Safilo Group S.p.A. (SFL) Earnings Call Transcript & Summary

Good evening, and welcome to the Safilo Group Third Quarter and 9 Months 2020 Trading Update. This call may contain forward-looking statements relating to future events and operating, economic and financial results for 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 Angelo Trocchia, Chief Executive Officer; Gerd Graehsler, Chief Financial Officer; Barbara Ferrante, Director of Investor Relations. At this time, I would like to turn the conference over to Mr. Angelo Trocchia. Please go ahead, sir.

Thank you for attending today's conference call on Safilo's first 9 months 2020 trading update focused on the key facts and figure of the third quarter. We entered the second half of this complex year continue to prioritize those key levers that make a business sustainable and successful in the present and in the longer term. This third quarter was, thus, for us, again, focused on execution of the key strategic topics, starting from the continued greater attention and care to the health of all our people worldwide, continue to support our communities and the many workers involved in the COVID-19 emergency. At the same time, we maintain a strong grip on our cash, providing the company with additional resources, and we progress on the key strategies of our group business plan, including the new collaboration with the Ocean Cleanup, to give a tangible contribution to the protection of our planet. The way in which we decided to organize the work of our people in this month played a significant part on everyone's morale and productivity. In the context of the implementation of the highest health and safety standard at our headquarters, subsidiaries and production plants, we desire to continue making extensive use of smart working, minimizing as much as possible the need for people to go to the office, while providing support for the relocation of the activities. In the quarter, we then had other important objectives to achieve, and I'm very pleased with the positive outcome. On one side, we secured additional liquidity for the group. It was still a pending topic when we talked at the end of July. And by mid of September, we were, in fact, able to finalize a new term loan facilities -- facility of EUR 108 million guaranteed by SACE to support our business in a period characterized by high level of uncertainty and volatility. On the other side, in line with our industrial plan of restructuring to optimize the production footprint, realigning it to our current needs, we sold the Italian plant in Martignacco to a local entrepreneur, which we consider an important step not just for us to recover a sustainable economic profile, but also for the workers and the local communities. In the quarter, we then continued sizing the opportunities provided by the current market environment to accelerate our digital transformation strategy, gaining additional speed and relevance in the direct-to-consumer channel, thanks to our recent acquisitions: Blenders Eyewear, for its advanced e-com platform; and Privé Revaux, leveraging on its social marketing skills to expand its reach off-line and online. We are also actively sharing and reapplying best practice in e-commerce, digital marketing, product and wholesale go-to-market between the new 2 brands and Smith. Staying on our digital transformation strategy, in August, we launched also our new B2B e-commerce platform in Europe, while just days ago we went live with a new CRM, customer relationship management, system, 2 state-of-the-art technologies, which go in the direction of reshaping and enhancing the relationship, the engagement and the way we do business with our main additions. I will come back on this project at the end of the presentation in order to add a little bit more color and flavor on what is going on in this area. Let me now move to the key dynamics, which drove the performance of our third quarter, which was indeed a period of significant recovery, both top line and bottom line. The quarter benefited from the full contribution derived from the recent acquisitions of Privé Revaux and Blenders, 2 brands which are currently performing strongly on the back of their surging D2C business and the gradual off-line expansion of Privé Revaux, as I will detail a little bit better later on. But the quarter also recorded a significant recovery of our organic business. Back at the end of July, we had already commented on the sales rebound recorded in July and how this was a consequence of an expected catch-up effect after the strong H1 pandemic impact. What we experienced during the rest of the summer was instead prolonged solidity of a few key markets in premise of the U.S. market, where the significant work we did in the last 2 years to strengthen our organization and the sales force, coupled with a supporting market environment, made the independent 3Os channel the key driver of our organic business recovery in the third quarter. But we should also and we need also to outline the outstanding growth we achieved in Mainland China, which almost doubled its business in the period, while all our core market and channels recorded an improvement in the third quarter compared to the first half of the year, with a more evident progress delivered by some of the main European countries and markets, such as Italy, Germany and France. Another meaningful point to make for the quarter is that our organic wholesale business was driven by the mid-single-digit growth of the prescription frames business, clearly outperforming independent 3Os channel. In the third quarter of this year, our online sales almost quintupled compared to the same quarter last year, and this was thanks to both the ongoing progress on Smith, by the way, we launched the new D2C platform; and the sales to our Internet pure player; and clearly, the significant contribution of Privé Revaux; and above all on this front Blenders D2C sales. The positive sales development came together with the ongoing implementation of the group cost-saving action to continue gaining structurally leaner cost structure, plus utilization of contingency measures in the context of COVID-19. On the key facts -- the key figures of the quarter. Group net sales were EUR 219.1 million in Q3, up 3% reported and 6% at constant exchange rate, with the adjusted EBITDA positive again at EUR 14.3 million or 6.5% of sales and growing by 9.3% compared to the Q3 '19. This result reduced the gaps of the first 9 months of the year, with the group net sales at EUR 554.7 million, down 21.7% reported and 21.1% at constant exchange rate. And the adjusted EBITDA reducing the loss to EUR 13.9 million compared to the loss of EUR 28.3 million reported in the first half of the year. Our group debt at the end of September stood at EUR 201.7 million post-IFRS 16, EUR 155.8 million pre-IFRS, a bit higher than the position at the end of June, but in line with our expectations. I stop here and hand over to Gerd to some additional details and comments on our economic and financial results. Gerd?

Thank you, Angelo, and good evening to all of you connected in call and webcast. Let's take a deeper look into the quarterly dynamics of our top line by geography. As I said, Q3 net sales were up 6% at constant exchange rates, reflecting the full quarter contribution of the acquisitions, which added a total of EUR 26.5 million to our North America business. Excluding M&A, our organic business achieved a significant recovery compared to the previous quarters of the year, down 6.7% at constant exchange rates or 5.5% at the wholesale level, excluding sales to Kering Eyewear. We come back shortly to our acquisitions, and I focus now first on the organic performance. This was indeed led by the rebound of North America, up organically 12.1%, mainly thanks to the solid sales recovery we recorded from the U.S. independent 3O stores, which are our most important distribution channel in the region. The recovery there was broad-based across our brand portfolio, although particularly evident are some of our core license brands, such as Kate Spade, Tommy Hilfiger and Jimmy Choo, which enjoyed solid momentum, driven by the growth of the prescription frames business. The quarter in the U.S. was a strong confirmation for our Smith products. The brand recorded double-digit growth in the sports stores channel and more than doubled its turnover in its online channel. All-in, group total sales in North America, including Blenders and Privé Revaux, stood at EUR 113.1 million, up 41.5% at current exchange rates and 45.9% at constant exchange rates compared to the same quarter of 2019. In Europe, our net sales equaled EUR 79.3 million in Q3, down 16.4% at constant exchange rates, 15.2% down the wholesale business, excluding the sales to Kering Eyewear. This was a clear improvement compared to the minus 56% and minus 34% recorded by our wholesale business in the second quarter and first half of this year, respectively. In Europe, recovery trends were mixed, particularly among the different channels. What we registered broadly on the more positive side was both the performance of 3Os, so the independent stores, sustaining the recovery of those countries where this channel is more relevant, particularly Italy, Spain and France, and the ongoing strength of the Internet pure players outperforming in Germany, U.K. and the Nordic countries. On the other hand, order taking remained subdued, although improving compared to Q2 in specialty channels such as boutiques, in the travel retail channel and also in some of the big chains with this latter having possibly been more equipped to enter into the summer with products already in stock, in particular, in terms of sunglasses, which is the product category, which suffered more in the period. The recovery was more meaningful for us in Asia Pacific with sales at EUR 15.9 million, down 6.4% at constant exchange rates compared to the same period last year, significantly reducing the gap compared to the 65.5% of the second quarter and minus 45.9% in H1. The continued hardship of the travel retail business, which in Q3 2019 accounted for approximately 26% of the regional sales, and in this quarter was down around 63%, was more significantly offset by the surge previously mentioned by Angelo in Mainland China, which benefited both from a very supportive domestic demand and from the contributions of the new brands in our portfolio, in particular Levi's and Ports. Q3 sales in China were up 83% at constant exchange rates. To conclude, in our regions, Brazil, India and the Middle East countries making up for the vast majority of our rest of the world region. While the area more than half -- the 74% drop recorded in the second quarter, it still registered a very meaningful negative 35.6% as these countries remain strongly impacted by the pandemic and the economic downturns. Zooming back into the sequential acceleration of our online business. In Q3, our online organic sales grew around 94% at constant exchange rates from plus 38% in the second quarter, thanks to the growth of Smith's D2C business and our sales through the Internet pure players, which in turn grew around 75% in the period. As commented by Angelo, our total online business is today greatly benefiting from our new acquisitions, particularly Blenders with its digitally native business model. In the third quarter, the share of the total online business grew to 16% from around 3% in the same period of 2019, while the share of the channel moved up to 13% in the first 9 months of the year from around 4% in the first 9 months of 2019. Moving to our economic performance for the quarter. This also represented a strong rebound, which was made possible by the positive sales developments we've just discussed, supported by the continued implementation of the structural cost savings envisaged by our group business plan and the additional contingency savings obtained in relation to the COVID-19 emergency, 2 areas which contributed in about equal parts to a combined positive P&L impact of around EUR 13 million. All this allowed us to restore in the quarter a decent level of gross profit and margin and to resume some positive operating leverage. Gross profit stood at EUR 112.6 million in the quarter, up 3.3% compared to Q3 last year, with the margin of sales moving from 51.2% to 51.4%. While up slightly as reported, here, we had some plus and minus aspects explaining the industrial performance of the period, which stripping out depreciation as we are reasoning at the EBITDA level, slightly contracted by 40 basis points compared to the same quarter last year. The key dynamic at the industrial margin level, where on one side a lower burden from obsolescence products, thanks to the tight control we kept on our stock levels and the positive channel mix effect, thanks to the accretive growing online business. On the other side, the supply chain performance remained subdued compared to Q3 last year, given the lower production volumes in the overall macro context. Below the gross profit, the total of our SG&A expenses, excluding depreciation and amortization, were just very slightly up compared to last year, almost completely reabsorbing the new costs, mainly of selling and marketing of 2 acquisitions. In fact, our organic SG&A expenses were down around 14% in the quarter, thanks to the structural savings and contingency measures, which totaled EUR 9 million in the period. Overall, below the gross margin, we recovered 70 basis points, arriving at an adjusted EBITDA margin of 6.5% from 6.2% in the same quarter last year, EUR 14.3 million compared to EUR 13.1 million. To conclude on the KPIs of the period, at the end of September, our group net debt post-IFRS 16 stood at EUR 201.7 million, EUR 155.8 million pre-IFRS 16 and EUR 44.2 million when excluding also the cash out for the 2 acquisitions. This was a EUR 13.2 million increase compared to the position at the end of June, which was substantially in line with our expectations in terms of higher working capital requirements following the tight management, which supported our liquidity needs during the second quarter. Angelo, back to you.

Thanks, Gerd. In the third quarter, we delivered sales growth and the recovery of a satisfactory level of adjusted EBITDA. And while September results were relatively slower than the trend during the summer, business development in October was positive, confirming positive organic growth driven in particular by North America and strong trend in Mainland China and some of the other Asian markets. Online sales remained a solid growth driver in the U.S. but also in Europe, where uncertainty grows again across most countries following the rise of the infections. Given the persistence over market environment still burdened by the virus resurgence and fresh government restriction on people movement in several countries, we continue to maintain a very prudent stance for the remainder of the year and why we are not in a position to foresee how November and the holiday season will play out. We remain committed to providing you and all, our stakeholders, with timely information on the development that the health emergency may have in the coming months on our economic and financial results. But let me put a couple of additional keynotes from my side. And these notes are on further development relating to our group business strategy, which took place during this month. As we discussed in December last year, our task is to develop Safilo into a modern and successful customer-centric business model, which means that the opportunity to become the best possible partner for our many existing customers and the opportunity to attract new ones is a real, real key priority. And as we announced last year, this includes for us a 3-year investment journey into the latest B2B technologies to redesign and dramatically improve our sales and customer care operation, with multiple initiatives and different execution ways for the various projects we have in the pipeline. The first execution way was the rollout of the new generation of B2B e-commerce platform, which we designed with the opticians for the opticians, naming it for this reason You & Safilo. This is a strategic renewal to align all our European markets to the best practice, enhancing the user experience in terms of commercial productiveness and services. Within our new B2B ecosystem, which just recently went live with the new CRM, customer relationship management, system used by the entire Safilo European customer care team. This is another execution way, which underline the importance for us to improve the relationship and the service offered to our customers. With You & Safilo and with new CRM system, we are putting the basis for a digital 360 customer approach, where customer satisfaction and loyalty are the key priorities for, at the end, increase the share of our B2B business. We launched You & Safilo in August to react faster to the complex market environment. The challenges of this month, having it shown the importance of state-of-the-art digital tools and confirm that this platform will be key for our future. Its first release focus on the points that customers indicate as a priority in the survey we conducted with them, including a new design, simple and pleasant to serve with a dynamic research capital, useful image galleries to immediately find and easily buy the best product for them and their clients, the possibility of ordering spare part and replacement fast and independently, clear information and product availability and detailed delivery types. Clearly, the entire platform is also accessible via mobile. Feedback from our European opticians is enthusiastic, and we aim to have the majority of them on board within the coming 12, 18 months. Back for a moment on our new brands, Blenders and Privé Revaux. They are strong outperformers in the current environment, in the first 9 months of 2020, up, respectively, 79% and 96% in the pro forma performance versus the same period of a year ago. Blenders is all about direct-to-consumer, and we are very happy how the team led by Chase Fisher continues building on its current strengths and planning for the future. Blenders is today working on the expansion of its Blue Light optical frame collection, plus they dropped the most anticipated snow collection in the history, launching a new snow goggle and accessories in mid of October, while getting ready for the launch in a few weeks of their new snow helmet. Starting from October, Blenders is also stepping into the RX business with its new Blenders RX collection, single-vision glasses and Readers styled with fashionable frames from 5 or the best-selling collection. An RX project has already been started this year also by Privé Revaux. And needless to say, this could represent a meaningful new business opportunity for both brands. Blenders is then speeding up the buildup of its website capability today to take its direct-to-consumer business internationally, and we are clearly all looking forward to it. On the other side, Privé Revaux pursues an omnichannel strategy. In the first 9 months of the year, the brand's D2C business grew its share of the total Privé business to 28% from 21% last year. On the other hand, the brand took further significant steps forward within its off-line expansion strategy if -- even if the pandemic environment has not allowed all the trends to come to fruition yet and rollout continues more gradually. We have already mentioned the launch in GrandVision stores, Germany, Benelux, Poland, U.K. and Turkey, and Privé Revaux will rollout in 2021 in all stores in Italy, Hungary, Czech, Slovakia. Spain, Greece and Mexico. A further meaningful achievement for Privé Revaux this year was its partnership with America's Best contact and eyeglasses, part of National Vision, one of the nation's largest optical retailers, providing quality, affordable eye care and eyewear. After a very successful pilot program at selected America's Best location in 2019, in 2020, Privé Revaux was listed and made available at all America's Best location nationwide. And it was just recently awarded by the optical retailer itself the Product of the Year. I would like to conclude our presentation by mentioning a new project, which we are very proud -- I'm really personally very proud and which we have developed in conjunction with the Ocean Cleanup, the well-known Dutch nonprofit environmental organization that develop advanced technology to extract plastic pollution from the oceans. We will produce -- we have produced the first eyewear product from recycled plastic, an investment which is part of our commitment to people, product and plant. More than a year ago, Boyan Slat, founder and CEO of the Ocean Cleanup called us and explained the project he had in mind, and we felt honored to be part of this mission to give a second life to the plastic collected from the ocean. Our design team worked hard to combine our history of eyewear manufacturing with material innovations to ensure the high-quality, stylistic content and uniqueness of this final product. The Ocean Cleanup sunglasses are made with injection plastic deriving from the Great Pacific Garbage Patch, using an innovative upcycling process, able to include types of plastic that have traditionally been more difficult to recycle, turning them into a high quality and safe material. This will a limited addition, 25,000 pairs, each carrying a unique QR code that directly connects the user to background information about the product, the project and the specific place where the marine plastic pollution was removed from. The Ocean Cleanup estimates that with the proceeds from each pair of glasses -- sunglasses, an equivalent of 24 football fields worth of the plastic can be cleaned. And when every pair from the first batch is claimed, that will equate to approximately 0.5 million football fields of clean up in the Great Pacific Garbage Patch. The sunglasses will be available exclusively on the Ocean Cleanup website and 100% of the proceeds will go to the continuation of the cleanup mission. This concludes our presentation, and we are now ready to take your question. Back to you.

[Operator Instructions] The first question is from Cédric Rossi with Bryan Garnier.

Actually, I have 3 questions. The first one is regarding you and Safilo initiative. So we saw that the independent optician channel was a key growth driver for you in Q3. And so we are seeing some of the lockdowns coming up in Europe. So probably -- so the big difference is that opticians will remain open this time compared to the spring lockdown, but probably the key challenge for them will be to drive in-store traffic. And so do you think that your -- you and Safilo initiative will be a rollout fast enough to help them to drive this traffic in stores in Q4? Or -- and what could be the other initiatives you have to help them drive this store traffic? The second question, so Gerd, you talked about the exposure to travel retail in Asia. But probably, the business also in Europe, especially in Spain and Italy, was also impacted -- negatively impacted by the -- by lower tourist flows. So if we had to assess your entire exposure to travel retail in all regions included, what would be the percentage of sales exposed to the travel retail in all regions combined? And my third question, so it was reassuring to see that you had the lower obsolescence cost in Q3. But I was wondering what -- according to you, what are the inventory levels at the retailers, especially in Europe, that are now facing new lockdowns? Do you believe that the inventory levels remain healthy despite of new lockdowns. And so do you expect also lower obsolescence costs in Q4 as well?

Okay. I start from the -- I catch the first one. I mean, You & Safilo is now rolled out in all Europe. So from an operational perspective, all the country are already on the system. Related to your question on traffic, I think the good characteristic of this system is, first of all, it's very easy to use. It's a website. So the optician can access from iPad, personal computer and mobile phone. But the good thing is that on the system, we have been putting not only the collection but also all the marketing content and all the content that they can use to -- for then social pushing. So to be honest, it's not only for us a system to take the order, but it's also to provide our optician with a lot of content that they can relaunch locally. So we are really working with the optician to give them any kind of instrument to try really to generate more traffic, but also because the system is so flexible, they can really also share with us performance on the best sellers. So let me say, they can also direct the portfolio into the shop. So is -- all information is content they can use openly at this app, let me say, sharing information on the best seller in their shop, but also in similar area or in similar kind of shops. So these are the activities, which are already operational and we are already working with the optician. So should we expect a positive effect in Q4, I think so.

Okay. On the second question, I think on travel retail, I mean, clearly, on a global level, it has never been a very dominant channel for us. Let me say, last year, more or less, travel retail represented about 4% of our global sales. So that's more or less the normal weight and quite heavily skewed to, let me say, the luxury part of our license portfolio. This year, I'm seeing travel retail weighing about 1% of the total sales. So it's clear that the channel has suffered quite a dramatic reduction in sales. And I think it will be a while until travel retail is going to come back to where it used to be. So this -- now travel retail for us -- it's true that it's a global channel. It's true that it has also the business in EMEA and the business in North America, but let me say that the vast majority of the travel retail business is really in Asia and it is particularly in markets like Korea, where it has basically dropped almost completely. Tourist flows is true. We have seen clearly in some of the markets that you were mentioning, especially in Iberia, we've seen a drop of tourists over the summer. We have also more generally seen, let me say, quite a decrease of sunglasses sales. What's been driving our business is optical frames. And therefore, clearly, sunglasses plus tourism areas plus travel retail, so that whole ecosystem is, if you wish, has not yet recovered. On the inventory levels, let me say that until the end of September, we've actually been able to reduce inventory, and we have even reduced inventory in the third quarter itself. So as we were rebounding the sales, we still managed to reduce the inventory in the third quarter. What we expect for Q4, I think, is not easy to predict. I think what we're seeing is that on the independence on the optical frames and on the independent opticians channel, possibly, the business should continue if the hypothesis you mentioned is correct, that indeed, they can stay open and people can still go to those shops and with the opticians we have, let me say, a faster rotation. What we were seeing with the bigger chains is that actually the business in the Q3 was quite subdued, which is why our hypothesis is that those retailers and the big sunglass chains, especially, they have the stock in Q3. They have the sell-through in Q3. So our reorders did not yet materialize, which is then something I would under normal circumstances have expected to happen in Q4 and have started to see in the month of October. But now in November and December, I think it's quite difficult to predict what will happen. But in general, I think inventory levels are quite healthy. Obsolescence levels have been good in Q3. At this point, I don't see a significant deterioration of that for the end of the year. But again, as I said, it will depend on how the next 2 months of sell-out will go.

[Operator Instructions] The next question is from Domenico Ghilotti with Equita.

I am interested, first of all, in your online pro forma performance. You were mentioning the 2 brands on a pro forma basis in the 9 months. I'm trying to understand if you have seen an acceleration -- sorry, or sustainability of these trends when the lockdown ended, and so something that is sustainable over time. And second question is on your other own brands. So you didn't mention in the call performance of Carrera and Polaroid. If you can give us a feeling on the trend of total own brands? And last question, just a clarification. So the -- I'm trying to understand -- so the obsolescence that is below last year levels despite the fact that you -- and the clients had clearly weaker performance compared to the initial for 2020. How did you manage to get this lower cost?