Safilo Group S.p.A.

Good evening and welcome to the SAFELO Group's third quarter and first nine-month 2021 trading update. This call may contain forward-looking statements based on current expectations and projects of the Group in relation to future events. Due to their specific nature, these statements are subject to inherent risks and uncertainties as they depend on certain circumstances and facts, most of which being beyond the control of the Group. Therefore, actual results could differ even to a significant extent with respect to those reported in the statements. Today's participants are Angelo Trocchia, Chief Executive Officer, Gerd Gressler, 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. Thank you.

Hi, thanks very much. Good evening. Good evening, everyone. And thank you for attending today's conference call on Safilo quarter three and first nine months 2021 trading update. Our third quarter economic results flagged another remarkable period of growth and recovery in which the solidity of our business and positive consumer trends in our key markets and product categories allowed us to overcome the dampening effect of a still complex environment in a number of countries, certainly in most Asian markets and our tough comparison basis in the midst of our business overhaul. These results are for us another important step in the right direction in the construction of a healthy and profitable business. In the period, we continue to cite the business opportunities that our brand portfolio offered us in our key markets and this led our organic business to grow double digits compared to Q3 2019 and to exceed also Q3 2020. In Q3, our positive organic performance was driven by our main markets, North America, which was again very solid but also a pick-up in Europe, where we saw a marked organic improvement compared to the previous quarters, thanks to a more positive business environment, which also prompted a more dynamic timing of deliveries into the quarter. In Quarter 3, the product category which had supported us the most also during the pandemic continue to be the key drivers with the prescription frames business which kept a strong pace of growth behind the sustained activity of optical stores in the different markets and Smith goggles and helmets which continue to outperform. Thanks to a supportive business contents for outdoor activities with a strong growth rate also partially impacted by some specific favorable base period effects. The quarter was certainly a positive turning point of sunglasses back to grow almost everywhere. This is an upside which follows over one year of continuing decline for the product category in the brick and mortar channels and which testifies the effect of an economy which continued to reopen during the summer. In the third quarter, the online business share of our total net sales was around 13%, compared to only 3% in Q3 2019 and to 16% in Q3 2020, when the channel soared thanks to the contribution of blenders, online business, and the surge of Smith's direct-to-consumer sales, and thanks to the internet players during the pandemic period. In the quarter, we continue to progress in our e-commerce development plans, launching in August a new e-commerce platform in U.S. for our brand Carrera, dedicated exclusively to sunglasses. This marks a further important step in our e-commerce growth plans, and we see the growth of Carrera via an omnichannel approach as a positive for all the distribution channels in U.S., and as an important sign of our commitment to make Carrera a deservingly more relevant brand in the market. On the front of our continuing brand portfolio rebalance, compared to Q3 2019, the sales generated in Q3 2021 by our new proprietary and licensed brand surpassed the significant decline of the licensed business terminated. In Q3 2021, our positive sales development coupled with the further progress in our cost of goods sold saving program also allowed us to achieve a significant improvement of our operating performance. But let's then look at the KPIs of our third quarter and how the period performed in particular comparing 2019 to the pre-pandemic. Our net sales in Q3 increased by 11.1% versus 2019 at constant exchange rate, while reporting a more moderate upside of 2.6% versus Q3 2020, the first quarter last year to record a growth over 2019 after a very negative first semester related to the COVID-19 pandemic. Our quarter's free adjusted EBITDA reached 19.1 million euros and the margin of sales of 8.4%, up 45.9% in absolute terms and 2028 points margin-wise compared to 2019. These quarterly results allowed us to close the first nine months of the year with total net sales of 737.4 million euros up 8.7% compared to the same period 2019, while our adjusted EBITDA reached 68.8 million euros, up 26.6% compared to the first nine months 2019, with the margin on sales at 9.3%, 160 basis points, better than in 2019. I stop here and I hand over to Gert for some more additional details on our economic and financial performance.

Gert? Thank you, Angelo, and good evening to all of you connected via conference call and audio webcast. Let me add some color to the remaining highlights already outlined by Angelo, starting from our net sales performance. For the sake of time and relevance, I will primarily focus my comments on our performance versus 2019 in line with the analyses provided in the previous quarters of this year. We are on slide five of our presentation. So Q3 net sales totaled 226.6 million euros, up 11.1% at constant exchange rates, plus 6.5% on a reported basis after the negative currency impact persisting in the comparison with 2019. Forex was instead almost neutral on a year-on-year basis. As highlighted by Angelo, this top-line performance benefited from the significant organic sales growth, which we can quantify around a plus 16% at constant exchange rates, to which all our main markets gave their positive contribution. North America remained our most important stronghold followed suit in this quarter by Europe, which recorded a remarkable organic improvement and by a nice catch-up in Latin America. Instead, Asia-Pacific showed a more mixed picture, with China positive, Australia flattening, and most other markets declining due to persistent COVID-related restrictions. In Q3, prescription frames and sports products reported an organic growth rate of around 25%, while sunglasses grew mid-single digits, versus 2019, driven in particular by the product growth recorded in the U.S. market with Carrera among the outperformers. Polaroid did not yet recover pre-pandemic levels, but it did show a promising year-on-year positive performance in some of the brand's core markets, like Russia. As highlighted by Angelo, also in Q3 and always compared to 2019, we delivered an effective brand portfolio rebalance with a very negative perimeter effect deriving from the exit of Fior, Max Mara, and now also Fendi, which terminated at the end of June. Having been slightly overcome by the positive perimeter impact of the new business generated by our acquisitions of Blenders and Privé de Vos, and the new license which we have been introducing in our portfolio starting from January 2020. As said, this is a meaningful result for us, as in Q3 we also start entering a lower season period for the new online business. In the nine months of September, our net sales grew by 8.7% at constant exchange rates, 4% at current exchange rates, with the organic sales performance at 12% at constant exchange rates. Adding some important comments on our total online business, in the nine months, to September, it confirmed its share of the total business as just slightly over 13%, up from around 4% in 2019, driven by our three significant drivers. Blenders, whose online business on a pro forma basis doubled its size compared to 2019, while growing around 20%, versus its impressive rise in 2020. Smith's direct-to-consumer online sales up around 80% on a two-year basis and close to 30% versus last year, and our revenues through our internet pure player clients, which soared by roughly 86% versus 2019 and 23% versus the sizable jump recorded last year. While we are glad about our online progress so far, as you know, we continue investing to further strengthen our e-commerce strategy and growing the market share we have more recently conquered. Moving to the main drivers by geography, we saw a continuation of the overall trends recorded in the first semester by the different regions, with some specific base period effects influencing the underlying organic performance. In Q3, net sales in North America recorded another solid quarter, up 52.3% at constant exchange rates compared to Q3 2019, clearly benefiting from the sizable contribution of the acquisitions, and the new licenses in the portfolio, including from this year, also Under Armour. Our organic revenues in North America remained, on the other hand, also strong, up almost 20%, and further consolidating the very positive organic trend achieved last year. Smith was, again, a key contributor of our strong progress in the market, undoubtedly thanks to our brand's strong product offer and effective go-to-market strategies. which in the period was even further supported by easy comps as Q3 2019 had showed a low level of Smith product shipments, which we then caught up in Q4 2019. The organic performance also confirmed, as said before, the positive momentum in the United States of Carrera and of the group's key licenses in the market, namely Kate Spade, Tommy Hilfiger, and Jimmy Choo. In Europe, Q3 reported net sales remained in negative territory in the comparison with Q3 2019, at minus 12.8% in constant exchange rates, slightly improving compared to the performance recorded in the first semester. It is important to highlight for Europe that while the region was even more heavily impacted by the decline of the terminated licenses for the exit of Fendi, on the other hand, The organic sales performance showed a market improvement around plus 16% compared to 2019, thanks to a moderate recovery in consumer spending and some favorable phasing in deliveries of some orders between the third and the fourth quarter this year. Among the core markets of the region, Italy continued to outperform with organic sales in the country, which largely exceeded pre-pandemic levels. followed by a positive upside of the business in Germany and a full recovery in the UK. Key markets like Spain and France recorded instead a significant organic recovery compared to last year, while still remaining below 2019 due to a still insufficient catch-up of the sunglasses business. Moving to the emerging regions, in Asia-Pacific, our Q3 net sales declined by 35.5% at constant currencies compared to Q3 2019, and as said during the last quarter, together with Europe, Asia is the other geography most heavily impacted by the decline of the terminated licenses. In the third quarter, we continued the transition of our Asia-Pacific business to a more solid and profitable brand portfolio, an effort which allowed us in the period to register in organic sales growth. while it was not enough to return to pre-pandemic levels due to the resurgence of COVID-related lockdowns and restrictions in Australia and most Asian markets, with the exception of China, which remained in the period very positive. Our organic business in the region was down around 13% compared to Q3 2019, a decline that by channel was almost entirely driven by the travel retail. Q3 in our rest of the world region saw net sales increasing slightly by plus 1.6% at constant exchange rates compared to Q3 2019. As we anticipated before, the region benefited from a strong organic sales performance up around 18% at constant exchange rates, which was fully driven by the significant growth recorded by our portfolio in the core Latin American markets, namely Brazil and Mexico, while sales in India and the Middle East fully recovered pre-pandemic levels. Let me now go to our economic performance in Q3, slide number nine, starting indeed by what was in the period a more meaningful driver of our operating performance, the gross profit. The latter benefited from a supportive sales mix development, mainly as a result of the accretive contribution of a bigger online business, but also from the further progress on our cost of goods sold savings program. As you already know, by the end of June we completed our €20 million overhead saving plan, while we are today more or less halfway through the €25 million cost of goods sold savings program after the additional around €2 million we delivered in the third quarter, mainly in manufacturing. As previously discussed, today these savings, together with the selective price adjustments we're taking, are going against the well-known increase of inbound transportation costs as inflationary pressures continue to hit there. That said, on Q3, our gross profit rose by 8.9% compared to Q3 2019, with a margin on sales which improved to 52.4% from 51.2% in 2019. Also in Q3, we had some non-recurring costs booked against the gross profit level, net of which Q3 gross margin on sale equaled 53.2%, posting an underlying improvement of 200 basis points compared to 2019. In the first nine months of 2021, the gross profit was just slightly over 2019 in absolute terms, while below 120 basis points on the margin at 51.7%. of sales, a gap fully reflecting the €10.2 million negative impact from non-recurring restructuring charges booked this year, adjusted for which the gross margin stood at 53.0% of sales in line with 2019. Moving down the P&L, our SG&A cost structure benefited from the recovery of operating leverage led by the top-line growth and by our now leaner overhead structure which we continue to manage with disciplined cost control. In the third quarter, our reported EBDA increased to 17.4 million euros from 7.7 million euros in Q3 2019, while the margin on sales jumped to 7.7% from 3.6%. Q3 adjusted EBDA equaled 19.1 million euros, up 45.9% compared to the adjusted EBDA reported in Q3 2019. Our adjusted EBDA margin increased to 8.4% from 6.2% in 2019. These quarterly results allowed us to close the first nine months of this year with a reported EBDA of 68.4 million euros aligned with the adjusted EBDA of 68.8 million euros as the €17.4 million of restructuring costs included in our reported numbers were counterbalanced by the €17 million positive impact deriving, as you remember from the semester conference call, from the release we made in the second quarter of the provision for risks and charges in relation to the positive outcome for us of the French Competition Authority investigation on the IWER sector. The EBDA and adjusted EBDA margin in the first nine months this year increased to 9.3% of sales from the 7.7% recorded in the first nine months of 2019. And I would like to conclude on my side, highlighting that our group net debt at the end of September stood at €228.3 million, or €188.6 million pre-IFRS 16, pretty much stable compared to the position at the end of June of €226.9 million and the €222.1 million, or €179 million pre-IFRS 16, recorded at the end of December 2020. Beyond the improved economic performance, the period showed a favorable networking capital dynamic, which we are generally satisfied with, notwithstanding the some delays and congestion on freight routes out of China, resulting in higher than expected inventories in transit. We aim to catch up on these in the fourth quarter, but are nonetheless monitoring the global logistics situation carefully. On the other hand, it is to be highlighted that in the first nine months of the year, the cash out for our ongoing restructuring plan equaled around 13 million euros. I stop here and I hand back to Angelo for his further comments.