Safilo Group S.p.A.

Good evening and welcome to the SAFRILO Group first half 2022 results. This call may contain forward-looking statements related to future events and operating economic and financial results for the SAFRILO 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 and related to a multitude of factors. Today's participants are Angelo Trocchia, Chief Executive Officer, Gerd Gressler, Chief Financial Officer, and Ms. Barbara Ferrante, Director of Investor Relations. I will now hand the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks very much, and good evening, good evening, everyone. and thank you for attending today's conference call on the Safilo Group's first house results 2022, including a trading update on the second quarter. We are pleased with the development of our business in the second quarter. Our strategic objective to build a software with a strong and balanced portfolio of brands, geographies, products, and channels is progressing well, supporting us in sizing opportunities where they arise. Given the complex environment which we continue to operate and the company-specific headwinds we still had to face this year, We are certainly pleased with our top-line growth, very solid at both the reported and organic level, with some clear growth engines which have well overcome some soft areas. And more than anything, we are today pleased with the market growth of our profits and the margin expansion which has come along with it. In quarter two, our total net sales grew 11.2% at current rates as Forex became an even bigger tailwind on the top line, adding almost 90 million euro and by 4% at constant exchange rate. while our organic growth, which is still to be considered our most meaningful KPI of revenue, was very subtly at plus 9.8% to be noticed after the 14.3% we posted in quarter one. This performance resulted in our H1 sales being up plus 11.8% at current rate, after adding a total around 28 million euro of positive foreign impact, but also at 6.2% at constant currency, and an important plus 12% at the organic constant currencies level. It is worth remembering that in H1 2021, our business had already exceeded pre-pandemic level, reporting the growth of 7.7% at constant exchange rates compared to the H1 2019. And it is an interesting data point that our H1 2022 is up around 15%. versus H1 2019 at constant currencies, with organic performance always calculated on a constant Brent perimeter up around 25%. In the second quarter, our gross margin increased to 56.5% of sales. which we consider a significant milestone on the path towards our goal to structurally improve the group's overall margin profile. This enables a virtual circle to improve profitability while at the same time reinvesting in marketing and advertising activities to further fuel the growth of our brand as we did also in the second quarter. This has brought our H1 adjusted EBITDA to 11% of sales, 130 basis points higher than in H1 2021, and 270 basis points higher than the 8.3 margin recorded in H1 2019. This semester is also a record period for our group, reaching an adjusted net profit of 33.7 billion euros, the highest net result in Sanfilo recent history in the first semester. And this is for us an important confirmation of the direction of the work we are taking to build a more and more profitable business at bottom line level. Let's see how our key business driver played out in these first six months affecting our organic sales. This year, Europe, our second largest region, has mounted back strongly, driven by the reopening of the economies and the return of local international tourists, thus becoming the group's key revenue growth driver. Our organic business instead remains substantially in line with last year in North America, where this year the pace of consumption has been, without doubt, more moderate behind the tougher economic environment in the United States. and the market where our sales were facing an even more demanding comparison versus Q2 2021, when we had posted a double-digit organic growth versus the pre-pandemic level of 2019. In Q2, we also benefited from the strength of our business in emerging markets, in particular Brazil, Mexico, and Middle East. which continue to deliver solid sales growth, while China remains impacted by the COVID-related lockdown. In terms of products and channels, in quarter two we saw a continuation of the key organic trends we recorded in the first quarter with the sales of sunglasses and the business of goggles and helmets for winter and summer sport activities remaining our key engine of growth. And prescription frames confirming the initial resiliency posting another quarter on quarter mid-single digit growth. At the organic level, sunglasses grew around 14% in the first semester, goggles and helmets plus 34%, while prescription frames increased by 5%. If we look from a channel perspective, we continue to benefit from the evolution of our multi-channel business model on one hand, fully sizing the opportunities provided in the period by the strong recovery of physical retail, and on the other side, continue to develop our online sales consisting of our direct-to-consumer business and the group sales via Internet Pro Player. which together grew by 6% at constant exchange rates also in Q2, confirming the share of our total revenue at a solid 14.4% in H1. And we continue to leverage on our diversified distribution network by also progressing with the development of our B2B platforms, including UN Syphilo in Europe, wholesale altogether grew by 12% in the first half of the year. Let me give you some color on how our brands perform in these first six months and how we are making them stronger and even more relevant for our clients and consumers. Let's start with Carrera and Polaroid, both confirming nice double-digit growth rates, also in quarter two, with Polaroid, which closed the semester back to the growth also versus 19, thanks to its strong, colorful sunglasses collection and to a new wave of well-orchestrated marketing and product placement activities, which are conveying Polaroid's strong brand equity in its core markets. Polaroid was certainly the brand most hit by the COVID-induced decline of the sunglasses market during the last season, and it was conversely the first one to benefit from the rebound of the product category in Europe, but also in Latin America, India, and Middle East, where the brand is developing fast. I'm sure some of you may have bumped into our new colorful Polaroid pop-up store in the train station in Rome, one of the busiest in the world with almost 500,000 passengers a day. Polaroid is there with its wide range of colorful eyewear for the entire summer season. And so far, the project has had quite amazing results, both in terms of visibility, brand awareness, and sales opportunity for the Italian market. Another very interesting project we recently ran with Polaroid was in Spain, where our brand was the sponsor of the Mat Cool in Madrid, one of the most important music festivals in Europe, with more than 40 international influencers who posted stories and content on the slogan, hashtag the sound of colors, reaching, along with live coverage of the official Polaroid account, more than 7.5 billion users. So the music is a relevant platform for the Polaroid strategy even moving forward. And let me say that while Polaroid is coming back with big time this year after Steel Complex 2021 for the Sun business, on the other hand, Carrera is having its second consecutive growth year, further accelerating on its very positive 2021 performance and growing around 30% or its 2019 business. And the recipe is quite simple for Carrera, strong sun and optical collection. Carrera is certainly becoming one of our core assets in the prescription frames business, very focused and appealing marketing advertising investment currently developed around the brand's notorious play of drive your story. Among Carrera's projects this year, I would like to mention its arrival in the MotoGP as official partner of Ducati team, launching an amazing 2022 limited edition collection to mark the start of the multi-year global licensing agreement for the development and distribution of Carrera Ducati co-branded optical eyewear and sunglasses. Let's go to Smith. Smith, another quarter of outstanding performance on this portfolio of sport and outdoor focused products. In its traditional sports stores, but more and more in its direct-to-consumer channel. As you know, Smith is today our biggest brand. Market leader in its reference product categories and still with the huge potential to grow by geography and product segments. to strategic areas on which, as you know, we are working relentlessly. Smith's current business has more than doubled compared to 2019, so we are indeed very happy about this success and how the great thing behind it is today working more and more with Blenders on the cross-fertilization project. Coming now to Blenders. The brand had a flattish start of the year, which was then followed by a soft quarter two, as the business context in North America has become progressively more challenging for pure e-tailers. On Blender, which is clearly running again its past two years of exponential growth rate, we are working on different levers. On the brand core D2C business, a key topic we are tackling in the U.S. is the diversification of the performance media mix. Historically, mainly Facebook-oriented, to other digital channels like, for instance, TikTok, with great success, connected TV, plus its international expansion in the English-speaking countries first. a project which today is to be running especially for Canada and Australia. As previously discussed, Blender is today also evolving its multi-channel business model by entering selected wholesale clients as well as by opening its first dedicated stores. There are four of them today with the objective to reach up to six by the end of the year. Coming to our licensed brands, also in quarter two, Boss, Tommy Hilfiger, David Beckham, Under Armour, Isabel Moran were outperformers, all posting excellent double-digit growth rates. With regard to our new launches, we are particularly proud of the strong demand for Carolina Herrera's collection, possibly one of the South Florida's best launches ever, a brand which is very meaningful for the Iberian market in Latin America, but progressing fast also in the United States, in line with the fashion house's core strategy. So this year, Carolina Herrera, together with the promoting start of Chiara Ferragni in this square, has given a valuable contribution to our strategy for a more diversified and balanced license portfolio. I stop here and I go over to Gerd for additional details on our economic and financial performances.

GERARDO FERRAGHIERI- Thank you, Angelo, and good evening to all of you. Adding, as usual, some color to the main drivers already highlighted. I'll start from our net sales performance by geography, our reported performance, and more importantly, commenting on our organic trends, which represents the performance of the brands fully comparable as present in both periods. That said, by market, starting with our key growth driver, Europe, 41.5% of our business at the end of the semester. grew 14.1% on a reported basis and constant forex, 22.7% organic, after another significant bounce back in the second quarter, respectively plus 12.1% reported and plus 20.7% organic, as the business context remained very dynamic, also driven by a significant return of local and international tourists, mainly from the United States and the Middle East. Sunglasses were the leading product category, rebounding by a strong double-digit growth rate in all key European markets, in particular in Italy, France, Spain, and Portugal, with Polaroid and Carrera being our stars, together with Tommy Hilfiger, David Beckham, Isabel Marron, and the new business of Carolina Herrera, as Angelo was saying, playing a significant role. Among the other markets, I would also mention Germany, which remained well supported by the good performance of the main internet peer players, as well as the quite meaningful sales increase we recorded in Turkey and Poland, where in the latter we opened a brand new subsidiary at the beginning of this year and a special focus on the development of our own core brands. It is worth noting that the European prescription frames business remained very solid, up by a high single-digit rate in the quarter, with the region representing, together with Latin America and the Middle East, the key growth driver of the product category. Business in North America, 45.3% of our total revenue in the first half, was up overall plus 7.7% at current forex, driven by the significant revaluation of the US dollar against the Euro. It was down minus 2.2% at the constant forex. On an organic basis, North America remained in the semester in positive territory, up 2.4%, reflecting the mid-single-digit progress recorded in Q1 and the substantial stability just highlighted by Angelo in the second quarter at minus 0.6%. We tend to consider this a reasonable performance given the double challenge the region faced on one side with the demanding Q2 2021 when we reported an organic growth of around 15% compared to Q2 2019 at the time, and on the other with a slower consumption pace in the United States behind a tougher economic environment. Smith was our strongest asset. in its core categories of goggles and helmets, followed by sound performance of Carrera by Boss and Hugo, Under Armour, and David Beckham. On the other hand, as already highlighted, the second quarter was soft for blenders and for some of our other local brands, which suffered the slowdown in consumption more. In H1, emerging markets represented the remaining 13.1% of the total business. Net sales in Asia-Pacific were down 8.9% with constant forks in the semester, minus 8.5% in the second quarter, with the business in Greater China remaining the main drag of the reported performance, due to the month of April and May having been heavily impacted by COVID-related lockdowns. In Q2, sales momentum was instead dynamic in a number of Southeast Asian markets, in Australia and in Japan, thanks to our ongoing expansions of brands such as Carrera, Smith, Boss, Kate Spade, and Levi's, which supported the whole region to record a positive organic performance of plus 5.9% in the quarter and plus 4.1% in the first half. As highlighted before, Latin America, India, and the Middle Eastern countries representing together the so-called rest of the world region and 8.7% of total group revenue were our growth engine over the entire H1, with the second quarter sales up a reported plus 24.9% at constant forex plus 26.4% organic. positive sales momentum continued into the second quarter in Brazil, Mexico, and other smaller Latin American markets, driven in particular by the strength of the key brands of the region, namely Tommy Hilfiger, Carrera, Polaroid, Boss, and Hugo. Similarly, our focused sales plans continued to be favored by a dynamic trading environment in the Middle East and in India. Two markets where sales were again very positive thanks to the significant progress of our core owned and licensed brands. Moving to our economic results in the second quarter and in the first half of the year, the solid pace of profit recovery we achieved in these last quarters is quite noticeable, with our growth and operating results growing at two to three times the rate of sales growth. In the second quarter, we hit a positive milestone in Safilo's recent history, certainly at the gross profit and margin level, as our sales growth continued to be driven by an increase of volume, a positive price mix effect provided by a richer brand assortment, largely absent of phase-out sales, and on the opposite, our new products and brands which lifted our price mix. plus the selected adjustments taken last year to start countering increasing input costs. These key top line dynamics, together with additional structural cost of goods sold savings for around 6 million euros in the first half, allowed us to more than offset inflationary pressures, as well as the ongoing Forex headwind, which diluted the gross margin by over 100 basis points in the second quarter. We closed the second quarter with the gross margin up to a meaningful 56.5% of sales, 420 basis points higher than Q2 of 2021, with the underlying improvement compared to last year adjusted gross margin having been of 280 basis points. In the first half of the year, our gross margin reached 55.8%, respectively 450 and 280 basis points higher than last year, on a reported and adjusted basis. Below the gross profit, we delivered a robust economic performance also at the operating level, notwithstanding the increase as occurred in the first quarter of selling general and administrative expenses by 13% in the second quarter and by 13.9% in the first half of the year. mainly driven by our now higher investments in marketing and advertising activities following the business peak season and the positive momentum of our key brands. The second quarter and the semester also continued to record higher EDP expenses following the impact in the P&L of software as a service investment projects under the new IFRIC agenda, the equivalent of which in Q2 and in H1 of last year was still being capitalized. The IFRIC SAS impact accounted for 1.8 million euros in the second quarter and a total of 3.7 million in the first half of the year and reflects the ongoing investment in SAFIDO's digital transformation. At the adjusted level, we closed the second quarter with an EBDA of 30.6 million euros, up 28.5%. while the adjusted EBITDA margin rose by 140 basis points from 9.2 to 10.6% of sales or 11.2% if we exclude the IFRIC SAS impact. This resulted in 62.6 million euros of adjusted EBITDA in the first six months of the year, taking our adjusted EBITDA margin to 11.11% of sales or 11.6% excluding the above described IFRIC impact. 130 basis points or 190x IFRIC higher than last year. In H1, our adjusted EBIT stood at 39.2 million euros. The margin grew to 6.9% from 4.8% in H1 2021. We ended the first semester with a record adjusted group net profit of 33.7 million euros. which represents an exponential increase compared to the 4.4 million euros recorded last year. Below the operating profit line, we recorded three positive dynamics. First of all, a significant reduction of net financial charges from 11.6 million euros to 2.7 million this year, thanks to the share capital increase undertaken last year, which more than halved group net debt, plus a net positive impact of 3.4 million euros from exchange rate differences, compared to a net negative of €0.9 million last year. Second, in the semester, we had a gain of €8.7 million for lower liabilities for put-and-call options on non-controlling interests, mainly due to the increase, which occurred in January of this year, of our controlling stake in Prix de Revaux from 64.2% to 82.8%. Third, our effective tax rate was this year of 26.7%. Moving to our cash flow and financial performance, at the end of June, our free cash flow equaled the cash absorption of 14.5 million euros compared to the absorption of 4.8 million euros recorded in H1 of last year. The cash flow from operating activities was slightly negative. by 3.6 million euros, reflecting on one side the significant improvement of our economic performance. We had in fact a positive 52 million euros of positive cash flow from operations before the change in working capital, and on the other, the absorption from net working capital, which was driven entirely by a strong and seasonal increase of trade receivables while the dynamics recorded by the other key components of working capital, a slight increase of trade payables and of inventories, offset one another. It is worth remembering that while cash collection remained strong and healthy during the entire semester, the activity of the period could not count on around 10 million euros due to some anticipated payments from customers at the end of 2021. In terms of CAPEX, the semester saw a cash flow from investments of 6.2 million euros while the cash payments for the principal portion of lease liabilities IFRS 16 equaled 4.7 million euros. Concluding with the group's net debt at the end of June, this stood at 105.6 million euros or 63.5 million euros pre-IFRS 16, slightly better than the 109.1 million euros recorded at the end of March and around 11 million higher than the 94 million euros recorded at the end of December last year. Very briefly on the key components of the net position, gross debt equaled 184.2 million euros, of which around 42.1 million was the IFRS 16 impact, 107.6 million the term loan facility guaranteed by SACE, and 34.5 million euros the term loan facility signed in 2018. We then closed the semester with a cash position of 78.7 million euros. I stop here and I hand over to Angelo for his further remarks on the business evolution and further actions.