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

Good evening and welcome to the Safilo's Group's Q1 2024 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 risks, 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; Michele Melotti, Chief Financial Officer; and Barbara Ferrante, Director of Investor Relations. I will now pass you over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks very much. Good evening, everyone and thank you for attending today's conference call on Salifo Group's first quarter 2024 trading update. The start of the year was overall in line with our expectations and with the trends we had partially outlined and discussed during our earnings call in mid-March. The first quarter was once again a very positive confirmation of the strength and the resiliency of our European business. We were particularly pleased about the dynamic business environment we continue to experience in our core European markets, where among all brands, Carrera had a really strong start to the year, also making it debut with a brand-new women's collection that is gathering excellent feedback, and we continue to register the strong progress of David Beckham in the premium segment, where the brand plays an increasingly relevant role among different [ male ] consumer targets, thanks to David's credibility, both as a fashion icon and British gentlemen with refined tastes. I would therefore say so far so good in Europe. On the other hand, as anticipated, it was a difficult start in North America, reflecting both a pretty poor winter season for our sports business in store, as already seen in quarter 4, and the weak wholesale eyewear market in the contemporary sunglass segment, where a more cautious order approach persists, while consumers buying online remain more dynamic. It was, above all, a solid quarter at the economic and financial level. We delivered another significant improvement of our gross margin and a lot more moderate and improving also on our operating performance. Very meaningfully, we then maintained a good grip on our cash flow, slightly declining the group's net debt. Before I hand over to Michele for some additional comments on the top and bottom line of the period, I would like to stress that our main focus remains the execute on of our medium-term strategic objectives, continuing to enhance the uniqueness and innovation of our product and service and to solidify the core asset of our business model. I would like to come back to this at the end of my presentation. Michele, over to you.

Thank you, Angelo, and good evening to all of you. Starting from our top line, revenues in the first quarter reached EUR 277.2 million, down 3.5% at current exchange rates, with ForEx negatively impacting for 170 basis points. So at cost of exchange rate sales softened by 1.8% compared to Q1 2023. Starting from this quarter, we stopped reporting the organic performance, a KPI, which was particularly helpful to align our underlying performance during our transition out of the [indiscernible] licenses. This is over and any current and future [indiscernible] will be specifically spotted where relevant. As you know, in the first 6 months of the year, we will be phasing out Jimmy Choo, meaning that we are doing some depletion sales with the brand with a reduction compared to the one done in the same period last year. This largely explains the drop in sales recorded in the quarter. Therefore, in Q1, before the Jimmy Choo drop, our sales were flattish. Let's now look at our top line performance by geography. It was a very positive first quarter for us in Europe, where sales were up 5.8% at constant exchange rate versus last year. I remind you that Q1 2023 was a challenging comparison period when organic sales grew double digits, net of the decline recorded in the former GrandVision chains. The start to the year were particularly positive in the French market where we kept strengthening and expanding our commercial network, as already mentioned during our previous earnings call. And we had a good quarter also in our Central and Eastern European markets, driven by the positive performance of the Internet pure player channel in Germany and the excellent progress of the business in Poland and Turkey. Angelo has already highlighted the strong performance of Carrera and David Beckham in Europe, where the brand grew double digits. I would also like to add that it was a positive quarter for the majority of our licensed brands and we also had a promising debut of our new Etro collection. In North America, Q1 sales dropped 7.2% at cost of exchange rates compared to last year, which you might remember was still a decent quarter in terms of organic performance. The drop in U.S. started to become more meaningful in Q2. As already highlighted by Angelo, the weakness in sales concerns both Smith business in physical sports shop, which was impacted by a soft winter snow season that started lower in Q4 and continue with a low level of reorder in Q1 this year and also drive our business in the contemporary sunglass segment, where we continue to experience the cautious order attitude of the main wholesale clients. On top, we were penalized by the Jimmy Choo phase-out. A positive note in the United States was the growth of our direct-to-consumer channels, continuing the strong performance we achieved last year. And as you remember, a particularly strong Q4. In Q1, Blenders and Smith D2C did very well, up, respectively, high single digits and double digits. Moving to our emerging markets. In Asia Pacific, our net sales were up low single digit at cost of exchange rate, by 2.3%. The quarter was positive for our business in China, also supported by the initial positive effect of the good result of our product in the Shanghai fair held in March. In China, we had another strong quarter with Ports and with Polaroid, which keeps solidifying its business. Q1 was a quarter of growth also for the business in Australia, where we continue recording the positive growth of Smith, our second-largest brand in the market after Carrera, which is a strong asset for us in the country, and where we have now launched carreraworld.com to accelerate brand growth through e-commerce. To conclude with our geographies, sales in our rest world recorded in the quarter, a decline of 12.7% at cost of exchange rates, which was mainly explained by the different timing of some deliveries in our Middle Eastern markets. The quarter was also a soft period for the travel retail business in Latin America, while on the positive side, I would like to highlight that both Carrera and Polaroid continue to make good progress in India. Moving to our economic key performance indicators. Q1 was another confirmation of our ongoing strength of our industrial performance. Our gross margin soared to 60% in the quarter, 160 basis points higher than the 58.4% recorded in the same period last year. Overall, we benefited from the higher production efficiency resulting from the industrial restructuring we accomplished in Longarone last year, which also resulted in a decrease of depreciation. Pricing remained a favorable lever together with the positive channel mix due to the ongoing development of our direct-to-consumer business. This driver more than offset the diluted effect we had in the quarter due to the Jimmy Choo phase-out sales. Below the gross margin, the expected normalization of the IT investment and the marketing expenses allow us to keep better under control, the still negative operating leverage. Bringing [ on ] part of the improvement achieved at the gross margin level. We just closed the quarter with an adjusted EBITDA of EUR 32 million equal to an adjusted EBITDA margin of 11.5%, 20 points higher than the 11.3% recorded last year. Clearly, at the EBITDA level, we missed the benefit of lower [ D&A ] which impacted the cost of goods sold and also G&A for approximately 50 basis points. We conclude, as usual, with the gross net debt at the end of March, which stood at EUR 81.3 million or EUR 41.8 million pre-IFRS 16, better net debt position pre-IFRS 16 of EUR 43.7 million reported at the end of December last year. As stressed by Angelo, we are very glad to be able to confirm a positive free cash flow generation also in this quarter, notwithstanding the seasonality of the business in Q4 last year, which was better than expected in terms of cash generation. The period was driven by a positive operating performance and a lower cash absorption from net working capital, thanks to declining inventories. I stop here and I hand over to Angelo.

Thank you, Michele. Before we move to the Q&A session, I would like to make a final point on our licensed brand portfolio. As I think we have in the month of April, further enhanced the work initiated more or less 1 year ago when we started to secure our most important license agreements for the long term. The renewal of the partnership with Marc Jacobs till December 2031 is relevant for us. It is an accretive asset of our portfolio, a very long-time partnership with still many new opportunities for growth in its core U.S. market as well as worldwide. I'm particularly happy then to comment on the signing a few days ago of a perpetual license agreement for EYEWEAR by David Beckham. As you may remember, we began this collaboration 5 years ago in 2019, introducing the brand to eyewear for the very first time. And in a few years, making it one of the most successful eyewear brands of the recent year, a top male brand in the global premium segment and for sure, a great force in our digital universe, thanks to David's global audience. This new agreement now marks another milestone within our strategy. By transforming David Beckham into a perpetual license, we secured another cornerstone of our brand portfolio, which is today in a position never occupied before. Let me highlight here 2 meaningful facts. First, if we look to the revenue we make today with our home brands plus the perpetual license with David Beckham, which in terms of its risk profile can now be assimilated to a home brand we are today already very close to 50% of our total turnover. Second, approximately 75% of our licensed brand -- licensed portfolio is today secure to the end of 2030. So we have over 6 years of a solid licensed portfolio in front of us with all our core license fully secured, and the remaining part of the portfolio made by a number of smaller brands, all low single digit. So again, I think that our current setting as far as our home and licensed portfolio are concerned, has positioned us very safely for a quite long time. This concludes our presentation. We thank you for all participation 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 rate. So can you give us an update on the trend that you have seen in April and early May with some details on what is happening in America? The second question is on the perpetual license agreement signed with David Beckham. Do you expect that this formula can be replicated for other licenses? And the third question is on M&A. In the past, you say -- you have said that you are interested in brands positioned in the sport segment and in a small -- and in small luxury brands. So has the licensing agreement with David Beckham replaced one of these opportunities or have you remained interested in finding targets in these 2 segments?

Okay. Thanks for the 3 questions. I try to take all 3 and then eventually, I will ask the help to Michele. Now overall, April was a positive month driven by a continuation of a very solid trend we see in Europe, where in North America, the performance were better than quarter 1, but still negative. The comps are now becoming easier both for eyewear and sport business in North America, but the real area of attention is the contemporary segment. The contemporary segment remains quite volatile in North America. Plus, I'd like -- just to remember as I think we had opportunity to say in some other occasions, we don't need to forget the Jimmy Choo effect mainly as a headwind, mainly in the H1 part of the year. On the perpetual, I think, first of all, allow me to say that David Beckham has -- as a position has a strategic position in terms of brand. I mean, we have developed this brand from 0. I think, it has been growing double digits fundamentally from the 0 for a simple reason. It's clearly positioned what we call the premium segment. So the segment which goes above [ $180 ] but below [ $250. ] which is quite a big segment which keeps growing and where I think David Beckham is really catching this segment in the best way. On the more broader question on perpetual, I think personally that the volatility of the market push this industry to have more stability on the license. We cannot afford any more licenses as they keep changing too fast. So personally, I think that we will look, we will try to discuss with other fashion houses, which have an open mind to think or understand if we can have other perpetual agreement on the -- along the line of the David Beckham one. With reference to the last question, which is M&A. No, I don't think that the David Beckham perpetual license is changing the approach towards the M&A. I think that we will keep -- we have now signed the agreement with David Beckham, but we will keep being -- looking and we are keeping -- looking to M&A in as I said -- as you were remembering, sports optical, that are the 2 main areas where we will keep looking for potential brands, which have a role in our portfolio. So we will keep looking to M&A.

The next question is from Cedric Rossi of Bryan Garnier.

I've got two. The first one is coming back on David Beckham. Just curious to understand -- so who had the initiative to launch these negotiations for this perpetual license? And given the fact that Authentic Brands has a huge portfolio of brands, especially in the U.S., does it give you any ideas of maybe trying to negotiate further licenses with them? And another question related to David Beckham. So you mentioned a strong start to the year in Europe. But what about the U.S., given the fact that David Beckham is also well known in the U.S., he owns a football club there. Do you think that it is also an opportunity to develop David Beckham in the U.S.? And my second question is coming back on the marketing investment. So as you said, during the full year results conference call, so -- you are benefiting from a normalization of investments in marketing. But if you consider that the U.S. market could be still a bit challenging. Could you also plan to maybe increase a little bit the marketing investment this year in North America to revitalize growth there?

Okay. I'll answer the first question on David Beckham. But look, I think, to be honest, we have been initiating this idea with David Beckham. But there is a starting point, which is very important, which is a strong relationship that we have been building. David Beckham is really involved in the collection, he really believes in the category, and it takes any kind of opportunity to put the eyewear on his face and any social media explode. So the starting point was a great relationship with him. But we have we have initiated the discussion. And to be honest, with David it has been quite an easy discussion because he likes what we are doing, and he sees the results. With reference with Authentic Brands, I think, to be honest, that is also a sort of side effect of this agreement because obviously, now we are getting to a closer relationship with Authentic Brands. There are options that we may evaluate. They have some interesting brand in their portfolio and why not for the future. With reference to North America, I mean, you are absolutely right. I think in this moment, North America, it's the smallest market for David Beckham, but thanks to the fact that -- thanks to Authentic Brands and thanks to the Inter Miami, so it's becoming quite popular in North America. You are absolutely right that North America will be one of the market where we should have a great growth in the next years. Michele, you will take the marketing one?

Cedric, I take the second one on marketing. I believe on marketing, I mean, considering the market environment in Q1, we have taken a prudent stance. But definitely, we always maintain a degree of flexibility, mostly in relation to the opportunity that may arise on the D2C channel. So as soon as we see a supportive channel development of a supporting market reaction. Of course, we are always flexible to reaccelerate investment but at present, considering -- I mean, there still persist a [ bad wind ] also in Q2, we commented. As we commented, we continue to have a prudent stance on the market investment.