Good afternoon, and thanks for joining us to comment the results of this third quarter. I think that we can be satisfied of the results that we have delivered. I would like to focus on two, three main points. I think that as we clearly committed during COVID period, the focus on cash generation has allow us to deliver the very very strong result, as you could read, EUR 80+ million less net bank debt compared to September 2020. We have been able to generate a very strong EBITDA compared to the same period of 2019.
I usually tend to compare our results to 2019 and not to 2020, because for obvious reason, I think the comparison gives us much more meaningful indications. The results of this third quarter are better than 2019 by EUR 3 million. In 2019, we ended with EUR 88 million. I think that the most important indication is that this year we have a gap to fulfill coming from India and Mexico of EUR 8 million. To compare apple with apple in the performance of this year of EUR 91 million should be compared with EUR 80 million EBITDA with same perimeter. The third quarter is giving us a good indication on school division.
We are finally back to a normal level of business. This is important for two reasons. This indicates that our operations are back to a normal level of efficiency. When children are able to go back to school, the business of F.I.L.A is, I would say, back to an important level, not only of cash generation, but also of profitability. By the way, this is the second consecutive quarter in which F.I.L.A has achieved the level of profitability that before COVID we have indicated as the level we wanted to achieve. India and Mexico, unfortunately, are still a problem.
These two countries are two very important assets for the group, mainly also for school business, even if Fine Art was showing a very important growth before COVID. Clearly, the government has really mistreated our school world. 18 months of consecutive lockdown has unfortunately created a very difficult situation to the families, to the organization. It is true that the schools have been reopened towards the end of August, but in reality, in Mexico, no more than 40% of the students are really attending the schools. There is a trend of improvement. We do expect in 2022 a full recovery, but it is a process. In India, the situation is similar.
The schools have been reopened, but almost 50% of the schools are still in DAD, so it's a digital school, not in presence. We do expect that the schools in presence will improve, especially if the COVID will not grow again. Here, of course, we need to cross fingers because the situation is not easy, especially here in Europe. Reality is that in these two countries, due to the weaknesses of the health system and the low rate of vaccination, we see the path of recovery of school attendance weak. Of course, the expectations in these two countries are very positive. The distribution is empty. There is...
We see even at a smaller rate, but when schools reopen, we see a very strong demand for products, especially after such a long period of absence. Before we will see the numbers that we have lost, I would say, since March 2020, I think we need to wait for 2022. Last but not least, I would like to focus a little bit on the working capital. You probably have seen a strong improvement in the parameter working capital turnover. Stefan will comment in a few seconds. Of course, I like to highlight the strong cash generation.
I think it is important, because I remember when we entered the COVID in April 2020, there was clearly a negative view on the group. If now we look at almost 19 months of COVID, if we consider the COVID starting in March, well, the group has been able last year to generate EUR 50 million of free cash flow. This year, we can now say that the free cash flow will go even beyond our expectation at the beginning of the year. All in all, a good demonstration of keeping the business under control in a difficult environment. The difficult environment is still there. Despite the business, the business is good, but as you can read in the newspaper, the
Unfortunately, the number of infection is still growing again. We are living in a world of strong inflation. We are living in a world in which we have scarce availability of workers, especially in Anglo-Saxon countries. I'm referring to U.K. I'm referring to United States. We have to work in U.K. in a situation in which we miss drivers. You probably have read in the newspaper that especially due to Brexit there is a lack of drivers, and we have to manage daily operation with containers that are sitting in docks waiting to find someone that can bring to our warehouse.
All in all, the environment is a complicated environment, but we are positive that we are able to manage the group in the right direction. Now I would like to ask Stefano to comment in detail the results, and then we will be happy to answer to all your questions. Thanks, Stefano.
Thank you, Massimo. I ask everybody to take the presentation and to start with the analysis of the core business sales, page five. As you can see, the core business sales September 2021 closed to a value equal to EUR 496.5 million, so with an increase of EUR 25.2 million compared to previous year, +5.3%. Of course, we had to analyze this difference, excluded FX effect. FX effect are equal to EUR -17 million. This difference is mainly due to North America, U.S., U.S. dollar, because the U.S. dollar suffered depreciation of 6% compared to the previous year, and for another remaining part to the Indian rupee.
Excluding the FX effect, the difference is equal to +EUR 42 million, +8.9%. These 42 million are mainly referred and related to Europe for EUR 23 million. Then to Central South America, +EUR 10.3 million. Asia, 8.1. Other countries, North America, are mainly flat, 0.1 and 0.5. Analyzing by product line, as Massimo mentioned before, we can see a growth compared to first six months of the year of the school and office product line. The positive difference is +EUR 23.6 million, +12.2%, was 9% in the first half.
Fine Art, of course, reduced the growth, but anyway, still in growth, plus EUR 3.5 million, + 2.3%. Industrial confirm the good trend with the plus EUR 1.7 million, plus 10%. Just to cross the two dimension, the graphic area product line, the school and office, plus EUR 36.8 million difference is mainly referred to Europe for EUR 14 million, to North America, EUR 9 million, Asia, EUR 7 million, EUR 8 million, Central and South America. While the difference of the + 3.5% million of fine art is mainly referred to Europe that was compensated by North America, and then we have Asia and Central America with one and plus two million of difference.
Going to page seven, the EBITDA analysis. The EBITDA as of September 9, 2021 is equal to EUR 91 million, showing an increase of EUR 12.9 million, +16.6% compared to the previous year. Also for the EBITDA, we have to exclude the FX effects. FX effects are equal to negative EUR 2 million, totally referred to US dollar, North America. Excluding this FX effect, the positive difference compared to the previous year jumped to plus EUR 14.9 million. That means +19.1%. Another important point maybe to be highlighted is that also the margin, the EBITDA margin increased to 18.3% compared to 16.6%.
This is the same trend that we're seeing also in June. This is due to the improvement of the margin for production efficiency, so mainly in the gross margin. Then also due to the better sales mix, especially in the Fine Art. Last but not least, also in the good management of the operating expenses that are still under control and a little less than the previous year. All these effects combine to improve the EBITDA margin. The extraordinary costs are equal to EUR 3.3 million, so not far from the value that we had in June. The increase is mainly due to the queue of some COVID costs, some queue of restructuring costs and the accrual of the quarter for the share-based payment.
Going to page eight. Of course, we can see that the good EBITDA margin is totally reflected in the improvement of the net income adjusted compared to the previous year. The value of September 2021 is equal to EUR 39.7 million. With an improvement of EUR 18.2 million compared to the previous year. Of course, this positive difference is due to the improvement of the EBITDA for EUR 13 million to less amortization depreciation for EUR 2.4 million. Then we have a better financial result for approximately EUR 9 million. That is a mix of more or less EUR 7 million FX, positive FX effect and EUR 2 million of better interest. Then we have more tax due to the increase of the result for more or less EUR 6 million.
Combining all these numbers, we can understand the improvement of EUR 18.2 million in the adjusted net income compared to the previous year. If we go to page nine. Again, Massimo mentioned before the good result related to the cash generation. We can see, as in the last twelve months, cash generation decrease of the net bank debt in the last twelve months is equal to EUR 83 million, excluding the FX effect. Also, we can see how the NFP of the September 2021 improved by EUR 7 million compared to the date of December. Main focus, but again, is not a different trend compared to the one that we have seen also in the previous quarter. We have a continuous improvement.
Of course, the operating result compared to the previous year, but mainly the improvement comes from the working capital. The working capital ratio was 55% in 2020, while we have a ratio near 51% in September 2021. Improvement more or less 4% that, as you can see also in the cash flow in page 10, it totally reflect in the EUR 30 million of improvement of the change in net working capital.
We can say that the good cash generation, the good cash management comes from a very good operating cash flow, but also from a good net, a good financial result, mainly due to the saving of interest, both from the main facility agreement because we reduce a little also the margin ratchet, and the North America part of the financing, this is the most expensive, was reduced of course compared to previous year. We were able to manage in a good way the local financing, the working capital line through some intercompany financing. Helping some countries, South America to have borrowing to a lower cost compared to the local cost.
These two effects help us to save more or less EUR 2 million of interest compared to previous year. I think that we touched the main point of the result of September. Maybe I can let Faith finish things.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. The first question comes from Niccolò Storer with Kepler Cheuvreux. Please go ahead.
Thank you for taking my questions. Good afternoon, everyone. The first one is on Q3 trend. If my calculations are right, basically you have reported strong growth in emerging markets, but flattish growth in Europe and the decline in the U.S., North America. If you can comment a bit on that and maybe on the two components, school on the one end and Fine Art on the other, which I calculated being down some 15%, overall in the third quarter.
The second question is on just a clarification on the indications that you gave on India and Mexico comparing 2019 with 2021. I was wondering if 2019 figures have been adjusted for FX changes because of course I see that 2019 numbers were higher, but also currencies in the meanwhile has depreciated quite a bit, in particular the Indian rupee. Maybe at today's values we would have lower figures. The third question is on 2022. I was just trying to understand how do you expect margins moving into next year?
Because you will probably have weaker product margin because of school outperforming Fine Art, a weak country mix because of recovery in emerging markets outweighing the growth in the U.S. and Europe. Also probably all the price increases that you have launched could have negative impact, at least on the margin in percentage points. Do you expect in the end to be able to post a margin higher than that of 2021 or not? Thank you.
Max, can you please answer the first two questions, and then I will try to answer 2022. Yeah. Okay. I can start maybe the first one for sure. Let's say that your analysis are correct, of course, and we said that Europe, the decline of Fine Art in Europe is a normal one, the one that we said because of course with the top of the lockdown, we foresee some decline of the Fine Art. Also the school ran really fast in the first six months. I was expecting a little slowing down of the school, but still growing anyway in an important percentage.
The school business in North America increased a lot also from June to September. What happened, the decline in the North America that of course you see on the P&L is only due to some, say, bubble that we had last year related to the Fine Art sales that were with some part of sales were with no big margin or high margin. This year we stopped this kind of sales of specific item in Fine Art, and we concentrate the sales on the very high margin Fine Art items.
For this reason that North America and also you can see that the EBITDA margin is better than the previous year, notwithstanding this decline of sales, the Fine Art in particular in North America. School still strong. Of course, we expect some little, we say, slowdown in Europe because, as you said, the growth was really strong. In North America, I can confirm that school grew compared June. The only aspect is this decline or this cut of the sales or this not repetition of sales with very low margin that affect Q3 2020. Anyway, where the margin was really low.
This is, I think the answer to question one.
Sorry, Stefano.
Yeah.
Just to be clear, European school was up but low single-digit versus H1 or was down in Q3?
School in Europe was 21% in 2021. Now we have 15% of growth, 15. The growth is double digit, but the big number was in June. Now, of course, a little slowdown was expected, but it's still strong. In North America, across a lot of numbers, it was 2% school in June, and now we have near 6% of growth. The decline was only Fine Art for the reason that I just mentioned to you. There was a big item with very low margin in 2020. The sale did happen in 2021. We changed the sales mix.
In fact, I mentioned when I talk about the improvement of the margin to a better sales mix compared in 2020, in particular, it's in the Fine Art section.
Mm-hmm.
Massimo, I don't know if you want to add something.
No. I think is correct. By the way, 66% of F.I.L.A group business is school-related. I think that the fact that school have gone back to a normal situation is very much welcome from us. By the way, explain the operating leverage that we have reached in this third quarter, because clearly, school bring substantial amount of cost. The majority of our clients are related to school. Clearly, the fact that the school business has a very good recovery is a very positive sign, by the way. There is not very much to add that, except that for school, we have to wait the recovery also of India and Mexico.
I will discuss after when I will answer about the 2022 question.
Yeah. Related to India, Mexico, if I capture exactly your question. You are correct. The value, do you know that the two companies made more or less EUR 17.5 million of EBITDA in 2019? I think, Massimo, we can forecast more or less EUR 5 million this year for the two entities.
Yes. Unfortunately, there is still a big gap this year with India and Mexico. By the way, I would like to remember that in 2019, especially India, was full speed growing double digits. There is clearly a big reserve of growth that we will have when the country will go back to normal situation. Of course, I don't know, Stefano, if you have adjusted to FX aspect, the
I don't have the FX, the adjustment, but I have the value. Mexican peso was 21.6 in 2019, and in September 2021 is 24, the exchange rate with euro. So there is a big devaluation. As the INR, Indian rupee, was 78.8 in September 2019, and now is 88.08. So for sure, there is a net FX negative effect on the two currencies. I don't have the absolute value, but maybe I can calculate the percentage. But there is a strong depreciation in the rupee, and there is a depreciation in the Mexican peso. Indian rupee is more or less.
There is a 10%.
10%-12% of depreciation, and for the Mexican peso is more or less 14%. The two FX effects are quite material on the results. Of course then there is also USD, but you didn't mention. The value was 1.12 average FX exchange rate in 2019. Now for September 2021, we had 1.2.
Mm-hmm.
Also for the U.S. dollar, there is a 6% of the valuation. No, maybe it's not 6%. Against 2020. Against 2019 is 7%.
Okay. Thank you.
All the value are affected by the FX. The 91 that you see at page four should be more or less EUR 95 million. If we use the same exchange rate of 2019.
Okay.
Without India, without the same value, absolute value of India, of course, and Mexico as absolute value, notwithstanding the FX.
Nicolò, I think I have to ask to answer your question of 2022.
Mm-hmm.
First of all, when Your comment about margin, I think, please correct me if I misunderstood because you said, what do we expect in terms of margin in 2022, when India and Mexico should go back to normality. From a mathematical point of view, today in our consolidated balance sheet, India and Mexico have very low gross margin also due to the big inefficiency we have in the system because they are working. If you look at the turnover, for example, the two countries did, in 2019, EUR 88 million, this year, EUR 51 million. So even adjusting for the exchange rate, it was EUR 80 million compared to EUR 51 million this year, which means the two countries are down 40% compared to 2019.
With such a low activity, gross margin are suffering due to heavy inefficiency in the production. EBITDA is minimal, it's close to zero. In this moment, I would say mathematically, India and Mexico are reducing our gross margin and our EBITDA. I think, we all agree because they are close to zero. What we do expect next year, but we have to be very honest, without COVID, we have a very strong expectation from those two countries. If you consider that, in India we have 300 million kids and in Mexico 32 million kids, this is self-explaining. We are talking of two countries that before COVID had an impact on F.I.L.A group around 24%. We are talking of a big number.
I think, with the remaining 76%, we have made miracles this year to achieve these numbers. We are positive that this number will come as soon as also in those countries, the society will learn to coexist with COVID, which seems not the case yet, even if we know that the school attendance is growing every week. Concerning the rest of the world, as you know, we have an important inflation in this moment in our cost, transportation and raw material. Starting the first quarter, and I underline the first quarter, so not the first January, but the first quarter, we are going to implement another important price increase, which will guarantee us in terms of EBITDA expected for 2022. Probably in percentage, there will be some negative impact.
In total value, if you recall with Mexico, mathematically, even if you look at the numbers this year, and if you add India and Mexico of 2019, we will go beyond EUR 120 million. The problem is that every week we read different things about COVID, so we live in a very unstable and unpredictable world. Net COVID, we do expect an important growth next year of EBITDA and an important growth coming from Mexico and India. We had, as a group, if you recall, a long-term target of 17.5%-18% on a yearly basis EBITDA. We hope to achieve that number under the circumstances that COVID will allow us to work in a normal environment. I don't know if I answered your question.
Yeah. Maybe just on price increase, I didn't understand if you will launch this further round of increase in Q4 or Q1. I guess Q1, you said.
Yes. We are going to launch in Q1.
Okay.
Not exactly the first of January because.
Got it.
We need to respect also the operation of our customers. I give you an example so you can better understand. We have customers that have catalogs, for example. With catalogs, they have prices printed. Every time we change prices, we create troubles to their business activity. This is one example. Another example, we have a notice period by contract with the big retailers. We have given them the notice period now that we think we have properly calculated the impact of the new cost, and what we think will be the cost at least for the first semester of next year. Unfortunately, we think that they will remain high. We send the notice.
As you can imagine, customers are playing their game, so they try to postpone one month, eight weeks. The full positive effect of the new round of price increase will start from the first of April.
Okay. Thank you.
The next question comes from Giulio Scanferlato with Equita. Please go ahead.
Good evening. Thank you for taking my question. I have just a very quick one on the tax rate. I see that in the nine months, you had the tax rate close to 26%. I would like to know if it is fair to expect a similar level also for the full year and for 2022 and 2023. Thank you very much.
Stefano? Hello?
Dr. De Rosa, we can't hear you. Sorry, I try to call again, Mr. De Rosa. Just a second.
Yeah, no problem. Thank you.
I don't want to get my answer.
No, I didn't hear you.
Sorry, because there is some problem for the phone.
Yeah, no problem.
Okay. Say that this year we had some integral compensation with some tax credits, in particular in Sila, from quite material amount. We were able to compensate. I think this create an improvement of 1% of the tax rate at group level. I would prefer to be a little conservative that we will place between 27% and 28% for the next year.
Okay, thank you very much.
The next question comes from François Robillard with Intermonte. Please go ahead.
Hi, good evening. Thank you for taking my question. Mine will be pretty straightforward. It's looking at your EBITDA guidance for the year. We talked about 2022 earlier, but we didn't talk about your expectations for 2021. Is the range EUR 108 million-EUR 110 million still your target for the year? Or does your good performance in the third quarter help you aim for something higher? Same question on your free cash flow guidance. You mentioned earlier superior to EUR 50 million. Is it also upgraded? Thank you.
Maybe I start from the cash flow. We confirm that the free cash flow generation will be between EUR 50 million and EUR 60 million. We of course working to maintain the improvement that we have. For the EBITDA guidance, Massimo, I don't know if you want to.
First of all, I think that we needed to understand what is the guidance because I recall that the guidance until June was around EUR 106 million and EUR 108 million, if I'm not wrong. Stefano, can you confirm?
Yeah, confirm.
I don't recall the guidance of EUR 108 million and EUR 110 million.
If we agree on the parameter, I think that we confirm that we are going to match the high side of the guidance. When I say the high side, I refer to the numbers that I was aware. The threshold EUR 106 up to EUR 108. The reason why, from a business point of view, I would like to repeat what I said before. From the business point of view, the situation is positive. We see good consumption, we see good sell-out, good demand both in Fine Art and school. The reason why, considering this trend, would be obvious to expect a better number.
We have to analyze in a very realistic way what we are seeing. In this moment we are facing a strong inflation that we can only partially compensate with the price increase we have applied in June. That clearly, when in June we expected an improvement by August, September, this is not happening. Clearly for a quarter that, among the four, the fourth quarter is the less important, we could have some negative impacts. We do not expect any recovery from India and Mexico in short term. Just to refresh the memory of everyone, the last quarter of 2019, India and Mexico did EUR 6 million, which is a big number for the fourth quarter.
This year, unfortunately, they will continue performing much lower than our expectation. When we were talking in the beginning of 2021 about what was our comfort level of EBITDA for 2021, I recall that we said we were expecting full speed in Mexico and India starting from July. Fortunately, we have overperformed in the rest of the world, and this will be enough to confirm the indications, the consensus, and to confirm the consensus in the high range of the consensus. This, I think, we are comfortable. Unfortunately, considering the lack of contribution coming from India, Mexico still, and the impact of inflation, I think to be conservative, it is a fair approach.
For cash, I think we can confirm we are going to improve the cash indication that we have given until June, and I think we will be very close to EUR 60 million.
Thank you very much.
is a follow-up from Niccolò Storer. Please go ahead.
Yes. Thank you. Can you please remind us whether also Q4 last year was positively impacted by final sales at low margin? Because if I remember well, Q4 last year was as strong as Q3, probably even stronger. I was wondering if it was affected as well by this kind of sales. Thank you.
Niccolò, maybe just to have maximum clarity, because I even want to meet the number. Q4 last year was EUR 70.3 million of the EBITDA compared to EUR 31.9 million that we had in Q3. Just for your information.
Yes. Thanks, Stefano. I do recall. Last year, yes, we had substantial sales with low margins. It was a difficult quarter last year, because probably you recall that, in November, suddenly London shut down. Also in Italy, many schools were closed starting from mid of November. And we had quite important negative impact from the sudden growth of COVID. India and Mexico contributed very small, like we do expect this year. We do not expect any change this year to last year.
In terms of business, the business is better this year. The reason why we are not, let's say, we still do not have a completely clear picture is because we have a very unstable market of freight transportation. Let me give you the example of the drivers in the U.K. We have orders, we have containers sitting in the dock. We don't have drivers to deliver the containers by 15 mi from the dock to our plant. In this environment, with inflation and with our prices that will be updated starting the first quarter 2022, we think that even this fourth quarter will not be a very easy quarter. Despite this, the consumption, so the sellout of the product is still very positive.
It's a positive picture, but the environment is still complicated. When I say environment, I mean supply chain complications related to transportation, difficult situation of missing containers available or missing labor force, missing drivers, that of course we hope will be adjusted in the weeks coming. At least the more the government will reduce the money available to the family, probably there will be more workers available. This temporary effect, negative effect of the inflation that we are going to solve to compensate with the price increase in the first quarter. This is the reason why we prefer to stay conservative.
Thank you.
There are no more questions at the moment. We have another question. The next question comes from Alessandro Cecchini with Equita. Please go ahead.
Hello, everybody, and thank you for taking my question. Maybe a point on Mexico. I don't know if you have already discussed about your working capital actions, what it's happening in Mexico in order to better understand your change in commercial strategy in Mexico. Thank you.
Thanks. Thanks, Alessandro. Yes, our strategic change are giving already brilliant results. I prefer Stefano to give you the figures. We have changed the terms to our customers. Of course, we could not imagine that the country suffered so far in terms of school attendance. In fact, schools are open. Last week, the prime minister said, "It's time for the kids to go back to school." The reality is that families are not bringing kids to school. Today we are at a level of attendance that goes around 50%. We have 16 million students on a total population of 32 million. Despite a very low GPA, and despite a very low turnover, we have an important cash generation from Mexico. Stefano, can you please elaborate more?
Yeah. Just to reinforce what he said, if you remember, I mentioned that we have a last twelve-month generation of more than EUR 80 million. EUR 5 million of these 85, EUR 5 million come from Mexico. Mexico in the last twelve months generated EUR 5 million, notwithstanding the poor operating results. This is due to the reduction of the stock of receivables and the good management of working capital due to the change of the commercial policy.
Okay. Thank you very much.
Last question comes from Isacco Brambilla with Mediobanca. Please go ahead.
Hi. Good evening, everybody. One question from inside. This is on Fine Arts. I was not able to attend the very first part of the presentation, so beg my pardon if I'm asking something which you already commented. Looking at Fine Arts, looks like the division has been settling a little bit below the quarterly pace of sales we have been observing in the second part of 2020, which was extremely strong. My question is, can you tell us the contribution of Arches on the nine-month sales in 2021? And also if you see sales from Fine Arts at least consolidating in 2022 the level achieved this year. Thanks.
Arches was
Stefano.
Sorry. No, go on.
No, just Stefano answers, please.
Of course, I'm talking of third-party sales is EUR 5.4 million, excluding intercompany sales, of course.
What is this, Stefano?
The sales of Arches in the nine months, excluding intercompany sales.
Okay. Yeah, but I think the question was more on the trend of Fine Arts in the second and third quarter, if you have the figures in front of you.
Yeah. As I mentioned also before, let me just recover the slide. The figures, Fine Arts was 13% in the first half. Now it's 2.3%. The decline in Europe is not a big decline because as we already said that we expect some decline, so we decrease what? From 19% to 16.7%, so not a big decrease. Of course, there was some decline also in Asia, in South America, but not big. What happened was a negative number in North America that is more or less 10%.
Compared to a positive number toward +3% in H1. This is totally due to the sales that we had in Q3 2020 of items that we exclude from our sales in 2021 because they were sales with low or nil margin.
Exactly. Let me add some comment. The trend of Fine Art is still very positive. By the way, if you look at the EBITDA of North America, you can appreciate that the company has improved substantially the profitability. To compare the third quarter of this year to the third quarter of last year, it's misleading because last year we had a peak of sales due to the problems related to COVID. Customers were looking whatever that was, let's say, drawing-related, where they were buying everything. There was a total disruption in the delivery coming from China, so customers were asking no matter what. This clearly has inflated the business.
As we said last year, by the way, if you just look at the EBITDA of last year, it starts explaining a lot of lines of business were with low margins. This year, the business of Fine Art has been cleaned by this, let's say by this bubble. We are back to a normal situation in which the business has a nice organic growth. We do expect to continue this organic growth, and the average profitability is well under control. If not, we could not achieve this number of 18.3% with zero contribution from Mexico and India.
I would say simply, as we always said, Fine Art is back to normal, and we do expect a normal trend of growth also in 2022.
That's very clear. Thanks, Massimo and Stefano.