Safilo Group S.p.A.

Good evening and welcome to the Safilo Group Q1 2023 Trading Update. This call may contain forward-looking statements relating to future events and operating economic and financial results for the 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, 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.

Hi, thanks very much. Good evening, everyone, and thank you for attending today's conference call on the Safilo Group's first quarter 2023 trading update. I will give you a brief introduction on the drivers that characterize the period, leaving to gear the specific discussion on the key sales, economic, and financial performance indicators, concluding then our presentation with a Q&A session. During our last Capital Market Day in March, I think we discussed about our stance on the current year, given some macro challenges and our specific headwinds. I must say that the first quarter of 2023 ended broadly in line with our expectations for the beginning of the year, with the month of March, which confirmed the trends already seen in January and in February. mostly reflected the continuation of some of the main business drivers that had characterized the second half of last year. Our home brand and our core license registered again a sound progress in the majority of our emerging countries and, above all, in Europe, while the business environment remained soft in the United States. On the profit side, we are pleased we continue our journey to achieve and improve the gross margin while we kept investing in our home brand and in the digital transformation of the company. I look at quarter one as a solid and resilient quarter, notwithstanding the expected headwinds, and I would like to look at our quarterly performance through the lens of our business portfolio. By brand, we were particularly satisfied with Carrera and Polaroid, which continued to post double-digit growth, broad-braced across product categories and markets, as much as with the solid momentum of our core license, from the good progress of Hugo Boss and Tommy Hilfiger to the double-digit expansion delivered by Carolina Herrera and David Beckham. The quarter was instead overall soft for Smith, mainly due to a very high comps base, while Blender was flattish behind bad weather conditions in California. Looking at our business from a geographical standpoint, and more specifically looking at our two main regions, also in quarter one Europe was strong and our key growth area with the various markets of the area which continue to grow nicely thanks to solid internal consumption and positive touristic flow. And growing Europe continues to be sided by strong growth trends in all the emerging markets, but China, where order intake resumed more sizably starting from the month of April. On the other hand, in the United States, we continue to see a discrepancy between more positive sell-out data and a more prudent behavior by customers, leading to still subdued wholesale demand and order intake. By channel, in the quarter, business with physical eyewear customers were largely positive and outpacing online due to the softer IPP sales in Europe. As expected, the business generated through the Grand Vision store network dropped significantly as its integration into Essilux Loxotica Business Arena progressed. I stop here and I hand over to Gher for the specific economic and financial outline of the period.

Thank you Angelo and good evening to all of you. Starting from our top line, Revenues in the first quarter reached 287.2 million euros, up 1.6% at current exchange rates and basically flat at minus 0.4% at constant exchange rates compared to Q1 2022. At the organic level, sales instead grew by plus 3.2% at constant exchange rates, which compares to what was last year our strongest quarter. having posted an organic growth of 14.3% versus Q1 of 2021. Let's then look at the drivers of our top-line performance by geography. And I would start from our key positive driver, Europe, where our business grew by 4% at constant exchange rates compared to Q1 last year, while organic sales increased by 5.5%. Angelo has already referred to Carrera and Polaroid's ongoing strengths, and this was particularly evident in Europe, where the two brands grew respectively by approximately 20% and 10%, driven by their core markets, namely Italy and Spain, but expanding nicely also in Eastern Europe. These were indeed our overall top-performing countries in Europe, together with France. And in all, sales growth was pretty much broad-based across channels. with chains and independent opticians particularly strong. We are glad of these performances because they come alongside the continued expansion of our B2B digital channel in line with our medium-term strategy for a strong omnichannel business model. As said, the general strength of the European business allowed us to more than offset the expected decrease of the revenue generated through Grand Vision, which dropped by approximately 70%. Therefore, our mid-single-digit growth in Europe was actually a sound double-digit, excluding Grand Vision, thanks to a strong, improved relationship with the thousands of customers outside the Essilor Lux Optica galaxy. In North America, Q1 sales remained soft, down 7.2% at constant exchange rates compared to last year, while the organic business was more stable, down 0.9% at constant exchange rates. As a reminder, the organic performance is stripping out the Givenchy phase-out sales still recorded in the base period. In the quarter, what we continue to observe and experience in the U.S. wholesale eyewear market was, on one side, healthy and ongoing demand for premium and high-end products, a trend from which also a part of our portfolio continued to benefit with Hugo Boss's Carolina Herrera, Carrera, and David Beckham delivering good growth. On the other, a still prudent propensity to purchase in the entry and mid-tier price points, which eventually resulted in a still soft order intake from our wholesale clients. What we then need to consider when looking at North America is the performance of sports shops and direct-to-consumer. In the former, Smith's business was soft in the quarter, as in H1 it is running against a tough comparison base, especially for bike products. It is indeed a well-known topic in the marketplace, the cautious start to the bike season, with bike retailers in US and Europe having to deal with higher inventory levels than they would have liked. Direct-to-consumer was instead low single-digit positive in the US, driven indeed by Smith, which was very positive in the channel, while blenders was instead slightly negative. This is the lowest season quarter for blenders, which was on top influenced, as Angelo said, by poor weather conditions in several key states, such as the Californian coast. Moving to the emerging markets, our net sales in the rest of the world marked another important growth of plus 16.6% at constant exchange rates compared to Q1 2022. The key driver of our good performance in the area were once again Brazil and above all Mexico, where Carrera Polaroid and all our core licenses recorded double-digit increases, both thanks to the greater productivity of the brands in existing stores and to the expansion of distribution, so new customers for us to serve. Sales in India and the Middle East also recorded a positive quarter as we continued to invest on focused events, to engage with the main local wholesale partners as well as on the development of online channels through internet pure players. Finally, in Asia and Pacific, net sales were down slightly by 2.6% at constant exchange rates, mainly due to still some prudence of wholesale customers in the Chinese market. Also considering that this year, the Shanghai Optical Fair, the most important eyewear sector fair in Asia, took place in April. In fact, we have seen a trend change starting from this second quarter. In Q1, our sales in Asia instead grew in the travel retail channels, thanks to the reopenings in China and the gradual recovery of tourist flows, and in Australia, where Smith kept expanding. Moving now to our economic KPIs. In Q1, we confirmed a solid and improving gross profit, up 7.9%, and a margin which reached 58.4% of sales, up 340 basis points compared to the 55% recorded last year. Yet again, our industrial performance was driven by a positive price mix effect, reflecting in particular our richer product offer and the pricing policies we successfully implemented last year, along with a more favorable brand mix driven by the absence of phase-out sales and a less abundant quarter for sport. which at the gross margin level is less secretive than eyewear. The other positive driver was then the easing of transport and energy costs, which in the same period of last year were still particularly high. As highlighted by Angelo in Q1, we continued to invest in the development of our home brands through very focused and targeted marketing and advertising activities, and we kept progressing on our digital transformation roadmap. through investments in software as a service. On the other hand, the period also reflected higher labor costs due to the inflationary pressures and some new capabilities and personnel. Selling general and administrative costs increased by approximately 9% compared to the corresponding period of 2022, with marketing and advertising expenses up approximately 14%, personnel costs by almost 14%, and software-as-a-service costs by around 1.4 million euros. Adjusted EBITDA in Q1 equaled 32.4 million euros and a margin on sales of 11.3%, up 1.3% in absolute terms and bang in line with last year margin-wise. As usual, we conclude our trading update with the group's net debt at the end of March, standing at 112.4 million euros, or 70.2 million euros pre-IFRS 16, substantially in line with the position recorded at the end of December last year. And we were glad to close the period with a slightly positive free cash flow, despite the normal seasonality of our business. I stop here, and I hand over to Angelo.

Thanks, Gerd. This concludes our presentation. We thank you all for participating into the call, and we are now ready to take your questions.

Thank you, sir. Excuse me, this is the conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. We will pause momentarily while participants join the queue. The first question is from Oriana Cardani of Intesa San Paolo.

Yes, good evening. Thank you for taking my questions. The first one is on current trade. So can you comment on the trend in April and which kind of progression do you see across geographies? The second question is on sun season. So what is your general feeling on this spring-summer season? The third question is about Longarone. So can you give an update on the ongoing discussions with trade unions? So when do you think that should be a clearer picture? And finally, on the evolution of net debt, what kind of trend do you expect for the coming quarters? Thank you.

Okay. I start, I let Angelo build. I think on the On the current trading in April, let me say that so far as we enter Q2, we see still quite similar conditions to Q1 with regards to our two main regions. So that means in North America, we have not yet seen a pickup. And in Europe, honestly speaking, despite the strong comp space still of last year, It continues to track very positively. We need to be clear that as I think expected and as we anticipated, the business with Grand Vision is phasing out. Grand Vision had the biggest chunk of business in the second quarter of last year. Then in the second half of last year, we had already quite a significant reduction. So I have to say Europe is dealing very well. with the rebalancing of the customer portfolio. And then I think on the emerging market side, as we were already commenting, we are seeing now some rebound in China, as the re-openings are now also affecting the wholesale part of the business, but you know clearly the incidence on sales there. is not so high. And then in the rest of the emerging markets, India, Middle East, Africa, and Latin America, we also continue to see quite a good progress.

Thanks, Gerd. Answering to your second and third question, some season, currently the overall quarter was very positive on some, probably with the different dynamic between Europe and North America where the comparison was tough versus Latin America and the rest of the world. Obviously, the sun ceases will start now, so we should start seeing the effect now as in Europe, north of Europe, they didn't have a great weather so far, so we should see the sun picking up even more in Europe in the next month. With reference with Longarone, I think we are discussing with the union, we are discussing with the institution, I think that Shortly, let me say, we will be in a position to update the market on the next concrete steps.

And then the last question on the net financial position or the free cash flow. Let me say that we were quite pleased to have started the year with a positive free cash flow, which is, let me say, seasonally not typical for us. And if we look a little bit at the drivers other than the operational flows from the EBDA, we have a network and capital dynamic which was characterized by quite a nice reduction in inventory as we were also expecting because we had clearly increased inventory at the end of last year in anticipation of the very early Chinese New Year in January. So that inventory has gone out as we start shipping, obviously, the spring-summer collections from March. And then we have an absorption on the side of the receivables, but this is seasonally quite normal because the big month of invoicing, let me say, starts from March. So I think on the working capital side, it was a decent start to the year. As usual, Q2 is seasonally always still an absorbing quarter, but I think with the start that we have seen in our ambition for the full year to generate a positive free cash flow that we have articulated previously, I think the year-to-date trends, they put us quite on track versus that objective.

Okay, thank you.

The next question is from Andrea Bonfa of Banca Acros.

Hello, good afternoon to everybody. I got a very simple question related to the Europe performance and if it's possible to know the absolute impact of the decline in sales to Grand Vison. So, in other words, what would that mean, the European performance net of that impact, if it's possible.

Thank you. Yes, so we had a reduction of Grand Vision in the first quarter of approximately 70%. So the Grand Vision business of last year that we had in Q1, when things were, let me say, still more normal, that business has gone down by 70%. While if you exclude Grand Vision, all the rest of Europe has actually grown significantly. at a strong double-digit pace as we are rebalancing some of those sales and see very good demand for our collections. And then the net of the two is the mid-single digits that I was commenting on.

And if I can build only, depending from GV, which somehow is the past, I think the results in Europe are honestly very encouraging and above our expectations. because first is broadly in almost all the countries in Europe and is focused on our main brands, which means that what we are doing in Europe is the right path and is also telling us that we've been able to to open new stronger relationships from one side with the single opticians, but also on the other side with other European chains.

Thank you very much.

The next question is from Cedric Rossi of Brian Gagné.

Yes, good evening everyone. I have two questions. The first one is coming back to the U.S. market. So you mentioned softer trends in the independent optician channel. So I was just wondering why trends are softer there. And do you expect the rollout of the U and Philo platform to maybe revitalize a little bit the momentum going forward? And the second question is, so Gert, if I understood correctly, you were mentioning personal cost up 14% in Q1. What kind of labor inflation you are budgeting for this year? Thank you.

Okay, I think on the United States, maybe I'll let Angelo comment on the trends in the channel, but with regards to UN SAFILO, This is on our roadmap for next year. So this year, we are upgrading all the legacy ERP systems that we have there, and we are well on track. So the UN SAFIDO will then be what we will do next exactly in line with our strategy. On the increase of the overheads, let me say that roughly half of that increase is driven by new head counts that we are putting especially onto our brands in the markets and on the digital side. And another half is coming from inflationary pressures. So, I mean, we are seeing somewhere in the range of 3% to 4% increase, but I think it's something that if you look at the progress of the gross margin where precisely the pricing interventions that we have been doing last year and that we will selectively obviously continue to look at also this year, they are constructed to set that kind of inflation and we are able to actually much more than offset that as we were saying.

Yeah, on terms of North American terms, I mean first of all I think just to build on the rollout of UN South Europe needs some time to explode. I mean, our learning in Europe is that you need to have time because it's really a sort of different way how to run the business. So anyhow, the effect will be starting from the second half of 2024. With reference to the channel, I think in this moment, In North America, we see two different trends. If I look to, you know, we have some sellout data and the sellout is not so bad. So I think we see more a problem or a sort of the customer are more reluctant to buy product. And this is reflected to the fact that we see worse performance in the retail and in the chain more than in the single optician. So in other words, what I'm saying, it looks for us from the number that we have, it's more a customer issue than a consumer issue. I'm not saying that the consumer is relaxed, but it's more the customer which are a little bit nervous on the cash. So we see more negative numbers in the retail, in the chain, more than in optician. And the second paradox is that the luxury, which obviously sounds really as a contradiction, The luxury is the part of the portfolio which goes better than the rest. And we see that the part of our brands which are close to the luxury part of the market are the brands which are performing better. So in this moment, there is a little bit of a strange picture. So more customers than consumers, more retail and chain than opticians, and more mid-low part of the market versus the luxury. I would summarize like this the picture that we see in North America.

Okay, very good. Thank you, Angelo and Gail.

Thanks.

The next question is from Domenico Ghilotti of Equita.

Good afternoon. I have a few questions. The first is related to your brands, in particular blenders and Smiths. You were mentioning the bad weather condition in March. I frankly speaking don't know if April was more normal in terms of weather conditions. In general, what is your expectation for blenders for this year, considering also the price position of the brand? And on Smith, if you see, clearly we are seeing really some tough comps on some segments. If you see some normalization already happening, or if you have to wait for a few quarters to get the full normalization. And the second question is on the gross margin and operating cost. So it was quite a significant improvement that you had at gross profit level. And on the other hand, it's a more muted DBDA. So I'm trying to understand if you see this kind of trend continuing all over 2023 or more concentrated in the first part? And if you can keep up the gross margin expansion that you have been able to deliver in Q1.

I start answering, then I leave to Ger. I start answering from your last question, just for my bit. I think here the point is we try to be consistent with what we have been said. So let me say it was easy for us, it could have been easier for us to starting from a higher gross profit to deliver a higher BTDA. But the decision has been let's keep investing behind our brand. So the difference in terms of marketing investment which if I remember correctly, roughly 140 bps, the effect of the marketing, has been all concentrated behind our brand. So that has been on our home brand. This has been a decision. Because if you remember, as what we were saying in the presentation of the plan, we will keep investing. We need to keep investing. So in quarter one, we took a sort of conscious decision to keep investing. The level of investment in quarter one will go down along the rest of the year. But we felt that we've done a very interesting and new activation on Carrera with the sponsor, the Coachella. We've been investing with Smith behind our D2C. has been growing. And blenders, we need to keep nurturing the brand. So it's been really a conscious decision. Obviously, the level of investment will be easing down for the rest of the year. So then for the rest of the question, I think, again, we'll answer. Going to blenders and Smith. I mean, let's start from Smith. Obviously, Smith comes from a huge comparison of the previous year. There are two effects. One is bike. I think that you can read everywhere that obviously this year is is a little bit of a soft period for the bike. To be honest, we need also to wait a little bit because there's been a cold season in North America with bad weather. So, obviously, we had the positive effect on the snow, but the bike season hasn't started yet. So, to be honest, to really understand how the bike is going to perform this year, we need to wait at least a couple of months. So, by sure, there is one element, comparison, strong comparison. effect of the bike and what I said before on North America is also true for Smith, where the customers are really, really reluctant to stock more. But Smith is a brand that it will keep growing. It will keep growing this year as it is being grown. Obviously, it cannot be at the same level of rate as of the last two years, but Smith will keep growing this year by the end of the year. Blender is a mixture of things. Weather is not an excuse. I mean, California this year looks, I don't know, it's been the most raining season period of the time, because to be honest, till we start January, February very well, and then March has not been so good. But I think the fundamentals of blenders are there, so I think blenders should keep growing, softer than Smith, but blenders should be growing this year. Obviously, we need to wait a little bit of the season. I mean, Blenders is a brand of sun, so we need to wait now the next two, three months because, again, Blenders remains a sun brand. But I don't see any reason. The fundamentals are right. The fundamentals are there. And, again, it's not going to change the picture of this year, but you know that we are sponsoring Red Bull. We are just also using all the yellow effect of the Red Bull Formula 1 will be something. It's not going to change the numbers and the P&L of this year, but it will be helping the brand equity of blenders outside North America.

And maybe to close on the gross margin, so indeed I think the 340 BIPs, that was an excellent start to the year. This was exactly... our ambition also in the strategic plan, that is where we see the source of additional EBITDA margin eventually to come to us from now until 2027. We are making intentional and discretionary investments exactly into marketing and into digital just as we had in mind in our plan. Along with the seasonality of the year, we should expect Q1 and Q2 to have a higher level of gross margin. And then in Q3 and Q4, we should have a lower level of gross margin because that is also the pacing of our sales. The same is a bit with marketing costs and with the costs of the digital, so everything which is software as a service, they are going to be higher in H1 and then they're going to normalize in H2. And I think this dynamic will allow us, as we have also been saying in the capital markets today, to come up with an improvement on our marginality on the full year basis, even if the top line would be rather flattish.

Okay, and maybe a follow-up on a topic that you discussed before that was at the inventory level and your working capital. Typically, Q1 is a quarter in which you build up inventories. I wonder, how are you managing the situation in which you see maybe also your clients more reluctant to stock? How are you adjusting the purchases so the inventory builds up?

Let's say that, first of all, the logistical situation has improved quite dramatically. You may remember last year With all the lockdown situations still in China, we have periods of delays all the time, especially on sport. Nowadays, with the whole reopening since the beginning of the year, there's also a lot more flights. There's a lot more sea routes. So the whole logistical situation has improved, which allows us to also operate with more reasonable lead times because we have more assurance that we can get the product on time when we need it. And I think that with regards to North America, we were obviously monitoring this situation, which, let me say, the softness of North America didn't start yesterday. It's already something we saw in Q4. So we have been already more prudent with our inventory plans there, while in Europe, as we have seen, the stock is rotating quite nicely. So we feel that we are we are able to manage the supply chain in a way that is commensurate with the sales that we're going to see.

Okay. Thank you.

As a reminder, please press star and 1 for questions. For any further questions, please press star and 1 on your touchtone telephone. Gentlemen, there are no questions registered at this time.

I'm just going to read a question coming from the website. Adam Crocker is asking for some early insight on our new blender store in Santa Monica and other upcoming locations.

The shop has just been opened this season. It hasn't started. First feedback of Santa Monica, very, very good. For this year, we have now the right number because we have San Diego, we have Encinitas, we have Austin, we have Houston, we have Santa Monica, and And we will open another one and that's it for this year. We need to consolidate and then we are preparing the plan for the year to come. But now let's consolidate what we have, let's take the learning and we will walk before running on the retail.

Okay, so thanks very much.

Thanks for everyone, and have a nice evening. Thanks very much.