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

Good evening, and welcome to the Safilo Group Q1 2023 Trading Update. This call may contain forward-looking statements relating 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 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, everyone, and thank you for attending today's conference call on the Safilo Group's First Quarter 2023 Trading Update. I will give you a brief introduction on the drivers that characterize the period, leading to get the specific discussion on the key sales, economic and financial performance indicators, concluding then our presentation with a Q&A session. During our last Capital Market Day in March, I think we discussed about our stance on the current year, given some macro challenges and our specific headwind. I must say that the first quarter of 2023 ended broadly in line with our expectations for the beginning of the year. With the month of March, which confirmed the trends already seen in January and in February, mostly reflected the continuation of some of the main business drivers that have characterized the second half of last year. Our home brand and our core license registered again a sound progress in the majority of our emerging countries and above all in Europe, while the business environment remained soft in the United States.  On the profit side, we are pleased we continue our journey to achieve an improved gross margin, while we kept investing in our home brand and in the digital transformation of the company. I look at quarter 1 as a solid and resilient quarter, not expanding the expected headwinds, and I would like to look at our quarterly performance through the length of our business portfolio. By brand, we were particularly satisfied with Carrera and Polaroid, which continued to post double-digit growth broad-based across product categories and markets as much as with the solid momentum of our core license from the good progress of Hugo Boss and Tommy Hilfiger to the double-digit expansion delivered by Carolina Herrera and David Beckham. The quarter was instead overall soft for Smith, mainly due to a very high comp base, while Blenders was flattish behind bad weather conditions in California.  Looking at our business from a geographical standpoint and more specifically, looking at our 2 main regions, also one on Europe was strong and our key growth area with the various market of the area, which continues to grow nicely, thanks to solid internal consumption and positive touristic flow. And grow in Europe continue to be cited by strong growth trends in all the emerging markets, but China where order intake resumed more sizably starting from the month of April. On the other hand, in the United States, we continue to see a discrepancy between more positive sell-out data and a more prudent behavior by customers, leading to still subdued wholesale demand and order intake. By channel in the quarter business with physical eyewear customers were largely positive and outpacing online due to the softer IPP sales in Europe. As expected, the business generators for the GrandVision store network dropped significantly as its integration into EssilorLuxottica business arena progress. I'll stop here and I hand over to Gerd for the specific economic and financial highlights of the period.

Thank you, Angelo, and good evening to all of you. Starting from our top line, revenues in the first quarter reached EUR 287.2 million, up 1.6% at current exchange rates and basically flat at minus 0.4% at constant exchange rates compared to Q1 2022. At the organic level, sales instead grew by plus 3.2% at constant exchange rates, which compares to what was last year, our strongest quarter, having posted an organic growth of 14.3% versus Q1 of 2021. Let's then look at the drivers of our top line performance by geography, and I would start from our key positive driver Europe, where our business grew by 4% at constant exchange rates compared to Q1 last year, while organic sales increased by 5.5%. Angelo has already referred to Carrera and Polaroid ongoing strength, and this was particularly evident in Europe where the 2 brands grew, respectively, by approximately 20% and 10%, driven by their core markets, namely Italy and Spain, but expanding nicely also in Eastern Europe.  These were indeed our overall top-performing countries in Europe, together with France. And in all, sales growth was pretty much broad-based across channels with chains and independent opticians particularly strong. We are glad of these performances because they come alongside the continued expansion of our B2B digital channel in line with our medium-term strategy for a strong omnichannel business model. As said, the general strength of the European business allowed us to more than offset the expected decrease of the revenue generated through GrandVision, which dropped by approximately 70%. Therefore, our mid-single-digit growth in Europe was actually a sound double-digit excluding GrandVision, thanks to a strong improved relationship with thousands of customers outside the EssilorLuxottica Galaxy.  In North America, Q1 sales remained soft, down 7.2% at constant exchange rates compared to last year, while the organic business was more stable, down 0.9% at constant exchange rates. As a reminder, the organic performance is stripping out the Givenchy phaseout sales still recorded in the base period. In the quarter, what we continue to observe an experience in the U.S. wholesale eyewear market was, on one side, healthy and ongoing demand for premium and high-end products, a trend from which also a part of our portfolio continued to benefit with Hugo Boss, Carolina Herrera, Carrera and David Beckham delivering good growth. On the other, a still prudent propensity to purchase in the entry and mid-tier price points, which eventually resulted in a still soft order intake from our wholesale clients. What we then need to consider when looking at North America is the performance of sports shops and tire 2 consumer. In the former, Smiths business was soft in the quarter. As in H1, it is running against a tough comparison base, especially for bike products. It is indeed a well-known topic in the marketplace, a cautious start to the bike season with bike retailers in U.S. and Europe having to deal with higher inventory levels than they would have liked.  Direct-to-consumer was instead of low single-digit positive in the U.S., driven indeed by Smith, which was very positive in the channel, while Blenders was instead slightly negative. This is the lowest season quarter for Blenders, which was on top influenced, as Angelo said, by poor weather conditions in several key states such as the Californian Coast. Moving to the emerging markets. Our net sales in the rest of the world marked another important growth of plus 16.6% at constant exchange rates compared to Q1 2022. The key driver of our good performance in the area were once again Brazil and above all Mexico, where Carrera, Polaroid and all our core licenses recorded double-digit increases, both thanks to the greater productivity of the brands in existing stores and to the expansion of distribution, so new customers for us to serve. Sales in India and the Middle East also recorded a positive quarter as we continue to invest on focusing lens to engage with the main local wholesale partners as well as on the development of online channels to Internet pure players.  Finally, in Asia Pacific, net sales were down slightly by 2.6% at constant exchange rates, mainly due to still some prudence of wholesale customers in the Chinese market. Also considering that this year, the Shanghai Optical Fair, the most important eyewear sector, fair in Asia took place in April. In fact, we have seen a trend change starting from this second quarter. In Q1, our sales in Asia instead grew in the travel retail channels, thanks to the reopenings in China and the gradual recovery of tourist flows. And in Australia, we're significate expanding. Moving now to our economic KPIs. In Q1, we confirmed a solid and improving gross profit, up 7.9% and a margin, which reached 58.4% of sales, up 340 basis points compared to the 55% recorded last year. Yet again, our industrial performance was driven by a positive price/mix effect, reflecting, in particular, our richer product offer and the pricing policies we successfully implemented last year, along with a more favorable brand mix driven by the absence of phaseout sales and a less abundant quarter for sport, which at the gross margin level is less accretive than eyewear.  The other positive driver was then the easing of transport and energy costs, which in the same period of last year were still particularly high. As highlighted by Angelo, in Q1, we continued to invest in the development of our home brands through very focused and targeted marketing and advertising activities and we kept progressing on our digital transformation road map through investments in Software as a Service. On the other hand, the period also reflected higher labor costs due to the inflationary pressures and some new capabilities and personnel. Selling, general and administrative costs increased by approximately 9% compared to the corresponding period of 2022, with marketing and advertising expenses up approximately 14%, personnel costs by almost 14% and Software-as-a-Service costs by around EUR 1.4 million. Adjusted EBITDA in Q1 equaled EUR 32.4 million and a margin on sales of 11.3%, up 1.3% in absolute terms and bang in line with last year margin-wise. As usual, we conclude our trading update with the group's net debt at the end of March, standing at EUR 112.4 million or EUR 70.2 million pre-IFRS 16, substantially in line with the position recorded at the end of December last year. And we were glad to close the period with a slightly positive free cash flow despite the normal seasonality of our business. I stop here and I hand over to Angelo.  Thanks, Gerd. This concludes our presentation. We thank you all for participating into the call, and we are now ready to take your questions.

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

The first one is on current trend. So can you comment on the trend in April and which kind of progression do you see across geographies? The second question is on sun season. So what is your general feeling on this spring, summer season. The third question is about Longarone, so can you give an update on the ongoing discussions with trade unions. So when do you think that should be a clearer picture? And finally, on the evolution of net debt, what kind of trend do you expect for the coming quarters?

Okay. I'll start. I'll let Angelo build. I think on the current trading in April, let me say that so far as we enter Q2, we see still quite similar conditions to Q1 with regards to our 2 main regions. So that means in North America, we have not yet seen a pickup. And in Europe, honestly speaking, despite the strong comps base still of last year, it continues to track very positively. We need to be clear that as I mean, I think, expected and as we anticipated, the business with GrandVision is phasing out. GrandVision had the biggest chunk of business in the second quarter of last year. Then in the second half of last year, we had already quite a significant reduction. So I have to say, Europe is dealing very well with the rebalancing of the customer portfolio. And then I think on the emerging market side, as we were already commenting, we are seeing now some rebound in China as the reopenings are now also affecting the wholesale part of the business. But clearly, the incidence on sales there is not so high. And then on the rest of the emerging markets, India, Middle East, Africa and Latin America, we also continue to see quite a good progress.

Thanks, Gerd. Answering to your second and third question, sun season. Currently, the overall quarter was very positive on some, obviously, with the different dynamics between Europe and North America, where the comparison was tough versus Latin America and rest of the world. Obviously, the sun season will start now. So we should start seeing the effect now in Europe, north of Europe, they didn't have a great weather so far. So we should see the sun picking up even more in Europe in the next month. With reference with Longarone, I think we are discussing with the union, we are discussing with the institution. I think that shortly, let me say, we can -- we will be in a position to update the market on the next concrete steps.

And then the last question on the net financial position or the free cash flow. Let me say that we were quite pleased to have started the year with a positive free cash flow, which is, let me say, seasonally not typical for us. And if we look a little bit at the drivers other than the operational flows from the EBITDA, we have a net working capital dynamic, which was characterized by quite a nice reduction in inventory as we were also expecting because we had clearly increased inventory at the end of last year in anticipation of the very early Chinese New Year in January. So that inventory has gone out as we start shipping obviously, the spring/summer collections from March. And then we have an absorption on the side of the receivables, but this is seasonally quite normal because the big month of invoicing, let me say, starts from March. So I think on the working capital side, it was a decent start to the year. As usual, Q2 is seasonally always still an absorbing quarter. But I think with the start that we have seen in our ambition for the full year to generate a positive free cash flow that we have articulated previously, I think the year-to-date trends, they put us quite on track versus that objective.

The next question is from Andrea Bonfa of Banca Akros.

I got a very simple question related to the Europe performance. And if it's possible to know the absolute impact of the decline in sales to GrandVision. So in other words, what would that be the European performance net of that impact, if possible?

Yes. So we had a reduction of GrandVision in the first quarter of approximately 70%. So the GrandVision business of last year that we had in Q1 when things were, let me say, still more normal. That business has gone down by 70%. And while if you exclude GrandVision, all the rest of Europe has actually grown at a strong double-digit pace as we are rebalancing some of those sales and see very good demand for our collections. And then the net of the 2 is the mid-single digits that I was commenting on.

And if I can build on, independent from JV, which somehow is the past, I think the results in Europe are honestly very encouraging and above our expectations because first is broadly in almost all the countries in Europe and is focused on our main brands, which means that what we are doing in Europe is the right path and is also telling us that we have been able to open new stronger relationship from on one side with the single opticians, but also on the other side with other European chains.

The next question is from Cedric Rossi of Bryan Garnier.