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

Good evening, and welcome to the Safilo Group's Third Quarter and First 9 Months 2021 Trading Update. This call may contain forward-looking statements based on current expectations and projects of the group in relation to future events. Due to their specific nature, these statements are subject to inherent risks and uncertainties as they depend on certain circumstances and facts, most of which being beyond the control of the group. Therefore, actual results could differ even to a significant extent with respect to those reported in the statements. Today's participants are Angelo Trocchia, Chief Executive Officer; Gerd Graehsler, Chief Financial Officer; and 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.

Hi. Thanks very much. Good evening. Good evening, everyone, and thank you for attending today's conference call on Safilo Quarter 3 and First 9 Months 2021 Trading Update. Our third quarter economic results flagged another remarkable period of growth and recovery in which the solidity of our business and positive consumer trends in our key markets and product categories allowed us to overcome the dampening effect of a still complex environment in a number of countries, certainly in most Asian markets and our tough comparison basis in the midst of our business overall. These results are, for us, another important step in the right direction in the construction of a healthy and profitable business. In the period, we continued to size the business opportunities that our brand portfolio offered us in our key markets, and this led our organic business to grow double digits compared to quarter 3 2019 and to exceed also Q3 2020. In quarter 3, our positive organic performance was driven by our main markets. North America, which was again very solid, but also a pickup in Europe, where we saw a market organic improvement compared to the previous quarters. Thanks to a more positive business environment, which also prompts a more dynamic timing of deliveries into the quarter. In quarter 3, the product category which has supported us the most also during the pandemic continue to be the key drivers, with the prescription frames business, which kept a strong pace of growth behind the sustained activity of optical stores in the different markets and Smith goggles and helmets, which continue to outperform, thanks to a supportive business content for outdoor activities with a strong growth rate also partially impacted by some specific favorable base period effect. The quarter was certainly a positive turning point of sunglasses, back to grow almost everywhere. This is an upside which follows over 1 year of continued decline for the product category in the brick-and-mortar channels and which specifies the effect of an economy which continue to reopen during the summer. In the third quarter, the online business share of our total net sales was around 13% compared to only 3% in quarter 3 2019 and to 16% in quarter 3 2020 when the channels soared. Thanks to the contribution of Blenders' online business and the surge of Smith's direct-to-consumer sales, and thanks to the Internet players during the pandemic period. In the quarter, we continue to progress in our e-commerce development plan, launching in August a new e-commerce platform in U.S. for our brand, Carrera, dedicated exclusively to sunglasses. This marks other important steps in our e-commerce growth plans, and we see the growth of Carrera via an omnichannel approach as a positive for all the distribution channels in U.S. and add an important sign of our commitment to make Carrera, a desirably more relevant brand in the market. On the front of our continuing brand portfolio rebalance, compared to quarter 3 2019, the sales generated in quarter 3 2021 by our new proprietary and licensed brand surpassed the significant decline of the licensed business terminated. In quarter 3 2021, our positive sales development, coupled with further progress in our cost of goods sold saving program also allowed us to achieve a significant improvement of our operating performance. But let's then look at the KPIs of our third quarter and how the period performed in particular compared to comparing 2019 to the pre-pandemic levels. Our net sales in quarter 3 increased by 11.1% versus 2019 at constant exchange rate. While reporting a more moderate upside of 2.6% versus quarter 3 2020, the first quarter last year to record a growth over 2019 after a period -- after a very negative first semester related to the COVID-19 pandemic. Our quarter 3 adjusted EBITDA reached EUR 19.1 million, and the margin of sales of 8.4%, up 45.9% in absolute terms and [220 bps] from a margin-wise compared to 2019. These quarterly results allowed us to close the first 9 months of the year with total net sales of EUR 737.4 million, up 8.7% compared to the same period 2019, while our adjusted EBITDA reached EUR 68.8 million, up 26.6% compared to the first 9 months 2019 with the margin on sales at 9.3%, 160 basis points better than in 2019. I stop here and hand over to Gerd for some more additional details on our economic and financial performance. Gerd?

Thank you, Angelo, and good evening to all of you connected via conference call and audio webcast. Let me add some color to the remaining highlights already outlined by Angelo starting from our net sales performance. For the sake of time and relevance, I will primarily focus my comments on our performance versus 2019, in line with the analysis provided in the previous quarters of this year. We are on Slide 5 of our presentation. So Q3 net sales totaled EUR 226.6 million, up 11.1% at constant exchange rates plus 6.5% on a reported basis after the negative currency impact persisting in the comparison with 2019. ForEx was instead almost neutral on a year-on-year basis. As highlighted by Angelo, this top line performance benefited from the significant organic sales growth, which we can quantify around plus 16% at constant exchange rates, which all our main markets gave their positive contribution. North America remained our most important stronghold, followed suit in this quarter by Europe, which recorded a remarkable organic improvement and by a nice catch-up in Latin America. Instead, Asia-Pacific showed a more mixed picture with China positive, Australia flattening and most other markets declining due to persistent COVID-related restrictions. In Q3, prescription frames and sports products reported an organic growth rate of around 25%, while sunglasses grew mid-single digits versus 2019 driven in particular by the product growth recorded in the U.S. market with Carrera among the outperformers. Polaroid did not yet recover pre-pandemic levels but it did show a promising year-on-year positive performance in some of the brand's core markets like Russia. As highlighted by Angelo, also in Q3 and always compared to 2019, we delivered an effective brand portfolio rebalanced with a very negative perimeter effect deriving from the exit of Dior, Max Mara and now also Fendi, which terminated at the end of June. Having been slightly overcome by the positive perimeter impact of the new business generated by our acquisitions of Blenders and Prive Revaux and the new licenses, which we have been introducing in our portfolio starting from January 2020. As said it's a meaningful result for us as in Q3, we also start entering a lower season period for the new online business. In the 9 months to September, our net sales grew by 8.7% at constant exchange rates, 4% at current exchange rates, with the organic sales performance at 12% in constant exchange rates. Adding some important comments on our total online business, in the 9 months to September, it confirmed its share of the total business at just slightly over 13%, up from around 4% in 2019 driven by our 3 significant drivers: Blenders, whose online business on a pro forma basis, doubled its size compared to 2019, while growing around 20% versus its impressive rise in 2020. Smith's direct-to-consumer online sales up around 80% on a 2-year basis and close to 30% versus last year, and our revenues to our Internet pure player clients, which soared by roughly 86% versus 2019 and 23% versus the sizable jump recorded last year. While we are glad about our online progress so far, as you know, we continue investing to further strengthen our e-commerce strategy and growing the market share we have more recently covered. Moving to the main drivers by geography. We saw a continuation of the overall trends recorded in the first semester by the different regions, with some specific base period effects influencing the underlying organic performance. In Q3, net sales in North America recorded another solid quarter, up 52.3% at constant exchange rates compared to Q3 2019, clearly benefiting from the sizable contribution of the acquisitions and the new licenses in the portfolio including from this year also, Under Armour. Our organic revenues in North America remained on the other hand, also strong, up almost 20% and further consolidating the very positive organic trend achieved last year. Smith was again a key contributor of our strong progress in the market, undoubtedly thanks to our brand's strong product offer and effective go-to-market strategy, which in the period was even further supported by easy comps as Q3 2019 had showed a low level of Smith product shipments, which we then caught up in Q4 2019. The organic performance also confirmed, as said before, the positive momentum in the United States of Carrera and of the group's key licenses in the market, namely Kate Spade, Tommy Hilfiger and Jimmy Choo. In Europe, Q3 reported net sales remained in negative territory in the comparison with Q3 2019 at minus 12.8% at constant exchange rates, slightly improving compared to the performance recorded in the first semester. It is important to highlight for Europe that while the region was even more heavily impacted by the decline of the terminated licenses for the exit of Fendi on the other hand, the organic sales performance showed a marked improvement around plus 16% compared to 2019. Thanks to moderate recovery in consumer spending and some favorable phasing in deliveries of some orders between the third and the fourth quarter this year. Among the core markets of the region, Italy continued to outperform with organic sales in the country, which largely exceeded pre-pandemic levels, followed by a positive upside of the business in Germany and a full recovery in the U.K. Key markets like Spain and France recorded instead a significant organic recovery compared to last year, while still remaining below 2019 due to a still insufficient catch-up of the Sunglasses business. Moving to the emerging regions. In Asia Pacific, our Q3 net sales declined by 35.5% at constant currencies compared to Q3 2019. And as said during the last quarter, together with Europe, Asia is the other geography, most heavily impacted by the decline of the terminated licenses. In the third quarter, we continued the transition of our Asia Pacific business to a more solid and profitable brand portfolio and effort, which allowed us in the period to register inorganic sales growth. While it was not enough to return to pre-pandemic levels due to the resurgence of COVID-related lockdowns and restrictions in Australia and most Asian markets with the exception of China, which remained in the period very positive. Our organic business in the region was down around 13% compared to Q3 2019, a decline by channel was almost entirely driven by the travel retail. Q3 in our Rest of the World region saw net sales increasing slightly by plus 1.6% at constant exchange rates compared to Q3 2019. As we anticipated before, the region benefited from a strong organic sales performance, up around 18% constant exchange rates, which was fully driven by the significant growth recorded by our portfolio in the core Latin American markets, namely Brazil and Mexico, while sales in India and the Middle East fully recovered pre-pandemic levels. Let me now go to our economic performance in Q3, Slide #9. Starting indeed by what was in the period a more meaningful driver of our operating performance, the gross profit. The latter benefited from a supportive sales mix development mainly as a result of the accretive contribution of a bigger online business but also from the further progress on our cost of goods sold savings program. As you already know, by the end of June, we completed our EUR 20 million overhead saving plan, while we are today more or less halfway through the EUR 25 million cost of goods savings program -- cost of goods sold savings program after the additional around EUR 2 million we delivered in the third quarter, mainly in manufacturing. As previously discussed, today, the savings, together with the selective price adjustments we're taking are going against the well-known increase of inbound transportation costs as inflationary pressures continue to hit there. That said, in Q3, our gross profit rose by 8.9% compared to Q3 2019 with the margin on sales, which improved to 52.4% from 51.2% in 2019. Also in Q3, we had some nonrecurring costs booked against the gross profit level, net of which Q3 gross margin on sale equaled 53.2%, posting an underlying improvement of 200 basis points compared to 2019. In the first 9 months of 2021, the gross profit was just slightly over 2019 in absolute terms, while below 120 basis points on the margin at 51.7% of sales. A gap fully reflecting the EUR 10.2 million negative impact from nonrecurring restructuring charges booked this year adjusted for which the gross margin stood at 53.0% of sales in line with 2019. Moving down the P&L. Our SG&A cost structure benefited from the recovery of operating leverage led by the top line growth and by our now leaner overhead structure which we continue to manage with disciplined cost control. In the third quarter, our reported EBITDA increased to EUR 17.4 million from EUR 7.7 million in Q3 2019 while the margin on sales jumped to 7.7% from 3.6%. Q3 adjusted EBITDA equaled EUR 19.1 million, up 45.9% compared to the adjusted EBITDA reported in Q3 2019. Our adjusted EBITDA margin increased to 8.4% from 6.2% in 2019. These quarterly results allowed us to close the first 9 months of this year with a reported EBITDA of EUR 68.4 million, aligned with the adjusted EBITDA of EUR 68.8 million as the EUR 17.4 million of restructuring costs included in our reported numbers were counterbalanced by the EUR 17 million positive impact deriving, as you may remember, from the semester conference call from the release we made in the second quarter of the provision for risks and charges in relation to the positive outcome for us of the French Competition Authority investigation on the eyewear sector. The EBITDA and adjusted EBITDA margin in the first 9 months this year increased to 9.3% of sales from the 7.7% recorded in the first 9 months of 2019. And I would like to conclude on my side highlighting, that our group net debt at the end of September stood at EUR 228.3 million or EUR 188.6 million pre-IFRS 16, pretty much stable compared to the position at the end of June of EUR 226.9 million and the EUR 222.1 million or EUR 179 million pre-IFRS 16 recorded at the end of December 2020. Beyond the improved economic performance, the period showed a favorable net working capital dynamic, which we are generally satisfied with, notwithstanding some delays and congestion on freight routes out of China resulting in higher-than-expected inventories in transit. We aim to catch up on these in the fourth quarter but are nonetheless monitoring the global logistics situation carefully. On the other hand, it is to be highlighted that in the first 9 months of the year, the cash out for our ongoing restructuring plan equaled around EUR 13 million. I stop here and I hand back to Angelo for his further remarks.

Thanks, Gerd. In the quarter, our strategic priority to expand the reach of our brand portfolio to the new generation into the digital universe where we keep investing was further advanced. Thanks to the new licensing agreement we signed with the Chiara Ferragni, one of the most famous and powerful digital influence in the world. A few years ago, we have decided to work on 2 strengths. One was the rebalance and change of our portfolio, the other to focus on the digital transformation. The license with Chiara Ferragni is placed within this strategy. In the quarter, we also continued investing in sustainability and process innovation, thanks to a strategic partnership we signed with Coventya, a global player with more than 90 years of experience in the development on specialty chemical for surface finishing treatment. Thanks to the joint efforts of our 2 companies, we will be the first player in the eyewear sector to exclusive use metallics, a new innovative conventional patent that allows the use of precious metal in galvanic treatment for the production of optical frames and sunglasses to be reduced by 90%. On another very important front, a few days ago, there was a successful completion of our share capital increase, primarily aimed at repaying advanced the shareholder loan we received in 2020 to complete our acquisitions. The objective of this repayment is to provide our group with a more cost-efficient financial structure, to support out of the path of recovering a solid and sustainable operating but also net performance. And we are clearly glad of such an external result with a record of 100% pickup, which did not require multi-brand to subscribe any remaining unsubscribed new shares. As we have anticipated in our communication, we have already proceeded with the repayment of the loan granted by multi-brands, with our pro forma net debt at the end of September at around EUR 96 million or EUR 57 million pre-IFRS 16. We closed a strong third quarter, where again the underlying trends, net of specific tailwinds in terms of base period effect and phasing of deliveries become that headwind in quarter 4 confirm us on the trajectories to deliver a solid second semester. The current visibility on the order portfolio put us on track to achieve our growth target for the full year with net sales expected to grow mid-single digit at constant exchange rates compared to 2019 and with an adjusted EBITDA, which will surpass '19. This concludes our presentation, and we are now ready to take your questions.

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

I have 2 questions, please. The first 1 is, could you give us some color on the current trading in October by region, just to confirm that the sequential improvement you have seen in Europe and probably the first signs of stabilization in Asia are confirmed in October? And the second question is regarding your unchanged full year sales guidance. I just wanted to clarify something. So taking the 9-month performance on a 2-year basis, so it would imply a modest decline in Q4. So how do you explain this control deceleration? Is it only due to the phasing effects you were mentioning? Or you keep -- you stick to this cautious scenario probably due to volatility in Asia or in Europe and maybe some logistic issues?

Yes. I think on the first question, let me say that trends in October remain positive and supportive of our overall expectations for the remainder of the year. I think, I mean, in general, United States for us continues to be positive. In Europe, we were happy to see in the third quarter that there has been a recovery of the business. And I think we've seen this in our organic performance. Let's see how Q4 goes. I think we all are moving now into the winter period with COVID, but so far so good. Asia, we see, honestly, still more difficult. It's true that Australia is getting into the peak season now, is out of the lockdown that they had over the summer. So that should be positive. But I think the rest of the region, I think there is still some -- quite some difficulty in our view. With regards to the full year, indeed, I think the important thing for us is to look at the second half as a full semester to get really a clear sense of the underlying business performance. We did have some phasing effects between Q3 and Q4. So we have some customers that asked us or that anticipated orders into the third quarter, so that is helping the third quarter, but it's a shift from the fourth quarter. We have some base period effects, especially on Smith with, let me say, very easy comps in Q3 '19 and then a big chunk of business in Q4. And I think that at the end of the story, we should see, if you neutralize all that phasing a relatively similar performance reading on an underlying basis between the 2 quarters. And therefore, we get and we stick with, let me say, the guidance that we gave back in August on the top line, which is a mid-single-digit growth over '19.

The next question is from Oriana Cardani of Intesa Sanpaolo.

The first 1 regards gross margin. Could you give us a target of gross margin for Q4 or for the full year, if you prefer. The second question refers to manufacturing footprint. Do you see opportunities to diversify production and reduce your exposure to China? And if so, how long would it take? The third question is on pricing power. Since inflationary pressures on logistic costs are not expected to fade until the second half of next year, do you think they could be passed on to consumers through repricing also in 2022? And finally, just a more qualitative question, which kind of headwinds and tailwinds do you see for next year?

Okay. Thank you for the question. Maybe I'll start with number 1, number 3 and number 4, and then I'll leave to Angelo on the manufacturing footprint. I mean, obviously, our guidance for the full year was focused around the top line and EBITDA level. On the gross margin, let me say, in general, we should be seeing an improving trend of gross margin compared to the base period that we had last year and also the year before because we are clearly getting out of this portfolio rebalancing in the company. How much exactly we will get in terms of gross margin for the fourth quarter, and therefore, for the full year, will depend, on the one hand, on the actual level of sales and the mix of sales, which is quite important in that context; and then the additional cost of goods sold savings and industrial efficiencies that we are planning to deliver. But in the context of what you also pointed out the inflationary pressures that we're seeing in -- on the logistics front. So it's a bit difficult to say and we don't want to give a target at that level. Linked to that is the question on the pricing power as we alluded to also before, we are responding to the inflationary pressures with price increases. Those are, as always, focused carefully on the right brand -- right country combinations where we have an opportunity in the market. We have started to roll that out already now. And I think so far, we are seeing this to be smoothly implemented. Whether this will remain like that, whether also next year, we're going to continue with that. I think it's really too early to tell because there's a lot of discussion around the inflationary trend. I mean, will that be transient? Will that be permanent? So we will just be closely watching the inflation side and the pricing side. But I think so far, what we have done so good. On 2022, so which are the headwinds and tailwinds that we should expect? I think directionally, let me say a couple of things. Obviously, this year has been positively impacted by a degree of recovery from all this COVID malaise of 2020, more visible, I think, in some geographies than others, which is a question mark, not just for the eyewear sector but also more broadly, how will this play out in 2022, but there is clearly a degree of rebound. Secondly, and this is also something that we've commented on previously, in particular, in the first semester of this year, we still have less than 10% of our total net sales on the terminated licenses in the portfolio. So Dior, Max Mara and they have their 6-month phase-out period, plus Fendi, which terminated at the end of June and then we had -- at the end of June and then we still have [Givenchy] let me say, which terminates at the end of this year. So clearly, having that level of business in 2021 will not recur in 2022, and therefore, is clearly another headwind that we have to deal with. And thirdly, we are clearly watching the developments at GrandVision. As you know, it represents about 5.5% of our sales and they are under new ownership. We have not seen significant changes so far, but this could potentially also be a headwind next year. On the tailwinds or on the positive, clearly, we have some exciting new licenses coming into the portfolio. We have Dsquared2. We have Carolina Herrera, we have Chiara Ferragni which is starting off in January. Then we have licenses that we launched this year, that are new this year that will reach a higher maturity next year like Under Armour. And clearly, we also plan to grow on our acquisitions. And I think in general, the industry structural growth trends, they are there and they are visible. So I think also those should be continuing to be tailwinds for us. So that's a little bit the dynamic and then let's see how they will play out.

Yes, before answering to the manufacturing, let me just complete on the positive side. I think that we have really added to the Safilo portfolio quite strong, strong license. Obviously, that as from next year, we will start seeing a strong positive contribution of this new very, very important license that we have been adding to the Safilo portfolio. Answering on the question about the manufacturing footprint, it's quite wide at the beginning of the year that we are working on clearly following very, very tight the situation in China. I have to say that during COVID, we have been reinforcing the relationship with some of our Chinese supplier. And together with them, we are evaluating or, let me say, we are working on concrete -- some concrete alternative to China in geography, which are obviously remaining in the Asia geography but out of China. How feasible are this scenario? I think that we can start seeing the feasibility as of H2 next year. But it obviously is a topic which is very strong on our table. And thanks to the strong relationship with a couple of big Chinese supplier. We are developing partially alternative scenario or backup scenario to China in the Asia region, but out of China.

Our next question is from Domenico Ghilotti of Equita. Mr. Ghilotti withdrew his question. [Operator Instructions] Gentlemen, there are no more questions registered at this time.

Okay. So thanks very much. Thanks for the time, everyone on the line and have a nice evening, and thanks to have been with us.

Thank you.

Thanks. Bye. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.