Safilo Group S.p.A. (0NJ5.IL) Earnings Call Transcript & Summary

Good evening, and welcome to the Safilo Group First Half 2025 Results Presentation. This call may contain forward-looking statements related to future events and operating, economic and financial results for the Safilo Group. Such forecasts, due to their nature, imply a component of risk and uncertainty due to the fact that they depend on the occurrence of certain future events and developments. The actual results may therefore vary even significantly to those announced in relation to a multitude of factors. Today's participants are Mr. Angelo Trocchia, Chief Executive Officer; Mr. Michele Melotti, Chief Financial Officer; and Ms. Barbara Ferrante, Director of Investor Relations. I will now pass the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks very much. Good evening, everyone, and thank you for joining us today to discuss Safilo H1 2025 results, including a trading update on the second quarter. Let me begin by framing the broader context of our performance. Throughout the second quarter, we continued to show our ability to adapt to the multiple layers of uncertainty streaming from geopolitical tension and shifting macroeconomic pressures particularly those related to tariffs. Despite this challenge and a landscape that continues to change, our sales performance at constant exchange rates remains solid across key regions, reflecting the strength of our brand portfolio, our operational agility and the execution discipline of our teams across markets. Supported by our long-term customer focus, this momentum translated into consistent economic and financial progress allowing us to deliver one of the strongest semesters in our history. At the same time, we are advancing on our strategic agenda, further strengthening our license portfolio and our commitment to long-term shareholder value. Turning to the key highlights of the period. In the second quarter, our sales at constant exchange rate continued to grow, in line with the performance we recorded in the first quarter, driven by positive momentum in North America where the recovery was more marked. And by the resilience of the European market, despite increased market uncertainty, weighing on consumer confidence. Once again, France stood out as one of our leading markets, underscoring its role as a strategic priority. Second quarter trends were substantially a continuation of Q1 also in emerging markets where Asia remained largely positive, while sales in EMEA region remained weak. Our results were again underpinned by the strength of our contemporary and lifestyle brands across our core wholesale channels. From an economic and financial standpoint, we delivered another quarter of significant profit and margin expansion, supported by a series of effective measures, which mitigate the negative impact of the U.S. tariffs. Gross margin reached a new high, and we were able to convert much of this improvement into a higher operating performance. Combined with strict working capital management, these results also drove strong cash generation and a significant reduction in net debt. In short, I would say that the balance of our geographic exposure, the quality of our brand portfolio and our operational discipline continues to sustain our performance through a complex and evolving cycle. With that, I will hand it over to Michele, who will walk you through our results in more detail.

Thank you, Angelo, and good evening to everyone. Let me start with an overview of our total sales performance in the second quarter and over the first half of the year. At constant exchange rates, total net sales rose by 2.3% substantially, in line with the plus 2.2% recorded in the first quarter. Differently from Q1, foreign exchange rates were a significant headwind for our reported revenues, given the approximately 5% depreciation of the U.S. dollar against the euro, which impacted on our top line translation. So Q2 sales were down 1.1% at current exchange rates. We closed the first 6 months with net sales of EUR 537.6 million, up 2.3% at constant exchange rates and in positive territory also at current exchange rate, up 1.1%. From a brand perspective, in the second quarter, momentum remained strong across our core portfolio. David Beckham, Boss, Tommy Hilfiger and Marc Jacobs delivered another quarter of double-digit growth while Carrera and Carolina Herrera recorded solid high single-digit increases. Across product categories, prescription frame remained the main positive driver supported by resilient demand across all key markets. This helped us offset the softer performance in sunglasses, which were influenced by a more prudent consumer spending and persistently promotional environment, especially in the United States. The quarter was overall flat for our sports products, largely due to different phasing of delivery of winter products. I will come back on this later. Looking at our distribution channels on a half year basis, momentum remains solid among our independent official and retail chains, up high single digits, while online sales were moderately positive, stable at around 16% of revenues. What we saw here was continued strong performance in direct-to-consumer channel and sales growth towards internet pure players, offsetting a subdued performance in Blenders’' e-commerce business. Turning to our regional performance, starting with Europe. Second quarter sales were moderately positive by 0.5% at constant exchange rates. Sunglass sales remained broadly stable, sustained by solid momentum through internet pure players, while performance in physical stores, particularly in Italy and Spain was more uncertain and volatile. Prescription frame posted resilient low single-digit growth, fueled by the increasing adoption of U.S. Safilo B2B platform among independent optician and retail chains, further strengthening our commercial execution. As highlighted France confirmed its role as the region's main growth driver, supported by robust demand for optical products, both prescription frame and sunglasses and further boosted by our in-store communication initiative. And we saw continued solid results also in Northern and Eastern Europe markets. As a quick note, our sales performance in Europe was also marginally impacted by the deconsolidation effect from the disposal of Lenti in June. In the first half, our sales in Europe increased by 1.7% at constant exchange rates, supported by double-digit growth from Tommy Hilfiger, Boss and Marc Jacobs, which showed a continued performance across both prescription frame and sunglass collection. Carrera closed the first semester with a very healthy high single-digit growth, while Polaroid posted a low single-digit upside, supported by the enhanced brand visibility as the official partner of the ATP Tour, particularly during the Madrid and Rome tennis tournaments. Turning to North America. Q2 sales at constant exchange rate rose by 4.8%, reflecting the continued recovery of the U.S. market. This performance was led by the double-digit growth in Carrera, David Beckham, Boss, Marc Jacobs and Carolina Herrera collection, which significantly boosted total prescription frame sales and helped sustain the sunglass category in what remains a challenging market environment. In direct-to-consumer channel, notwithstanding the fact that Blenders continue to be impacted by promotion-driven demand, particularly evident in the entry-level price segment, its performance showed some improvement compared to the first quarter. In the second quarter, sales of Smith’s products were held back by our decision to temporarily limit import of new winter helmets from China following tariff announcement. This move resulted in the deferral of some deliveries to the second half of the year. Zooming out to the first 6 months, our sales in North America increased by 2.8% at constant exchange rate, driven by mid- high single-digit growth across its core channel and product categories. Notably, Smith closed the winter season '24, '25 in North America, further solidifying its market leadership in snow goggles and snow helmets. This, combined with solid results from our leading eyewear brands in wholesale helped us sustain the region's positive trajectory. Turning to emerging markets. The second quarter presented a mixed picture across the regions, shaped by a combination of macroeconomic and geopolitical factors. Asia Pacific continued to make a positive contribution to our performance with second quarter sales up 11.5% at constant exchange rate. Momentum remained healthy, especially in China and across distributor-led markets, which continue to show solid demand and engagement across our portfolio. In the first semester, our sales in Asia Pacific were up 14.7% at constant exchange rates, so far confirming the region as a steady contributor despite some local volatility. In the period, figures, Tommy Hilfiger, Smith, Marc Jacobs and Levi's were our top-performing brand in the area. Turning to the Rest of World. In the second quarter, sales were down 5.2% at constant exchange rate, while in the first half, business was down 3.8%. EMEA market and Latin America showed contrasting dynamics with challenging condition in the former and more positive trend in the latter. In the Middle East, the region continued to face a combination of political tension and operational restrictions in certain key markets. This disruption affected distributor sell-in and weighted on overall business visibility, making the operating environment more complex. In contrast, Latin America posted a positive performance in the second quarter, led by a business recovery in Mexico, thanks to a strong performance by Carrera and Carolina Herrera. Let me now turn to our economic performance, starting with our gross margin, which was one of the highlights of the second quarter, reaching 61.6% of sales and taking the first semester to 61.1%, among our all-time high. What made the difference here was the combination of several factors. First of all, we were able to maximize the use of existing inventory to serve the U.S. market efficiently, a move that helped us minimize the immediate cost escalation due to the high tariff level introduced by the U.S. administration in early April. Starting from June, we also implemented target price increase adjustment and engaged in focused supplier negotiation, which further contributed to preserving profitability. In addition to this lever, price mix continued to play a favorable role on gross margin, especially a lower contribution from the product supply business and transport products on top are more favorable dynamics on sales. Gross margin also benefited from the lower obsolescence costs supported by continued improvement in inventory, both in terms of quantity and quality. Finally, we had some 50 basis points support from foreign exchange movement, which also contributed to lifting gross margin during the period. Altogether, this factor led to a strong and healthy margin profile with 150 basis point improvement in the second quarter and 110 basis points higher in the first semester. In the second quarter, we continue to deliver strong progress at operating level, effectively converting a significant portion of the gross margin improvement into higher profitability, even if we maintain a sustained level of marketing investment to support the development of our own brands. During the quarter, reported EBITDA included a gain of EUR 9.7 million due to the disposal of the subsidiary, Lenti, which together with few nonrecurring costs is clearly excluded from our adjusted results. On this basis, our adjusted EBITDA grew by 9% in Q2 with the margin improving by 100 basis points from 10.1% to 11.1%. In the first semester, we recorded the strongest operating performance of the past decade. Adjusted EBITDA was up 8.1% to EUR 62.3 million, while the margin reached 11.6%, 80 basis points higher than last year. This result was supported by healthy operating performance as the increase in SG&A expenses, which rose by around 1% was mostly absorbed by sales growth. This moderate increase in selling, marketing, general and administrative expenses was primarily driven by higher marketing investment and by a greater allowance for doubtful accounts in certain emerging markets. Yet as a percentage of sales, SG&A remained stable. The improvement in profitability was further supported by lower depreciation and amortization, which helped drive a 15.3% increase in adjusted operating profit with a margin expansion of 100 basis points to 8.1%. In summary, this was a milestone period for us from an operational standpoint, one where top line quality, margin discipline and focused investment came together to unlock one of the best underlying profit delivery in our recent history. Turning now to the bottom line. Our strong operating performance was clearly the main driver behind the significant improvement in our net results over the first 6 months of the year. Below the operating line, the positive trend was further supported by lower net financial charges, which declined from EUR 6.9 million to EUR 2.9 million, mainly due to the lower average group net debt during the period and a net positive impact of around EUR 2.4 million from exchange rate differences. We also recorded a higher nonoperating gain linked to the fair value assessment of the option liability of minority interest, which is due to Blenders lower-than-expected results. Finally, we closed the first semester with an adjusted net result of EUR 33.7 million, recording an increase of 39.4% compared to the EUR 24.2 million recorded last year. If we net out the effect of the put and call option, our adjusted net results still showed an healthy year-on-year improvement of 32%. Let me now finish with our cash generation and financial performance. We closed the second quarter with strong free cash flow of EUR 29.1 million, bringing the total cash generation for the 6 months of the year to EUR 43.5 million. This result reflects a sharp improvement in cash flow from operating activities, which reached EUR 40.7 million in the semester, up significantly from the EUR 27.3 million last year. The strong performance was driven by the solid earnings and by continued discipline in working capital management, particularly through tight control of inventory levels. This efficiency was further supported by the strategic decision taken in the second quarter to limit import from China, a move that helped optimize stock dynamics and preserve cash. Cash flow for investing activity was also a positive flow at EUR 8.4 million in the semester due to the disposal of Lenti, which generated net proceeds of EUR 11.9 million. This compared to the cash outflow of EUR 41.1 million in the first 6 months last year, mostly related to the strategic investment for the perpetual license of eyewear by Authentic Brands. At the end of June, our net debt was halved to EUR 42.4 million compared to EUR 82.7 million at the end of December last year. Notably, excluding IFRS 16 lease liability, we're substantially net debt-free at the end of June, a significant achievement that confirms the strength of our financial profile. With that, I'll now hand it back to Angelo to share a few closing remarks.

Thank you, Michele. Before concluding our presentation, I would like to outline three strategic milestones we achieved in the last couple of months. First of all, the early renewal of our licensing agreement with Carolina Herrera, which we have extended for another 5 years through December 2031, allowing us to complete the path we began in 2023 to secure long-term visibility over all our core licenses. With the renewal of Carolina, we have indeed completed the important journey. We are particularly pleased to continue this successful collaboration with one of the most iconic names in the global womenswear. The synergy between Carolina creative directors and our design and craftsmanship expertise has produced distinctive modern eyewear collection that truly reflect the extense of the brand, and that has allowed us in just a few years to place it among our leading licensed brand. Secondly, this renewal has given us that additional hint of confidence also to proceed with the launch of the share-back program we had announced in March, notwithstanding the highly uncertain landscape. We continue to navigate market by still evolving tariff negotiation. As we had already declared, the program is designed to set up the reserve of treasury shares, ensuring we retain the flexibility to size the future investment opportunity, whether for growth or strategic initiative. It underscores our focus on long-term value creation for our shareholders. As a quick reminder, the plan allows for the purchase of up to 15 million shares equal to approximately 3.6% of our outstanding capital and is expected to be concluded by December 2025. Based on the share purchase program, we started on June 2025, at the end of the semester, we had bought around 438,000 Safilo Group ordinary shares, equaling approximately 0.11% of the outstanding capital. Finally, we entered the third quarter announcing the addition of Victoria Beckham to our portfolio, a brand that further enhances our women's offering and strengthens our position in the aspirational entry to luxury segment. Victoria Beckham is a signature in the women fashion backed by one of the most influential creative directors in the industry. We are thrilled to welcome her into the big Safilo family. Together, we aim to establish the brand as a global reference in eyewear with collection defined by minimal design and highly distinctive brand identity. This new partnership exemplifies our ambition to lead in the segments where creativity, quality and brand storytelling make the difference. With this, I conclude our presentation. Thank you all for your attention, and we are now happy to take your questions.

[Operator Instructions] The first question is from Oriana Cardani of Intesa Sanpaolo.

Three questions. The first one is on price development. Do you think that the price increase already implemented in North America is enough? Or are you considering a further slight revision in light of the recent tariff scenario. And so how do you expect the price mix effect to be in the second part of the year? Then the second question is about gross margin. What are the headwinds you expect in the second part of the year? And considering this scenario, do you think that there is room for margin stabilization at the level of the second half of last year in terms of gross margin? And third question is about current trade. Can you give an update on the trend you saw in July for the group and across each region?

Sorry, thanks for your question. I will start answering to your last question, and then I will answer the other two. In terms of current trading, we can say that we exited the second quarter with the same trend with the trend largely in line with what the overall performance was of the period. If we look by region, North America, June was a solid month, particularly in our wholesale channel. In July, trading remained positive but showed some sign of deceleration related mainly to uncertainty and volatility. If we look to Europe, in Europe, we had a solid April, we had a very challenging May related to very rain period, especially in the south of Europe. So Europe has been almost divided in two -- but we have been penalized in the south of Europe, mainly Italy and Spain, which has impacted our sunglasses. June saw a very clear improvement of the performance in terms of both sell-in and sell-out. And in July, we see a pickup of the sunglasses category. This is divided by region. If we look to the -- I answer to the prices, then Michele will answer on the gross margin. With the current scenario and with the current assumption, except that big changes will happen on the tariff side, we don't see a need to do other activities or take other actions on the price increase. We've been very careful in doing it. We've been doing differentiated by different categories. But as it stands today, that's it, we don't see need for further acting on price. With relation to the H2, I think H2, now to be honest, we don't see effect on the demand from the price increase, at least we have not seen it for our categories. Openly, to be honest here, the question is what's going to happen on the inflation in North America. As it stands, we don't see negative impact from the price increase that they have been done so far.

On the gross margin for second half. Clearly, our headwind will remain tariff and our ability to mitigate all the tariff-related costs. I would say, as a matter of fact, in Q2, we have been able not only to offset most of the impact arising from the tariff, but even to build margin, primarily from a positive price mix effect. And of course, also some development on obsolescence reduction and also some headwind -- some tailwind from the ForEx impact. So our ambition for H2, of course, depending on how the tariff scenario will evolve is to continue to build margin, I mean, the level which will highly depend on one side on our ability, as I was saying before, to counter the impact arising from the tariff and on the other side, but also the mix of our sales in the second semester.

The next question comes from Niccolo Storer of Kepler.

Two questions. The first one is on the transfer of your production capacity. If I remember well, you were mentioning to lower China to below 50% by the beginning of Q2. So I was wondering if this has actually happened. And the second one is on CapEx. I see that CapEx has remained extremely low in the first part of the year. Why that? And should we expect any kind of acceleration in the second part?

I answer on the first one on the sourcing. No. I think we are absolutely in line on -- according to the plan that we've been discussing last time. So all the so-called differentiation of the supply chain toward Vietnam, Philippines, Cambodia and Thailand is going absolutely according to the plan. So, so far, there are no mean variance versus the numbers you were referring to and then we have been talking last time. But what is important, I think the way in which we are working gives us also flexibility if anything will change in the current weeks. You know that we need to get used to quite some instability, we will be able to eventually rebalance or take the right decision according to the different situation. But so far, in the current scenario, we are definitely in line with the plan we've been discussing and declaring last time.

On CapEx, as you can see, recently, we have a very light, I would say, infrastructure setup. I would say that around 10% -- EUR 10 million would be a reasonable estimate for the year. And this is mainly related to maintenance CapEx, which this year is more skewed to the second half.

The next question is from Andrea Bonfa of Banca Akros.

Some of my questions have been already answered. So I got two remaining. One is you mentioned some benefits on the working capital from, let's say, the trade tension with China, which benefited exploiting current stocks in U.S. Does that imply that you will have some net working capital absorption in H2 that we need to consider? This is my first question. And the second, if you can elaborate on Victoria Beckham license, which seems interesting. And if you can give us an idea in terms of potential vis-a-vis your overall sales.

On working capital, yes, I mean Q2 and overall H1 has been helped and supported also by, let's say, the decision of delay some of the import to second half. I would say the amount is roughly in the range of EUR 10 million inventory that has been delayed. So we should assume in the second half buildup of this working capital for this related driver. At the same time, as per seasonality, we also foresee a reduction in receivables. So we should expect anyhow an end of year with an improvement on our working capital efficiency versus prior year.