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

Good evening and welcome to the Safilo Group's First Quarter 2022 Trading Update. This call may contain forward-looking statements related to future events and operating, economic and financial results of 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. Gerd Graehsler, 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.

Good evening. Good evening, everyone and thank you for attending today's conference call on Safilo Group's First Quarter 2022 trading update. When we talk mid-March to discuss the 2021 results, we provided some flavor on the first 2 months of the year and on how our business was progressing in the key geographies and product categories. We are glad to have closed the first quarter in line with expectation, with a positive start to the year for our sales and even more important farther advancing the improvement of our profits. The first 3 months of the year were another confirmation of the positive momentum on our own and licensed brands or their ability to grow at a healthy pace in their core product categories and markets, not standing the challenges still posed by the COVID-19 pandemic, the high inflation environment and fairly the ongoing conflict in Ukraine. The period stood out again for the resilience of the industry we operate in and the effectiveness of our strategy to drive the group sales and margin growth. Let's then look at the performance top and bottom line we achieved in the first quarter. Our net sales grew to EUR 282.6 million, up 8.4% at constant exchange rate compared to quarter one last year, while Forex was a quite significant tailwind on top, driven by the US dollar strength and taking our total reported growth for the period to plus 12.4% at current exchange rate. At the economic level, our profit and margin continue to benefit from positive top line dynamics and from farther progress on our structural COGS savings project, while we continue to focus on the efficiency of our supply chain, largely completing in March, the industrial restructuring plan launched in the end of the 2019. In Q1, our gross profit increased by 22.8% versus last year, with the margin slowing to 55% of net sales and our adjusted EBITDA reached EUR 32 million, growing by 23.8% with margin standing up at 11.3% of sales. In the quarter, the positive momentum of our business driver were certainly confirmed by the double-digit growth of our organic business at plus 14.3% at constant exchange rate, largely driven by volumes and by the launch of new license as we continued our brand portfolio overall strategy. Our organic performance continue to be backed by the strength of Smith and Carrera, both up at sound double digit, together with a very promising start of the year for Polaroid. In the licensed portfolio Tommy Hilfiger, Kate Spade, Hugo Boss all kept posting high single to double-digit growth rates, while the brands that have entered our portfolio more recently David Beckham, Missoni, Isabel Marant and Under Armour also increasing the relevance in their respective reference market. In quarter one, we recorded a significant pickup in demand in Europe, still mostly soft in the first quarter of last year and the continuation of a strong momentum in our core market in Latin America and in the Middle East. Our business remained solid in North America, where the good breadth of channels for which we are selling give us resilience and the ability to keep catching business opportunity. Our organic sales performance was driven by the strong encouraging comeback of sunglasses, which had missed a chance to recover last year due to the restricted business environment in Europe at the time and by another quarter of strong growth for sports product. Prescription frames were very resilient continuing to progress everywhere and to support strong momentum in the core independent of digital channel. In the business environment which is today more dynamic than a year ago, with retail operation mostly open, we are also pleased to report that also in quarter one the online business more or less confirmed is relevant and continue to represent an organic growth driver up 9.4% at constant exchange rate. As said, new license were an additional significant growth driver, supporting the offset of the nonrecurring sales from terminated license in the base period. We move forward in our portfolio overall strategy with excellent result in January of the eyewear collection of Carolina Herrera, Dsquared2 and Chiara Ferragni, the 3 new license we signed last year and which has been already enjoying considerable market excitement, supporting us in the business expansion toward our consumer target groups. I stop here and hand over to Gerd for additional details on our quarterly performance.

Thank you, Angelo and good evening to all of you. Let me add some color to the main highlights already provided by Angelo, starting from our net sales performance by region, commenting mainly our organic trends versus last year. North America, our biggest market was totally up 0.9% at constant exchange rates against the challenging double-digit growth recorded in Q1 last year versus 2019. We are thus pleased by the resilience of the region, which posted a mid-single-digit organic growth, up 5.5% at constant exchange rates. Returning to Angelo's point, today, the strength of our omnichannel go-to-market strategy is paying off, driven by the double-digit growth of Smith both in the specialized support shops and online through its direct-to-consumer channel, thanks to the brand's leadership in helmets and goggles, but also by its growing eyewear business, one of our key priorities for the brand this year, together with its international expansion. Among the other leading brands in North America, Kate Spade, Carrera and Under Armour outperformed spending out in the different wholesale channels. Blenders had a very solid and resilient start to the year, substantially confirming the extraordinary level of business recorded in Q1 of 2021 when its e-comm sales surged by 79% versus the previous year. Moving to Europe, as said, we had a remarkable business rebound there in the first quarter. The region was up 16.2% at constant exchange rates compared to Q1 last year, with our organic growth standing at plus 24.9%. This is clearly a good start to the year for Europe and what we were waiting for after the softness experienced in the category last year. Our organic sales growth in Europe was quite broad-based across markets, very meaningful in the UK, France, Germany and in Spain and Portugal with the latter being in 2021, one of the country's most exposed to the slow recovering sunglass market. This strong sales recovery was broad-based also across brands with all of our own brands and key licenses recording significant double-digit growth rates, fueled in particular by their sunglass sales. The sound performance of Polaroid up around 35% is worth noting, as is the successful launch, particularly relevant for the Spanish-speaking markets of Carolina Herrera. Q1 was furthermore another positive confirmation for our rest of the world markets, which kept their -- growing their relevance as a percentage of the group's total business standing at 8.5% versus 7.1% in Q1 2021 and 7.5% in the last full-year 2021. After a very robust performance in 2021, Rest of the world grew by 27.3% at constant exchange rates compared to last year, plus 29.8% organically, driven by the main constituents of the area Latin America, where Brazil and Mexico continue to post significant double-digit growth, thanks in particular to Carrera, Polaroid and Tommy and the EMEA markets, thanks to the constantly improving business dynamics in the Middle East and India, with the latter returning to growth after many quarters of softness. In Asia and Pacific, our organic business performance was a positive plus 2.3% at constant exchange rates, mostly driven by the business recovery we recorded in Japan and Southeast Asia. On the other hand, business activities in the region remained constrained mainly as a result of rising COVID-19 cases and related lockdowns in Hong Kong and many Chinese provinces. Also leading to the cancellation of the Shanghai Optical Fair, the most important eyewear sector exhibition in Asia. In Q1, our total sales in the region declined by 9.3% at constant exchange rates compared to Q1 2021. Moving to the next slide and summarizing what we had said on the dynamics of our sales performance by our 3 product categories. Sunglass sales recorded an organic growth of around 20% at constant exchange rates versus last year, as said, driven mainly by the European rebound and to a lesser degree also by the continued growth in Latin America and the rest of the world. In Q1, organic sales of prescription frames grew by a very solid 5.2% at constant exchange rates after surging by around 21% in the 2021 full-year versus 2019. While our other products category which is mostly sport products of Smith recorded a plus -- plus 27.6% sales growth, following very consistently the plus 28% posted in the full-year 2021. Moving down the P&L and looking at how our positive top line performance translated into the key catalyst of our economic results, gross profit was the main beneficiary of the volume growth already highlighted by Angelo, coupled with a positive price/mix effect. In the first quarter, we enjoyed a richer sales mix, mainly reflecting a positive brand mix effect, also supported by a business which is now clean from phase-out revenues. Plus, we continue to benefit from the price adjustments taken in Q4 last year. These 2 levers continue to support us encountering the ongoing negative impact deriving from increasing transport cost and the now higher incidence of energy expenses. As said, very meaningfully in quarter one, we progressed further with our structural cost of goods sold saving, achieving some additional EUR 4 million, almost fully driven by efficiencies on procurement activities. Finally, at the gross margin level, Forex was a headwind, having a negative 70 basis points impact. We closed the quarter with the gross margin at 55% of sales, an improvement of 460 basis points compared to the margin of 50.4% reported in Q1, 2021. The progress was very meaningful also when we more appropriately measure it in comparison with last year's adjusted gross profit of EUR 131.2 million and 52.2% gross margin, recording an increase of plus 18.5% in absolute terms and plus 280 basis points respectively. Below the gross profit, our selling, general and administrative costs increased by around 15% in the quarter, mainly due to our higher investments in marketing and advertising, given the more dynamic business environment compared to Q1 2021. On top, EDP expenses grew by roughly EUR 2 million due to the recent inclusion of the costs no longer capitalized due to the application of the IFRIC standard on Software as a Service related to investments in software that we continue to implement in line with our digitalization strategy and which were not yet recorded in the comparative period. These expenses then brought with them an equivalent reduction in capital expenditures. At the adjusted EBITDA level, we closed Q1 with a profit of EUR 32 million, up 23.8% compared to Q1 2021, while the adjusted EBITDA margin increased to 11.3% of sales, improving 100 basis points compared to the 10.3% margin recorded in Q1 2021. As a reference, before the IFRIC SaaS impact, the margin stood at 12% in Q1 2022. Finally, on the last KPI of the period, at the end of March, our group net debt stood at EUR 109.1 million or EUR 68.9 million pre-IFRS 16, slightly higher compared to the EUR 94 million or EUR 52.8 million pre IFRS 16 recorded at the end of December last year. The change was driven on the one hand by a positive cash flow from operations provided by our positive economic performance and on the other hand by the normal seasonality of the business in terms of higher working capital absorption, mainly due to the increase of trade receivables. On this front, I'd like to remind you that at the end of last year, our net working capital benefited from a stronger-than-expected cash collection, which reflected for approximately EUR 10 million anticipated payments from customers, a cash inflow which therefore we did not have in this first quarter. This concludes our presentation and we are now ready to take your questions.

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

Yes, good evening Angelo, Gerd and Barbara. I have 2 questions. The first one is on Europe. So a very strong pickup and performance in Q1. I was curious to know whether April was more or less in showing the similar trajectory? I'm just trying to know how you are preparing the same peak seasons with your wholesale partners? The second question is regarding the gross margin. So here again, a stronger increase in Q1. So given the strong performance, do you feel that the price increases you have already implemented are enough? So in other words, you consider -- you don't consider any further price increases throughout the remainder of the year? And my third question is on China. So could you recall your exposure to China? And just to confirm that you haven't faced any disruption in your supply chain with what's happening right now?

Okay. So I take the first and eventually the third. Europe, I think honestly, we see April keeping the trend in Q1 in Europe. So I think that we don't see any negative. I think we see quite a positive move in Europe. First of all, people started traveling again. There is, in general, a positive mood talking with the customer. Last weekend, we had MIDO which is this eyewear fair in Milano and all the feedback we are hearing from the customer is that they are positive. Obviously, we need just to remember that we come up from 2 years where Europe was not really too positive. So April continued the trend of the quarter one in terms of how we are preparing the season, obviously, we are expecting a rebound of the sun or is the fact that the people will be able to travel, we are assuming that, obviously, this will be -- will have a positive impact on the sub. And to be honest, we have been preparing the season also accepting a little bit higher level of stock to be ready -- to answer to the market, a high level of stock from one side to be more reactive to the market, which we will expect it will happen and on the other side, obviously, to be more flexible towards supply chain in China. This leads me to answer to your second question, which is in China today, obviously, we keep tracking all the situation on the daily base. I have to say that till now, independently from the lockdown in Shanghai and some local in Beijing, we have been able to assure, absolutely continue to our supply chain. So we keep a tight eye on China from a supply chain perspective. But till now, we've been able to manage it carefully and obviously now more we get close to the season, more it will be important to assure continuity. But as we are organized, I'm assuming that we will do that. In terms of the business, Asia as opposite the last year where we had positive China negative in the rest of the region. This year, we see the opposite, clearly, China and Korea struggling in a transparent way where we see the rest of the market, which -- honestly, we see a positive rebound. But obviously, China, especially in quarter 2, we are assuming that we will see a slowdown. So the gross margin, I leave to Gerd to answer to you.

So on the price increases, I think 2 things there. One is that we feel they have been very well implemented and accepted in the market. And one good indicator is always to look at in terms of total net sales growth, how much of that is volume-driven and how much of that is price driven. And I think the positive thing is that our Q1 sales growth was largely driven by volume growth with a positive price effect on top. And that means that in terms of transactions, in terms of selling the units to our customers and consumers, we feel that that is still continuing well. We are moving with pricing interventions and cost of goods sold reduction in order to counter cost inflation. So that is the whole logic of why we're doing that. Cost inflation is clearly ongoing at the moment and we've had I think we have a prudent stance on this, so we don't expect necessarily a recovery in the second half of the year. What impacts us particularly are, as you already know, the higher inbound logistics costs, so the cost of shipping, finished products from suppliers and factories to our distribution centers. We saw also raw material increases and rising energy prices, but those are actually impacting us less. So like last year also in Q1 this year we had about 200 bps of negative gross margin impact from inflation, but we have been able very well to, I think, offset that with savings and with pricing interventions and led to a, I think, still strong build on the gross margin.

The next question is from Oliver Chen of Cowen.

Thanks a lot The US showed really impressive momentum on tough compares. Would love some highlights on what's ahead for the Smith brand and key opportunities there? Second question on sunglasses. This looks encouraging as well. Are you still seeing volatility in the Sunglasses category? Or do you expect a nice runway with different forms of the reopening? And then thirdly, inflation trends. Some of this is outside of your control, and it's ongoing. What are aspects that you're monitoring? And do you feel like the elasticity of the price increases are in a good place? It sounded like you did thanks a lot.

I'll answer on the brand. I think on the brands, I think that the numbers are always the result of the action. I think that what we've been put in place some years, some time ago to be really, really focused, the focus is always paying. Focus means advertising, focus means execution, focus means have a strong story to tell about the brand. So we see a very, very encouraging double-digit growth behind Smith, behind Polaroid, behind Carrera. So and we see Blenders continuing performing. So I think that is a mixture of, as I said, brand story, more brand story, more investment, quality of investment and really focus. So I think that we will see these brands growing also in quarter 2 and in the second half, I don't have doubt about that. But I think the good thing is, as I'm always saying that the strategy is what I call a balance portfolio. So we not only grow above our brands, which we will keep doing with no doubt, but also I think the focus behind some big brands, some big license are paying off. So the both, that only, the Kate Spade and David Beckham are really growing at very, very interesting pace and on top of the new brands. So in terms of brand, I think the strategy of being very clear, having a very strong marketing strategy and a very clear execution is paying off and it will keep paying off in the quarter 2 and in the second half. I don't have any doubt of that because it's a healthy growth, it's a structural sustainable healthy growth. If I understood correctly the question on the sunglasses, I mean, the sunglasses, I mean, obviously, in the new situation, the sunglasses has to grow. I mean in the last 2 years, sunglasses has been suffering because obviously, if people couldn't go out, if people couldn't travel, if people were tied up in the lockdown that was the effect. So the first sign tell us that the sunglasses they should have a rebound. But in a clear way, now are the 2 next months, I mean, the months that we have in front of last May, June, which really will tell us the truth. We are positive, I mean we see -- honestly, we have all positive signs, but it's little bit too early, I feel I'm positive about the sunglasses category, I think that this year we will see a clear rebound, but we did wait May, June. And once we will have these 2 months, then we will really know if the rebound will happen. I think our view and the size we are receiving from the market are all positive in this moment. I'll leave on the inflation Gerd to comment on that.

I think the other thing I would add on the sunglasses is that what is, I think positive for us is that this category is already quite significant in terms of online and direct-to-consumer e-commerce and it's growing quite fast, quite fast there. And I think with the capabilities that we have and with the brand portfolio that we have on the dart to consumer of our brands, I think we are well positioned to continue catching that online shopper. On the inflation, I think what are we monitoring? I think the one area that is impacting us the most is the inbound logistics cost, so the cost of shipping by sea or by air the product from our supply base in China to our distribution centers or from our factories in Italy to our distribution centers worldwide. I think like in every other industry, there is quite a bit of congestion, there is more demand than supply and we have seen quite a significant increase in the freight rates. So we are monitoring that one quite carefully. And I don't see that this is easing up yet. I think one day, I think we can all expect that probably supply and demand will balance out. But right now, I think there is this imbalance. The other areas which are less impactful for us in terms of the cost of the product is the raw material and the energy cost. Clearly, we've seen, especially on the energy side quite some increases just looking at the world market prices, but it is not a huge input factor for us, but because of the variations, we are seeing some impact there, but it's not, let me say, it's not a big issue for us. The biggest component of our product cost is really labor. So making eyewear is a very labor-intensive process. And especially in China, we are not seeing -- we are not yet seeing, I should say, any significant movements there. And I think also the overall inflation rates in China are much, much lower than what we're seeing in the Western world.

Okay. One question, one follow-up on your omni strategy and your Go Digital. Are there any highlights in terms of managing inventory optimally between your digital and physical channels? And then second question, lastly, the US optical market saw some traffic volatility with Omicron earlier. Did that impact your business much? It looks like you had really nice momentum in this segment as well?

I think on the inventory -- on the online business, let me say, I think that the -- in the brands where we are operating omnichannel, which is or let me say, multichannel, which is especially Smith, but also increasingly our strategy on Blenders, where on top of the online business, we have started opening brand retail shops. I think there is a benefit because it does help us inform our inventory choices. So we see much sooner on the smith.com, which products are selling and which products therefore might also be hot for the wholesalers. And this then helps us inform the supply chain and prioritize the, let me say, the product accordingly. So I think there is the trend and logistically, all our US e-com business is managed out of the same distribution center. So we can quite dynamically switch to stock depending on where we have the highest demand and the highest return. On the United States, let me say that, yes, there has been some volatility. I have to say that all in all for us, the first quarter in the United States was a continuation of, I think, probably 7 quarters in a row of positive performance. Clearly, last year, the United States experienced a huge rebound from COVID, experienced all the benefits of the stimulus. And we had some very big growth numbers in North America last year. So we are quite happy that in Q1, we have been able to build on those. There should be obviously some kind of normalization of those growth trends going forward because the base is strong. We are growing on the back of already strong base period growth rates. So I think it's now important to see the coming weeks, the coming months, which are the most important in our business. It's the start of the summer season, it's the peak season for sunglasses, et cetera on how this is going to continue -- on how this is going to continue evolving.

But I think on North America, one important element for us that do the work that we've been doing the last years, we are now really a sort of omnichannel, omnichannel position in North America. So we have trios, we have department store, we have D2C, we have sport channel. So I believe that the work that has been done in the last year is putting us in the better position to counterbalance or let me say, serve the channel, which is growing faster. So I think the change we have done in terms of the footprint in North America is helping us to catch the opportunity we are raising or eventually counterbalance eventually some slowdown in some of the sub-channel. So I think that this is a structural change, which will help us moving forward in North America.

[Operator Instructions] The next question is from Adam Crocker of Logbook Investments.

Hello and congratulations on your results and growing very nicely at increasingly attractive margins. I had a big picture question about the benefits of scale as you guys grow. I know you're still obviously far behind the industry leader and the market seem to place a big premium on their scale advantages. So what advantages accrue to you guys as you gain scale? And over time, do you think you can -- do you think that those advantages will be appreciated by the market in your multiple?

Yes, let me say that I think there are quite some significant benefits of scale because if we look at Safilo from a macro perspective, I think we have the tremendous footprint and we have a tremendous distribution capability. We are in practically every country in the world. We have 40 subsidiaries. We have distribution partners everywhere else. We reach 100,000 points of sale globally. So I think that the more we are able to grow our business, the more can we fill up for or let me say better utilize that strong distribution footprint that is in place, the more we will be able to better use also the various digital tools that we are -- that we have put to play, I mean be this, for example, our business-to-business platform, you and Safilo today through business-to-business platforms, we make about 20% of our sales in an optician. So the more we grow, I think there is a sort of positive network effect in utilizing distribution channels and in utilizing digital tools. Then clearly, there are also benefits on the cost side because to start with, I think we are in an industry which is growing driven by fundamental factors. And then on top, we have, I think, a great portfolio, geographies, products, brands, channels that I think will help us grow faster and will help us grow faster than our base of fixed costs that we have spent the last 3 years really getting into a good shape. So I think the more we grow, the more benefit I also see on our operational leverage. And I think if you look at Safilo in the last 7 quarters, I think that's what we've been seeing. I mean, I certainly hope the market will appreciate those as we go forward. And I think as we continue delivering what we promise and as we continue delivering I think very deliberately the strategy that we have mapped out and which I think is working for us. And as we continue building top line growth and profitability. So my belief is always, if you do a good job on the business and if the numbers prove that, then I think the valuation should in principle follow.

Gentlemen, at this time, there are no questions registered. Would you like to make some closing remarks?

No, big thank. Let's -- we have 2 important months in front of us, so let's really -- we will keep track on May and June, let's see and then we will update once we have the quarter 2. Thanks very much to all.

Thank you.

Thanks.

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