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

Good evening, and welcome to the Safilo Group Third Quarter and First 9 Months 2025 Trading Update. 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's trading update for the third quarter and the first 9 months of 2025. Let me start by saying that Q3 was another solid quarter for Safilo. We stayed on course, delivering a consistent performance, marked by steady sales growth at constant exchange rates, further margin improvement and another round of robust cash flow generation. In the context of persistent macroeconomic uncertainty and tariff pressure, these results give us even greater confidence in our ability to navigate complexity and keep building momentum. We are proving that we continue to grow in a sustainable way even when the environment didn't make it easy. Let me briefly walk you through the key highlights of the quarter. Despite intensified ForEx headwinds penalizing reported sales, we maintained a positive trajectory at constant exchange rate, delivering a resilient plus 2.1%, substantially in line with the performance of the first half and again, supported by the strength of our contemporary and lifestyle brands and the breadth of our geographical footprint. Regionally, the picture remained mixed. In our core markets, flat sales in North America were offset by high single-digit upside in Europe, while in emerging markets, the continued growth in Asia Pacific helped mitigate the softness seen in the rest of the world. From an economic standpoint, our operations continue to face pressures from tariffs, yet the effectiveness of our mitigation actions, together with favorable price/mix dynamic and the gradual normalization of some operating costs allowed us to protect our gross margin and to increase our adjusted EBITDA margin to 10% of sales, 210 basis points higher than last year. Thanks to the strong operating performance and to our tight control over working capital, we delivered another quarter of robust cash generation. We brought the free cash flow in the first 9 months to around EUR 64 million, leading us for the first time in our history to become net debt positive pre-IFRS 16. That's a milestone we are really proud of, and it shows just how far we have come in building a resilient and more agile business model. Michele, over to you to go through our results in more detail.

Thank you, Angelo, and good evening, everyone. Let me start with a quick look at our total sales performance in the third quarter and over the first 9 months of the year. At constant exchange rates, Q3 net sales growth was consistent with the pace we recorded in the first half, while reported revenues were more significantly impacted by negative currency movement, particularly the depreciation of the U.S. dollar against the euro, closing down 2.1% at current exchange rates. For the 9-month period, we closed with a total net sales of $758.4 million, up 2.2% at constant exchange rate and in line with last year at current exchange rates. Across brands, as Angelo highlighted, our contemporary and lifestyle brands continue to grow nicely. We are talking about Carrera, David Beckham, Marc Jacobs, BOSS, Carolina Herrera, and now -- also Kate Spade, while the quarter was still soft for Blenders e-commerce and Smith sport products in physical stores. By product category, prescription frame continued to show growth across all regions, while sunglasses recorded a nice recovery in Europe. Let me then walk you through our regional performance, starting with Europe. Europe was clearly the bright spot this quarter with sales up 7.7% at constant exchange rates. This acceleration was fueled by two key drivers. First, our prescription frame business strongly outperformed in the quarter in this occasion also supported by a favorable phasing of delivery, which last year had fallen into the fourth quarter. Second, we saw a rebound in sunglass sales. As commented in August, this started to be visible in July, driven by favorable sellout dynamics, particularly in Italy. Demand remains strong across both independent optician and retail chains, and we are especially pleased with the continued traction of our You&Safilo B2B platform. Its growing adoption is helping us deepen customer engagement and sharpen our commercial execution. Brand momentum was broad-based. Carrera, David Beckham, Marc Jacobs, Tommy Hilfiger, BOSS, and Carolina Herrera, all strengthened their competitive position in the region. Looking at the individual markets, France stood out once again as our top performer, driven by an expanding customer base and dynamic commercial and marketing initiatives. Growth was powered not only by our leading international brand, but also by regional successes like Isabel Marant, which continued to resonate strongly with French consumers. In Germany, we maintained solid momentum, particularly among independent optician and online pure player. And in Eastern Europe, we delivered another strong quarter in Poland and Turkey, which remain our largest market in the region. In the first 9 months of the year, sales in Europe were up 3.2% at constant exchange rates. Let's turn to our performance in North America, where the third quarter was marked by a mixed picture, set against a backdrop of continued volatility and uncertainty in the business environment. Sales were flat at constant exchange rate, while down 6.6% at current exchange rate, given the stronger depreciation of the dollar. In the Sports segment, Smith experienced diverging trends across its 2 channels, delivering on one side, very solid growth in the direct-consumer business. This was supported by strong demand and effective online engagement. On the other hand, sales to physical sports shops were affected by the ongoing normalization of shipment of sport products from China. As we had anticipated in August, this delivery were to be recovered between the third and the fourth quarter. In eyewear, our wholesale business posted a mid-single-digit increase, thus a very healthy performance, although a bit of a slowdown compared to the second quarter. Positive momentum was driven by solid demand from independent optician and chains with Tommy Hilfiger, Marc Jacobs, BOSS, Kate Spade, and David Beckham continue to act as our growth engines. The quarter remained challenging for Blenders' e-commerce, which was still affected by intense promotional activity from several players in the value for money segment. Overall, our sales in North America closed the 9-month period, up 1.9% at constant exchange rates. Let me now briefly comment on the performance of our emerging markets, starting with Asia Pacific. In the third quarter, the region sustained its positive momentum with sales up 7.8% at constant exchange rates. Growth was primarily driven by our distributor-led market, supported by the strong brand contribution from Tommy Hilfiger, BOSS and HUGO. Australia stood out with a particularly strong performance fueled by Carrera ongoing brand-building initiatives, including the successful launch of its women collection earlier this year and by Smith continued development in the market. Looking at the first 9 months, sales in Asia Pacific were up 12.4% at constant exchange rates. Finally, turning to the rest of world. The third quarter remained challenging with sales down 13% at constant exchange rates. Performance continued to be affected by persistent headwind in India, and a difficult market environment for our Middle East distributors. Mexico, on the other hand, demonstrated resilience, supported by positive sales trend to independent optician. Across the regions, Tommy, BOSS, and David Beckham stood out as top-performing brands, helping to partially offset the broader market pressures. Over the first 9 months of the year, sales in this area were down 6.8% at constant exchange rate versus the same period in 2024. Let's now move to our economic performance for the quarter, focusing on the 2 key indicators we typically comment on during our trading update. Gross margin showed another improvement in Q3. The impact of our mitigation action against higher tariff pressure become more visible, particularly the price adjustment introduced in early June and the ongoing shift towards out of China sourcing. This measures helped us absorb much of the cost inflation and protect profitability. The year-on-year increase in gross margin from 59.1% to 59.7% was then supported by favorable price dynamics, although to a lesser extent than in Q2 and a more meaningful contribution from foreign exchange. At constant rates, gross margin was broadly stable compared to last year's third quarter. Looking at the 9-month period, gross margin rose to 60.6%, up from 59.7%. At the operating level, Q3 marked the most significant step forward. We reached our highest ever adjusted EBITDA margin for a third quarter at 10% of sales up 210 basis points from Q3 2024. This result was supported by a gradual normalization of marketing investment after the peak we saw in the first half, where spending reached nearly 13% of sales. In Q3, marketing expenses declined by roughly 50 basis points year-on-year. Cost optimization also came from lower logistics and IT costs. For the 9-month period, our adjusted EBITDA margin stood at 11.1%, up from 10% last year. As a reminder, our EBITDA margin at 12% includes EUR 9.7 million gain from the disposal of Lenti in Q2. Finally, let's look at our financial performance, which continued to strengthen in Q3. We delivered another quarter of strong free cash flow, generating EUR 20.7 million, up from EUR 16.9 million in Q3 last year. This was driven by solid operating performance and disciplined working capital management. Over the first 9 months, total free cash flow reached EUR 64.2 million, including EUR 11.9 million from the Lenti disposal. This level of cash generation allow us to continue reducing debt. As of September 30, net debt decreased to EUR 30.4 million, bringing us to a positive net financial position pre-IFRS 16 of EUR 10.7 million for the first time in our history. It's also worth noting that these results include the transaction cost for EUR 10.2 million related to our share buyback program launched in late June. Since then, we have purchased approximately 7.8 million shares, equal to around 1.9% of our outstanding capital, including share already held at the same date, treasury share represented 4.5% of the company's capital. That concludes our presentation. Thank you all for your attention. We are now happy to take your questions.

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

The first one is on October performance. We know that October is a small month, but can you give us an update on the performance across regions and overall? And what is your feeling for a potential recovery in North America in Q4? My second question is on gross margin. Can you give us some indication on your expectation for next year? Finally, I've got some questions on the M&A activity. You revealed that you submitted a non-binding offer for Eschenbach. When do you expect to hear back from [ Inspes ] regarding its potential interest in entering into negotiation? And if successful, have you ruled out other potential acquisitions for the coming year? Or would it be possible to combine it with other small acquisitions of companies already under screening?

Okay. I will answer to the first and the last. October was overall a positive month, both North America and Europe, we saw a continuation of the regional underlying performance, which we exit the third quarter. I'd say that in the emerging markets, we would spot some deceleration mainly in Asia, where on the other side, we saw a sign of improvement in the rest of the world. Obviously, that said, we are -- October is just 1 month. And obviously, we have all the period of the Black Friday and the promotion period around that. So that's, to be honest, we need to wait that part of the Q4 to have really a clear view on the full quarter. I will answer on M&A. I mean, Inspes, obviously, is aligned with our strategy that we have said in different occasions, which is to reinforce our position in optical segment and to expand our footprint in the key European market, particularly in DACH. Said that, I mean, the process is at the beginning. We are evaluated different options with a very open mind. But as I said, we are really at the beginning. So I mean -- and obviously, as soon as some news will come, we will inform the market. But we are really the beginning of the process. For the rest, I mean, I don't see an issue to -- I mean, we are open and we are in a position to look for other M&A and eventually additional M&A. So I mean, we -- potentially, we will not stop here. We don't have any issue to look for more M&A in the next month or in the future also once inspect should come to some positive conclusion.

On gross margin for next year, I mean, we continue to have the ambition to build margin next year. Definitely, tariff will continue to be a headwind. But as you have seen also in Q3, I believe the countermeasures are actively and effectively managing and offsetting the vast majority of the tariff impact. So I mean, it's difficult to quantify now and to give some more light on that. But definitely, we see the opportunity to continue to be in an accretive margin position. The margins of which will highly depend also on the evolution of the top line and will highly depend also on the mix component of the different brands and geographies.

The next question is from Niccolo Storer of Kepler.

So the first one is on operating cost. You mentioned advertising and promotion of 50 bps. If I'm not wrong, you gained basically EUR 4 million in EBITDA and maybe lost something at gross profit level. So 50 bps is roughly EUR 1 million. And so I was wondering if you can elaborate a little bit more on the other million you were able to save and if this is something that we can also project going forward or if this was more kind of one-off? The second question is a clarification on North America. You were flat basically, but at the same time, prices were increased. So is it fair to say that volumes were down maybe in the mid to high single digits? Then the other question is on your cash flow. If you maybe can help us a little bit bridging Q2 net debt with Q3 at a very high level, in particular, with some comments on working capital also in light of what you said last time about stocks and possible normalization?

Yes. I'll take the first and the last one. So on the Q3 margin, as we commented, I mean, 50 basis point improvement are coming from the normalization of marketing costs. Of course, 60 are coming from the gross margin, while more or less, I mean, the other 100 basis points coming from the normalization of costs, mostly on logistics and IT. On the cash flow, if I'm getting right the question, so the EUR 20 million free cash flow generation in Q3, very much driven by, I would say, an improvement of the flow from operation has been then supported by a limited, let's say, absorption in working capital despite also the potential buildup of inventory we were foreseeing back in Q2 to counter the decision of [indiscernible] some of the import to manage the tariff. So the bridge versus the net debt should be easy is the EUR 20 million free cash flow generation, roughly EUR 10 million in investing in the share buyback. So it should be a EUR 10 million reduction in net debt to IFRS 16 base.

On the last -- on the question on North America. In North America, we have different dynamic. We have -- as I said, we see a positive month in October, so a continuation of the positive trend of North America wholesale. We are very positive on Smith B2C, where we have some -- we see some weakness is on Blenders, as we said, I mean, Blenders, obviously, we need to wait now the Black Friday time. But I mean, Blenders will be still struggling in quarter 4. Where on the other side, Smith shops, as Michele was underlying, we saw some weak figures, also honestly, driven partially by the stock -- some stock decision we took in Q2. So really, the picture on North America is quite different by channel. As on the brands, as Michele was mentioning, we see a positive trend on our main brands there, Carrera, Divid Beckham, BOSS, and also Kate Spade getting on a positive momentum.

Next question is from Domenico Ghilotti of Equita.

My first is just a follow-up. So just to have the sense of what was the contribution of price mix versus volumes in the third quarter. Second, you mentioned in the call that there is some phasing prescription shipments, if I'm not wrong, in Europe. Does it mean that we should expect -- we should expect some deceleration in this segment going into the Q4? And then I have a broader question, but quite relevant related to the wearables and to the fact that the category now is really getting traction. So if you can update us on what's your view on the category and on your opportunity in this category?

Yes. On the price mix component pricing had roughly 70 basis points positive impact in the quarter. While the impact of the European, let's say, phasing impact in Q3 is roughly representing -- I mean, 3%, roughly 3% to 4% that, of course, in Europe, we will see as a potential negative block in Q4.

On the smart glasses, I think it's -- let me say, first of all, that I think we need to acknowledge that Essilor and Meta, they are doing a great job. So I think, honestly, they are doing a great job. Obviously, they are pushing the demand. As I said in different occasions, we are working on both. We are working very, very tight on both legs, the smart glasses and the hearing aids with our traditional partner and with the potential new partner. But to be honest, I mean, we don't -- we don't chase speed. I mean, we will take some decision when we think is the right moment. I can assure that, as I said, we see the number, we see some consumer data. So it -- there are two areas of great focus from us, but we will take the decision on the timing when we think it's appropriate. Anyhow, we have our partnership with Amazon that we keep working with them. But yes, we will see when we think is the right time to step in.