Good evening and welcome everyone to this call. The quarter ended this last September tell us many positive information and leave us with some clouds. We are doing a great job in India and the good results will continue. I think it's just the beginning of a long-term trend. We did a great job in Mexico in which we already see strong cash generation and a very good EBITDA and margins. North America we could have done a much better job this year but the violent inflation in such a short period did not allow us as in the history to have an efficient pass-through to customers.
You know, in North America with a few large customers, it's very bureaucratic to announce a price increase every few weeks. This process has been complicated, and it will be completed with the last price increase that we have announced and approved by January 2023. This is clearly late compared to the cost increase we suffered during 2022. This will allow us to regain our margins, but unfortunately, margins will be eroded until this December 2022. Costs now are stabilized. We do expect some nice reduction in the months coming, but clearly the situation has happened probably in a too short period.
The inflation has burned cash absorbed by working capital, but historically, this has corresponded in F.I.L.A. balance sheet in a reversal, and next year, we will enjoy the effect in the other way around. Also because this is important to highlight, we can start now to implement a reduction of inventory because due to the gradual normalization of our supply chain that in the last two and a half years, between COVID and wars and problem in transportation have been under heavy stress. The difficult macroeconomic situation that we do expect in Europe and in North America historically have not impacted our businesses.
In a situation in which we will have stability in cost, 2023 should be a better year than what 2022 is showing to us. Last but not least, I want to remember that the fourth quarter is the quarter in which we start getting paid, our receivables start getting paid. As of now, we don't see particular difficulties. Thus, despite the erosion of inflation, we should have a positive cash flow. Stefano, if you can please now enter in the details of the numbers, and then I say, I remain available for Q&A session. Thank you.
Okay. Thank you, Massimo. We can go to page four of the presentation, and we can start analyze the core business sales. Core business sales closed with a value of EUR 595 million, with an increase of EUR 98.5 million, 19.8% compared previous year. We have an effect, an FX effect on this data, this difference, and is equal to EUR 60 million of FX, positive FX, and is mainly due. Sorry, it is equal to EUR 37 million FX effect. The difference, the increase compared to the previous year is equal to EUR 60.8 million. These EUR 37.7 million of positive FX are mainly allocated to North America for EUR 28.6 million.
We have Central and South America for EUR 3.7 million, then Asia for EUR 6.2 million. These are the main effect. Excluding, as I said, the FX effect, the increase is equal to EUR 60.8 million, 12.3% compared the previous year. This increase can be allocated by geographic area, mainly to Asia for EUR 39 million. Then to Middle South America for EUR 22.8 million, and we can say Europe and other countries are quite flattish, and North America showed a little decrease of EUR 1 million. We can see clearly how the weight of the geographic area of Asia and Central America increased compared to previous year.
If you go to page five, we can analyze the EBITDA trend, EBITDA adjusted excluding IFRS 16 of course. The EBITDA closed with a value in 2022 in September of EUR 95.5 million, with an increase of EUR 4.5 million compared to the previous year, equal to +5%. As for the core business sales, we have a positive FX effect equal to EUR 3.9 million, and is mainly allocated to North America due to the increase in the U.S. dollar. We can see that we are talking about adjusted EBITDA. The increase of extraordinary items is mainly referred to the extraordinary cost due to the refinancing.
I would like to point out that the EBITDA percentage margin is equal to 16.1% compared to 18.3%. The trend is similar, maybe, wider than June, but it's similar to the one that we already discussed in June. We have a decrease of EBITDA margin due to the geographic area mix, first because as you have seen the big part of the increase is allocated to Asia and Central America, where the EBITDA margin is lower compared to North America and Europe. For the other part is due to the inflation impact on the GM. If we go to page six, sorry, we can analyze the adjusted net profit trend.
Adjusted net profit, excluding IFRS 16, is equal to EUR 43 million, with an increase of EUR 2.4 million compared to the previous year, equal to 5.9% of positive increase. Of course, this increase is due to the increase of EBITDA, mitigated by an increase of depreciation due to the increase of the capital expenditure compared to the previous year. We have an increase of the financial cost. They are not interest, but is an accounting effort due to the release of the amortized cost when we close all the finance in July. Interest are in line, a little better than the previous year, and this is confirmed as it was in June.
We have a positive effect of deferred tax release due to the close of the refinancing. Just to make a short summary, a big part of these adjusted net profit increase is due to the EBITDA increase. If you go to page seven, we can analyze the last slide with the net bank debt trends. Net bank debt is equal in September 2022 to EUR 415.6 million.
If we exclude the FX effect of approximately EUR 36 million, due mainly to U.S. d ollar and for a minor part to the Mexican pesos, and if we exclude some M&A effect and the upfront fees paid for the refinancing, we can see that the net debt decrease compared in the last 12 months is equal to EUR 15.2 million. At page eight, you have also the cash flow compared to nine months of the previous year. The focus is we have a free cash flow to equity in this nine months 2022 worth of EUR 47 million compared to nine months of 2021. We say the focus is in the working capital, where we have an absorption, a temporary absorption of EUR 34 million-EUR 35 million.
This is only due to inventory increase, mainly in North America. Even what Massimo mentioned before are okay. We don't see any issue in this moment in any collection in all the geography. I finish, I think, the explanation, so we can go to the Q&A session.
We will now begin the question and answer session. Again, if you have a question, please press star then one on your telephone keypad. The first question comes from Storer Niccolò of Kepler. Please go ahead.
Good afternoon, Stefano and Massimo. A few questions, please. The first one is on pricing. Which is the price increase component in your nine-month growth? You said you expect another round of price increases in the U.S. from January, which is the amount of this further increase. Second question, I wanted to understand a little bit better the trend in Europe and North America in particular. I see that Q3 was negative in both regions in the, say, mid-single digit. I wanted to understand which are the trends behind that. More importantly, also the trends behind the drop in profitability in EBITDA that we have seen in those areas.
If I'm not wrong, worse than 10% decrease in EBITDA in the nine months in both North America and Europe. If you can comment on the reasons behind this drop, if it is mix with Fine Art doing worse than school, if it's just inflation, up to you. Thank you.
Thanks, Niccolò. Sorry, I'm not sure I understood properly the first question. Can you repeat, please? The first one.
The first one was about pricing. If you can tell us which is the pricing component in the reported growth that you had out of the 19% growth, how much is pricing?
Okay. Stefano, can you please answer how much is price, how much is volume?
If we talk about, I think that we can say that more or less 6%-7% is price increase.
Okay.
On the 19%. The difference is volume.
The new round of increases in North America starting January-
Okay, I can answer, yeah.
It's another 3%, 4%.
I can answer the questions. It's not in North America, but it's worldwide.
Okay.
Because the problem are more or less the same. Let me explain what happened. We have, by contract, a notice period. When we approve the budget in November, we have launched a price increase starting from January. During the discussion in January and February, we were seeing costs going much beyond our budget. We opened immediately a discussion with customers. Again, you have to give them a notice period. The price increase has happened more or less around June in Europe and in July in North America. The problem is that during May and June, we have received further cost increase and again, beyond also our estimation, and I would say the estimation of everyone.
Let me remember, it's a joke, but not later than 12 months ago, the Bundesbank said that in June 2022 inflation would have been below 2%. Apart from this comment, it's very complicated to manage continuous cost increase on a regular basis, and you can only proceed with assumptions, because if not with customers, it's impossible to maintain a relationship. When we requested a further price increase in July, we thought that would have been sufficient. In reality, we have experienced a further price increase.
When we saw this, we were thinking if it made sense to ask for another price increase in September, October, but we would have obtained nothing more than some difficult relationship with our customers, and we would have caught only a minimum part of the volume of 2022 due to the back to school that was already over. We have decided to move this price increase to January 2023. This has caused an erosion in margins during the third quarter, and the same will happen in the fourth quarter. In reality, in this moment, we see the cost stabilizing, even slightly going down. We have anyway announced a new price increase in January 2023, and I can anticipate to you that it has been accepted.
With January 2023, we will go back to our historical margin. The magnitude of price increase of January is between 4%-6% depending on the geographical area. Let me repeat again, we cannot do anything before December also for relationship reason with our customers. Your question on EBITDA, I think I have already responded. We have lost, more or less, if I'm not wrong, please, Stefano, correct me, 3%-4% of margin in North America and, more or less the same Europe for the unbelievable high inflation. I mean, I would say unprecedented in the history, but more than that, in a short period.
That has created a problem, because in any moment we thought that was the last cost increase, so it would have been dangerous to ask a too high price increase. We have decided to reach a certain stability like we have now and ask for the last price increase to adjust the situation and go back to the margins that we are used to. EBITDA has been impacted in Europe and in North America by this effect of delayed pass-through.
Okay. If you say that basically we should expect further pressure on margins in Q4, do you still believe that the consensus number for EBITDA, which I think is EUR 114 million-EUR 115 million, is still achievable? Because probably if we assume some pressure of the same magnitude of that of Q2, Q3, probably would end up a bit lower than that.
You said a bit lower, it is possible. We are very close to the numbers anyway. I would say whatever will be, it will be insignificant in our number. Because when I think since the beginning of the year, you remember when we saw a better first quarter, a better second quarter, I always said that I did not want to increase the expectation of the year because exactly for this reason, because we were working in an environment that was extremely unstable. Fortunately, we have kept this consensus throughout the year. Even if until June, we probably could have easily increased the expectation, I think now it's not important if we end at EUR 113 million or EUR 112 million.
The situation is that we see a strong growth in turnover. We see an erosion in margin, and we have already reacted, launching a price increase that has been in large majority accepted. I can tell you that in 2023, our margin will go back to what we expect. It's again, it's not EUR 1 million or EUR 2 million plus that minus plus that change this year.
Okay. Very last one. Maybe if you can discuss which kind of inflation you have been facing, because we are seeing that raw materials are coming down. We are seeing freights are coming down massively. Which kind of inflation you are currently facing? Maybe wage inflation or I don't know if you can elaborate a bit on that.
Yeah. This is a good question because what you say cannot be applied to F.I.L.A. Can I explain? For what freight is concerned, yes, we see a strong reduction, so we will enjoy the reduction starting from December, January, going on when we will start importing from different plants around the world for back-to-school 2023. Clearly not now in which we are not importing anything. We see plastic raw material going down, but not substantially. There has been a rebound, unfortunately. Really the difference is in the area of 10% down from the top. The big cost that we still suffer is paper. Paper is not only the paper that F.I.L.A. sell.
Paper is packaging, paper is displays or pigments or chemical component. In those areas, there is zero reduction, but there is not any further increase. I repeat again, the prices that we are going to apply from January will allow us in a stability, but in a stability at the peak level, will allow us to regain our normal margin. Don't forget that, we have kept, I would say, in a very efficient way, the cost of electricity under control. We need to see what will happen next year, even if we are not a company that is called energy voracious. It's not a big issue, but anyway, we are in an environment that is, I would say, inflated, even if government are pushing harder to create a recession.
As of now, with the next price increase, we will reestablish the margin where they should be.
Perfect. Thank you.
The next question comes from Cecchini Alessandro of EQUITA. Please go ahead.
Hello, everybody, and thank you for taking my questions. The first one actually is on a previous question on the performance of North America in the third quarter that was organically speaking -5%. I would like to understand, I mean, the volume component, the pricing, and in particular, of course, in this -5%, probably it's embedded decline in Fine Art, while school, according to your previous statements, were going well. I would like to better understand on this kind of a topic at the top line level. You discussed it and highlighted very well in terms of EBITDA margin. Now I would like to focus on top line in the third quarter.
My second question instead is about inventories. You ended the nine-month results with EUR 333 million of inventories. How much of these inventories you expect to push down, to decrease by year-end? Linked to this question, you were guiding before, I mean, about, roughly speaking, EUR 30 million of free cash flow to equity for the year-end. I would like to have your, I mean, opinion on this. Finally, my last question is about your position in Europe and in the U.S. against the private labels. Just to better assess, I mean, the current framework. Finally, last question is India. You are expecting, I mean, nice growth.
Just if you could, I mean, elaborate a little bit more on next year, what kind of top line are you expect in India? Thank you.
Thanks, Ale. Stefano, probably you need to help me with some figures, as unfortunately, we have some complication related also to the currency trend. The -5%, Stefano, is related to the top line or to the EBITDA?
The top line.
Okay.
Mm.
Yes, I do confirm, Ale, that we had a pretty good year in school. I have to underline not only we, but the entire world, which means not only United States, but the entire world of Fine A rt, has experienced a reduction in consumption, as a reaction to the super performance of 2020 and 2021. There is nothing that is unusual. I asked Stefano to give me the numbers at the end of September versus September 2019. Stefano, please confirm, we are still growing. I think we just need to neutralize the, I would say, the unusual growth we have had for COVID.
We had everybody have experienced this talking, but not only at customer level, but also at consumer level. By the way, one information that could be interesting because I just got from my marketing. There was another business inside the school business. There is one category that is paint. Paint, in terms of volume this year, is heavily going down. In a business that is very healthy in 2022, like school business, we have one category of product that is paint, that has grown in an unusual way during COVID. Like Fine Art, now there is a reaction from the consumer, and the consumer have reduced substantially the purchases of paint, and we do expect a normal trend next year.
By the way, we do have some positive expectation from Fine Art business next year. You are right, the -5% is a combination of a positive school business and a negative Fine Art business.
Massimo-
In terms of inventory, maybe.
Massimo, sorry, just one second.
Just to confirm what you asked me. Fine Art globally was EUR 137 million in 2019, while is globally EUR 145 million now. just to confirm that, with that.
As I just guessed, because I'm not in the same room with Stefano, in September 2022, despite all the difficulties, we are growing versus 2019. Stefano, if you can elaborate a little bit, the second question, that is, what do we expect from inventory reduction by the end of the year? I don't know if you have a number. For sure, we do expect an important reduction. Stefano, I don't know if you have the number. I would like to add one comment. We do expect, anyway, a constant reduction in the following quarters because we can now say that the supply chain has gone back to a normal situation after, I would say, almost 30 months of complications.
This has allowed us to start working on a strong improvement in terms of inventory reduction. Stefano, do you have this number?
I don't have the precise number, but because my number is a combination working capital release, so, just to confirm that anyway, we confirm our target of a decrease of EUR 20 million-EUR 25 million of net debt for the end of the year. I don't know the exact number at this moment of the inventory decrease. Anyway.
Stefano, you have answered the third question meanwhile. On the free cash flow, we do confirm that-
Yeah, yeah. Sorry.
Okay. For what is Europe and U.S.A. private label is concerned, Alessandro, there are not a very specific comments, maybe. We see at least our customers are trying to impose more private label because they are struggling with the growth of e-commerce, and they try to compensate trying to increase the sales of the private label. In reality, for example, in school business, the trend is absolutely. There is nothing that is outside the normal trend of market share. So I don't have to recognize any difference from what is the average in the last years. For what is India is concerned, India, clearly, the honeymoon with India was completely and suddenly interrupted with COVID.
The company was already extremely well performing, both from profitability and cash generation point of view. It was a very small company just 10 years ago, and we were hitting almost EUR 80 million pre-COVID. This year, the company should hit EUR 120 million with a growth of more than 100% versus last year. We do expect next year, the growth will be in the area of 40%-50%. Another very strong year, the company will hit EUR 170 million, up to EUR 180 million in 2023.
Okay, thank you. Thank you for the answers.
Again, if you have a question, please press star then one on your telephone keypad. There are no more questions at the moment. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Okay. If you confirm that there are no more questions, I thank everyone.