Safilo Group S.p.A.

Good evening and welcome to the Safilo Group third quarter and nine months 2020 trading update. This call may contain forward-looking statements relating to future events and operating economic and financial results for 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 Gressler, Chief Financial Officer, Barbara Ferrante, Director of Investor Relations. At this time, I would like to turn the conference over to Mr. Angelo Trocchia. Please go ahead, sir.

And thank you for attending today's conference call on Safilo's first nine months 2020 trading update, focused on the key facts and figures of the third quarter. We entered the second half of this complex year, continuing to prioritize those key levers that make a business sustainable and successful in the present and in the longer term. This third quarter was thus for us again focused on execution of the key strategic topics, starting from the continued greatest attention and care to the health of all our people worldwide, continuing to support our communities and the many workers involved in the COVID-19 emergency. At the same time, we maintain a strong grip on our cash, providing the company with additional resources and we progressed on the key strategies of our group business plan, including the new collaboration with the Ocean Cleanup to give a tangible contribution to the protection of our planet. The way in which we decided to organize the work of our people in this month played a significant part on everyone's morale and productivity. In the context of the implementation of the highest health and safety standards at our headquarters, subsidiaries, and production plans, we decided to continue making extensive use of smart working, minimizing as much as possible the need for people to go to the office, while providing support for the relocation of the activities. In the quarter, we then had other important objectives to achieve, and I'm very pleased with the positive outcome. On one side, we secured additional liquidity for the group. It was still a pending topic when we talked at the end of July, and by mid-September, we were in fact able to finalize a new-term loan facility of €108 million guaranteed by Sacha to support our business in a period characterized by a high level of uncertainty and volatility. On the other side, in line with our industrial plan of restructure to optimize the production footprint, realigning it to our current needs, we sold the Italian plant in Martignanco to a local entrepreneur, which we consider an important step, not just for us to recover a sustainable economic profile, but also for the workers and the local communities. In the quarter, we then continued sizing the opportunities provided by the current market environment to accelerate our digital transformation strategy, gaining additional speed and relevance in the direct-to-consumer channel thanks to our recent acquisition, Blender's Highway for its advanced e-commerce platform and Prevariable, leveraging on its social marketing skills to expand its reach offline and online. We are also actively sharing and reapplying best practices in e-commerce, digital marketing, product and wholesale go-to-market between the new two brands and Smith. Staying on our digital transformation strategy, in August we launched also our new B2B e-commerce platform in Europe. while just days ago we went live with the new CRM customer relationship management system. Two state-of-the-art technologies which go in the direction of reshaping and enhancing the relationship, the engagement and the way we do business with our main auditions. I will come back on this project at the end of the presentation in order to add a little bit more color and flavor on what is going on in this area. Let me now move to the key dynamics which draw the performance of our third quarter, which was indeed a period of significant recovery, both top-line and bottom-line. The quarter benefited from the full contribution derived from the recent acquisitions of Privet Evo and Blenders, two brands which are currently performing strongly on the back of their surging D2C business, and the gradual offline expansion of Privet Evo. as I will detail a little bit better later on. But the quarter also recorded the significant recovery of our organic business. Back at the end of July, we had already commented on the sales rebound recorded in July and how this was a consequence of an expected catch-up effect after the strong H1 pandemic impact. What we experienced during the rest of the summer was instead the prolonged solidity of a few key markets, in premise of the U.S. market, where the significant work we did in the last two years to strengthen our organization and the sales force, coupled with a supportive market environment, made the independent Trios channel the key driver of our organic business recovery in the third quarter. But we should also and we need also to outline the outstanding growth we achieved in mainland China, which almost doubled its business in the period, while all our core markets and channels recorded an improvement in the third quarter compared to the first half of the year, with a more evident progress delivered by some of the main European countries and markets, such Italy, Germany and France. Another meaningful point to make for the quarter is that our organic wholesale business was driven by the mid-single-digit growth of the prescription frames business, clearly outperforming independent trios channels. In the third quarter of this year, our online sales most quintupled compared to the same quarter last year. And this was thanks to both the ongoing progress on Smith by the way, we launched the new D2C platform, and the sales to our internet pool payer, and clearly the significant contribution of PreVariable and, above all, on this front, Blender's D2C sales. The positive sales development came together with the ongoing implementation of the group cost saving action to continue gaining a structurally leaner cost structure, plus the utilization of contingency measures in the context of COVID-19. From the key facts to the key figures of the quarter, group net sales were €219.1 million in Q3, up 3% reported and 6% at constant exchange rate, with the adjusted EBITDA positive again at €14.3 million for 6.5% of sales and growing by 9.3% compared to the Q3 2019. This result reduced the gaps of the first nine months of the year with the group net sales at 554.7 million euros down 21.7 reported and 21.1 at constant exchange rate and the adjusted EBITDA reducing the loss to 13.9 million euros compared to the loss of 28.3 million euros recorded in the first half of the year. Our group debt at the end of September stood at €201.7 million post-IFRS 16, €155.8 billion pre-IFRS, a bit higher than the position at the end of June, but in line with our expectations. I stop here and I move on to some additional details and comments on our economic and financial results.

Thank you, Angelo, and good evening to all of you connected in call and webcast. Let's take a deeper look into the quarterly dynamics of our top line by geography. As said, Q3 net sales were up 6% at constant exchange rates, reflecting the full quarter contribution of the acquisitions, which added a total of 26.5 million euros to our North America business. Excluding M&A, our organic business achieved a significant recovery compared to the previous quarters of the year, down 6.7% at constant exchange rates or 5.5% at the wholesale level, excluding sales to Kevin Eyewear. We come back shortly to our acquisitions, and I focus now first on the organic performance. This was indeed led by the rebound of North America, up organically 12.1%, mainly thanks to the solid sales recovery we recorded in the U.S. independent 3.0 stores, which are our most important distribution channel in the region. The recovery there was broad-based across our brand portfolio, although particularly evident are some of our core licensed brands, such as Kate Spade, Tommy Hilfiger, and Jimmy Choo, which enjoyed solid momentum driven by the growth of the prescription frames business. The quarter in the U.S. was a strong confirmation for our Smith products, The brand recorded double-digit growth in the sports stores channeled and more than doubled its turnover in its online channel. All-in, group total sales in North America, including blenders and pre-variable, stood at 113.1 million euros, up 41.5% at current exchange rates and 45.9% at constant exchange rates compared to the same quarter of 2019. In Europe, our net sales equaled 79.3 million euros in Q3, down 16.4% at constant exchange rates, 15.2% down the wholesale business, excluding the sales to Kering Eyewear. This was a clear improvement compared to the minus 56% and minus 34% recorded by our wholesale business in the second quarter and first half of this year, respectively. In Europe, recovery trends were mixed. particularly among the different channels. What we registered broadly on the more positive side was both the performance of 3Os, so the independent stores, sustaining the recovery of those countries where this channel is more relevant, particularly Italy, Spain and France, and the ongoing strength of the internet pure players outperforming in Germany, UK and the Nordic countries. On the other hand, order taking remains subdued, although improving compared to Q2 in specialty channels such as boutiques, in the travel retail channel, and also in some of the big chains, with these latter having possibly been more equipped to enter into the summer with products already in stock, in particular in terms of sunglasses, which is the product category which suffered more in the periods. The recovery was more meaningful for us in Asia Pacific, with sales at 15.9 million euros, down 6.4% at constant exchange rates compared to the same period last year, significantly reducing the gap compared to the 65.5% of the second quarter and the minus 45.9% in H1. The continued hardship of the travel retail business, which in Q3 2019 accounted for approximately 26% of the regional sales, and in this quarter was down around 63%, was more significantly upset by the surge previously mentioned by Angelo in mainland China, which benefited both from a very supportive domestic demand and from the contributions of the new brands in our portfolio, in particular Levi's and Ports. Q3 sales in China were up 83% at constant exchange rates. To conclude on our regions, Brazil, India, and the Middle East countries making up for the vast majority of our rest of the world region. While the area more than halved the 74% drop recorded in the second quarter, it still registered a very meaningful negative 35.6% as these countries remain strongly impacted by the pandemic and the economic downturns. Zooming back into the sequential acceleration of our online business, In Q3, our online organic sales grew around 94% at constant exchange rates, from plus 38% in the second quarter, thanks to the growth of Smith's D2C business and our sales through the internet peer players, which in turn grew around 75% in the period. As commented by Angelo, our total online business is today greatly benefiting from our new acquisitions, particularly Blenders with its digitally native business model, In the third quarter, the share of the total online business grew to 16% from around 3% in the same period of 2019, while the share of the channel moved up to 13% in the first nine months of the year from around 4% in the first nine months of 2019. Moving to our economic performance for the quarter. This also represented a strong rebound, which was made possible by the positive sales developments we've just discussed, supported by the continued implementation of the structural cost savings envisaged by our group business plan and the additional contingency savings obtained in relation to the COVID-19 emergency. Two areas which contributed in about equal parts to a combined positive P&L impact of around €13 million. All this allowed us to restore in the quarter a decent level of gross profit and margin and to resume some positive operating leverage. Gross profit stood at 112.6 million euros in the quarter, up 3.3% compared to Q3 last year, with the margin of sales moving from 51.2% to 51.4%. While up slightly as reported, here we had some plus and minus aspects explaining the industrial performance of the period. which stripping out depreciation as we are reasoning at the EBDA level slightly contracted by 40 basis points compared to the same quarter last year. The key dynamic at the industrial margin level where on one side a lower burden from obsolescence products thanks to the tight control we kept in our stock levels and the positive channel mix effect thanks to the accretive growing online business. On the other side, the supply chain performance remains subdued compared to Q3 last year, given the lower production volumes in the overall macro context. Below the gross profit, the total of our SG&A expenses, excluding depreciation and amortization, were just very slightly up compared to last year, almost completely reabsorbing the new costs, mainly of selling and marketing, of two acquisitions. In fact, our organic SG&A expenses were down around 14% in the quarter, thanks to the structural savings and contingency measures, which totaled 9 million euros in the period. Overall, below the gross margin, we recovered 70 basis points, arriving at an adjusted EBDA margin of 6.5% from 6.2% in the same quarter last year. 14.3 million euros compared to 13.1 million euros. To conclude on the KPIs of the period, at the end of September, our group net debt post IFRS 16 stood at 201.7 million euros, 155.8 million pre-IFRS 16, and 44.2 million when excluding also the cash out for the two acquisitions. This was a 13.2 million euros increase compared to the position at the end of June. which was substantially in line with our expectations in terms of higher working capital requirements following the tight management which supported our liquidity needs during the second quarter.