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

Good evening, and welcome to the Safilo Third Quarter and First 9 Months 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 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; 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. Thanks very much. Good evening. Good evening, everyone, and thank you for joining us today to review Safilo Quarter 3 2024 Trading Update. As expected in the third quarter, we continue to face a complex and volatile market environment, particularly in July and August, where sales performance was impacted by soft reorders of sunglasses and ongoing uncertainties across several key markets. In September, we saw a recovery, particularly in Europe, with the launch of our new collections delivered a promising start in terms of order collection. Despite the headwinds, we maintain our focus on our long-term priorities, and I'm very pleased to report that we ensure growth in margin and in cash generation. The quarterly performance showed ongoing soft trend in North America and Asia, while Europe remained more resilient despite the slowdown, which was due to a subdued sunglasses business. As said, throughout the quarter, we stayed committed to improving our operational efficiency, which has allowed us to grow our gross margin and deliver an improvement also at operating level. Additionally, our focus on financial discipline allowed us to achieve another period of positive and higher free cash flow thanks to an effective management of our working capital. Let me hand over to Michele, who will take you through our trading update in more detail.

Thank you, Angelo, and good evening to all of you. Starting from our total net sale performance, revenues in the third quarter were down 3.4% at constant exchange rates, 4.1% at current exchange rates following the appreciation of the euro and the U.S. dollar and against other currencies, mainly from emerging countries. This growth our sales performance in the first 9 months to minus 2.7% at constant exchange rates, 3.5% at current rates. As you know, the impact due to Jimmy Choo exit was more moderate in Q3 compared to the previous 2 quarters. However, it was not insignificant in such a complex business environment. Excluding this headwind, both the quarter and our year-to-date performance were flattish versus the corresponding period of last year. In Q3, looking at our underlying driver on one side, Carrera, David Beckham, Tommy Hilfiger and Marc Jacobs kept very solid grow rates, up mid-single to low double digits, benefiting from a favorable product and channel mix. On the other, in eyewear, we saw Polaroid other brands penalized by higher exposure to sunglasses. While in the sports segment, Smith performance remained affected by a highly cautious market environment. Let's now look at what happened in our regions. In the quarter, Europe was down 1.4% at concurrency and flattish at current currency with the performance in the first 9 months remaining positive by 2.2% at constant rate, 1% reported. Excluding Jimmy Choo, the underlying sales performance in Europe saw a slight growth also in Q3, up mid-single digit in the first 9 months proving that the market remained resilient despite a deceleration compared to Q1 and Q2, which was due to the soft sunglass sales over the period. Prescription frame [indiscernible] resilient despite a deceleration compared to Q1 and Q2, which was due to the soft [indiscernible] sales over the period. Prescription frame were instead very solid, particularly in France, where independent optician and chains continue to see a nice growth. Germany and Eastern Europe market were also ongoing positive drivers, while Italy and Spain were softer. I would name Carrera, Tommy Hilfiger, Boss, Carolina Herrera and Isabel Marant, our solid best seller in Europe, while Polaroid was on the soft side. As mentioned by Angelo, the exit to the quarter was positive with September, partially offsetting July and August as the month saw their first delivery of our new autumn winter collection, marking a promising start to order collection. Moving to North America. Excluding Jimmy Choo, the underlying performance of the area remained weak and volatile, down low single digit with varying trend across product categories and distribution channels. The performance was down by still prudent demand in winter sport equipment as not only clients, but also consumer in the B2C's channel maintain a cautious approach to purchases, waiting to understand how the season will kick off. In eyewear, wholesale of prescription frame and sunglasses performed reasonably well maintaining a good recovery path, thanks mainly to the growth achieved by Carrera, Boss, David Beckham and Marc Jacobs. On the contrary, the exit to the quarter was subdued for sunglasses in the B2C channel, meaning Blenders was, in the end, soft in the period. As you know, the couple of months [indiscernible] in North America, in particular, on the B2C front, with Black Friday and holiday season kicking in. You may remember that last year, there was a very strong period for Blenders, thanks to the launch of the new partnership with Coach Prime, which in this year is in the second round. In sport, Smith instead runs against easy comp as the start of the winter season was particularly soft in Q4 last year due to the unfavorable weather condition with no snow. Moving to emerging markets. In Asia, the third quarter was very much a continuation of the second quarter with net sales down 12% at constant exchange rates, closing the first month at minus 7.8%. This was largely due to a slowdown in China. The feedback we received, however, at the Beijing optical set in September was encouraging, which we expect will then drive recovery in the month ahead. Our key positive in Asia were Polaroid and Marc Jacobs, while Carrera continued to make a nice progress in Australia. Sales in our rest of world were still negative in Q3, but improved compared to the previous quarter, down 1% at constant exchange rates, with the first 9 months at minus 8.1%. It was still a soft quarter for the area, although trends improved compared to the first half of the year, especially in the EMEA markets, driven by Boss, David Beckham and Tommy Hilfiger. Turning to our economic performance. We are pleased to report another solid improvement of our gross margin, which in the quarter increased by 140 basis points, rising to 59.1% of sales compared to the adjusted level of 57.7% in the third quarter of last year. This was largely driven by the [ structural ] efficiency of our new industrial setup and price mix dynamics, which remain in the period, slightly favorable. Thus, our gross margin in the first 9 months was solid at 59.7%, confirming an improvement of 120 basis points over the adjusted gross margin of last year. At the operating level, despite the operating deleverage stemming from a lower level of revenues, we managed to bring some of the gross margin improvement to our adjusted EBITDA margin level. The quarter selling, general and administrative expenses recorded a decrease of 2.8%, primarily driven by the ongoing normalization of IT investments. On the other hand, I would like to highlight that despite the change in the top line, we remain committed to supporting our strategic initiatives. Marketing expenses saw a [indiscernible] versus a year ago, but we continue to support the launch of our new collection and campaigns through quite sustained investment, which we believe will drive long-term growth. In the quarter, our adjusted EBITDA margin improved by 20 basis points from 7.7% to 7.9%, close in the first 9 months with an adjusted EBITDA margin of 10%. 40 basis points better than in the same period of last year. Finally, on our financial performance in the third quarter, generated a positive free cash flow of EUR 16.9 million. This was largely driven by a tight control over working capital, in particular, on effective inventory management, which allowed us to maintain our financial efficiencies despite the market challenges. Therefore, over the first 9 months, we almost completely offset the cash absorption recorded in the first half of the year closed in the period, just slightly negative by EUR 2.1 million. You will certainly remember that this flow includes the investment made in the second quarter for approximately EUR 35 million to acquire the perpetual license of EYEWEAR by David Beckham brand, while in the first 9 months, the cash flow from operating activity was positive for approximately EUR 50 million. At the end of September, the group net debt decreased to EUR 96.1 million or EUR 56.6 million pre-IFRS 16 compared to EUR 100.4 million at the end of June. As you know, our position at the end of September also includes the share buyback program we launched on July 1, which by the end of the period, accounted for around 7.9 million Safilo Group ordinary share equal to approximately 1.9% of the outstanding capital for a total transaction amount of EUR 8.7 million. Thank you all for your attention, and I'll now hand over to Angelo.

Thank you, Michele. While we remain cautious in the outlook for the near term further in North America, we will continue even more to focus on executing our long-term strategy, driving operational efficiency and a very, very strong financial discipline. This will allow us to invest in the future opportunities while navigating tie the ongoing uncertainties. We stop here, and we are now ready to take your questions.

[Operator Instructions] The first question comes from Cedric Lecasble of Stifel.

Yes. I would have 3 questions, please. The first one on your comment on the U.S. on what happened at towards the end of the quarter, as the D2C deterioration you mentioned on your caution in the U.S., if you could maybe elaborate a little bit? The second one is on the drivers of gross margin expansion, which remained extremely strong. Could you maybe recall us in terms of phasing when you start annualizing the positive, especially industrial setup and price/mix. And the last one is on your marketing activity. Maybe you can come back a little bit on the new collections that went well and maybe elaborate a little bit on marketing as a percentage of sales in the next quarters.

Okay. So thanks very much. Thanks for your question. I will try to answer on question #1 on the D2C. I think the D2C, we are discussing since a while. So until quarter 3, our D2C business was really running on a completely different rate than what was the wholesale. In Q3, still the D2C runs by far more positive than the wholesale but we have been seeing some signs of getting a little bit smoother, which are the main reason. One reason is more related, let me say, to us that maybe Blenders and Smith have been really growing quite a lot in the first bit and they couldn't keep that pace. But I think the second element, which we need now to understand in the next week, if it's not, I mean, getting closer to the election time in North America, we have seen quite a lot of wait -- what I call wait and see mood. So I think -- more and more we were getting towards the election, the more and more we see -- we saw a consumer which was more waiting more nervous. So the real answer that we have. We have 2 -- the real question we have what we need to -- the answer is to honest in the next 3 weeks. Now election are gone. I leave to the America to judge it. But now the elections are in the back. So now we need really to see if the nervous and the wait and see mood was already to the uncertainty. So the next 3 weeks will give us the answer to say was a short-term slowdown related more to the overall environment in North America or is something which is going to stay. So crucial are going to be the next 3 weeks, honestly, starting already from yesterday. On gross margin and commenting the Q3 results, I would say half of the 140 basis points of gross margin improvement were driven by the industrial restructuring and the rest mostly from pricing, while in the quarter, mix was substantially neutral due to the I would say, softness of the B2C in the quarter compared to last year. In terms of execution of the last industrial restructuring initiatives, [indiscernible] last year, it happened at the end of Q3. So we've seen, let's say, the impact of -- impact from Q1 this year. And I would say, the vast majority of the impact will, I would say, the positive impact will end with the end of Q3. So Q4, the impact should be marginal on this side. Answering the question #3, marketing. I think it's obviously in end of August, September, we have been start presenting the winter collection. And a combination of good receivables of the new brands like Stuart Weitzman for North America, Etro more for Europe and Asia, by sure the collection and the brand have been received very, very well. Only, we are not talking about game changer in the short, but the reception is of these 2 -- the collection of these 2 new brands have been very, very positive. Going on the rest of the portfolio [indiscernible] the big brands, Carrera, it definitely keeps being very positive, and the new collection has been appreciated even more than the January collection, [indiscernible], I would say, David Beckham and Boss. So on some of our brand on top of the new brand, the new collection has been seen very well. Take also into account one element, which is very important because if we look both to Europe and North America, don't forget that the sun has been really heated by the -- sunglass that have been really heated by the season, where also in the winter collection, the more the optical has more space and the optical has been performing well, both in Europe than in North America. So I will summarize new brands, our big brand collection, very well received. And obviously, there is a more optical weight in this collection, and the optical has not been softening, not in North America, not in Europe, where the main suffering was on the sunglass bit.

Just to close on the market to be a bit more specific on the investments. In the 9 months, we have been more or less 80 basis points lower in terms of marketing on sales. While in Q3, we have been just slightly down. And we have been also accelerating pretty significantly in September. As we wanted to support strongly the back-to-school launch of the full winter collection. And so Q3, roughly 20, 30 basis points below a year ago in terms of marketing investments.

The next question is from Cedric Rossi of Bryan Garnier.

Coming back on the U.S. elections. Of course, so the sourcing topic will become a hot topic again. So I was curious to have your view on how do you see the potential threats regarding the China sourcing? And have you anticipated any issues with regard to the imports coming from China? And my second question is coming back, so referring to what you are seeing regarding the wholesalers mood. Have you seen any discrepancies between optical chains and in the [ parent ] opticians?

I mean I will not understood if the last question is also just related to North America or was more.

Yes, Angelo.

So the focus is North America. Okay. So I mean -- obviously, as I said before, North America, if I look to the wholesale to the [indiscernible], we have seen a different dynamic looking to optical [indiscernible] also the chain which were more -- which are more exposed to sun have been suffering more. Where on the optical, to be honest, the market is growing low single digit, but is on territory where the sun is not. So obviously, the chain of the optician more exposed on sun have been suffering by far more than the optical bit. This is something that should help, let me say, the end of the year for the same reason. I was refering before that, obviously, the optical has a bigger weight. On North America, let me say, I think still our view is that the context is still complex, and we see quite a high volatility and both in store then in online. Now as I said before, October -- sorry, October was a positive month also for North America. True is that the comp was much easier, but at least October has been positive. The real question now is in front of us is November and December. The mood of the consumer, is it going to change now that the election are not there and somehow in a way or the other, there is a stability. So this sort of anxious mood should be out. This, honestly, we need to wait a little bit the next weeks or the next month. Too early to say now. But this is, for me, one important element that we should [indiscernible] try to understand and also what is going to happen in the Black Friday is going to tell us something more about the mood of the consumer. It's really the mood of consumers getting more relax, getting more positive, honestly, we need to wait some weeks. Looking specific to Safilo, Safilo North America. In North America, there are 2 elements, which it's important that we take into account. You remember that last year, Blenders had a significant important quarter 4, thanks to the launch of Coach Prime. This year, we have year 2 of Coach Prime, where we see good results, but not on, let me say, the astonishing growth of last year. So this is something that, again, we need to see in the next week. And on the other side, we have Smith, where last year, there was really not a good winter season. So now you need to see really if the snow season kicking in, the brand is healthy. We have done also some analysis on brand health and market share. So the brand is healthy. The question mark will be -- are we going to have a normal winter season? Yes, yes or no. With reference to China, I think to be honest, it's too early. I think obviously, the topic is very clear in our mind. We have the experience of the previous situation. But to be honest, any speculation now is a little bit too early. We need to wait. We are prepared. We know a little bit what the pictures can be. But I think not on this, we need to wait a little bit, really understand where the political -- which are going to be the political choices.

Just to complement a bit what Angelo is just saying, it is important to recall that more or less 80% of our supply for North America is China-based. So this is and will be a relevant topic. But we can also confirm that based on our past experience, I would say, the impact at the time was not material. So.

The next question is from Oriana Cardani of Intesa Sanpaolo.

The first one is about gross margin. What is your expectation for next year in the sense that -- do you see a room for a slight improvement also in full year '25 compared to this year. And my second question concerns the smart glasses business. Last year, you launched Carrera smart glasses in partnership with Amazon. How did the plan go? Do you plan to release an update version? And what is your position in relation to this new market niche. And the third question is a clarification on October trend. You said that it was positive for North America. Was it positive also for Europe?

I will start from the last, which I think makes much -- make my life a bit easier. October was positive in all our regions. So we see -- we saw a continuation of the positive exit to quarter 3 in Europe. And we've been positive, both in Asia and in the rest of the world. So the speed, the exit speed of October, definitely, definitely positive in Europe, definitely positive in Asia, definitely positive in the rest of the world. As I said, in North America, we saw also this positive trend in October but the rest of the comment is what I've answered before. I leave Michele to the gross margin, and I'll answer to the second question.

Yes. So on gross margin so far, the greater efficiency of our industrial footprint and the price/mix, as I was commenting before, were the key drivers. It has been playing in our favor to achieve a very strong improvement at the gross margin level throughout the last quarter. But it's important to recall last year, our Q4 gross margin was already very high, being the result on one side of our sport business and an extremely positive B2C business also connected with the success of Coach Prime on Blenders. This year, the probability is to register a more balanced performance between the sport business and the B2C with therefore less favorable channel mix that is to be expected. If this will be the case, then our aim will be to remain as close as possible to last year level in Q4, which in turn will give still the opportunity to maintain our full year gross margin well above 2023.

On smart glasses, let's say like this, our -- at the Amazon, Carrera was intended to I mean, obviously, it's been a launch but has never been tended like a sort of game changer in terms of [ wins ] in the short term. The main aim was to learn. And we are taking very, very clear learning on both on the D2C and on the physical shops. So honestly, the numbers we had in our P&L were nonsignificant. The aim was, let's have a learning on the consumer behavior on one side and how D2C channel and physical channel can be played on this new business opportunity. This is the specific answer related to Amazon and Carrera. And Amazon, Carrera, [ for ] choice of Amazon was limited to North America and limited to specific area of North America. With reference to the broader question, which is on smart glasses, I think that I'm reading all what is happening with -- I'm very happy with what is happening in the sense that I think that it's a great opportunity for the market to become bigger. So any activities and initiatives that is going to enlarge the market is by us, I mean very well received. It's an area that we are looking and working tight, but I cannot answer to, let me say, on obviously when and how we will have news on that on that specific category. But by sure, the fact that it looks like it's working. Look, we consider as a great opportunity, the market gets bigger, and we are ready at the right moment to catch that opportunity.

The next question is from Domenico Ghilotti of Equita.

Three questions. The first is related to price, because if I understand properly, so your channel mix is maybe a little bit less favorable going to Q4 and the industrial footprint is behind us. So I wonder if you have been implementing some price increases or this is not prepared for the current market condition? And second is on the CapEx, if I'm not wrong, so trying to extract the data from your press release, you were running at around EUR [ 13 ] million CapEx in 9 months. So it will be some acceleration. So I'm trying to check if this is true. And if you are really increasing the pace of investments? And the third the European situation. So you have been flagging the uncertainty on North America, but you sounded a bit more comfortable with the situation in Europe. And so if you can elaborate a little bit more because at the end, this is a quite relevant market and would be quite interesting to see an acceleration or sustainable growth there?

Thank you, Domenico, starting from price. As you know, we don't comment on specific price initiative. What we confirm is that pricing will continue to be a tailwind also in Q4 between low to mid-single-digit impact in Q4 from pricing. And we do expect also pricing to continue to be a positive element also in 2025. In terms of CapEx, we don't comment specifically financially in Q3. But just to confirm, we are not increasing level of spending. As you recall, H1 was impacted in terms of CapEx by the acquisition of the David Beckham perpetual license for roughly EUR 35 million, EUR 45 million. If we net this amount, we continue to spend more or less aligned to what has been our CapEx spending last year.

Yes. Answering to your last question on Europe. Let me say, Europe, as I said before, we had a positive feedback in September on the presentation of the collection. October has been a positive month for Europe. So our position is that Europe remains for Safilo, the most resilient market. Obviously, we follow tight, let me say, what is happening in Germany, what is happening in other geography, we see clearly sort of consumer confidence in Germany going obviously, down. So if you say Germany is in this moment market that we see a little bit more nervous from a consumer perspective, but I can openly say that Germany, we have been positive in quarter 3. We don't see reasons why that this positive trend should not keep going for the rest of the year. France. We have been -- we are seeing now for quite some months a positive trend. October was positive, quarter 3, quarter 3 was positive, where obviously we see Spain and Italy a little bit on the slow pace. Why is that? I think the portfolio that we have been working and focusing in Europe is working very well. Carrera is going well. David Beckham is doing well. Boss and Tommy are doing well. So I think the portfolio we have been putting our priority is working well in Europe. The other dimension, which I think is a competitive edge that we have been building in Europe is the B2B. I think we've been talking many times about that. But I think one of the reasons why our business in Europe is so resilient is also related -- is a combination of go-to-market is a combination of brand, but there is a strong contribution on this digital new way how to talk and how to deal with our customer base.

Can I follow up on when you're commenting Spain and Italy, a bit softer. Do you attribute this to the sun and so clearly more relevant for these 2 markets? Or we have seen softness also in prescription.

No, I think it's -- you are absolutely right. Obviously, Spain and Italy for geographical reasons are more exposed to the sun. And as I was saying before, obviously, we see a different trend the sunglasses is negative low single digit where the optical is up low single digit and also Germany and France, they are more -- they're country at the north, country, which are more skewed around optical.

[Operator Instructions] The next question comes from Carmen Novel of Banca Akros. [Operator Instructions]

Okay. I have only a quick follow-up question on marketing expenses. Can we expect those expenses to increase in absolute terms in the last quarter of the year? And if not, when you are planning to further accelerate the expenses always in absolute term.

I mean I will not [indiscernible] a big change in trend of quarter 4. I will summarize with the statement that I don't think it makes sense to put or to push water up to the hill. So obviously, some of our brands are more sun related. So we took a conscious decision to slow down because, I mean, in the peak of the season, I think everyone remember what I mean, the weather in what was it, May and June. Only next year, we will come back in investing mainly on -- mainly on the priority brand we will invest more compared to this year. So I think also thanks to the fact that most of our investment now is in digital. We have this opportunity to retune and rescheduled very, very, very fast our investment. But there is no intention to cut marketing. This year, as I said, we did a conscious way on some specific brands. But next year, we will keep investing again where we need this -- is needed. There is no intention to reduce the marketing support.

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

Okay. So thanks very much. Thanks for everyone, and have a nice evening. Thanks very much.

Thank you. Bye-bye.

Bye-bye.

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