Safilo Group S.p.A.

Good evening and welcome to the SAFILO first half 2023 results. 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 a relation to a multitude of factors. Today's participants are Angela Trocchia, Chief Executive Officer, Gerd Gressler, Chief Financial Officer, Barbara Ferrante, Director of Investor Relations, and Michele Melotti, Senior Director, Group Controlling. I will now pass the call over to Mr. Angela Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Thanks, thanks very much. Good evening, good evening everyone and thank you for attending today's conference call on the Sunfield Group's second quarter trading update and first half results. We entered the second quarter aware that in these three months of the year our sales could be facing our biggest headwinds. From the continuation of the weak business environment in North America heightened by poor weather to the expected significant drop of our revenue in the former Grand Vision chain in Europe. Notwithstanding these negative dynamics, our economic and more meaningfully, our financial performance remained solid and we also made further progress on some of the key strategic drivers of our medium-term plan. I think that it is important to highlight that while top line momentum was for us subdued in Q2, with sales down by 6.6% at constant exchange rate, at minus 5.9% at the organic level, with quite a number of headwinds and a still challenging comp pace, We delivered in the period another significant improvement of the performances, with the adjusted gross margin, which improved by 260 basis points to 59.1 as a percentage of sales, allowing us to absorb a large part of the sales-related operating leverage. and also of the higher investment we decide anyhow to undertake in order to support the group's development in the long run. In the quarter, despite our adjusted EBITDA margin softening by 110 basis points, we were able to deliver a positive cash generation of €9.2 million, also thanks to the good working capital management we will see later on. For us, these months were intense also for a number of important business developments. In the second quarter, in fact, we achieved important results in solidifying our brand portfolio for the long term. Thanks to the early renewal of two constants of our licensed business, Kate Spade and Tommy Hilfiger. Very, very important achievement. And the signing of the new 10-year agreement for the eyewear of Etro, a brand on the rise in the luxury space. And adding to the recent signing of successful brands in the premium luxury women's segment, such as Sports, Isabel Marant, and Carolina Herrera. In July, we were also pleased to renew some others of our partnerships, namely Juicy Couture, Fossil, and Havaianas. Let me now look at our business performance through the lenses of our portfolio. From a geographical standpoint, as said, North America remained our main hurdle in this first semester. as a number of headwinds impacted to a different degree the core channels in which we play and the majority of our business in the region. On the positive side, the underlying performance in Europe, excluding the GV business, remained satisfactory for us, given the still tough comparison base with the corresponding period of last year. and we recorded a very strong quarter in Asia, which rebounded mainly thanks to China reopening. We were also glad to see India and Middle East, which kept growing nicely. My brand, Carolina Herrera, was our best-performing brand, posting another quarter of growth, while Polaroid, David Beckham, and Hugo Boss performed better than the rest of the portfolio. In the third half, both Polaroid and Carrera were positive compared to the same period of last year, and meaningful results, in particular for Carrera, given it was a brand well-developed in the former GV chain. By channel, aside from our expected significant drop in the former GV chain, which in both periods negatively impacted growth by about 4%, Physical channels continue to outpace online and our F consumers in this post-COVID normalization period do appreciate the experience in the point of sale, while it was quite the opposite for our sport business, where the D2C continued to be a key positive driver. Overall, our online channels confer the 15% share of the group total sales. I stop here and I turn over to Geir for the economic and the financial highlights.

Thank you, Angelo, and good evening to all of you. Starting from our top line on the quarterly performance already provided by Angelo, I would just like to remind you that this period was still against tough comps, as Q2 last year was up almost 10% organically versus 2021. Q2 brought our first half net sales to 550 million euros, down 3.5% at constant exchange rates compared to the first half of 2022, while the organic performance was more stable at minus 1.4%, compared to last year when the organic business improved 12% versus 21%. Excluding Grand Vision, our second quarter was down 1.9%, while the semester was up around 2%. That said, let's see the specific topline performance by geographical area. In Q2, our total sales in Europe were down 3.1% at constant rates and 6% at the organic level, with a drop in GV impacting the performance by around 10 percentage points. As a quick reminder, this impact will become less significant, in particular in Q4, when last year's sales in GV had already strongly declined thus the comp space becomes easier our sales in europe excluding gv were up mid single digits in q2 quite a remarkable performance for us as this was achieved against the plus 20.7 percent recorded at the organic level in the corresponding period of last year looking at our underlying performance all our main product categories were positive also in the second quarter thanks to the progress of our B2B business in independent opticians, and another positive quarter for the travel retail channel, favored by the return of touristic flows. To the point made earlier by Angelo, revenues in the internet pure players channel were instead again soft. In H1, our reported sales in Europe were substantially in line with last year, plus 0.4% at constant rates, minus 0.3% at the organic level, and plus 10%, excluding GV, with Italy, Spain, and Eastern Europe our best performing markets, both in the quarter and in the semester. In North America, Q2 sales were down 15.3% at constant rates and 11.5% at the organic level. As already highlighted by Angelo, the U.S. market was affected by quite a number of combined headwinds. Certainly a continuation of the subdued wholesale environment we have been experiencing for a couple of quarters at the independent optician level and which did not improve into the second quarter. This challenge was heightened in the period by poor weather conditions holding back the start to the sun season and consequently orders and sales of sunglasses both in stores and in the online channels with blenders being mainly sun among the brands most affected. Looking then at our sport business, its performance continued to reflect the still demanding base period and a late start to the season also for bike products. Smith sales and sport shops improved in May and June, whereas its business continued to grow seamlessly in the direct-to-consumer channel. So clearly, in the last two quarters, we missed the sport business as a growth driver, something that we are quite confident to resume in the next quarters given the supportive sell-out results for Smith in stores, an easier come pace from the third quarter onwards, plus the B2C business, which keeps a very encouraging pace of growth as we continue to invest in its evolution, including quite recently the launch of Smith's own presence on Amazon. In H1, our sales in North America were down 11.3% at constant rates and 6.2% at the organic level. Moving to the emerging markets in Asia and Pacific, this was a quarter of strong growth. Net sales soared by 36% at constant rates and 38% at the organic level compared to Q2 last year when China was still closed. A significant rebound of the region was mainly driven by the market reopening, where revenues rose over 60% year on year, coupled also with the Hong Kong domestic market returning to normal. In these markets, Our key growth drivers were, in particular, ports, Hugo Boss, and we had a nice progress also on Polaroid, while Smith led the very positive quarterly performance of Australia. Thus, the first half in Asia-Pacific closed up 17% at constant rates and plus 17.8% organic. Finally, on the rest of the world, namely, IMEA and Latin America, sales were slightly down, 0.7% at constant rates, and flat at the organic level, a performance that we consider a bit of a normalization after many consecutive quarters of significant growth. More specifically, Brazil slightly decelerated compared to the same period of last year, while trends remained very positive, especially in India and the Middle Eastern markets, where we continued our development plans driven by strong local marketing and product activities. In H1, sales in the rest of the world were up 7.6% at constant rates and 7.9% at the organic level. Turning to our economic performance, commenting as usual on our adjusted results, I would like to point out that in this first semester, these adjusted figures exclude non-recurring costs for a total of 16.2 million euros at EBIT level, 12.7 million at the EBITDA level, and 5 million at the gross profit level. These were mainly booked in the second quarter in relation to the project for the disposal of the Longarona plant to third parties, which reached in June an advanced stage. The majority of these non-recurring costs related to Longarona is non-cash. In Q2, our industrial performance remained very solid, delivering an adjusted gross margin of 59.1%, from 56.5% in the same quarter last year, an improvement of 260 basis points, which was driven by lower inbound logistic expenses, lower obsolescence cost behind tight inventory management, and an overall positive price makes effect on sales. We closed the first semester with an adjusted gross margin of 58.8%, up 300 basis points compared to the 55.8 recorded last year, an improvement that surpassed our expectations for this time of the year. Moving down to P&L, the results we achieved at the gross profit and gross margin level allowed us to absorb not all but a good part of the sales-related operating deleverage and of the inflationary pressures on personnel costs we faced in Q2, in particular and as a consequence also in H1 where we also front loaded the majority of the investments in the projects for the group's digital transformation. In Q2, the incidence on sales of selling general and administrative increased mainly due to higher personnel costs and software as a service expenses increasing from 1.8 to 3 million euros. Our adjusted EBDA margin thus reached 9.5%, 110 basis points lower than Q2 last year. As a point of reference, in H1, personnel costs increased by 5.9% and those related to software as a service projects from 3.7 million to 6.3 million euros. Finally, H1 adjusted EBDA margin was 10.4%, 60 basis points lower than last year. Below the operating lines, we had two specific dynamics which reversed compared to last year. First of all, we had a negative delta of 17.3 million euros due to different dynamics on the put on call options on the non-controlling interests. Specifically, while last year we booked an income of 8.7 million, following mainly the increase of our stake in pre-variable, this year we booked a charge of an almost equal amount in relation to the extension of the second and third tranche of the put and call options in blenders, with the strategic rationale being to prolong the founders' engagements in the brand's future development. In the first semester, we then recorded higher net financial charges, mainly due to negative exchange rate differences compared to the positive difference of last year and to the increase in interest rates. All this brought our group's adjusted net result to 6.9 million euros from 33.7 million last year. Moving now to our financial performance, we were here glad to see that our operating results, along with the good work in capital management, resulted in a cash generation in a period which is typically of seasonal absorption. In H1, we generated a positive free cash flow of almost 10 million euros compared to the cash absorption of 14.5 million in H1 last year. We had approximately 1 million positive free cash in Q1, while around 9 million were recorded in Q2. Overall in the semester, our cash flow from operating activities amounted to a positive generation of 21.1 million euros, reflecting a more moderate cash absorption from working capital of 14.7 million euros, mainly driven by a quite meaningful decrease in inventories compared to the end of the year and a healthy cash collection in all the main geographical areas. The cash flow for investing activities remained instead stable at 6.2 million euros. This cash generation allowed us to close the month of June with the group's net debt standing at 103 million euros, 61.7 million euros pre-IFRS 16, confirming a sound financial leverage of 0.6 times. That was better than the position of 113.4 million euros reported at the end of December 2022 and the 105.6 million euros recorded at the end of June 2022. Finally, and as I'm sure you have all read the communication concerning my departure from SAFILO, I wanted to thank you all for your engagement during these last nine plus years worth of earnings calls, shareholder meetings, investor meetings and conferences and so on. I believe that this engagement has helped me and Sanfilo to focus on the relevant business drivers to start unlocking the creation of shareholder value. I'm very pleased with the announcement of Michele Melotti as the new group CFO. who brings with him a wealth of insight and experience in South Africa and beyond. And I know that you will have the opportunity to get to know him from September onwards. Thank you again, and I hand back to Angelo for his closing remarks. Thank you.