all the packaging of our product that are derivative of pulps. As you can see in this graph, during COVID time, the price went down significantly. In 2021, the cost reached the pre-COVID levels, but in 2022, as all the other commodities and utilities, price went up really a lot.
The peak was in October last year. Just to give you a number, in 2022, the average purchasing price was 37% more than the average of the previous year. The same trend is, was, and is for U.S., because at the end, all the suppliers are international suppliers located mainly in Brazil and then after the Europe. The softwood cost trend was really similar to the one we have seen for Europe. The same trend happened for all the other commodities. Just one example you have seen here, we producing markets. We start from a polypropylene, and pre-COVID, the average price was around EUR 1.25. In 2022, we experienced to be over EUR 2, challenging to find the materials to be supplied by our vendors.
The price start going down at the end of last year, we are now comparable to the pre-COVID price. Another big part of our cost, because we have 22 plants around the world, and we have 33 distribution center, or a little bit less, in our 33 branches, is related to the inbound freight. You can see here a graph for the cost of containers from the different sources, delivered to U.S. I represented U.S. because manage to import more than 700 containers a year, this is a relevant cost for us. In 2022, from Shanghai, for instance, we reached a peak of more than $21,000 per container, while the pre-COVID price was below $4,000.
Luckily, the cost went down to the pre-COVID level already in the second part of last year. Unfortunately, due to the BTS back-to-school peak, the first semester is the period where we import more, so we didn't take a lot of benefit from last year cost reduction, while this year costs are much lower compared to 2022. Similar trend, you can see a similar trend from the other countries. In average, we return to the pre-COVID level. Still, we are missing to see this trend for the shipments from Europe to U.S. The excuse is related to the war, but I don't know if it is true or not. Last year, I know working capital is a relevant element for you. Last year, we decided to overstock-
For us.
For us, clearly. Last year, we decided to overstock our distribution center because in the previous two years, we experienced a lot of issues in serving our customers, and in many cases, we have been obliged to have to plan a shipment with incremental inbound cost. Not knowing what COVID, or inflation, or whatever could happen, could give in 2023, we decided to be on stock in advance compared to our historical trend. The inventory level, part of the net working capital, relevant part of the net working capital, was worse than our original budget. For this year, one of the main priority is to improve the, as much as possible, the net working capital and to have the inventories well managed.
Piero, Nicoletta, and Francesco already told you about our strategy to have a rationalization of our offer to not spread throughout 1,000 SKUs, our offer, and the final effect is to have additional stock in the warehouse. There are at other levels, we have already switched on. I'm referring to a better forecast. I said we produce everything. We produced in 22 plants. If the sales forecast is not as much as possible accurate, the risk is to have the inventories going up. We have a big attention on how each subsidiary is forecasting sales.
For this year, we officially implemented a quarterly meeting for, with each subsidiary, where we analyze the final consensus demand, which in reality is the pre-closing of the year, to understand if our view of sales is in line with the actual, and take all the corrective actions to have the inventory not growing or to be better managed. On the other side, we are fine-tuning all the MRP setting, because COVID brought sales completely different by product family or product category compared to the history. When we want to serve good our customers, to be on stock, safety stock, planning delivery time, I don't annoy you with all these elements, but the fine-tuning is part of the actions so we have taken to have the inventories going down.
In 2022, net working capital was 39.6%. We expect to have a very good improvement in 2023, it will be just the start. Focused in North America, because as you know, Dixon U.S. was the subsidiary who more suffered from the strong and fast inflation. Also because it is not easier as it is for the other countries to move customers, the cost increase, having in front of us strong retailers like Amazon, Walmart, and all the others. Our target is to bring back the subsidiary to the historical levels of profitability. We already made effective the separation between school and fine art.
Also physical. We have today structure and offices, plants, and distribution centers, which are dedicated for each business unit, because customers are different, and the customers are expecting to have a different treatment, I can say. We have now in place a VP and VP dedicated to each single subsidiary. We launched a different initiative, thanks to our more commitment with this subsidiary. We are taking the lead of the company. When I say we, it means me and all of my colleague officers, to drive the company and to have the company returning to the historical level of profitabilities. I said we have a very long action plan, more than 70 items.
We define targets, commitments, culture of working with more the, let's say, European style. We are now implementing this strategy. Part of the rationalization is related to brands. You can see here how many brands we have been managed, also because Pacon was coming from an M&A acquisition path, buying other companies in U.S. For more than 20-25 brands, the aim is to end with not more than 10 brands. Also, net working capital is very important for U.S.
What we already did, we already reduced the distribution center from four to three, and we have a target to be more efficient within the end of the year with a dedicated project. Customer simplification, offer simplification, a real make to order way to manage the private label we produce for customers. We launched a different initiative. One of the most important to return back to the historical level or better of profitability is the price excellence intended to have a better margin. For U.S. team, having product sold with a low margin was a part of the business.
It is not for us, so we challenging them, to have any product below a certain threshold of margin, to discontinue the product or to increase price. I try to be as fast as possible. Thanks.
Okay. Thanks, Luca. I am Cristian Nicoletti, Group CFO. We can analyze the Q1 2023 results. The main KPI and the financial performance, considering that we already discussed the share that is result during the previous meeting. The adjusted core business sales were approximately EUR 180 million, +7.6% in comparison with Q1 2022. Asia, Middle South America, and North America guided this performance, especially highlighting a store growth in India, +35.5% comparison to Q1 2022. The adjusted EBITDA was of EUR 24.3 million, +7.4% in comparison to Q1 2022, with a positive performance in Asia, Middle South America, and North America.
Adjusted EBITDA equal margin, equal to 13.6%, almost in line with Q1 2022, is better than the foresee, mainly thanks to the positive effect generated by sales price increase. The adjusted free cash flow to equity at - EUR 55.5 million, instead of -EUR 29.6 million in Q1 2022, show another absorption in CapEx for approximate EUR 10 million related to India for supporting its growth, and higher financial expenses for approx of EUR 4 million and temporary negative effect on the net working capital. About the free cash flow, we can confirm between EUR 40 million and EUR 50 million of free cash flow to equity.
We attend an improvement on net working capital, mainly to the inventory stock decrease, despite an increase of CapEx substantially to support the growth in India, to mitigate as much possible the continuous increase of variable interest rates. Actually, we have completed the European cash pooling project that have involved Italy, Spain, France, and Germany company. These company are in cash pooling structure, led by F.I.L.A. headquarter. The cash pooling permits to F.I.L.A. to decrease the bank expenses and to generate the efficiency in cash availability reduction, the expensive credit line, and obtaining better bank condition. The financial structure of our senior facility agreement give us the opportunity to use the central revolving credit line to be used for financing the F.I.L.A. companies, saving the higher local interest rate.
Relating to debt structure, I want to highlight that the 35% on debt variable is under pressure of actually trend of interest rate. The Group work each days to try to minimize this impact using the source, financial source at quarter level. These are the main target of the Group to work on this main KPI. As much possible, short. Change order.
Me, sorry. We should have a dedicated section talking about sustainability, but due to time constraints, again, I will try to be fast and to give you some highlights. F.I.L.A. Group always operated in a sustainable way. For us, environment, people, communities, products, were part of our targets to be the best in class in this regard. Many consultants told us that we didn't market in a good way whatever we have done in the last years. We decided to be a little bit more effective in terms of way we present ourselves in terms of a sustainable group. We launched or we approved in 2020 the 5-year strategic plan. Big part of the strategic plan is related to the sustainability plan.
We make reference to eight pillars, which are linked to all the ESG goals. We have a sustainability action plan for all the related pillars. We have a full commitment of the group to sustainability targets. You know very much better than me, that people are one of the main pillar and one of the main asset we have on the group. As I said, part of the action we took and we have in our sustainability plan is related to pillar. I already said that we always work in a sustainability way, we try to not have waste and to recycle internally whatever possible.
You visited this plant this morning, for instance, for the plastic raw materials, we use all the scraps. I'm not talking about biodegradable or polypropylene coming from renewable resources. In case we are not able to reuse internally, we sell our scraps to some customers who made this thing for us. Last but not least, I forgot to mention, the commitment is reinforced by the fact that we have, we assign to the risk committee, the sustainability responsibilities. We have a steering committee made by some F.I.L.A. office at quarter level, and we implemented local committees in all the major subsidiary to have a track of all the action foreseen in the sustainability plan directly to each subsidiary.
In the last, not financial, information, we disclose better our sustainability targets for the next year. I think you already know this target, because this is, this is a public information. I recap very, very quick. Our aim is to reduce the CO2 emission by 2027, by 50%. Also considering that we are not considered energy group because our consumption are not relevant. We also have the target to reduce by 20%, the water consumption, mainly in our mills, but not just there. The plan is to have all the plants in the group, certified ISO 14001 environment and ISO 45001 safety.
We plan to increase in the next couple of years by 10% the training hours to our employees. Considering the entire supply chain is more and more a focus also from the authorities, we aim to extend the code of conduct to our suppliers and the procurement by 2024 to all the vendors who have, let's say.
A turnover with us over a very low threshold. I was very fast. Thank you.
Yes, sir.
Before moving to the Q&A session, I would like to summarize a bit what we just heard in our presentation. I think we had the chance recently to meet, I'm not going to give you any extraordinary news. It's important, I mean, with the explanation that the team has given to you, I think you better understand why we are consistent and positive on the 2023 outlook. The outlook say that we do expect a single, a mid-single digit growth, but more than a proportional growth in EBITDA. The reason you have found that using the presentation, the cost trend is really going down. We have implemented, as expected, the price increase that we have announced several time last year.
The efficiency, the diversification we have in the market. It's true that we have competition from private label, but private label is targeting undiversified production, me-too product, low prices. We are targeting differentiation. We have established a strong communication with our consumer all around the world, and we can do this, and we can guarantee this long term, thanks to our fully controlled supply chain. This guarantee us innovation and the marketing mix advantage that several time I mentioned, but today maybe you have a better idea why this competitive advantage is sustainable in long term. I think we have mentioned it about cash flow generation. I think this is important because we are in May, we do confirm that the cash generation expected remain between EUR 40 million-EUR 50 million.
Why we do confirm? First of all, after five months, we start seeing consistency in our expectations. Number 2, the trend of cost is helping us. In the beginning of the year, it was difficult to identify really the trend, not in the magnitude, but in the period. We could expect the period is helping us because this is happening during back to school, we will entrap the majority of the cost reduction. We are going to guarantee this good cash generation, despite we are going to substantially increase the CapEx. This is extremely important. This is not going to reduce the cash generation, but we are going to keep this healthy cash generation to further reduce our leverage and guarantee a strong growth, especially in Indian market.
As we were talking about India, I would like to repeat what I already said. The market in the next five years is expected to grow on average, the market in India, on average by 50%, while our company is expected to go in the area of 100% to 120%, 130%. As it has happened in the last 10 years, we are lucky because we are working in a very dynamic market, but we are definitely beating the numbers that the market is generating. We are beating competition, and the company is today probably a leader, an undisputed leader, at least in terms of innovation and profitability. Maybe not yet in terms of turnover, but this will come soon.
Thanks to the large investment, we have approved. I think there is Brenda.
Do you want to go deeper on the Indian?
Yeah, we are, as you all probably have understood, we are analyzing different opportunities in Indian market. India, as you all know, has been discovered by the financial community just recently, but fortunately, we are in India now for 12 years, so we were there. We entered in India in 2011. We have always been extremely positive about the country, despite we have to manage the problems in during COVID period, that was very poorly managed by the local government. India is giving us a huge opportunity, but is going to need a substantial amount of financing. Our strategic idea is to remain involved in the country, keeping the governance and the strategic direction for the next decades.
We have decided to allow the company to become independent from F.I.L.A. Group in terms of financial resources, because this company will absorb a huge amount of resources. While in F.I.L.A., we have two different priorities: number one, to reduce the leverage; number two, sooner than later, restart our M&A opportunities. During the presentation, you had the chance to see how fragmented is our market. Very briefly, I can tell you that the market situation is quickly evolving in our favor. The reason is very simple: F.I.L.A. is, in fact, an Italian company from a legal entity point of view, but in reality, we do more than 70% of our turnover in North America, Mexico, and India. This, I think, we did a great job.
We have been also lucky, really. U.S., Mexico, and India are really the market where you have to be in this moment in our fine art and stationery business. We compete with large competitors, some of them larger than us, that are... Their market are more focused to in Europe or limited to North American market. This will quickly worsen their profitability and their cash generation. We do expect unique opportunities in the next two, three years.
That's why after we managed positively the COVID period and the so-called the inflation period that characterized 2022, I think we need now to start thinking strategically and to be ready in two, three years to become again, protagonist of the next M&A session that again will come sooner than later. I think that you have heard a lot from this 1-hour-and-a-half presentation. I would like to move to Q&A session, if any, of course, and we are available for your questions. Thank you.
Someone has to start, I'll start with two questions, actually. Going back to the first presentations, I wonder if you could give us a bit more detail about the SKU reduction. Do you have a target? I think you said there are 15,000 SKUs in total. I'm not sure if that was fine art and school and office, but, I mean, where do you want to get to? Does it concern one brand or business area more than another? Is it just a general housekeeping that you haven't done for a while? If I ask the 2nd question-
Yes.
A t the same time. My second question would be, I wonder if you could sort of quantify the marketing budget that you spend every year and how you allocate it, what priority you give to the different brands. I mean, does half of it go on the global brands? Just a little bit more detail on how you spend your money. Thanks.
Okay. I answer.
No, we have. What we said is that we manage 15,000 SKUs per country. It doesn't mean that it is the number of total SKUs that we have in the group, because there are specific SKUs and specific brands that are local. In fact, every subsidiary has an average of 15,000 SKUs, including fine art and school, and the school and office SKUs. If I put them all in total, I should say that we are above 60,000 in total. We rationalize mainly all the overlappings. I can tell you what happened in the fine art. All brands had products that were produced and traded items. All the traded items have been almost discontinued, and we focused on the original DNA of the brands.
To give you some examples, we have Maimeri, Daler-Rowney, and LUKAS, three main color brands, where Daler-Rowney was already producing all categories of products. When Maimeri and LUKAS had in the portfolio in the past, brushes, painting knives, canvases, these were all discontinued, and we selected one brand that was.
In the origin, already manufacturing the four categories. This was a way of rationalizing under one main brand. We tried to reinforce the values of every brand. Maimeri is for color, focused on color. If there is any development, is on color. Daler-Rowney covers all segments, so we have, as you have seen, a complete portfolio covering the four categories of fine art products. I don't know if I replied to your question, but it's a way. Another example could be with the acquisition of Arches, some of the Canson top quality products that were, let's say, discontinued in favor of the integration of Arches in the portfolio of brands. Okay?
For the school it's a little bit different, but the concept is the same. We don't have a so huge range, because when you go to fine arts, just things about the spare colors, single colors, where you have at least 100 and more than single items. When going to school, we don't have this depth, so we are removing what is not in reality moving well or that can be is not interesting, and reducing line that we are not no longer interesting at the group level, and try to concentrate on the real important items. One point essential, Luca can confirm, you have seen the production. Take this marker, for example. This marker, we sell the same in USA, and the brand is a USA brand.
Which means that we don't change almost anything but the print and the box. Also this is a SKU rationalization, try to avoid, to multiply then duplicate what we have. This could be a little bit different, Luca show very well the situation of Pacon. You have seen we have a full array of brands today, sub-brands, that came from acquisition, and we try to move them to 10 fundamental brands. In this case, we are going to reduce seriously what I said. There are product that honestly won't have a long life. Coming to the budget of marketing, Okay, no, more or less. More or less, the total spending on our marketing in % is 2.5%-3%. Okay?
Yes.
We include in that all activities directed to consumer and trade. Of course, we are investing more and more on global brands, and brands that has a potential of growth. We do so both above the line activities, much more and more digital, because as you know, the digital has really changed. The best consider that on the total spending, the digital today in terms of advertising account, more than 50% of the total spending. We are moving to digital for two simple reason: cost less, not so as it was at the very beginning, but cost less, and this can be much more focused on your target.
Digital activities, that takes a social, digital, all in general, but also the so-called below the line activities, which you saw the show. We are investing a lot still in the trade because we believe our customer are still very important for us to reach the consumer. We do display, we do activities on the point of sales, all of that. More or less, the... Janice, depends on the year, 2.5%, 3% of the total investment. A part of any capital related, of course, to the marketing-
Completely.
These are not included in that.
We are discussing about OpEx cost.
OpEx, of course.
It's important also to highlight that the main area where we have this budget, this is Italy, considering that we have the quarter and CFO that organize the marketing and define the line and the strategy that we follow. The other parties, USA, considering the volume of the sales and in Canson, France. Our three main area where is concentrated our budget, discussing about topics. Change during the last three years, considering that we come from a period of Covid, that our activity is limited, of course, considering that we are recovering. In these years, we are resilient about this activity, considering that we are trying to achieve our target.
I have two questions. The first one is, taking into considerations the families of products you have, is it possible to produce a ranking by profitability from top to the bottom, giving or not giving the detailed percentage of profitability, but just the list from top to bottom? And if you believe that the ranking you will produce is similar for your competitor, or if there is some peculiarity? The second question is, if it is possible to know what is the percentage of the business in U.S. which is done through private label business?
Question is easier, in private label in U.S., is around 10%. Probably going down in the near future because since we took over directly the execution of the business plan, we have put some rigid rules that our former American management did not respect. We are going either to improve working capital and profitability. We think we're going to reduce a little bit the percentage of private label in our turnover, starting already from 2023. For the first question, don't ask me to give you specific numbers, but I will be very close to the reality. The most profitable business for us is still pencils, and this is valid also for our competition.
What you don't know, because you need to be an expert of the business, is that the real manufacturer of pencils that are at the end, the real leader in this world, are very few. Despite you see a huge number of brands that are selling pencils, majority of them are just trading pencils. The real strong leader in the world are today, probably number one in the world is F.I.L.A., followed by the German Faber-Castell, and also for them, pencils is a top profitable product, followed by a Chinese manufacturer. Immediately after pencils, we have paper.
Paper for us, we cover niches, because you know that the profitability of paper decline quickly the more you move towards banalization and mass consumer, but we are not definitely in that, in that area, and we are not even competitive in that area, so we couldn't, very simply. Third is markers, and color markers in terms of profitability, is still important. Then going down, you find modeling material. This is very much similar to when you analyze competitor that are manufacturers. So the complication from an external analyst is to differentiate, because if you, if you look at a company and a brand, you don't understand why, for example, F.I.L.A. is substantially more profitable than direct competition. The answer is the supply chain.
Our supply chain is completely controlled by us, and, but this is a little bit of a secret or a strategy that we decided in mid-nineties to grow, to become international, and to grow only through fully controlled supply chain. While I would say majority, if not all of our competitors, decided to copy our business model, but they tried the simplest way, which means outsource, go in China, put an umbrella brand, and answer to our proposal quickly. The problem is that this approach is not defendable in long term, because what happened is that all the Chinese, Indian manufacturer, and Indonesian manufacturer, as soon as they open a market through a brand, they immediately start to supply the private label exactly the same product.
This is extremely important to understand our business, because we produce unique products with unique features. What is very important to maintain the success is to give to the consumer a measurable advantage. A measurable, what does it mean? It means that you should respond to the request of the consumer every day. When we wake up, we have our subsidiary in Australia, and then we wake up in Europe, and then we wake up in United States. Our marketing team, our sales team, talk with our consumer via digital, via physical meeting, with the fair, we are meeting teachers, and we have to respond to their request and their expectation, giving value to our products.
One thing is to develop internally a product, launch, enter in the market, have a diversification from the private label, for example, and get a unique price advantage compared to the competition. Different is you have to respond to a request, you go in China, you ask a manufacturer to produce what you want, and then after six months, you find this product everywhere in the world, and this banalize the differentiation. This is the main reason why F.I.L.A. has guaranteed a substantial better profitability than the competition. This is the reason why we have suffered from COVID, and not only COVID, from pre-COVID, because we made the largest acquisition in North America, but we didn't have time to restructure the company. We enter in COVID, and after COVID, we enter the inflation.
For these external elements, it was very difficult for us to manage properly the supply chain and the working capital. At the end, we have decided, even if the market does not like this, we prefer to keep the service, to keep our margin and our differentiation, and when the situation will stabilize, which happens in 2023, by the way, so we will enjoy a very good year this year, we can start working, looking for a better efficiency. It was a very unstable environment where we have worked in these three, four years, and our approach is very much often targeting long term. Many time I understand that we are analyzed on a quarterly basis. Unfortunately, this is not our mentality, because we want to protect consumers that we talk since centuries. Some companies have centuries, and they are extremely reliable.
Loyal to our brands and the performance of our product, and this only can explain why we have a substantial better performance. I can anticipate to you that 2023 will be a milestone in the future, because analyzing the presence in the market, we are going to see a, really, a differentiation in performance between Fila and our competitors. This will speed up the strategy that in the future we're going to implement, but we will have the opportunity to discuss further. 2023 will be a key year for us, because we will be able to improve working capital, to generate cash, to improve profitability, and we are exposed to the best market in the world.
In this moment, Mexico is overperforming, India is overperforming, United States probably will be the most important market in the world for us in terms of growth this year, even better than India. I know that everybody is waiting for some news in India that will come soon, and it will be very important news for F.I.L.A., but still, the best market in the world in 2023 will be United States. Alessandro?
Thank you. Immediately, about your last point, U.S., the best performing country this year, I presume that you are talking about EBITDA rather than the sales?
Cash generation.
Cash generation. My first question is about inventories. We know that all the key clients are wanting to reduce inventories. You want to reduce inventories, how you are so confident about the fact that you can reduce inventories this year and likely next years? My second question is that about India, if you can share with us some timeline on your process, you are targeting about a 14% of EBITDA margin. I would like to better understand the starting point of this year, 2022, in terms of margins. Finally, my last question is about still North America, when we expect to have the first tangible benefits in term of margins.
If I am not wrong, last year, you lost 300 basis points against the average that you had in the past. Just to have a timeline on this, your expectation in the U.S. Thank you.
If it is okay, as Luca is in charge of the United States since January, I ask him to answer, and then maybe I will integrate with some colors, if you like.
Okay. In terms of inventories, as I already said, we overstock our distribution center. The inventory reduction is coming from better management of sales forecast first. The very deep analysis on private label, we have the aim to move really private label to a true make to order and not to stock products that are branded for our customers. We are also targeting. We have seen there is a brand rationalization, we have a specific project related to get rid of our inventories for all the products which will be discontinued. With these three actions, the aim, as I said, is to have the U.S. inventories going down.
On the other side, we should remember, in 2022, inventories went up, not just in terms of volumes, but also in terms of value, because with the strong inflation, the same volume have a higher value. We have seen this year, U.S. has getting benefits for not more than also from cost, but from inbound freight cost, which in any case, are part of the cost of a product. This is in terms of bread. It is true, customers are destocking. We experienced daily orders to be over the expectations, because we believe customers already reach a stock level which cannot be lower than today. We are in.
Yeah, they started in September 2022 already.
Yes.
So-
We have a daily contact with customers, to better understand their expectation, and to be able to deliver what they will require, required for the back to school, without having the inventories going up, because we don't know what they would like to buy. It is not easy, but it's an exercise, we are doing. You remember the other questions?
Yeah.
Margin improvements, I believe Massimo already gave you this reply in other meetings. The last price increase entry in place at the beginning of this year. As I said before, 2024, 2022 was a very poor year in terms of profitability for U.S., despite we pushed our managers there to implement price increase in during 20 to 2022, they entered in place later and not at the level that was required. We realized clearly the needs to bring back the price at the level which could give us the profitability we want. Starting from 2023, January, we implemented price increases.
There are a few exceptions, related to, some contacts with some customers, where we have a new planogram entering place in the middle of the year or so. By the way, we are still now in negotiation with, some customers for all the products which are below a certain threshold of, profitability. We are asking mainly for private label, but not just for private label. We are fighting to have the prices at the level we want, otherwise we stop selling, we stop delivering the product. We expect, the, subsidiary to return performing at the, let's say, historical level. A big, recover will happen in 2023 for all what we said, but-
Don't forget.
It's still at the start.
Don't forget, I already mentioned this in your... when we had a meeting. I repeat. Last year, the last price increase that was implemented in July, in fact, did not show any impact until the end of September. For the reason that we mentioned, and that customers started heavily restocking, really 2022, the price increase of July have impacted, I mean, in a marginal way, our income statement. The good side of 2023 is that we are going to have the full effect of July price increase, and that will be added to January price increase. The reason why we are positive for this year is that costs are going down as we expected, and price have been accepted as we expected.
It is very important because when you judge a company, I think, you cannot judge during COVID period or in extraordinary inflation period. You should judge a company in the way the company manage the expectations. I think we have clearly announced that we would have implemented the price increase based on our estimation of cost reduction, that probably are going even farther, more than what we estimated, but this is not under our control. And this is the reason, not only of a first quarter, better than what we were expecting, but the fact that our estimation for 2023 are improving every month. To answer your second question, about India. In India, there is a unique situation.
Again, every time, if you are brave, you can take risks, but you need to be lucky. Of course, we are very lucky because in India there is a conjunction of positive elements. You have an extraordinary high level of rate of birth. India just became the first population in the world, but not only the first population, but also the youngest. Second, is an Anglo-Saxon country, so very much different in terms of culture, very much different from China. It's more or less a democracy, which help a lot in terms of investment in culture. It's, from a strategic point of view, a country that has positioned itself in the, in a perfect way. They are friend with everyone, and enemy, and enemy of no one.
The final result of this is that United States is pushing hard to have then India on their side. Those, for example, our exports from India to United States is growing very much against the Chinese import. In the same time, in India, we are enjoying extraordinary cost reduction because Russia is pushing a lot of sales in terms of oil, raw materials, gas, that they are not able to supply to other countries, particularly Europe, at a extremely competitive cost. The reason why margins are increasing is because we are enjoying cost lower than expected, and we have implemented a price increase during 2022 and early 2023. Plus, we have an operative leverage, because when the turnover grow between 30%-40%, fixed costs do not grow at the same percentage.
We are enjoying an operative leverage. I would say a lot of positive things that are happening, I invite you not to think that we are only lucky, but we did some nice choices 10 years ago when we decided to invest in Mexico, in India, and in the United States. It's not just in case that we see our competitors talking of difficult 2023 due to inflation, margin erosion, low consumption in the market, while we are going to announce probably an extremely positive year from every point of view.
Of the IPO, potential IPO on margins? Potential.
The IPO, as I said, is one of the option we have on the table. What we have decided is that we start from the end. The end has to be that F.I.L.A. will keep the governance of the company and the strategy, because we want to stay in India for long term. We have decided that F.I.L.A. should not use its own financial capabilities to support India. We estimate India will need probably hundreds of millions of EUR, let's say, sources or financial support in the next two, three years. We think that either we decide to stop investing in all the rest of the world, and we concentrate everything into India, which could be a decision. It's not my decision.
It's not my decision for twi reasons. Number one, India is still a country in which you are a guest. Even if you're owner, you are a guest, and you have clearly seen what happened in China when they take different approach from Western countries. Number two, is a country that, on average, works with lower margin than United States and Europe. Three, we clearly see unique opportunity to aggregate in the next three years in Europe, in Central and South America, with probably higher return of investment, because if you make acquisition in India, you risk to pay multiple of 30x-35 x EBITDA, while in Europe and North America, you can buy at 6x, 7x, 8 x EBITDA.
If you consider this decision, we will keep the governance of the company and the strategic direction, but we need a financial partner. Who can be the partner? The partner can be the market, or a private equity, or an Indian family, or another company. The decision will be announced in the next three, four, five weeks. What is extremely important that the market has clearly not understood the value of our Indian investment. Probably, the market has not been helped by the disaster of COVID, because India suddenly... I remember April 2020, the company invoice turnover was zero. I remember the statistic, our statistic we received from them, zero. It clearly is difficult with 5,000 employees to have zero turnover.
The government told us, "You cannot fire, and you have to pay salaries." The market clearly did not appreciate the problem we had, and the opportunity now we are having. The value that we have, you know, we have invested in India, in two consecutive times, more or less EUR 40 million, and we are talking of an asset that it's probably close to half a billion euro now. This will be soon disclosed, and will have a strong impact on our financials. It depends on what will be our final decision. Correlating to question about the inventory, considering the first quarter of 2023, we aligned that we absorb less than Q1 2022, about the inventory, considering the comparison between the period.
The negative cash establishment in the net working capital is mainly to the payment of the debt 2022. Considering that we are inside this value, 10% of inflation and higher receivable, considering the increase of 7% of the sales. In other part, we have preserved the first quarter 2023, with the inventory from China, considering that last year, the China is closed with the lockdown about the COVID. In projection, is important also to highlight that inventory in India is continuing to grow. At the moment, in India is zero inventory. In the future, the projection is not only the CapEx, but also to increase the inventory, because at the moment we are order, invoice, order, invoice.
To point, to understand the flow of the inventory for Q1 and the trend at the end of 2023.
Question, if I can. First of all, congratulations, because what I really like is because of the quality of your product. New arts are now available. Photography is fantastic now, printed photo. Because of your paper, it didn't exist, therefore. You mentioned, of course, the brand is really important because of the quality. I think that for brands like yours, quality is quietly for granted. I will have a question, because it's quite difficult to be a brand today because of social is an opportunity, but also is a threat. Do you see any risk in terms, for example, sustainability? If I have to look at your business, paper is water consumption, pencil could be risk cutting, I don't know, the injection of plastic.
We noticed brand we couldn't imagine the last time, last month for Calzedonia in Zurich or for Coca-Cola, they injected a lot of plastic in countries where they are not able to manage. In this sense, do you see a risk for you? Do you see a product development in this sense in terms of research and the new solutions, or is something that is so limited because it's something so useful and is, it's not an issue for Fila, this kind of problem?
Yeah. Fortunately, the two most profitable category of product we are in, that represents more than 50% of our turnover, are 100% ecological and friend with the environment. Pencils are using wood, and we generally use wood or sources that is planted or recycled. It's really an ecological product. By the way, the reason why pencils are growing in terms of consumption is because there is a substitution for two reasons: cost less compared to pens, and it's completely ecological. When I say ecological, I also mean that we start using water-based lacquer instead of solvent-based. It's really a clean product for long term.
Fortunately, I remember when I started in early 1990s, F.I.L.A. was the number 13 in the world for pencil production, now is number one. An historical business, really historical, we go back a couple of centuries for competitors, that we have been able now to control. To control means that we control the sources of the wood down to the brands. Paper is more or less the same. First of all, the most profitable product we are in for paper do not use wood or cellulose, we use cotton fiber. Water, yeah, we need to manage. Clearly, after this month, the risk has gone away suddenly, but could be a problem.
The strong advantage of our paper is that it's almost impossible to meet or to copy our quality, because the quality of our paper is a combination of the quality of the air, together with the quality of the water we use, and sometimes the know-how of our workers that are trained inside. I remember when I was a competitor of Arjomari, I tried everything and more than everything to copy their paper. Result, zero. Now we are in the wonderful position to own Arches and the follower in the world, which is St Cuthbert's Mill. That's why we enjoy very high margins and unique quality. When I say unique, it's really unique. You cannot go to India and China and copy our product, because the water is different, the air is different, the paper is different, the raw material, the base is different.
We are protected by a differentiation that for our user is key, to a point in which sometimes they even don't care about the price they pay, because they want our product. I think for our future, we will try to collect some more of unique brands that are strong and profitable around the world that today we do not have. This will be part of our M&A strategy, to collect more and more unique brand. It will be, from a certain point of view, easy to integrate them in our offer, because we are established in almost 100 countries with our subsidiaries. When we buy a brand, we immediately can distribute and have under control the margins and price positioning. I don't know if there is something else to add?
For the product, we have the chain of custody in place, in terms of sustainability, this is not a threat for us. If we talk about water consumption, we have the goal to reduce by 20% the water withdrawal. In reality, our mills are consuming not more than 15% of the water we withdraw from the river. Our sustainability plan is to reduce the water withdrawal from the river. In terms of consumption, will stay the same. This is something also required by the local authorities for sustainability reasons. We say our protection is there. For markers, it will be a little bit more challenging because plastic is plastic.
We have in place six years now, R&D working to use all plastic coming from renewable resources, or to use plastic recycled.
Packaging. We have substantially reduced plastic in packaging.
We removed already the packaging, plastic packaging from all our products. This was something we didn't disclose in... probably never, but we used to have a lot of plastic packaging. Today, it's all carton box, which are made by recycled paper, by the way, because all our packaging is made by recycled paper. It's a little bit more a threat, but at the moment there are no substitution. If you want to have the 9 kilograms for the nibs or for the plug, you need pure raw materials. It's challenging. We are working on since a long time, and at the moment we didn't get effective results, but a lot of improvements.
We have time for the last question.
Thank you very much. Michele Baldelli from BNP Paribas. I wanted to know how much of your sales is not local for local. I mean, imports coming from India to Europe, India to North America, or something like this. What is not local for local by continent? Attached to this, how much is the logistic cost that you had in 2022? Will the independence of the Indian subsidiary have an impact on it? There are intragroup sales to the other companies. A little bit of background around this. Second question relates to this possible independence of India. I know that from India, dividends should be taxed if exported to other countries like Italy.
I was wondering, will any money coming from these operations will be kept in India, partly will come to Europe, U.S., or anyway, will be exported? Will you be in the need to pay taxes on it? What's the background? Thank you.
The cost of transportation, if you take out paper, that we produce locally for obvious reasons, and by the way, we produce only very high added value paper. The cost of transportation for our product is very low. When you talk about... it's indifferent, either you talk about pencils, or sketch markers, or wax crayons, the amount you can put in one container is a lot of value, and the cost of the container, you have seen, has gone down to EUR 3,000-EUR 4,000 per container. Divided by the quantities you can put in the container, the cost of transportation is around 3% on average, so very low.
The percentage of export from India and Mexico is still low. The great majority of the production in India is for domestic market, in Mexico is for domestic market. Generally speaking, we touch more or less 20% of their turnover towards export. We would like to have more, this is the reason why we are investing so much in India. A little bit less in Mexico, because we needed to feed, still we need to feed some of our plants in China. The reason why we increase so much the capacity in India is to try to move more production over there, because we are extremely competitive. We will need 12-18 months to finalize the investment. We just, as you know, we just bought the land, 45 hectares. No, 45 acres, not hectares.
That will almost double the number of workers. Today, we have 5,000 workers. We will reach 10,000 workers in the site. Thus, we will be able to produce and export more towards different countries. I don't recall the second part of the question.
It is related to the possible transaction here for the Indian subsidiary. If money will be raised, as let's say, it seems, will you be keeping it in India? Will you be reshoring it? If, you will reshore part of the money, you will need to pay taxes on it? I know that, dividends...
Okay.
The dividends from Indian subsidiaries, if reshored to Italy, Europe anyway, should be taxed, if I'm not wrong.
We have already re-received dividends from India several times.
Yeah.
We have paid 20%, but in India.
Yeah, if you get a capital gain from the sale of a stake.
No.
Then.
We estimate it's zero, the impact on capital gain. Because we have since 2011. We can double-check.
We will confirm this.
Okay.
We can-
When we finalize the operation, we analyze properly what is the correct way to.
Okay.
Depend on what we are, okay?
Okay.
It's completely different.
Thank you.
Francesca is hungry, so I would like to talk for another half an hour, but she says, "I am hungry, you have to stop.
Excuse me. If you want, we have a little cadeau there. There's the book we printed for 2020.