Safilo Group S.p.A.

Good evening and welcome to the Staffalo Group's First Quarter Trading Update. This call may contain forward-looking statements relating to future events and operating economic and financial results for Staffalo 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 Gwesler, Chief Financial Officer, Barbara Ferrante, Director of Investor Relations. I would like to have the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin.

Hi, good afternoon, everyone, and thanks for you, and thank you for attending the today's conference call on FASILO Quarter 1 2020 Trading Update. Quarter 1 2020 will be, and I think everyone of you can agree, will be mostly remembered as the beginning of a period of unprecedented and really extraordinary challenge in which our thoughts and actions have been first and foremost focused on the health and safety of all our people. We have immediately and in a very rigorous way implemented in all offices, in all locations of Safilo, all safety and prevention protocols. Everywhere, as I said, manufacturing, distribution center, headquarter, distribution center abroad, starting only with China, Hong Kong, and Shanghai, and then country, country after country, and ending in all the commercial procedures. I really want to thank again each and every one of our people for the huge effort that they have been doing and they are making every day. and the commitment and dedication that they have really continued demonstrating throughout this time. And in this period of strong business challenge at Asilo, we want also to give not only to show our closeness to our people, but also to give the possible support of our communities. and the health care professionals who are every day in the front line to respond to this health emergency. We have launched the activity Hashtag United for Eye Care, our global corporate activity put in place in different countries by Paso and its brand for the production and donation of safety glasses, goggles, and face shields to supply to hospitals and frontline medical workers in clinical needs around the world. I will take a few additional minutes at the end of the presentation and I will give you more insight on this specific project or activity. At the same time, we have immediately focused on doing everything possible to support our customers ensuring seamless operations and business continuity. I'd just like here to remember that also in the peak of the crisis in Italy, we didn't have any disruption. We've been continuing to provide with no disruption service to our capital, taking orders on 24 hours, seven days on our online and via our B2B website. And our customer service, which has been working completely, is not working, has been fully assuring the full service to the customer. So people, our people, the community, but also the customer in the heart of all what we've been doing. We've been also offering to our customers a series of very well-received virtual training seminars on a variety of topics from brand, product training, visual merchandising, and eyewear technology. And we will continue to make these initiatives available to our customers, staying connected and ready to restart together also in the new ways, also in this new environment. Today, our production and logistics sites in Italy and elsewhere in the world are partially operative to ensure manufacturing and service levels, which are fine-tuned on new consumption scenarios. While in our headquarters in Padova, we are mixing and alternating between smart working, temporary layoffs, and holidays. We have expanded the smart working solution to the vast majority of our office people, almost in all our offices around the world, using laptops, remote phone systems, and video technology. And I have to say that maybe in this field we have been even more engaged, both internally and both externally, even more than in normal times. So in this very special circle, Francis, we have set up since day one, I'm talking about early need of FAB, we have set up a global crisis team meeting every day morning and talking every day to our leaders around the world to assess together how lockdowns and business sentiments are evolving and modulate according to our contingency and recovery plan. we are strictly focused on minimizing extractionary expenditures and topics, adjusting marketing plans, and implementing as much of an effective working capital and cash protection management as possible. In the context of the measures to contain costs, the member of the board of directors have renounced two parts of their annual director compensation, and the extended global management team have renounced part of their annual compensation and education. The situation we are experiencing is, anyhow, on one side, one of the most complex we have ever seen. I think no one of us has really gone through such an experience. is aware, and I'm really, really strongly convinced about that, offering us opportunities to accelerate the digital transformation we have outlined in our strategic plan 2020-2024 that we presented last, December last. And why this acceleration will be happening? Because we are fine-tuning a series of action and tools which will allow us to even more effectively address this new context, working better and more effectively with our clients and consumers throughout the world. In these days, this field has shown that digitally we can keep in contact with our consumers, we can keep contact with our customers even better. Just let's recall that our digital transformation has three main legs. Digital marketing, the B2B ecosystem, and the D2C economy. In these days, we continue to work on several fronts to achieve this goal. Specifically, we work hard and we even accelerate to progress on the development of our new business-to-business platform for clients and on the new CRM program and initiatives to drive as never was needed in this moment, try traffic in store when the shops will start reopening. We expect to start rolling out the B2B ecosystem from summer 2020 in Europe. We are furthermore working to sharpen digital marketing campaigns, which will restart with gradual investment when the markets will be ready and when we start working tightly, and on the other side, we have been start working tightly with pre-variable to cross-fertilize capabilities. I think pre-variable is taking exactly, is exactly spotted on what is working during these days. Finally, on the D2C e-commerce, we have seen this channel significantly outperform the market as consumers have shifted shopping preferences online, reinforcing a trend that has already been before, was very clear already before the COVID time. This has driven the business of SNF, but also has been a positive for the online business of Privy Law, which even these days is getting ready to launch its LX optical propositional online in the US. we are confident that we will be able to close our second acquisition blender within the second quarter, whose fully online business has also continued to grow disproportionately since the beginning of the year. As we have already commented, first quarter of 2020 started well for Safilo. We had a solid and promising January and February, overall up mid-single digits, particularly positive for our own core brands, Carrera, Polaroid, and Smith, which were up double digits in the two months, but also for some of our core licensed brands, Hugo Boss, Tommy, Jimmy Choo. We are on top of the launch of our new three partnerships, David Beckham, Levi's, and Missoni, at the beginning of February. We are quite prepared to go, to enrich our own brand portfolio of different business propositions and new brands in this new digital marketing arena. As is known, offices business trends were suddenly interrupted in the month of March, first in Italy and from the middle of the month across Europe, and then very, very fast to the US, as the outbreak has been spreading really, really fast all over the place. And it was starting from those last two weeks that the most severe measure of national lockdown and halt of business activity were imposed by the public authorities in the affected countries, more heavily disrupting the performance of the month and our first quarter's results. On April 6, we anticipated expectations for our quarter 1 net sales to decline by 11, in range 11.13% at constant exchange rate. Revenues were eventually down 11.5% at constant exchange rate, minus 10.8% at the wholesale business, excluding the production agreement with Carrick. On the other hand, our adjusted ABTDA margin declined disproportionately to 2.6% of net sales from 8.1% in the same period of last year, dragged down by not optimized supply chain factory utilization, so a reduction of the supply chain efficiency, which has been driven by temporary shutdown of the manufacturing and sourcing activities in China, but also by a subdued operating leverage as the big drop of business occurred in one of the seasonally most sizable months of the year in terms of sales and costs. On the liquidity front, the first quarter, our cash needs remain under strict control and we close the period with a group net debt of 135.5 million euros including IFRS 16, including the acquisition of Privedivo, the latter fully driving the around 61 million euros increase in the position compared to December 2019. Today, we are actively utilizing our credit facilities in order to maximize cash management flexibility and responsiveness. And we are also actively accessing current and future financing opportunities, including the possibility for our group to access the financing provided by the so-called Italian degree of liquidity. I stop here, and I know where to get for some additional comments on top line and bottom line.

Thank you, Angelo, and good evening to all of you connected in the call and the webcast. Let me then look in some more detail at our net sales, which in the first quarter equaled 221.1 million euros, down 10.6% at current currency, and 11.5% at constant exchange rate all in, and minus 10.8% at constant forage at the wholesale level. This decline was entirely driven by the drop of volume, while the sales mix remains slightly positive, together with some forage tailwind. Following what Angelo has just commented, in the months of January and February, all our own core brands, Carrera, Polaroid, and Smith, had positive accelerating trends compared to last year, which allowed them to close the quarter with a more moderate decline, overall down 3.4% at constant exchange rates. This performance was driven by Carrera, down 5%, and Polaroid, down 7%, at constant exchange rates, while the sales of Smith remained slightly positive in the period, up 0.7% at constant forex, thanks to the positive performance of the sports channel and of his online business, which in the period was up 4%. This leads me to highlight that in the first quarter, our total online sales increased by almost 25% at constant exchange rates, representing 6% of the group's total revenues from 4% in Q1 2019. The positive performance was spurred by the strong business recorded with the main internet pure players we work with, a positive dynamic that we have seen continuing into the month of April. As for our licensed brands, Tommy Hilfiger, Hugo Boss, and Jimmy Choo were relative outperformers among licenses on the back of their strong start to the year, while the contribution we had from the launch of our three new brands David Beckham, Levi and Yisoni fully compensated the decline we recorded on Dior, which, as a positive note, did not exceed our budget projection. Finally, the acquisition of Privé Riveau contributed for one and a half months to the quarter for 5.5 million euros, all recorded in North America. Let me now go to our sales performance by geographic area. Net sales in our biggest region, Europe, declined 13.5% at current and constant exchange rates, with a wholesale business which was down 12.2%, mainly due to the significant contraction we recorded in March in Italy, which was the first European market to be severely hit by the outbreak of COVID-19 and by the subsequent lockdowns implemented by the Italian government. The rest of Europe, in particular Spain and France, sadly and quickly declined followed suit in the second half of the month, enough of a setback to drag South Europe quite deeply into negative territory. On the other hand, business in Germany, northern and eastern Europe countries remained more sustained, driven by Hugo Boss, Polaroid, and Tommy Hilfiger. In North America, net sales recorded a contraction of 7.8% with constant exchange rates, a performance which reflected a significant deterioration of the business environment suffered by the market starting from the second week of March, when the majority of customers stopped accepting sales reps' visits for order collection and immediate delivery. This was the case for an increasing number of independent optical stores, chains, and department stores, which were then eventually to shut down. The consequences of this severe lockdown were more heavily suffered by our U.S. brand portfolio, Fossil, Juicy Couture, Banana, and also Kate Spade, while in the upper contemporary and fashion luxury segment, Fendi and Marc Jacobs were the two mostly hit. On the positive side, to support our overall sales performance in North America, the just-mentioned acquisition of Privevo, a U.S.-origin brand which goes to enrich our Encore brand's portfolio, but also the very resilient performance of Smith, up 3.5% at Constant Forge in its home market, Hugo Boss, which progressed very well for the greater part of the quarter, And relatively speaking, I'd mention also Tommy Hilfiger, clothing Flattish and Carrera down mid-single digits. Moving to our emerging markets, Q1 in Asia-Pacific declined by 17.5% with constant currency, hit by the early lockdowns imposed in China to respond to the COVID-19 outbreak, which strongly impacted our business, in particular towards the travel retail channel, chains, and the boutiques of our fashion houses. Business to independent stores in China was relatively more resilient, together with our sports business Smith in Australia. To conclude in our top line, in the rest of the world, net sales were down 10.5% in constant exchange rates, mainly as a result of the significant sales deterioration we experienced in Brazil, while positive trends resumed in Mexico after the deceleration experienced in the fourth quarter, and also in the IMEA markets, the sales recorded to growth compared to the same period of last year. Let's then move to the key items and topics of our growth operating performance. As usual in our quarterly trading updates, we provide our EBDA and adjusted EBDA and we do it now exclusively post IFRS 16 as the periods are now fully comparable. As already highlighted by Angelo, the decline in profits and margins was significantly higher than what we experienced at the top-line level, and this was, for a greater part, due to the negative dynamics we suffered at the gross profit level. In the first quarter, our industrial profit equaled €109.4 million, down 16% compared to the previous year, while the margin on sales contracted to 49.5% from 52.7% a year ago. A dilution of 320 basis points, which is mainly explained by the overall lower efficiency of our supply chain due to temporary manufacturing interruptions and half-sourcing activities in China between January and February, with their gradual recovery during the month of March and also a higher impact from obsolescence costs as we increase our related provision at the end of the quarter to account for the current scenarios. On the other hand, sales mix was more favorable on gross margin as the lower weight of the clearing supply business outpaced some negative impact deriving from the decline of the oil. Below the gross margin, to arrive at our adjusted EBDA of 5.8 million euros, which is equal to a 70.8% decline compared to the same period of last year, we suffered a further 230 basis point margin dilution due to the strong operating deleverage we recorded in March, which is one of our biggest months for sales, but also for marketing and selling expenses. While cost containment measures started to be adopted quickly in the month of March, there was not the short-term opportunity to adjust the cost so drastically. As far as our overhead savings program is concerned, this indeed continued into the first quarter for a total of 3 million euros. Finally, on my side and anticipated by Angelo already, our net debt at the end of March remained under control, standing at 135.5 million euros post-IFRS 16 compared to 74.8 million euros at the end of December 2019 and 105.7 million euros at the end of March last year. Group net debt included an IFRS 16 impact of 45.5 million at the end of March 2020, close to the 47 million euros booked at the end of December last year, while the accounting impact was higher at 79.3 million euros in March 2019 when the Solstice retail business was fit in our books with its store leaseholds. The position at the end of March 2020 also reflected the €61.6 million for the acquisition of the 61.34% controlling interest in Privé de Vaux, of which €30 million were financed through a subordinated loan provided by Santiago's reference shareholder and for the remaining portion through our available resources. The increase of our group net debt at the end of March 2020 compared to last year in the end was fully driven by the acquisition. Despite the deterioration of our economic performance, we had more favorable working capital dynamics, meaning the seasonal cash absorption was lower than in the same period of last year, mainly following a decrease in inventories at the sufficient stock levels we had at the end of 2019, granted us the opportunity to continue serving the positive market demand between January and February. Although we do not usually provide on a quarterly basis and it's not relevant for testing in this occasion, we are also highlighting the financial leverage which increased to 1.6 times at the end of the quarter. The way it is calculated is excluding the impact of IFRS 16 and the €30 million subordinated shareholder loan for the acquisition of Privé Nouveau. Following on Angelo's comments, I would also like to confirm that we continue working with all our credit lines available, which we have fully drawn in the quarter in order to maximize available liquidity and minimize time to action. We are in parallel in active talks with our lending banks to assess the new financing resources provided by the Italian in order to strengthen the group's liquidity position and to safely navigate through this period that is quite exceptional at the moment. I hand it over to Angelo for his final remarks.