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

Good evening, and welcome to the Safilo First Half 2024 Results. This call may contain forward-looking statements related to future events and operating, economic and financial results for the Safilo Group. Such forecasts, due to their nature, imply a component risk of 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 the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks very much. Good evening. Good evening, everyone, and thank you for attending today's conference call on Safilo Group's 2024 first half results and Q2 trading update. The second quarter was mostly a continuation of the main dynamics by market and by brand we saw in the first quarter. Our total sales performance remained soft in Q2. As expected, Jimmy Choo represented our main headwind with its negative impact, which was higher than in quarter 1. On the other hand, notwithstanding a business environment which was, for different reasons, challenging, our underlying business performance held up, thanks in particular to the strong momentum of Carrera and David Beckham. In the second quarter, we again delivered economic and financial improvement, and we remain focused on our medium and long-term goals. We recorded another positive cash flow from operating activities higher than last year, which we have reinvested in the continued strengthening and developing of our brand portfolio. Let me come back to the key business drivers of our underlying performance in the second quarter and the first half of the year. In the first 6 months, Europe remained positive despite the slowdown recorded in the second quarter due to the poor weather conditions that hit our main markets between May and June. On the other hand, the recovery of North America was softer than expected. In Q2, we saw improvement in the eyewear business, with a number of our core brands performing well, while Smith's wholesale business at the sports shop level was still weak. Michele will give you some more color on this data later on. As said, Carrera and David Beckham have not only continued to grow, but both gained additional speed, supporting what was a significant achievement for us in the first half of 2024. We had already outlined it when we talked in May, but I think it's important to remind to all of us that today, Carrera, with the rest of our home brand portfolio, including the perpetual license of the Beckham account for around 50% of our sales, making it another important milestone of our medium-term strategy. I'll stop here, and over to Michele for the additional comments and analysis on the economic and the financial performance of the period. Michele?

Thank you, Angelo, and good evening to all of you. Starting from our sales performance, revenues in the second quarter were down 3.1% at both current cost of exchange rate as the depreciation of euro on the U.S. dollar was fully balanced by its application against other currency, mainly from emerging countries. The first half closed with a net sales down 3.3% reported and 2.4% at constant exchange rate. As adapted by Angelo and discussed in our previous call, the performance reflected the reduction in sales of Jimmy Choo, which in the second quarter impacted growth in North America and Europe more meaningfully. The brand's outsell impact diminished pretty significantly compared to those recorded in Q1, thus, we have less business to counter the IBA period. Looking at our underlying business by brand, our key growth driver really in all our regions were Carrera and David Beckham, which in the quarter delivered a marked double-digit growth, but also we have seen positive momentum continuing for Carolina Herrera and Marc Jacobs. The period will be challenging for Smith and Polaroid, and I will come back to this. By channel, the semester benefited from the resilience of the independent optician channel in Europe, also thanks to our advanced B2B platform, You&Safilo, which continue to strengthen the relationship with our customers and thus the quality and the volume of our business with them. We also consolidated the progress of our online business, confirming its 16% stake with a very positive D2C channel and a positive recovery by the Internet pure player business in Europe. On the other hand, sports shop and the travel retail channels were the main hurdle to grow during the period. Let's now look at what happened in our regions. In the second quarter, Europe was basically flat at current currency and slightly up at constant currency by 0.8%, taking the first half performance of positive 3.4% at constant exchange rate. The deceleration of the region compared to the first quarter was explained by the bad weather that affected the sellout of most of our channels and also by the more negative impact of the Jimmy Choo exit. In Europe, by brand, it was a continuation of much of what we have seen in the first 3 months of the year with Carrera and David Beckham leading ahead, but also newer license doing well, like, for instance, Dsquared in Italy and Isabel Marant, in France. Exceptions to this in the quarter was polaroid down by a low single-digit percentage, which was affected more than others by the poor sun season, being the brand still more skewed to sunglasses. By country, our performance in Europe continued to be driven by the positive trend in France, led by a solid prescription frame business and by the growth of Central and Eastern European markets. We also recorded a positive performance in Germany, where the Internet pure player channel continue to recover nicely, and we saw positive business also at some of our major optical chain. Moving to North America. As said, Q2 was better than Q1, with the sales drop reducing from 7.2% to 4.4% at cost of exchange rate compared to the same period last year. The improvement was more evident of the negative impact of Jimmy Choo as we move from a mid-single-digit decline in Q1 to a flat performance in Q2. This was below the kind of recovery we are hoping for in the period. We saw some additional recovery in eyewear, while the sport shop channel remained weak. Let me start on the positives. The United States, Q2 was a good quarter for Carrera, also driven by the success of the new woman collection supporting the brand productivity in store and its further expansion in the market. We saw positive momentum also from some of our core licenses, namely David Beckham, Carolina Herrera, Marc Jacobs and Tommy Hilfiger with their distribution growing double digit. Our insights from the field were some consumer demand shifting from pure luxury brands to more after contemporary offer, especially in the independent optician channel. As a matter of fact, the optician channel was our best-performing business in the quarter, delivering a positive performance in prescription frames, but also some recovery in sunglasses. On the other hand, in Q2, Smith's wholesales revenue of helmets were hampered by the lower reorder of winter products due to the unseasonal weather in Q4 last year, which unfavorably impacted no sellout. In consequences no re-order by sport shop. At the wholesale level, orders were also lower than expected for summer helmets, as the bike channel was still recovering from high stock level being cost on them. Smith's performance remained instead very positive in its direct-to-consumer channel, which continue to benefit from the greater responsiveness of end consumer and the more favorable product needs more skew sunglasses. I think that it's very important to note that despite the unfavorable business environment in store, in North America, Smith's consolidatory leadership is now ready to take advantage of a more positive winter season. Moving to our emerging markets in Asia Pacific, net sales were down 11.3% at cost of exchange rates in the second quarter closed in the first half at minus 5.6%. As we know, the quarter had an extremely challenging comparison base versus Q2 last year when sales grew 38% over the same period in 2022, mainly driven by reopenings in China. In Q2 this year, the staff comp mitigated a still positive performance we recorded in China, we continue to benefit from the very positive progress of brands like Ports and Polaroid, where we continue to invest in locally relevant collection and marketing plans. The main headwind of the region was the weak sales performance recorded by distributors in Southeast Asia. Sales in our Rest of the World remained weak in Q2, down 9.6% at constant exchange rate, with H1 closing at minus 11.3%. In the quarter, the main negative driver was the travel retail business in Latin America, and in Argentina in particular, while in EMEA we saw better business trends in the Middle East and Africa market, while sales in India normalized as they were running against a pretty tough comp base. Moving to our economic performance, notwithstanding the still soft top line, we made further progress in margin expansion, continue to post an improvement both in industrial and operating level. Q2 confirmed our gross margin at 60%, precisely 60.1%, 100 basis points higher than the 59.1% gross margin adjusted recorded in the same period last year. In this quarter, the positive driver were pretty much the same as those recorded in Q1. In other words, a higher production efficiency resulting from the industrial restructuring accomplished last year, which also resulted in a decrease of depreciation. Price mix remained a former lever, while in this quarter, the dilutive effect from Jimmy Choo's out sales was lower than in Q1 when we recorded more of these revenues. Gross margin in H1 for 60% share, an improvement of 120 basis points compared to the adjusted gross margin of 58.8% posted in H1 last year. Below the gross margin, despite a still unfavorable operating leverage, Q2 performance recorded a more significant year-on-year margin recovery compared to the first quarter, mostly benefiting from the ongoing normalization of IT investments. Similarly, on our marketing and advertising activities, while we continue to focus on all our key projects, these expenses also see some normalization compared to last year peak. In Q2, they reduced by around 6% in absolute terms, while the incident on sale was up 40 basis points lower compared to last year. As a reminder, this cost became seasonally more marked in Q2 compared to Q1, but weighted more on sales than in the first 3 months. In the quarter, our adjusted EBITDA margin stood at 10.1%, 60 basis points higher than the 9.5% recorded in Q2 last year, while we closed the first half with an adjusted EBITDA margin of 10.8%, 40 basis points better than H1 last year. Finally, our group adjusted net result equaled EUR 24.2 million compared to EUR 6.9 million recorded in H1 '23. As a result that, as you may remember, was affected last year by a charge of EUR 8.6 million resulting from the revaluation of the liabilities for action on the interest in blenders. Net of these items, that in this year was around EUR 1 million positive, our adjusted net results grew roughly 50% compared to last year. In H1, net financial charges decreased to EUR 6.9 million from EUR 9.4 million in H1 2023, mainly due to our lower average group net debt, plus a tax rate, which in the first half normalized around 30%. Coming to our financial performance. The free cash flow of the first semester was negative EUR 419 million, reflecting the 2 distinct dynamics already mentioned by Angelo. On one side, the cash flow from operating activities increased to EUR 27.3 million from the EUR 21.1 million recorded last year. This was the result of the positive generation for around EUR 20 million posted in Q2, which in turn reflected the solid economic performance of the period, which, by the way, also included the settlement of a non-recurring cost related to a terminated license and payment posted in P&L in Q1. It was also the result of a positive cash generation from working capital, also due to a reduction of inventories. On the other hand, cash flow from investment grew to EUR 41.1 million from last year's maintenance CapEx of EUR 6.2 million. The increase was explained by the investment we made of around EUR 35 million for the perpetual license of David Beckham eyewear. Very meaningful for us. The agreement also calls for a significant reduction of the royalties to be paid, making the license one of the most profitable and accretive brand in the portfolio. Finally, our group net debt stood at EUR 100.4 million or EUR 62.6 million IFRS 16 from EUR 82.7 million recorded at the end of December last year and EUR 103 million at the end of June 2023. Our financial leverage also [ predicts us ] remained very solid and sound at 0.7x. We stop here, 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 about current trade. Can you give an update on the trend that you have seen in July with some details on what is -- what happened in America in sports and eyewear? And my second question concerns the evolution of net debt. Can you give us your expectation for the second part of this year?

I take the first one on the current trading. I mean, first of all, let me say that when we look to the Q3, September is really the month which is making the difference. But that said, in July, let me say, we have not seen a meaningful change in the market dynamic that we have outlined before. U.S. eyewear, this is quite important, is getting better and better month after month. The sport shop channel still weakish. In Europe, we see that the reorder of sunglasses continue to be soft. So the visibility remains low in these days, and we need to really understand in September, when the new collection will kick in, what is going to happen.

On the net debt, as you have seen, the H1 has been positive from an organic cash generation. Our aim is to continue to be cash positive in the second half and to have a full year free cash flow turning into positive territories.

The next question comes from Cédric Rossi of Bryan Garnier.

I have 2 questions related to David Beckham. So the first one is, can you elaborate a little bit more on the strategy now that you have the free hands on the license? What are your plans in terms of development in Europe and the U.S.? And my second question is regarding on David Beckham as well. So how would you position the license considering that David Beckham also signed with Hugo Boss. So how would you avoid any cannibalization risk between Hugo Boss eyewear and your own David Beckham brand?

Yes. Thanks. So let me say -- let's start from the first one, David Beckham development. Obviously, David Beckham has been a license which has been successful since when we launched. Obviously, as soon as we turn now the license in the perpetual, what we are doing, we are gearing now to David Beckham exactly the same focus than Smith, Carrera, Polaroid and Blenders have. So there is the maximum focus in terms of distribution. That is going to be an area of developed distribution. In Europe distribution, in North America, and a little bit of productivity improvement in the Middle East. So obviously, it's going to be now -- it's really on the priority rather. We think that there are 2 dimension, as I said, distribution mainly in Europe and in North America increase of the productivity because obviously, now we also can manage different the marketing investment in the other region. Second question about David Beckham, let me say, being also part of Boss. I mean we will keep the 2 topics separate. I think David Beckham not be part of any of the Boss eyewear campaign. So Boss -- so David Beckham will work with the fashion houses, but we don't see any conflict because we will keep absolutely separate. So David Beckham on Boss eyewear will not be used at all in any advertising and in any kind of discussion. So the involvement of David Beckham with Boss will be in all the categories except eyewear. So we don't see any cannibalization there or any risk of confusing the consumer. In terms of -- I think also the role that David Beckham is going to have involved is more in the design and the development of the collection but not in the eyewear. So I mean, we don't see a big issue over there.

[Operator Instructions] The next question is from Domenico Ghilotti of Equita.

Three questions. The first is a follow-up on your comments related to the North American eyewear market improving. So are you seeing it both in prescription and in suns? So how do you see it evolving also in terms of channels? Second is, well, it's a question on the Marcolin saga, if you want. So, should we expect any hard date on the topic? And last is, Angelo, probably for you, is a consideration on the industry evolution. So we have seen a lot of interest about smart glasses. We saw Meta and other players interested in it. You had an agreement with Amazon. So I'm trying to understand how do you see the category? And how are you positioned? And how do you want to play this opportunity?

Yes. Okay. Thanks for the question. Let's start from North America. I mean, as I said, we are seeing this sort of step-by-step, month-by-month improvement, and we see this improvement, and we are expecting this improvement to keep going on also in, let me say, in quarter 3 and in the rest of the year. So we think that North America will move on this trajectory of recovery. Today, we see a recovery both in prescription and in sun. I think that what is happening step-by-step is something -- is a different dynamic from what has happened last year. Last year, the American market had the luxury growing double digit and the rest of the market suffering. Now we see that the luxury is still growing, but definitely at a single digit. And so the rest of the market is, if you like, gaining of this slowdown of the luxury. So I think that this is something -- this is a trend we see fundamentally independent from some prescription and some we see this trend moving also for the next month. And this will also explain why Carrera's going, as Michele was mentioned before, Carrera's performing very well, David Beckham has performed very well. Marc Jacobs is performing very well. So the so-called premium contemporary is the area where there, let me say, gaining out of this change of trend between luxury and the rest of the market that we saw as we saw last year. On Marcolin, I mean, no comment. I think you should ask, I think, the owner of Marcolin about their intention. On the last question on smart classes, I think, first of all, I mean, thanks for the question. It's clear -- look, I think the eyewear is a category where in the future, it's the category where you can have a evolution, which has happened with the Apple Watch. So I think it will come. I'm happy to hear that market leader and other people are going to work in that because it can represent a growth of the category. So I see as an opportunity. I do see as a threat. We, on the different scale, let's be very clear, on different scale, we have been launching, as you know, Carrera with Amazon, we are keeping working on Amazon. I think it's -- the trend is there. It will have the industry. My personal opinion is not a short trend. So I think, at least, this is how we see that as Safilo. I am talking about Safilo, I don't think it's going to change the P&L of Safilo in the next couple of years. But by sure, the fact that people are investing on that, we are ready to catch the wave. But I don't think that this for us is going to be a game changer in the short term.

The next question is from Cedric Lecasble of Stifel.

I have 2 actually. The first one is a surprise versus your comments that France was a good market to political environment and context in France has been very tough and quite surprised. So that was the first remark. What was the growth in France? And is this sustainable? And the second one is on your comment on current trading in Europe. You said that it was quite tough for sunglasses. Maybe could you elaborate a little bit more with your main markets and tell us what you expect in the next week?

Okay. So with -- I think the first question is about France. I think France is -- I think we are growing in France for 2 reasons. One, which is true for the overall Europe, so it's a transversal comment. I think I was mentioning in my speech, or I think Michele was mentioning, I think this combination of having a traditional, say, traditional way of selling and our B2B is making the difference in Europe. I mean, we have the data. I think this combination that we have found is helping France and is helping Europe. So it's partially also entering on Europe. On France, I think we have, in this moment, the right portfolio for that country. We are growing on Carrera, which is transversal to all the market in the Safilo world. But we have Marc Jacobs, but we are growing high double -- we are growing double-digit on Isabel Marant. So it's a combination there to have -- and we are going very well with both. So again, it's a combination of what we call global brands, let me say, Marc Jacobs and both Carrera, which is our own brand and Isabel Marant, which is very, very successful in France. So I will summarize in 2 reasons why transversal the effect of the B2B. And the second element, the fact that the mix between Carrera, Marc Jacobs, and Isabel Marant, is working very, very well in Europe -- sorry, in France. Going back, I think, under your second question on Europe, if I understood correctly, to give a little bit more inside of the carbon trading. Obviously, Europe has been heated by the sun. I mean, prescription is going well. I mean we are not -- we don't have any problem on prescription and also from the sale data we have from some chain in Europe prescription is going very well. But obviously, we had the market -- not with -- the market had a positive April, and then May and June, I mean, the weather in Europe has been really affected the sun. So obviously, that effect we see now in the level of the orders. So we saw step-by-step as sort of decelerating of the level of order mainly on the sun. So it's not a structural thing. We think is really related to the season. Now we need to understand when in September we're going to kick in with the new collection, which normally in the second part of the year is more optical than some, how much is going to be the recover, but it will happen eventually in the last -- in the -- more in Q4 than in Q3. I don't know if I did answer 2 questions.

Yes. Just to be sure to understand, Angelo. Just do you think -- do you see, as far as sell-out is concerned from your clients, in July after the very tough weather conditions in May and June, do you see any more optimism from your final clients in July?

I think it's -- we see in July that the sellout is getting more positive. The question is now how much can compensate the hit that the market has got in May and June. But in July, we see a change in the trend compared to May and June by sure.

The next question is a follow-up from Domenico Ghilotti of Equita.

Yes. My follow-up is, well, first of all, on your price mix and volumes balance in the quarter. And if you -- how do you see that the price is moving into the second half? And the second question is on profitability. So you are anniversarizing the positive impact of the longer on disposal. So I'm wondering if now to get really some upside on profitability you need operating levers? So you need volumes.

Yes. I mean starting from the first question on pricing, as we also commented in Q1, so price mix continues to be a positive lever for us, let's say, let's say, low to mid-single positive. And we do continue to see, let's say, this impact also in H2. When it comes to your second question, so the overall profitability expectation, of course, our aim is to be able to limit as much as possible the unfavorable operating leverage that we have seen, of course, from the top line. And this, coupled with the normalization of our IT investment and marketing expenses and keeping always a bit of flexibility on the level of investment in second half to be able to continue to build margin in the second half. Of course, as commented also before, the aim for this year has always been to bringing as much as possible the operating leverage down to the bottom line. So it clearly will require also some support from the top line.

Can you remind me, because you mentioned before the marketing impact on profitability. I don't know if it was first half or second quarter, if you can...

Yes. I mean marketing declined roughly mid-single digit in Q2 and more or less 10% in H1. And this, from a business standpoint, represents 50 basis point reduction in Q2 and roughly 100 basis points in H1.

The next question is a follow-up from Mr. Cédric Rossi of Bryan Garnier.

Yes. I have 2 follow-ups, please. The first one is, can you remind us what the magnitude of negative impact regarding Jimmy Choo we can expect for the H2 because you were mentioning a more moderate impact. So I just wanted to be sure that I got it correctly for Q3 and Q4. And the second one is just to be clear. So you are -- Michele, you were mentioning a mid-single-digit impact from pricing in H2. So does it mean that you are also planning additional price increases in the second half of the year?

So on Jimmy Choo, as we said, we continue to see an impact also in H1, but the demand will be much lower than the one recorded in H1. On the second question, on the pricing, of course, we don't comment on specific pricing actions. As we said, the contribution will continue to be positive, but mostly coming from action and initiatives that we already implemented.

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

Okay. So big thanks to everyone, and for the one which goes on holiday take your time to be with your family and enjoy the period. I think that we will catch each other after the summer period. Thanks very much...

Thank you.

...for being with us this evening. Thanks.