Safilo Group S.p.A.

Good evening, and welcome to the Sakhilo Group's first half 2021 results. This call may contain forward-looking statements relating to future events and operating, economic, and financial results for the Sakhilo 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 Mr. Angelo Trocchia, Chief Executive Officer, Mr. Gerd Gressler, Chief Financial Officer, and Ms. 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.

Hi, thanks very much. And good evening to everyone. And thanks all of you for attending today's conference call on the Safilo Quarter 2 Trading Update and H1 2021 results. We are very pleased that the second quarter continued the solid sales and profitability momentum of the first three months of the year. allowing us to close the first half of 2021 with a significant year-on-year rebound, but even more meaningfully, growing well above the H1 2019. In the period, we continue to size the business opportunities that our renewed brand portfolio offers us in our key markets. For the first two quarters of 2021, our business performance was consistently driven by the strength of our key strategic pillars. We benefited from the successful rebalance of our brand portfolio, which has so far allowed for the full offset of the business terminated at the end of 2020. through our acquisitions of blenders and pre-variables and the new, recently introduced, licensed brands of Levi's, David Baker, Missoni, Ports, Isabel Marant and Under Armour. This has been the main objective of our action plan during the last three years, the effective implementation of which is now permitting us to bring home a positive performance of our core business. In the first semester, we in fact benefited from the significant organic growth achieved by the brands already in our portfolio, meaning our comparable business was up high single digits, a result which was broad-based from Smith's strong outperformance across all its categories, a big thank to the Smith team, across all its categories, channels, and geography, to Carrera and the main license of Hugo Boss, Tommy Figer, Kate Spade, and Jimmy Choo, all firmly exceeding 2019 levels. For the fourth consecutive quarter in a row, our path of recovery was led by the significant rebound in the consumption experience in the United States, a market which is certainly performing better than any expectation. and I think the team over there is doing quite a great job. But also, by the vigorous progress we kept recording in China, Australia, and in most of the Middle Eastern markets. Also in the second quarter, our sales growth came largely from prescription frames. The product category which has best sustained the industry during the depth of the pandemic and which is still today outperforming alongside our winter and summer sports products. Our sales of sunglasses, which continue in the second quarter to be held back by the pandemic-related restrictions which persisted in many crucial European markets, at least until May, benefited on the other hand from the strength of our online channel, which grew a strong double digit also in the second quarter, thanks to the business momentum of Internet2Player as well as the D2C digital sales of Blenders and Smith. Let's then look at the KPIs of our second quarter trading update. As expected, our business performance in quarter two recorded an exceptional year-on-year rebound of growth, with sales and profit doubling or tripling compared to the extremely small business and the losses we recorded in the second quarter last year, the one most heavily weighted down by the COVID-19 pandemic. Our comment will so mostly refer to our performances compared to the same period of 2019, the most meaningful benchmarks to measure the health of our business and the progress of our operational execution. Our net sales in Q2 were up by 9.4% at constant exchange rate versus Q2 2019. posting a sequential acceleration compared to the 6% we reported in the first quarter of the year. Our quarter 2 adjusted ABTDA reached 23.8 million euro and the margin on sales of 9.2%. not far from the double-digit level we achieved in the first quarter and 70 basis points better than the margin of 8.5% we recorded in Q2 2019. The sum of the two quarters was a solid H1, in which the very robust sales growth and the structural cost reductions we have been implementing delivered a significant recovery of the profits. In H1 2021, our total net sales reached 510.7 million euros, reporting a growth of 7.7% at constant exchange rate compared to H1 2019. Our first half adjusted the BDA was just short of 50 million euro and 10% margin, precisely at 49.7 million euro at 9.7% adjusted ABTDA margin. A result which granted us a plus 20.5% increase in value and a 140 basis point margin improvement compared to 2019. Very meaningful for us, the semester was back to a small adjusted group net profit of 4.4 million euro, which compared with the adjusted loss of 63.7 million euro recorded last year, while it was below H1 2019 adjusted net profit of 8.5 million euro due to higher financial charges. Now, the significant recovery of operating profitability we achieved in the second period supported what we consider a satisfactory first semester free cash flow, which allowed our group net debt at the end of June 2021 to be substantially stable with the position we recorded at the end of last year despite of the cost of the restructuring. I stop here for the moment and hand over to Gerd for some additional details on our economic and financial performance.

Thank you, Angelo, and good evening to all of you connected via conference call and audio webcast. Let me add some color to the main highlights already discussed by Angelo, starting from our net sales performance in the second quarter and first semester of 2021. We are on slide six of our presentation. So our Q2 2021 net sales reached 259.4 million euros, taking the H1 top line to 510.7 million euros, respectively up 4.3% and 3% at current exchange rates and 9.4% and 7.7% at constant exchange rates on a two-year basis. Forex has been quite a headwind so far for U.S. dollar denominated sales, both versus 2020 and versus 2019. As highlighted by Angelo, key for us this year was and still is the effective rebalancing of our business portfolio in line with our group plan, working on the different important business levers by product category, geography, and channel. The foundation for our business model to be successful is a competitive and very appealing brand portfolio, and what we're commenting on today goes exactly in that direction after three years of portfolio overhaul. Also in Q2, and always in comparison with Q2 of 2019, the negative perimeter effect from the exit of Dior and Max Mara was overcome by the positive impact of the new owned and licensed brands we have been introducing during the last 12 to 18 months. As a reminder, we bought a controlling stake in Prevariable in February last year, while last June marked Blenders' first year within our portfolio. With regards to our licenses, we launched Levi's, David Beckham, and Missoni in the first half of 2020 in the midst of the pandemic. Ports in China in July, while Isabel Marant in Q1 this year, and Under Armour more recently in this quarter. Focusing then on our organic performance, the one driven by our fully comparable brands on a two-year basis, this was strong and again leading the high single-digit growth we recorded in the peers versus 2019. We'll add some more color on our brands when moving on to our geographical performance. By product category, prescription frames continue to register strong momentum, up by a meaningful double digit also in Q2 and consequently in H1, reflecting the sustained business activity in optical stores, quite broad-based by brand and market. Such trends have been supporting our work of shifting more of our business towards prescription frames. The latter accounted for 39% of our H1 2021 sales mix, up from 36% in H1 2019. The rebalancing would be clearly even more evident looking at the business X, the acquisitions, which are largely sunglass businesses. Smith's winter and summer sport products were the other winning categories, growing exponentially in Q2 and driving a strong over 80% increase in H1, also boosted by the surge of outdoor activities. Sales of sunglasses, which doubled year on year in Q2, were, on the other hand, still slightly below 2019 levels due to the impacts of lockdown restrictions on retail and travel and to a particularly difficult comp space given the terminated licenses high weight on these products. As highlighted by Angelo, our sales of sunglasses in Q2 and in the semester were supported by the strong growth of the product category in the digital channel. clearly driven by the significant contribution of our acquisitions, blenders in particular, but indeed also by the strong ongoing progress of Smith's renewed digital direct-to-consumer channel, as well as by the outperformance of internet peer players. Let's have the usual quick zoom into our group's total online business performance in the next slide. At the end of June, our total online business represented roughly 14% of the group's total sales, or around 75 million euros on a constant currency base, with the channel growing 2x and almost 4x compared to H1 2020 and 2019, respectively. For online, the most meaningful comparison to make is with last year, as the channel experienced its strongest development indeed in 2020, concurrently with our acquisitions. In H1 2021, the doubling of our total online sales came from the significant addition of blenders, but also thanks to Smith, up 39% at constant exchange rates and to the revenues generated through the internet pure players, which increased by 38% in the period. In Q2 of 2021, the group's online business continued to record a strong development, up 64% year-on-year, still benefiting from the positive perimeter effect of having blenders in the base period just for the month of June. On the other hand, the organic performance of the channel started to normalize a bit in Q2 compared to the extraordinary growth rates experienced last year when online was the only way for consumers to buy, remaining nevertheless very meaningful. Moving to the drivers by geography of our sales performance in the second quarter and first half of this year, we can generally say that on a two-year basis, Q2 trends were quite consistent with what we recorded in Q1, with some accelerations and decelerations reflecting specific base effects. Starting from what is today our biggest region, representing 47% of our total sales, North America was again the key driver of our sales growth. thanks to the buoyant consumption trends persisting within the United States, to the strong momentum our portfolio is enjoying in the market, and today now to our acquisitions. Meaningfully excluding the acquisitions, our sales growth in North America accelerated in Q2 to plus 20% from the plus 17% recorded in Q1, again driven by a wide-ranging improvement across brands, product categories, and channels. Amongst all, a special mention goes to Smith, whose revenues in Q2 this year almost doubled versus 2019, behind the sizable development of all its product categories through its traditional distribution and more significantly through its renewed D2C channel. Reading out our total reported performance in North America, in Q2 2021, net sales grew 60.3% at constant exchange rates and 50.6% in H1 versus 2019. In Europe, our Q2 net sales recorded a very significant year-on-year rebound, which was, on the other hand, still not sufficient to allow our business to match pre-pandemic levels and to fully compensate the gap generated in the region by the terminated licenses. After a weak start to the sun season, affected by the impact of retail restrictions until May, and the lack of tourists in key cities and summer locations, sales trends improved in the UK, Italy, and some Nordic countries, but they remained more subdued in markets like Germany, France, and Spain, and in those channels more exposed to the terminating businesses, in particular licensor-owned boutiques, department stores, and travel retail. Also in Q2 2021, sales of prescription frames in Europe were up double digits compared to Q2 of 2019, while sunglasses remained subdued, also reflecting the still negative trading environment for Polaroid, in particular in some of its core sunglass markets like Spain. In the comparison with the respective 2019 periods, our Q2 net sales in Europe were down 11.4% with constant exchange rates, recording, however, an improvement compared to the decline of 17.8% reported in Q1 of 2021. Overall, in H1, our net sales in Europe declined 14.7% at constant exchange rates, mainly as a result of a very challenging base period for sunglasses due to the terminated businesses and a still patchy business environment. In Asia Pacific, our Q2 2021 net sales recorded a year-on-year growth of plus 49.6% at constant exchange rates, and an almost equal decline of 48.5% in its comparison with Q2 2019, a very tough phase period as travel retail was particularly strong then, and as we know, heavily exposed to the terminated business. In the second quarter of this year, sales trends in Asia Pacific were highly diverging, reflecting on one side the ongoing rebound of China and Australia, up respectively 21% and 12.4% versus Q2 of 2019, thanks to a supportive business environment where we could effectively relaunch our brand portfolio, and on the other, the still highly subdued travel retail business and many other markets in the regions still affected by the pandemic and lockdown restrictions. In H1, our net sales in Asia Pacific declined 39.1% at constant exchange rates. Finally, in the rest of the world, Q2 was another supportive quarter for the group's business recovery and growth, with our net sales in the region recording an exponential rebound compared to last year's extraordinary decline, and a plus 4.9% compared to the same quarter of 2019. Both Middle Eastern markets and core Latin American countries, Mexico in particular, contributed to the upside of the period, while our total H1 performance in the area equaled the growth of plus 14.4% in the comparison with H1 2019. Let me now move to our economic and financial performance, slide 10, building on the highlights already provided by Angelo. I would say that the second quarter was similar to what we saw in Q1. More sales, better operating leverage as sales volumes increased, additional progress on our cost efficiency plan accelerating now also at the cost of goods sold level. But also as expected, an acceleration of some SG&A investments and higher inflationary pressures. Let me give you an update on our total structural cost savings in these first six months. These amounted to around 13 million euros with just under 9 million euros on COGS, which, as I said, had quite a significant acceleration in the second quarter. In the six months, we also had some 4 million euros of cost avoidance in relation to the contingency measures still in place due to the COVID-19 emergency. In the period, we incurred some additional non-recurring costs, mainly at the gross profit level in depreciation for the write-off of manufacturing assets in relation to the closure, which occurred as expected in June, of the Ormos production plant in Slovenia. Total non-recurring costs in the first semester equaled 19.3 million euros, and as said, these were mainly related to our industrial restructuring plans. As you will probably have read, on the 22nd of July, the French Competition Authority, following the investigation initiated in 2009 regarding a number of alleged practices in the Irish sector in France, dismissed all the charges which had been raised against Safilo and which we have been vigorously challenging. We are clearly very happy with this decision, which meant that no sanctions were applied to Safilo, thus allowing us to release the provision for risk and charges equal to 17 million euros, which we booked in 2015 in order to cover the potential estimated liability. This release has had a positive impact on our reported Q2 NH1 2021 results, which is not included in our adjusted key performance indicators, as it is treated as a non-recurring income. Q2 2021 gross profit rose to 135.6 million euros and to a margin of sales of 52.3%, marking an exponential increase compared to the exceptionally low levels recorded in Q2 of 2020. On an adjusted basis, gross profit in Q2 was 3.8 million higher, equal to 139.4 million euros and to a margin of 53.7%, accelerating quarter-on-quarter versus the 52.2% adjusted gross margin recorded on Q1. On a two-year basis, compared to Q2 of 2019, gross profit was up 2.6% in value terms and down 100 basis points margin-wise. And looking at the key dynamics which drove this performance, on the positive side, we had the sizable accreted growth of the D2C channel, which is largely, but not fully, offsetting the double negative impact We suffered in these quarters from the terminated licenses, very high and accretive in the base period, yet residual and dilutive in their final depletion periods this year. In the quarter, we had also a quite meaningful positive contribution from lower obsolescence costs, an important component of our structural COG savings plan, which together with some other manufacturing and purchasing savings, supported us in counterbalancing the rise of inbound transportation costs. In the first semester, our gross profit reached €262.2 million, up 76.5% compared to H1 2020, with a gross margin which bounced back to 51.3% from last year's 44.3%. On an adjusted basis, H1 2021 gross profit equals 270.6 million euros and a margin of 53%, respectively up 1.7% and down 70 basis points compared to H1 of 2019. Moving down the P&L, our SG&A cost structure benefited from the recovery of operating leverage led by the strong top-line growth and by our now leaner overheads cost structure, which we continue to manage with disciplined cost control. Let me say that as expected and anticipated, we closed the first semester of this year with a substantial completion of our original overheads productivity plan of 20 million euros. We had, in fact, some 4 million additional euros of structural overhead savings in the six months to June. On the other hand, as planned, Marketing and advertising expenses re-accelerated compared to Q1 2021, mainly as a result of the expected easing and lifting of the restrictions which have prevented our core organic business from trading regularly in the first months of the year. The acceleration of these costs was quite significant, also compared to the second quarter of 2019, as the period represents the peak season for the online business, Thus, the months in which a great deal of blenders marketing investments are concentrated. Starting from Q2, blenders, like many e-commerce marketers across industries, have been experiencing advertising price increases on social media coupled with the impact of the recent iOS updates on ad targeting. Quite interestingly, always in our two-year base comparison, the higher mix of marketing or higher weight of marketing was compensated by lighter royalty expenses in line with our now different brand mix in the portfolio. Briefly on the numbers. In the second quarter, our reported EBDA soared to 37.7 million euros as it accommodated the release of the 17 million euros provision discussed before. which meant more than doubling the profit of 17.4 million euros reported in Q2 2019, with the margin jumping to 14.5% from 7% in Q2 2019. Q2 adjusted EBDA equaled instead 23.8 million euros compared to the loss of 34.1 million euros recorded in Q2 of 2020, increasing plus 12.2% compared to the adjusted EBDA of €21.2 million reported in Q2 2019. In Q2, our adjusted EBDA margin increased to 9.2%, 70 basis points higher than the 8.5 margin recorded in Q2 2019. This solid result allowed us to close H1 2021 with an adjusted EBDA of 49.7 million euros, posting an increase of 20.5% compared to the adjusted EBDA recorded in H1 2019. Meaningfully, in H1, our adjusted EBDA margin was very close to the double-digit level at 9.7% of sales, marking 140 basis points improvement compared to the 8.3% adjusted EBDA margin recorded in H1 2019. After DNA, our H1 2021 operating result was back to profit of 22.3 million euros and to an EBIT margin of 4.4% with an adjusted operating results of 24.7 million euros at 4.8% of sales, meaning an increase of 85.5% compared to the EBIT of 13.3 million recorded in H1 2019. and an improvement of 210 basis points compared to the 2.7% margin recorded in H1 2019. Our operating performance in H1 allowed us to close the period with a group net result back to a small reported profit of €2 million, while the adjusted net result equaled a profit of €4.4 million. compared to the adjusted net loss of 63.7 million euros in H1 2020 and the adjusted net profit of 8.5 million posted in H1 2019. Below the operating line, net financial expenses equaled 11.6 million euros, remaining absolutely in line with last year, although with a different mix, driven by higher financial interests and a lower negative impact from exchange rate differences. Financial charges were, on the other hand, higher than the 2.9 million euros recorded in H1 2019, mainly as a result of the higher average net debt and of the higher interest on the shareholder loan. Moving to our cash flow in the semester and group net debt at the end of June, slide 14. As already remarked by Angelo, our solid economic performance allowed us to close the first semester with a satisfactory free cash flow, which was driven by a positive cash flow from operations of 10.1 million euros, which was achieved thanks to a significant recovery of operating profitability, notwithstanding a cash out of around 12 million euros relating to the definitive closure of the Ormoz production site, with which we took another significant step forward in the execution of our industrial restructuring plan. In the first half of 2021, we recorded a relatively contained absorption from working capital of €9.4 million with the net working capital dynamics which were characterized both by the normal increase of trade receivables and payables accompanying the surge of trading activities and by a reduction of inventories by €6.7 million. In H1, the cash flow for investments amounted to 9.8 million euros primarily devoted to the group's current digital transformation and overhaul of its IT infrastructure and to maintenance capex for industrial footprint. In H1, our free cash flow equaled the small cash absorption of 4.8 million euros compared to the slightly positive generation of 2.5 million euros before the acquisitions of Blenders and Prevail Revolve recorded in H1 2020. thanks to, at the time, the strict COVID-related cash protection approach. As regards our net debt, at the end of June 2021, it stood at €226.9 million, €186.7 pre-IFRS 16, pretty much stable compared to the position of €222.1 million or €179 million pre-IFRS 16, recorded at the end of December 2020. and the position of 223.9 million, 181.3 pre-IFRS 16 recorded at the end of March this year. If we look at the key components of the group's net debt position at the end of June, we moved from the gross debt of 298.1 million euros, of which 40.2 million euros was the IFRS 16 impact, 96.5 million euros the shareholder loan for the acquisitions, €108 million, the term loan facility guaranteed by SACE, and €55 million, the renegotiated term loan facility signed in 2018. We then closed the semester with a cash position of €71.2 million and our €75 million revolving credit facility undrawn. I stop here and I hand over to Angelo for his further remarks on the business evolution after the closure of the semester.