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

Good evening, and welcome to the Safilo First Half 2023 Results. 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; Barbara Ferrante, Director of Investor Relations; and Michele Melotti, Senior Director Group Controller. I will now pass the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks. Thanks very much. Good evening. Good evening, everyone, and thank you for attending to the conference call on the Safilo Group's second quarter trading update and first half results. We entered the second quarter aware that in the 3 months of the year, our sales could be facing our biggest headwinds from the continuation of the weak business environment in North America, heightened by poor weather, to the expected significant drop of our revenue in the former Grand Vision chain in Europe. Notwithstanding these negative dynamics, our economic, and more meaningfully, our financial performance remained solid, and we also made further progress on some of the key strategic drivers of our medium-term plan. I think that it's important to highlight that while top line momentum was for us subdued in Q2 with sales down by 6.6% at constant exchange rate, at minus 5.9% at the organic level, with quite a number of headwinds and a still challenging comp base, we delivered in the period another significant improvement of the performances with the adjusted gross margin, which improved by 260 basis points to 59.1% as a percentage of sales, allowing us to absorb a large part of the sales-related operating deleverage, and also of the higher investment we decide anyhow to undertake in order to support the group's development in the long run. In the quarter, despite our adjusted EBITDA margin softening by 110 basis points, we were able to deliver a positive cash generation of EUR 9.2 million, also thanks to the good working capital management we will see later on. For us, these months were intense also for a number of important business developments. In the second quarter, in fact, we achieved important results in solidifying our brand portfolio for the long term, thanks to the early renewal of 2 constants of our license business, Kate Spade and Tommy Hilfiger, very, very important achievement, and the signing of the new 10-year agreement for the eyewear of Etro, a brand on the rise in the luxury space, and adding to the recent signing of successful brand in the premium luxury women's segment such as Ports, Isabel Marant and Carolina Herrera. In July, we were also pleased to renew some others of our partnership, namely Juicy Couture, Fossil and Havaianas. Let me now look at our business performance through the lenses of our portfolio. From a geographical standpoint, as said, North America remained our main hurdle in this first semester as a number of headwinds impacted to a different degree the core channels in which we play the majority of our business in the region. On the positive side, the underlying performance in Europe, excluding the GV business, remained satisfactory for us, given the still tough comparison base with the corresponding period of last year. And we recorded a very strong quarter in Asia, which rebounded mainly thanks to China reopening. We were also glad to see India and Middle East, which kept growing nicely. By brand, Carolina Herrera was our best-performing brand, posting another quarter of growth, while Polaroid, David Beckham and Hugo Boss performed better than the rest of the portfolio. In the first half, both Polaroid and Carrera were positive compared to the same period of last year and meaningful results, in particular for Carrera, given it was a brand well developed in the former GV chain. By channel, aside from our expected significant drop in the former GV chain, which in both periods, negatively impacted growth by about 4%, physical channels continued to outpace online. And our consumers in this post-COVID normalization period do appreciate the experience in the point of sale, while it was quite the opposite for our sport business, where the D2C continued to be a key positive driver. Overall, our online channels confirmed a 15% share of the group total sales. I stop here and I turn over to Gerd for the economic and the financial highlights.

Thank you, Angelo, and good evening to all of you. Starting from our top line on the quarterly performance already provided by Angelo, I would just like to remind you that this period was still against tough comps as Q2 last year was up almost 10% organically versus 2021. Q2 brought our first half net sales to EUR 550 million, down 3.5% at constant exchange rates compared to the first half of 2022, while the organic performance was more stable at minus 1.4% compared to last year when the organic business improved 12% versus '21. Excluding Grand Vision, our second quarter was down 1.9%, while the semester was up around 2%. That said, let's see the specific top line performance by geographical area. In Q2, our total sales in Europe were down 3.1% at constant rates and 6% at the organic level, with the drop in GV impacting the performance by around 10 percentage points. And as a quick reminder, this impact will become less significant particular in Q4 when last year's sales in GV had already strongly declined, thus the comp space becomes easier. Our sales in Europe, excluding JV, were up mid-single digits in Q2, quite a remarkable performance for us as this was achieved against the plus 20.7% recorded at the organic level in the corresponding period of last year. Looking at our underlying performance, all our main product categories were positive also in the second quarter, thanks to the progress of our B2B business in independent opticians and another positive quarter for the travel retail channel favored by the return of touristic flows. To the point made earlier by Angelo, revenues in the Internet pure players channel were instead again soft. In H1, our reported sales in Europe were substantially in line with last year, plus 0.4% at constant rates, minus 0.3% at the organic level and plus 10% excluding JV, with Italy, Spain and Eastern Europe our best-performing markets both in the quarter and in the semester. In North America, Q2 sales were down 15.3% at constant rates and 11.5% at the organic level. As already highlighted by Angelo, the U.S. market was affected by quite a number of combined headwinds. Certainly, a continuation of the subdued wholesale environment we have been experiencing for a couple of quarters at the independent optician level and which did not improve into the second quarter. This challenge was heightened in the period by poor weather conditions holding back the start to the sun season, and consequently, orders and sales of sunglasses, both in stores and in the online channels with Blenders, being mainly sun, among the brands most affected. Looking then at our Sport business. Its performance continued to reflect a still demanding base period, and a late start to the season also for bike products. Smith sales and sport shops improved in May and June, whereas its business continued to grow seamlessly in the direct-to-consumer channel. So clearly, in the last 2 quarters, we missed the sport business as a growth driver, something that we are quite confident to resume in the next quarters given the supportive sell-out results for Smith in stores and easier comp base from the third quarter onwards, plus the D2C business, which keeps a very encouraging pace of growth as we continue to invest in its evolution, including quite recently the launch of Smith's own presence on Amazon. In H1, our sales in North America were down 11.3% at constant rates and 6.2% at the organic level. Moving to the emerging markets. In Asia and Pacific, this was a quarter of strong growth. Net sales soared by 36% at constant rates and 38% at the organic level compared to Q2 last year when China was still closed. The significant rebound of the region was mainly driven by the market reopening, where revenues rose over 60% year-on-year coupled also with the Hong Kong domestic market returning to normal. In these markets, our key growth drivers were, in particular, Ports, Hugo Boss, and we had a nice progress also on Polaroid, while Smith led the very positive quarterly performance of Australia. Thus, the first half in Asia Pacific closed up 17% at constant rates and plus 17.8% organic. Finally, on the Rest of the World, namely EMEA and Latin America, sales were slightly down 0.7% at constant rates and flat at the organic level, a performance that we consider a bit of a normalization after many consecutive quarters of significant growth. More specifically, Brazil slightly decelerated compared to the same period of last year, while trends remained very positive especially in India and the Middle Eastern markets, where we continued our development plans driven by strong local marketing and product activities. In H1, sales in the Rest of the World were up 7.6% at constant rates and 7.9% at the organic level. Turning to our economic performance, commenting as usual on our adjusted results, I would like to point out that in this first semester, these adjusted figures exclude non-recurring costs for a total of EUR 16.2 million at EBIT level, EUR 12.7 million at the EBITDA level and EUR 5 million at the gross profit level. These were mainly booked in the second quarter in relation to the project for the disposal of the Longarone plant to third parties, which reached in June an advanced stage. The majority of these non-recurring costs related to Longarone is non-cash. In Q2, our industrial performance remained very solid, delivering an adjusted gross margin of 59.1% from 56.5% in the same quarter last year, an improvement of 260 basis points, which was driven by lower inbound logistics expenses, lower obsolescence costs behind tight inventory management and an overall positive price/mix effect on sales. We closed the first semester with an adjusted gross margin of 58.8%, up 300 basis points compared to the 55.8% recorded last year, an improvement that surpassed our expectations for this time of the year. Moving down to P&L. The results we achieved at the gross profit and gross margin level allowed us to absorb not all, but a good part of the sales-related operating deleverage and of the inflationary pressures on personnel costs we faced in Q2, in particular, and as a consequence, also in H1, where we also front-loaded the majority of the investments in the projects for the group's digital transformation. In Q2, the incidence on sales of selling, general and administrative increased mainly due to higher personnel costs and software-as-a-service expense increasing from EUR 1.8 million to EUR 3 million. Our adjusted EBITDA margin thus reached 9.5%, 110 basis points lower than Q2 last year. As a point of reference, in H1, personnel costs increased by 5.9% and those related to software-as-a-service projects from EUR 3.7 million to EUR 6.3 million. Finally, H1 adjusted EBITDA margin was 10.4%, 60 basis points lower than last year. Below the operating line, we had 2 specific dynamics which reversed compared to last year. First of all, we had a negative delta of EUR 17.3 million due to different dynamics on the put and call options on the non-controlling interests. Specifically, while last year, we booked an income of EUR 8.7 million following mainly the increase of our stake in Prive Revaux, this year, we booked a charge of an almost equal amount in relation to the extension of the second and third tranche of the put and call options in Blenders with the strategic rationale being to prolong the founders' engagements in the brand's future development. In the first semester, we then recorded higher net financial charges, mainly due to negative exchange rate differences compared to a positive difference of last year and to the increase in interest rates. All this brought our group's adjusted net result to EUR 6.9 million from EUR 33.7 million last year. Moving now to our financial performance. We were very glad to see that our operating results along with a good working capital management resulted in a cash generation in a period which is typically of seasonal absorption. In H1, we generated a positive free cash flow of almost EUR 10 million compared to the cash absorption of EUR 14.5 million in H1 last year. We had approximately EUR 1 million positive free cash in Q1, while around EUR 9 million were recorded in Q2. Overall, in the semester, our cash flow from operating activities amounted to a positive generation of EUR 21.1 million, reflecting a more moderate cash absorption from working capital of EUR 14.7 million, mainly driven by a quite meaningful decrease in inventories compared to the end of the year and a healthy cash collection in all the main geographical areas. The cash flow for investing activities remained instead stable at EUR 6.2 million. This cash generation allowed us to close the month of June with the group's net debt standing at EUR 103 million, EUR 61.7 million pre-IFRS 16, confirming a sound financial leverage of 0.6x. That was better than the position of EUR 113.4 million reported at the end of December 2022 and the EUR 105.6 million recorded at the end of June 2022. Finally, and as I'm sure you have all read the communication concerning my departure from Safilo, I wanted to thank you all for your engagement during these last 9-plus years worth of earnings calls, shareholder meetings, investor meetings and conferences and so on. I believe that this engagement has helped me and Safilo to focus on the relevant business drivers to start unlocking the creation of shareholder value. I'm very pleased with the announcement of Michele Melotti as the new Group CFO, who brings with him a wealth of insight and experience in Safilo and beyond. And I know that you will have the opportunity to get to know him from September onwards. Thank you again, and I hand back to Angelo for his closing remarks.

Thank you. Thanks, Gerd. Now, while the uncertainties and low visibility characterizing the short-term external market context make it particularly difficult to foresee the overall business evolution, in the second half of the year, we will strive to improve our sales and adjusted EBITDA year-on-year performance compared to what we achieved in the first half as well as to deliver another semester of positive cash generation. Finally, before concluding our presentation, I really would like to thank -- to take this opportunity to thank Gerd. He has been instrumental in Safilo to justify where we are today, has been giving himself the full dedication to Safilo and I really -- I'm happy for the contribution he has given to Safilo and I'm happy for his future that he will found a new way and a new success. On the other side, I'm also happy that Michele Melotti will take over as the Group CFO. We thank you again for your participation into the call, and we are now ready to take your questions.

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

I have 2. So the first one is regarding the U.S. market. If I recall correctly, in Q1, you were mentioning sort of the cautiousness of wholesalers, especially in the department store channel, plus the subdued trends in the sports channels. So you are not mentioning this cautiousness anymore. So does it mean that the department stores resumed their orders during the summer? And how do you see the current trading in the U.S.? And the second question is still on the U.S. According to you, these softer trends are due to -- is the cause only weather related? Or do you think that it's also a wait-and-see behavior from customers due to the tough macro environment?

Okay. I can start, if you like. So I think in the U.S., you have quite different developments. On the one side, I think also not just Safilo, but others have flagged quite a soft season on the sunglasses. Particularly in April, it started, let me say, quite negatively. Then it started to sequentially improve. This has also affected sport, where also sunglasses are relevant part of the business over there. In terms of optical frames, let me say that the sellout performance has started to improve, but there are some different dynamics by segment. So we still see the luxury segment performing more strongly than the contemporary and premium segment. I think that this is converging now a little bit. Our portfolio, as you know, is more geared towards the premium contemporary segment. So this can become -- this current challenge can perhaps become also an opportunity in the future. Department stores have rebounded a bit in the second quarter compared to the first quarter, where indeed they were quite negative. And I would say that the sellout is now improving a bit. Especially, in terms of sports, we saw a very positive month now coming online in July. And we saw some month-on-month improvement also as we entered Q3 in the wholesale channels. I'll leave to Angelo.

No, I think it's -- the point that he refers -- I mean, obviously, there is a little bit of -- has been a sort of soft sun season in U.S. And then it has been sort of the customer, which are quite cash conscious in this moment. So these 2 elements have been affecting the numbers. But I think we -- the worst period has been April, May, June. Especially in the sport, as Gerd was saying, we see some sign of recovery. On the other side, the luxury, which was growing very well, we see now that it is still growing but at a different rate, which can be for us an advantage in the second half of the year.

Gerd, best of luck for your future.

Thank you, Cedric.

The next question is from Domenico Ghilotti of Equita.

First question is on the portfolio license renewals. So you have been doing a lot of work early compared to the termination. And so I wonder if you are working also on BOSS. That is probably the large missing part in this renewal process. Second, on the current trading, I'm interested also in having a comment on what's going on in Europe, has been much more resilient so far. And -- but it's not so easy to understand because of this -- the moving parts. And so entering into Q3, I wonder if you can provide some color on that.

Okay. In terms of license -- thanks, Domenico, to have been -- flagging that. Yes, we have been very, very active. Obviously -- let me say, the renewal -- the early renewal on Kate Spade and Tommy is really quite an important step. These 2 licenses give stability to our portfolio till 2030. So obviously, very, very 2 important achievements and 2 great brands like Kate Spade and Tommy. We've been also adding Etro. We were missing -- we had Isabel Marant in our portfolio. Now with Etro, we have even a higher luxury brands still strong in women. So renewal: Kate Spade, Tommy Fundamentals, Etro, a very important add-on to our portfolio. We have been also renewing license which are smaller, but with a sort of regional, local role. So Juicy Couture, Fossil and Havaianasa. Specific on your question on BOSS, it's a little bit early, but obviously, we have a very, very good relationship with them and we have a very constant open channel. But a little bit too early to come to some conclusion. I can confirm a great relationship. We are working very, very tight together. We have a very, very great relationship with them. But it's a little bit too early. I'll just give you a small comment on Europe, and then I leave to Gerd. You are right that from an external, Europe is difficult to understand because there is this effect of GV. Without being too specific, I can tell you that take out the effect of GV, we are -- we have our main brands in Europe growing in a very important dimension. Obviously, this effect in the short period is going to be hidden by GV. But for me, it's showing that the brands are healthy and it's showing that we are compensating step by step in a phased way. The exit with GV reinforcing the relationship both with a small optician, but even more important, with the other European chain, a chain in Germany, a chain in France, a chain in the Nordic. Let me say, we have been really, really reinforcing our relationship. We've been really, really reinforcing our shelf space. So this is for me more important. I understand that this year till the end of the year, the figures in Europe will be a little bit difficult to be interpreted. But I can assure you that taking out the effect of GV, honestly, in Europe, all the top brands are all performing very well. I leave to Gerd to add anything.

Yes. Let's say that Europe last year really came back with a vengeance after COVID and grew a lot. And I think this year in the beginning we were a bit worried that maybe the European economy would be more difficult than it actually is. And if we look at the performance without the GV business, I mean we did a double-digit performance in H1. We had a quite strong double-digit in Q1. We were still at a good mid-single digit, excluding GV in Q2. And as we're entering Q3 now, it's August. Let me say that excluding the GV effect, which is starting to ease -- it was still there in Q3 last year. But we would expect also Q3 to remain positive excluding GV. And then -- well, hopefully, again, the same in Q4 barring any other political or macroeconomic development. So we remain quite positively tuned on Europe.

Okay. If I follow up on your comment for the full year, because -- just to be sure that I understood properly. So you are saying that you are expecting some additional cash generation, so cash flow to be positive in the second half. And I didn't understand -- so on -- when you were seeing some positive development in profitability if it was year-on-year. So you try to get to at least the same level of profitability that you had in the second half of last year, but I'm not sure I got the message properly.

No, you got it properly. So both on the top line and on the bottom line, we expect a better year-on-year performance compared to last year than what we recorded in H1, and we do expect also to continue with cash generation in the second half.

[Operator Instructions] The next question comes from Oriana Cardani of Intesa Sanpaolo.

The first one concerns the disposal of Longarone. So can you give us an idea of the impact you see in terms of cash flow? And the second question is about pricing. Are you thinking to adjust some prices in a selective way?

So on Longarone, I mean, we are -- if you follow a little bit the news flow that is coming out every hour of the day, you can see that we are in deep negotiations trying now to come to the conclusive phase on this project. So not all of the elements have yet been fully negotiated. But we do have the 2 potential buyers. We do have the discussions in place. So there is still, let me say, some negotiation to happen. But I would expect that we would have, let me say, a rather moderate effect on the cash from this transaction. What exactly the impact will be, I think we will see end of August, beginning of September. But it is certainly much less than what you see in terms of P&L, where you do have a lot of non-cash related write-offs obviously of fixed assets and things like this. The second question, sorry, was on pricing. I think pricing, as we have been saying also in the past earnings calls, is something that we have been very proactively and selectively implementing over the last 18 months. We did see the inflation coming. And I think that what we have done is working out well, because pricing is a positive contributor which is more than offsetting some of the negative mix effects that we are seeing in the portfolio. So it's a positive contributor. We've also seen roughly 3%, 3.5% of salary inflation in the operating expenses. So it helps us also to more than counter, let me say, that effect. And we will continue to be looking very carefully at this topic, because, clearly, inflation is coming down in the main geographies of the world and energy costs are lower, food inflation is going down, core inflation seems to start normalizing. So we will continue to look at this lever, but probably not in the way that we did in the past 18, 20 months when it was really a big emerging phenomenon.

[Operator Instructions] Ms. Ferrante, gentlemen, there are no more questions registered at this time.

Okay. Thanks very much. Thanks to everyone. And thanks again to Gerd.

Thanks to everybody. Have a good evening.

Have a nice evening. Thanks very much.

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