First quarter results presentation. I think this first quarter is giving us interesting information and interesting answers on multiple questions we have received in the last couple of years. I think what we see is that under normal course of business, F.I.L.A. continue to generate cash. We see that in a difficult environment we have been able now to transfer prices and keep margins substantially stable despite the strong inflation we see all around the world.
We see that after COVID crisis, Mexico and India have come back to very strong performance thanks to their birth rate and the importance that schools have in those areas. We see the United States performing much better than Europe. As I always said, it was an important asset for F.I.L.A. to be exposed to North America market, and we can clearly see the strong positive impact we have on our numbers. All the areas I'm referring to India, Mexico, and North America are much less affected by the Ukrainian situation and the potential risk of shortage of oil and gas. Also from a psychological point of view, consumers are much more positive.
In fact, we see two completely different trends in Europe. In Europe, we see a strong inflation affected by cost. In North America, in India and in Mexico, we see strong inflation driven by strong consumption. This trend continues also in the second quarter. We can finally say that the fact that F.I.L.A. is exposed for more than two-thirds of the consolidated business to these areas is definitely becoming a positive asset versus a problem that we had during COVID period. The growth of the EBITDA is important because we have not only important change in geographical areas, but we have also some changes in product mix.
I think that the message is that we are able to manage troubled environment, inflation, and we still feel positive for the remaining part of the year. I mean, at least until the third quarter included, because we see that school will reopen under normal circumstances, which is giving us today a good view on the trend of the orders worldwide. I think that now it's the moment to ask Stefano to present us in details the first quarter result, and then we can move to the session of Q&A. Thanks.
Okay, thanks, Massimo. If you go to the presentation, page four, we can start with the core business sales. Core business sales value Q1 2022 is equal to EUR 166 million, with an increase of EUR 24.3 million, +17.2% compared to Q1 2021. We have a positive FX effect of EUR 5.8 million, mainly allocated to North America for EUR 4.7 million, due to the evaluation of U.S. dollar of 7% compared to the previous period of the year. Then we have EUR 1 million referred mainly to Asia. Meaning, in this case, mainly Indian rupee. Excluding these FX effects, the increase of sales is equal to EUR 18.5 million, +13% compared to the previous year.
These EUR 18.5 million are allocated for EUR 8.7 million to Asia, that means India, in this case, to Middle and South America for EUR 6.6 million, mainly Mexico, but also Argentina and Chile and Brazil. North America for EUR 3.4 million. As Massimo also mentioned before, Europe is mainly flat with EUR 0.2 million negative. As you can see in this graphic, it's clear the increase of the weight compared the previous year of India and Mexico. Now, the weight of the two areas, Central South America and Asia, is more or less 22% compared to 17% that we had last year in the full COVID period. If you go to page five of the presentation, we have the EBITDA trend, EBITDA adjusted.
The EBITDA adjusted from extraordinary costs that are very low, only EUR 0.4 million. It's equal to EUR 22.7 million, with an increase of EUR 2.6 million compared to the previous year. That means 12.9% compared to the previous year. We have a small FX effect equal to positive EUR 0.3 million that is referred to North America. Excluding this FX effect, the increase of EBITDA is equal to EUR 2.3 million. That means +11.7%. We can see that the incidence of EBITDA is 13.7% compared to 14.2% of the previous year. I think that is a good result due to the environment that we have in this period worldwide.
It can be referred to the cost of sales impact due to the cost increase and all the delivery costs increase that we experienced in this period. Also to the different geographic mix because as we have seen for the sales, the growth is mainly concentrated in South America and in Asia. Also being concentrated in this geographic area, of course, is mainly referred to school products than Fine Art products. If we go to page six, we can see the trend of net income adjusted. That net income adjusted is equal to EUR 7.9 million, with an increase of EUR 0.8 million, +10.2% compared Q1 2021.
This increase, of course, is due to the increase of EBITDA, but mitigated by the increase of amortization and depreciation and the increase of tax compared to previous year due to the higher profit that we had in Q1, 2022. If you go to slide seven, there is the net bank debt and NFP values. The net bank debt decrease of EUR 42.5 million in the last 12 months. We have, due to the increase of U.S. dollar, the valuation of the dollar, a negative FX effect of EUR 10 million. If we decrease these from these FX effects, they will say that the net bank decrease, excluding FX, is equal to EUR 24.3 million.
I would like to point out that the cash generation, the decrease in the debt is quite a good result. If you see also the ratio, the net working capital is still better than the previous year because we have 47.9% compared to 51.3% of the previous year. Let's say that this is due in particular to the three quarters of 2021 that were the cash generation was very strong. In the Q1 2022, cash generation only referred to the Q1, to the quarter, is less than EUR 10 million compared to the previous year. This can be seen very clearly in the cash flow slide that is at page eight.
The only thing that must be clarified is that you can see that the working capital absorption is higher than the previous year. This is totally due in this quarter to the increase of inventory that, for our management decision, we planned just to face all the disruption of the supply chain that there is in this period in all the world. There is a temporary increase of inventory, particularly in North America. This is, we think, a good help to guarantee a good delivery to all the customers. I think that these are the main topics of the quarter, and we are open to the Q&A section.
We will now begin the question and answer session. To ask a question, you may press star then one.
The first question comes from Niccolo' Storer with Kepler. Please go ahead.
Thanks to Massimo and Stefano, thanks for taking my questions. I have a few. The first one is on price effects. On the strong growth that you reported in Q1, what is the impact of pricing. Can you remind us at which point you are in increasing prices? What you've done so far into the year, and what should we expect next? Related to that, what should we expect in terms of profitability? Is it right to assume that going forward, we should see less pressure on profitability because on the one hand all the price increases come into effect and on the other the year-on-year comparison on cost becomes easier.
I have a question on... I see that, as you anticipated already, you're no longer giving the split between, school and fine art, but maybe if you can give us a sense of the trend of the two division at least, from a qualitative point of view. Last question is on China. On China, are these lockdowns impacting in some ways your business there, and the possibility for you to bring products out of China to Europe or the U.S.? Thank you.
Thank you. Thank you, Niccolo'. First of all, let me point out one thing that, unless you want to get crazy, I always give. I'm talking of price increases. First question, I'm giving always to you an average. Let me make an example. There are countries in which they have already structural inflation, so our price increase will go on top of the structural inflation. I'm taking out from my answer, countries like South America, in which the price increase that we are giving to the market is higher. On average, there is one last price increase that has been passed to the market, first of May, and not everywhere, mainly in Europe, but with some customers, this will go into effect, around June and July.
Specifically, I'm referring also to North America. There is still substantial price increase going on. Why? Because the impact of the war has further increased certain costs. I would say some hypotheses we made at budget level in November, in which we were considering costs to go back to a normal level by May, June, is not happening due to the strong instability. We are forced to compensate at the budget level this difference. I repeat what I always said. We are going to cover the extra cost we face, as you have seen in the first quarter. We are not going to exceed the cost increase because we think that a portion of this cost, I'm referring to transportation, I'm referring to cost of plastic that is related to oil.
We think that they are temporary. One day they will go back to a more normal situation, and also, we don't want to stress too much the consumer. What we are doing today is in line with your expectations of the year 2022. If you remember, we have already some discussion especially as soon as the war happened. When we announced the result of 2021, we said that we are comfortable with a single digit growth of the EBITDA in 2022. The results of the first quarter, I would say, confirm that our indication is consistent with the reality. The reason why we would prefer to stay a bit conservative is obvious. We are positive until, I would say, September.
I think we are going to see two good quarters ahead of us. We need to understand everybody saying that in autumn, COVID will come back. Okay. I read this in the newspaper, but I cannot translate into simulations. I read that the war will be longer than what we expected in February. At this point, if you analyze our quarter, it is stronger than what we expect for the entire year. Again, I think we need to be consistent with what we say. We are comfortable with the expectation of the entire year. I'm not sure I gave the number, but in May, the prices have grown another 6%. Concerning-
Sorry to interrupt you. You already made one round of price increases in Q1, right?
Yes. Yes.
Okay.
This you have seen in the numbers of the first quarter because you could see a 17% top line growth and only 13% EBITDA growth. This I think we could expect. What is important is that we are able to to keep our business healthy and profitable. Concerning the question of the two businesses, the reason why we took this decision is because our business, we think is already a bit complicated to be completely understood.
We see more and more overlap between schools and secondary school that use Fine Art product, and hobby that there are big consumption that can be done with coloring product that are part of the school business or part of the so-called Fine Art business. We have decided to report with a geographical method because at the end, also profitability, it is true that we are talking of one or two percentage points of EBITDA. As you could see, we have completely changed the geographical mix, and the EBITDA is showing a very strong consistency. The trend in the beginning of the year is very simple.
I want to give you some basic information. The first quarter of 2022, we see for Fine Art a better number compared to the first quarter of 2019. I think this is the only comparable quarter because then we have seen an unbelievable, let's say boom, unexpected also during COVID period. While Fine Art now is returning to some normal level of organic growth. The first quarter has been, I would say, weak. Customers are destocking because they see the same trend that we see, so they are going back to the level of pre-COVID situation. After the destocking, now we see the Fine Art having a good positive trend in the second quarter.
School is strong in North America, very strong in India and Mexico, where schools are completely open. We see a weak trend in Europe since the war started. What we see these days, a reasonably good back to school also in Europe, because at the end of the day, our business is related to the number of kids that go to school. Fortunately, this kind of consumption is not related to war. The first quarter, we see definitely a strong return of school business. For the third question, the China lockdown, let me answer in this way.
The same question, one week ago, I would have been very concerned because we are moving production from China to other plant in the world, but we will finish in a couple of years. The authority have kept our plants all closed for more than five weeks, so I was very concerned. Fortunately, last week, they allowed us to restart operation. The worst case scenario is that we will use some air shipment if we need to, let's say, save some time or we need, let's say, to speed up some delivery. We need, in this moment, to understand the level of orders before taking this kind of decision. We are talking of some EUR 100,000, nothing more. For the moment, our operation have restarted.
In terms of market, fortunately for us, China represent 3% of the global business. The market in this moment is weak, because the two lockdown of Beijing and Shanghai are having impacting the consumption. Nothing that, as you could see, have influenced negatively our first quarter.
Thank you.
The next question comes from François Robillard with Intermonte. Please go ahead.
Hi, everyone. Good afternoon, and thank you for taking my question. First one is also on the India and Mexico breakdown, you used to give it in the previous quarters. It was, so combined sales for both countries were EUR 17.5 million in the first quarter of 2021. Where do we stand in the first quarter of 2022? And how does it compare to the usual seasonality of this business? Can we expect this first quarter figures to carry on being the same, let aside the price increases? So that's my first question on India and Mexico. Second one is on the working capital.
In the first quarter, you accelerated a bit on supplies in order to build inventories to secure production. Can we expect the trend to remain as strong in the second quarter, which is also usually a cash burning one in terms of working capital for you? Still on the back to school update. You mentioned the return to normal business conditions for now, and the good visibility it grants you. Can you give us some update on how the back to school seasons are going in the U.S., and some macro on Europe as well? Thank you very much.
Stefano, can you please answer question number one and question number two, because I don't have the figures in front of me. Stefano?
Between India and Mexico, we have all for third-party sales, we have more than EUR 30 million.
The first quarter.
EUR 8 million, EUR 8 million on Mexico, only third- party sales, and EUR 23 million for India.
That has to be compared to 2021.
In 2021, we had EUR 3.8 million for Mexico and EUR 13.6 million for India.
Total EUR 16 million?
Total EUR 16 million, compared more than EUR 30 milion in 2022.
Yeah. François, this trend will continue because, especially in India, the market is extremely strong. I would add one new point that we have never raised so far, but we start seeing. The political decision of the government of China to push more towards domestic economy is clearly giving strong advantage or less competition that is also related, by the way, with the difficulties of the supply chain of the harbors that have been closed for multiple weeks is clearly reducing the competition from China. The countries that will enjoy this reduced competition are clearly Mexico for the geographical position, India because India is the other big country in the world.
We do expect a very strong trend in these two countries. F.I.L.A. in India was the rising star. Suddenly we lost the trend due to COVID. I would say that the trend is coming back extremely strong. Let me tell you that we are invoicing what we can. The demand in India is much stronger than what you can see in the numbers, but unfortunately, we cannot work more than what we are doing. Okay, the second question is working capital.
Yes.
Yes.
Can you just repeat the question on the working capital, please?
Yeah. No. Basically, you hooked on inventories building in the first quarter. Can we expect the same to carry on in the second quarter?
Yes.
Yes.
Absolutely. If your question, I can give you a precise answer as it is public. April is even accelerating the trend of the first quarter in terms of growth. For back to school, which is the third quarter. Sorry, which is the third quarter. Yes. In United States, the back to school is very promising for several reasons, not only one. There is a budget left from the COVID period that schools have decided to spend. So there is a very strong demand, especially after kids have been kept away from school, from physical school, so they have a normal desire to go back to their traditional activities. There is a structural difficulty from China in the supply chain.
As you know, we supply the United States from Mexico, and we produce in the United States. This is giving us some competitive advantage in the domestic market. Of course, we enjoy this. Last but not least, the environment in the United States is completely different compared to Europe. The Ukraine problem is far away from their daily concerns. Their big concern is inflation. When you talk about school business, you know as well as me that the unit price of our product does not change the economy of a family. Even if we have to face an inflation period, in the history, school is not, let's say, very elastic to the level of prices.
In Europe, we are less optimistic because the environment is difficult. In United States, we feel we can be optimistic.
Thank you.
François, maybe let me just point what Massimo explained before. I would like to repeat that the increase of the working capital, that means inventory, not other receivable are okay and no other issue. It's a precise decision of the management. To be honest, it was a good decision also considering the lockdown that we have in China for one month due to the COVID. Also this high level inventory allow the group to face the back to school campaign in a good way, because otherwise some company should suffer of a lack of products. I think that at the moment, as Massimo said, the trend will be strong inventory to support strong sales. This must be clear.
Of course, I expect for the end of the year, if the things go as expected, the decrease in inventory of course. In this moment, if I think in particular to China, I don't know, Massimo, if you agree, it was a very good decision to have the inventory very high.
This kind of decision we will keep in the following months because there are still a huge bottleneck in the supply chain worldwide, not related to us, but related to transportation, to harbors, container not available, ships not available. We prefer to be on the safe side.
Okay. Just a quick one to follow up while I still have the line. Coming back on Niccolo's question earlier, can you just give us quickly the amount of price increase in your top line growth in the first quarter? What percentage of growth did it represent?
Stefano, do you have this.
Yes. On an average of 5% if my data should be correct, 5%, 6% on average worldwide on the 17%.
Yeah. Thank you.
The next question comes from Alessandro Cecchini with EQUITA. Please go ahead.
Hello, everybody, and thank you for taking my questions. The first one is about the inventories in the trade. Basically, you saw that, of course, in India, basically there is a huge demand. I presume that there are no inventories in the trade. I would like to better understand what is the level of inventories in the trade in the U.S. or in Mexico or in Europe. This is my first question. My second question, actually, could you update us on the total headwinds, cost inflation, I will say, for the full- year 2022, your, I mean, best estimate at this point? And finally, I was curious about the trend in North America.
Basically you saw that the price increases I mean average is 5%-6%. The growth in North America is exactly 5% and 6%. I would like to better understand basically volumes seem flat in North America. I would like to better understand if it is something to improve over the next quarters thanks to your expectations in terms of good back to school. Thank you.
Okay. Thanks. Thank you, Ale. The inventory in trade. There are two different situations. For what concerns the school business, the trade is absolutely in a normal situation, if not empty. Let's say the situation is going back to normal little by little. Different, as I mentioned it, 15 minutes ago, different is the situation of Fine Art. The trade was still under the COVID impact, I would say, until December. Now the situation is completely changed. Also the approach of the consumer to Fine Art in this moment has bounced back to a normal situation. The trade has started a restocking strategy, they started in January.
I would say now we are back to a normal situation also for Fine Art. Cost inflation for 2022, do you have, Stefano, an evaluation of the cost increase we had? Because the problem, to give a precise answer, Alessandro, is that we made a budget, so in November, and we have clear in mind the level of cost. Suddenly the war came, and we had a lot of costs that are extraordinarily high. We don't have a representation because the budget was made with different assumptions. That's why we have applied a second price increase to cover the gap. Stefano, are you able to give an estimation, or should I make a rough calculation?
I can say that I don't know if the answer is too specific, but for the wood, we don't think that we are able to contain any cost increase. For the paper, we have an increase at the moment, more than 50% compared to the average of 2021. For the plastic material, we are higher than 20% than 2021. For chemicals, no big increase. For the energy also in some company, we're able to keep the cost flat due to some agreements that we already had with before. This is just by materials.
I don't know if you want to have a value. At the moment is not easy, but if I remember well, it's some million that we think that EUR 5 million-EUR 6 million, if I remember well, that should impact globally at the moment.
Okay. Thank you.
Transportation at budget level, we had considered a reduction that is not happening, but is not growing versus 2021. We had a huge cost increase in the second half of 2021 for transportation costs. We have budgeted a reduction, which is not happening at all, so we are forced to increase further the prices. Really, if you analyze the cost between 2021 and 2022, there is no increase in transport, in freight in, for example. In freight out, we have some increase due to the peak of oil cost.
Okay.
In this case, the war is giving us some negative impact. It's a very complicated world in which I think it's fair to say that all the costs, one plus the other in the last two years have increased at least 20%, if I had to calculate an average, at least 20%.
Okay. Basically I was assuming that if you are adding additional 5% or 6% of pricing for half of the year or, I would say, seven, eight months, it means that you probably have EUR 10 million, EUR 50 million of additional cost inflation to-
Exactly.
to cover .
Exactly. It's a fair analysis. What I want to tell you is that it's not necessarily new cost. It was our projection.
Mm-hmm.
Of cost reduction that is not happening.
Yes. Yes, of course.
This is important because it's not another increase.
Okay.
It's a decrease that is not happening.
Clear. About the U.S., issue maybe.
About U.S., first of all, yeah, the big numbers will come in the second quarter. First quarter is not a big quarter for school. In U.S., as I mentioned, we have seen some significant destocking in Fine Art. Despite this, we see a nice growth. Why we are positive? Because the destocking activity has finished. We have discussed with our customers, important orders are coming. We continue seeing school going fast. We would say that the first quarter is growing despite some unique negative effect that now has been concluded. We do expect another good quarter ahead of us.
Great. Thank you. Last point from my side on the private label, I mean, your fight against private label in Europe in particular. If you could, I mean, update us on the current situation of brands like you against private label.
Yeah. You know, Ale, the situation, as we talk every day and you open the newspaper, you read of Shanghai Harbor closed. I read somewhere that every month in Shanghai, they ship 4.5 million containers. They have been closed for one month, so you can make a quick calculation. China is the big producer of the private label. Then you have to add almost five weeks of lockdown in Shanghai and in Beijing. Imagine the impact on the production activity. I give you an example. We have just reopened our factory, but we discover that there are a lot of supplier of cardboard boxes of working process that maybe are still closed, because they are in a different location than our location in Shanghai area.
We have opened, but we have difficulties to find efficiency in the supply chain. It's a never ending story in which if you sell premium prices, quality, and by the way, you are dependent on China, as we do by maybe 10% or 15% of our total supply chain is manageable. When the private label buy 90% of their product in China, clearly the situation is extremely complicated. I'm not surprised that the private label is struggling, but not only private label, also some competitors, as we do, by the way, because not necessary our turnover in the first quarter reflect the demand we have.
Because even United States is not invoicing all the orders that we have, because unfortunately, we are also affected by container not available, ship not available, harbor suddenly closed. We are not highlighting this because this has become a normal situation, and I don't like the idea to have a call in which we spend half an hour to give you a long list of problems we have around the world. Reality is that the supply chain is under an historical inefficiency, and we don't see any improvement for at least another year.
Okay.
When you have to move hundreds and hundreds of containers, low added value product, clearly the situation is much worse than as it is, for example, to manage a private company like we do.
Yes, clear. Thank you. Thank you, Massimo.
The next question comes from Brambilla, Isacco with Mediobanca. Please go ahead.
Hi. Good evening, everybody. Just a very quick question from my side. If I recall correctly, in March, you stated to target a 0.5 yearly reduction in your leverage. Is this still a reasonable target also for 2022? If yes, which is the underlying assumption on net working capital sales by the end of the year? I appreciate it is really uncertain times, but if you can give us some sort of rough indication, it would be really helpful. Thanks.
Yes, we have announced a free cash flow generation for 2022 of EUR 50 million. I would say that, then Stefano please be more precise, but the first quarter fully confirm our indication, and mathematically these represent 0.5. For the level of sales, I think that this will also be affected by the exchange rate. In this moment, euro is extremely weak, and this is inflating, of course our numbers. By the way, I think euro will be weak for quite a long period. Clearly, F.I.L.A. will enjoy this. We could have some impact from working capital, but I think we can keep under control for the reason that I have already explained multiple times.
If you have product today and you give a good service to the customers, they have to pay on time. So far our working capital is under control. Stefano, you want to be more precise?
We say a good approximation that number because it's the free cash flow is our standard level of EUR 50 million. As you said, the leverage would be a reduction of 0.5. We closed near three, so we seem to close near 2.5. Net working capital ratio was near 42% in 2021. Will be a little improvement, maybe as we said, there will be some improvement, but not so high as was the past trend, due to the reason that we will want to keep safe working capital for at a safe level for the sales. There will be a little improvement, not so strong in the previous year, but more or less it will be little improvement. The 0.5, the leverage is confirmed.
Thanks.
Thank you.
It concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.