Safilo Group S.p.A.

good evening and welcome to the South below group third quarter in nine months 2023 trading update this call may contain forward-looking statements relating to future events and operating economic and financial results for the South below group such forecasts due to the 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 depending even significantly to those announced in relation to a multitude of factors. Today's participants are Mr. Angelo Trocchia, Chief Executive Officer, Mr. Michele Melotti, Chief Financial Officer, and Mrs. 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.

Thanks. Thanks very much. Good evening, everyone, and thank you for attending today's conference call on Saffilo Trading Update on the third quarter and nine months of the year. We exited the month of September with a continuation of most of the key dynamics which characterized the first part of the year. In the nine months, our net sales performance mainly reflected the soft trend in North America, particularly in our contemporary mid-price segments. Europe was solid as the region offset with the growth of its underlying business, the most part of the significant sales decline recorded in the former GB chains. And we recorded good growth also in our emerging markets. At the economic and financial level, the nine months delivered a sound improvement of the gross margin, which has continued to strengthen year on year in each single quarter, while our adjusted EBITDA margin continued to be impacted by the higher incidence of our continued investments. In fact, our execution plans did not stop because of the market uncertainties we are currently experiencing. and we continue to focus on the implementation of those projects and activities that we consider strategic enablers of our medium-term objectives. Very meaningful for us, these nine months were also a confirmation of our ability to generate positive cash flows, a goal that we have so far achieved thanks to the good management of the working capital. Looking more specifically at how our business performed in Quarter 3, and its key drivers, sales net of the Forex headwind, which materially worsened in the period, improved from the minus 6% recorded in quarter 2 to minus 3.9%. As mentioned during our previous call, the drop of the business in the former GV banner was less meaningful in this quarter compared to the previous one, but still relevant, accounting for the majority of our quarterly top-line declines. approximately 3%, and for the total nine-month contraction, which was thus slightly positive at the organic level, XGV. As a reminder, quarter four will be the quarter less affected by the GV impact as our decline in the customer became already quite significant starting from Q4 last year. Looking then at the key drivers of our underlying performance in the quarter, Europe was up low single digit compared to the same period last year, showing a deceleration from the strong growth trend that has been supporting our business in the region in the last five to six quarters. Overall, we expected this performance. Also consider that this year, the summer season was not particularly positive and that we were instead confronting a strong sun season last year. In quarter three, our business performance in North America was better than in quarter two, thanks to the sport business, which returned to grow after the normalization of H1. Sports means Smith. which grew in all its core channels. Carolina Herrera, David Beckham were instead our best performing brands in hour. Boss, Carrera and Polaroid were softer in the quarters, but all growing nicely ex-GV. While in the nine months performance, they were positive also including the drop in these banners. Our nine-month revenue stood at €785.1 million, down 3.6% at constant exchange rate. The organic performance, which we did not report in the third quarter, as the base period was no longer influenced by phase-out sales, but is still a relevant data point for the nine months, was down 2.3% at constant exchange rate. As said, excluding the business in the former GV chains, our 9-month underlying organic performance was positive low single digits compared to last year. Let me stop here and I leave it to Michele to go through the specific sales trend by geographical area and our economic and financial KPIs.

Thank you Angelo and good evening to all of you. Let's now see our specific sales trend by geographical area. In North America, Q3 sales delivered a quite significant improvement from the previous period, from minus 11.5% in Q2 to minus 4.9%, backed by the return to growth of our sport business. Smith was up double digits, a nice meeting performance which was supported by an easier con base with last year, despite a still challenging retail environment in the brand-specific business segment. Notably, Smith was back to growth in physical store while it continued to develop its direct-to-consumer channel that, at the end of the nine months, accounted for around 20% of the brand's total turnover. The eyewear market, on the other hand, remained soft, and as Angelo pointed out, this softness, in line with the previous quarter, was more marked in the contemporary segment where our portfolio is more skewed, with sunglasses being the product category more impacted. In the US, Carolina Herrera, Boss, Carrera, and David Beckham were our best performing brands in the quarter and in the nine months, all posting positive year-on-year growth. An autumn blenders, which despite the challenges of sun, recorded an improved trend in Q3, with the expectation now to deliver a significant year-on-year improvement in Q4, also thanks to the successful collaboration with Coach Prime launched toward the end of the quarter. Moving to Europe, our total sales in Q3 were down 6.1% at constant exchange rates, with the drop in sales in the former GB chains explaining entirely the decline. As already indicated by Angelo, our underlying performance in Europe was slightly positive, up around 1% compared to last year, a normalization from the previous growth trend that was more evident in markets such as Italy, France and Spain, which had more markedly rebounded over the last five to six quarters, also on the back of a very favorable season last year. As a reminder, Europe was up 14% in Q3 last year, so we are still reasoning against tough costs. By channel, on the other hand, also in Q3 our independent optician B2B business continued to outperform the rest of the channel, up double digits in the quarter. Q3 was weak in Germany, a market which remained affected by the negative performance of Internet Q player, while our growth was again very strong in the newest Eastern European market, in particular in Turkey. In the nine months, sales in Europe were up around 7% net of the former GV business. Emerging market and another positive quarter. In Asia-Pacific, sales recorded a more moderate upside coming from a very strong rebound in H1 and some different phasing of delivering between Q3 and Q4. In Q3, the business was up 2.3% at cost on currency, taking our nine-month progress to plus 11.2%. China and some of the other core markets of the region, including Australia, continued to register good progress, while by brand, our quarterly performance was mainly driven by Ports, Smith & Polaroid, the latter thanks to the effective launch in China of a dedicated collection and marketing plan. Finally, in our rest of the world, sales were up 5.9% at cost and rates, driven in particular by the positive performance of Carrera in India and in the Middle East. In the quarter, Latin America was was more muted, with Mexico continuing to record good growth but Brazil softening, while the region was up mid-single digit in the nine months. In the nine months, the total rest of the world grew by 7.1% at constant exchange rates, with its share of total revenue reaching a meaningful 10%. Turning now to our economic performance, commenting as usual our adjusted results, I would like to point out that in the third quarter we incurred some additional external costs mainly related to the disposal of the Longarone plant, still ongoing at the end of September. Those equal €3.1 million at the gross profit level and €4.7 million at the EBITDA level, bringing the total nine months one-off respectively to €8.2 and €17.4 million. That said, in Q3, our industrial performance remained very solid also on a reported basis, with the gross margin improving by 250 basis points to 56.3%, while delivering almost 400 basis points on an adjusted basis to 57.7%. Key drivers of this strong upside were lower inbound logistic costs and efficiency in procurement, which accounted for more than half of the improvement, while the rest came from a positive price-mix effect mainly related to the continued effective pricing action we executed in the last quarters. Overall, such quarterly progress allows us to consolidate our nine-month gross margin at 58.5%, 340 basis points higher than the 55.1% gross margin achieved in the last nine months of the year. At the operating level, our Q3 performance was again impacted by a negative operating leverage, which was internally influenced by high personnel costs due to the ongoing inflationary pressure and the continuation of our investment in the project for the group digital transformation, plus marketing activities that we intentionally implemented to continue to develop in the medium term our own brands. In Q3, our adjusted BDA margin stood at 7.7%, 100 basis points, lower than Q3 last year, while our nine-month adjusted BDA margin reached 9.6%, down 70 basis points compared to last year. Concluding with our financial performance, in the third quarter, we had a positive free cash flow of roughly 12 million euros before the payment of 5.9 million euros we had in July to exercise the first option on an addition of 10% of blended non-controlling interest. Such positive generation took our 9-month free cash flow to €21.7 million before the option payment compared to an absorption of €17.8 million in the 9-month of 2022. In the quarter, our cash flow from operating activities improved thanks to a cash generation at the working capital level. As in the first part of the year, the period recorded a decrease in inventories, and unhealthy cash collection in all our main geographical areas. At the end of September, our group net debt decreased to 96 million euro, 55.5 pre-FRS16, corresponding to a financial average of 0.6 times. Thanks again, and I hand back to Angelo for his closing remarks. Thanks, Michele.

I would like to conclude this presentation by highlighting the business updates announced in this third quarter. In these nine months, in fact, while we continue to invest and grow with other home brands, representing now approximately 43% of the business, we also continue to consolidate and reinforce our licensed brands in order to secure our most important partnership and build new opportunities in specific areas of our portfolio. After having renewed Kate Spade and Tommy Hilfiger in June and signed Atro in the same month, in September we announced a new partnership with Stuart Weisman, an iconic brand in the women's global luxury footwear, which enters into eyewear for the very first time. This represents for us an excellent addition to our portfolio in the women's luxury eyewear segment and an additional opportunity to strengthen our successful collaboration with Tapestry. The brand first-hour collection, both sun and optical, will be presented in North America next year for the fall-winter season. In September, we also announced the launch of the new Carrera smart glasses with Alexa, blending our Italian design with Alexa technology into two iconic frames. We are very proud to collaborate with Amazon in this innovative project. This new generation of smart glasses allows us to put an important first step into the future with an innovative approach. Finally, as communicated on October 31st, we finalized the transfer of the two business units related to the Longarone plant to Telios and Innovatec. We worked with determination to reach this agreement which has hoped will guarantee the full employment of all the workers, allowing for the preservation of the sector's existing know-how. With this, I conclude the presentation and give back the line to you for the Q&A.

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 1 on their touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. We will pause for a moment while the participants join the queue. The first question is from Oriana Cardani with Intesa San Paolo. Please go ahead.

Yes, good evening. Thank you for taking my questions. The first one is about the price-mix effect for next year. What kind of impact do you expect in 2024? My second question is on current trade. So how did October go in each region? And finally, I have a question on the outlook for this end of the year. do you still expect an improvement in the trend in the second part of this year in terms of sales trend and adjusted bid margin trend compared to what you recorded in the first half of this year?

Thank you. Thank you, Rihanna.

I start with the first question on the price mix. Of course, I mean, as we've been discussing, price mix has been so far very supportive, has been one of the key drivers of our gross margin build-up. Of course, this has been done implementing various pricing actions to counter inflationary pressure in the last quarter. Of course, we don't comment specifically on next year, but we, of course, plan to continue to be active on this side and to see selective price increase along the year, always looking at specific brands and specific markets and always comparing ourselves to competition.

Okay, I take the other two. October is quite a small month for us and its overall performance, I would say, continues to be impacted by the softness of our wholesale business in North America. while Europe XGV still slightly positive and Asia growing. Our expectation looking to November and December is to recover a positive performance in North America and to keep building on the positive trend online with Blenders and Smith. Going on the second part of your question is, Our position is that for the second half, we see the opportunity to end up with a better year-on-year top and bottom line performance. We'll, as I said, we'll rest in particular on North America. for better performance in November and December. And especially November is going to be crucial to understand the effect of the D2C both for blenders and for Smith.

Just to complement this on the last point, Angelo, of course, November and December, to recall, last year has been, I would say, pretty soft as we already registered a pretty sizable slowing demand environment, and that's why we should be looking to an improving trend between November and December in North America.

Okay, thank you very much.

The next question is from Cedric Rossi with Brian Garnier. Please go ahead.

Yes, good evening, everyone. I have three questions. So the first one is coming back on the outlook. Specifically, could you give us more color on the mood regarding the U.S. wholesale, i.e., department stores and independent opticians with regard to inventory levels and what they are saying about the consumer demand for next year? My second question is, could you elaborate a little bit more on the Carrera partnership with Amazon and the EcoFrames collections? What kind of sales impact are you expecting? Is it really a matter of increasing sales or more to increase the visibility of Carrera in the U.S.? And my third question is regarding the margin trajectory for next year. I guess it's too early to give detailed guidance. But could we expect maybe a more moderate improvement in the growth margin and probably a higher contribution from operating leverage for next year? Thank you.

Okay. So I will start from the question on Carrera. I mean, on this topic, I'd like to be – thanks very much for the question because you allow me to clarify. I think what is important out of this is that Amazon has choose Safilo to launch this product. What I mean by that is because this product is putting together the technology that is owned by Amazon with the Italian design. So this is for me a very, very important step for Safilo because again, someone like Amazon has decided to work with us. Is this going to change? the net sales or is going to revolutionize our net sales in the next two years? No. Let's be very clear. But it's very important because I believe that on the five, six years horizon, the eyewear will be something different from what it is today. So it's very important that Safilo with Carrera get on the train on this new business model that it will come. In the short run, it's not a game changer in terms of that sale, but obviously it's helping Safilo as an image and it's helping Carrera because Carrera has been chosen and obviously this collaboration will reinforce the brand. With reference to the wholesale in North America, today what is happening in North America, we see still a different trend between what is the, looking to the wholesale, mainly on the trios, we still see a different trend between what is luxury and what we call contemporary. Just to call, we look, we talk about contemporary in our world, it's a sort of meat price. So we had the first part of the year which the luxury was growing very, very strong, and now it's slowing down, and we see a slightly positive number on the contemporary side. Still, the wholesale mille de trios in North America remains a little bit nervous. So, I mean, they really try to work. We see, for example, that we have even a higher number of orders, but the size of orders are by far smaller than before. What I mean by that is that they are very, very conscious on the cash. So, I will summarize that still the trios, or in general, the wholesale in North America is quite prudent in this moment of the year.

On the margin question for 2024, of course it's still too early to start talking about next year. We will definitely have better understanding on the development of the macro contest in our reference market in the coming months and the exit speed of this year, but for sure we can anticipate some of the tailwind we will see on our margin next year. On one side, the sale of Longarone should, as we already discussed, imply an improvement in the gross margin for next year. And then on the other side, we will start to see normalizing some of the investment that we have been doing this year, especially on the IT digital front, while on the other side, we will continue to invest in marketing.

Okay, thank you.

I'd just like to build on this. I think that this year we took the decision to keep investing on the digital transformation that this company is doing, because if we like to deliver the strategic plan, we need to do that. Obviously, next year this level of investment will reduce compared to the peak of this year, and this will always help us at OPEC level.

Okay, thank you.

The next question is from Domenico Gilotti with Equita. Please go ahead.

Good afternoon. A few questions. First, a follow-up on the current trading, in particular on the European market. So if I understood properly, you are seeing the flattish XGV continuing into the Q4, if you can give us any color. And if I, well, back on the North America, I understood that you are seeing a D2C quite good, and then depending clearly on the critical month of November, while some improvements anyway in wholesale, also thanks to EasyCombs, just to double check these comments. Then I have a question on the inventory level. I wonder what is the level of inventory, not to say the precise number, but how are you approaching in Q4? And if you add, how did you manage the obsolescent cost during the third quarter? And last topic on the transfer of Longarone. Is it correct to say that all the calls now have been booked in your P&L, and can you give us the sense of what is the cash impact that we are still seeing in the next quarters?

Thanks, Domenico.

Starting from Europe, of course, we are coming from a very strong H1, as we already discussed many times. Q3 is We have started seeing Q3 normalization from a very strong base last year. For Q4, we expect to continue to see XGV, a slightly positive Europe. Of course, as you already commented, GV in Q4 will be a bit less heavy for us, and therefore the all-in business will be moderately negative in the total Q4. On North America, I repeat what I said.

As I said, October is a small month and we see that the trend has been comparable to what we saw in the month before. So the wholesale, especially in the contemporary, remains not exciting. So we see the same trend. We have not seen any changing trend compared to the previous month, but said that we expect a positive year to go in North America for two reasons. for an easy comparison versus last year, and for the positive effect that we expect from the G2C, both Smith and Blenders. But, to be very clear, only November is when we play the cards on the D2C. Today, both brands are in a good position. I mean, the D2C of Smith, honestly, is always growing in a very good way. Blenders is picking up, thanks to Red Bull and thanks to Coach Prime. But, obviously, the truth will be seen in November. I don't know if I've answered to your question. Yes.

Absolutely.

So then moving to inventory, I mean, in Q3, we have continued to see some positive reduction, while on the observance side, I mean, we already reached quite a good level last year, and so we don't see this anymore as a tailwind, and the same for Q4. For inventory Q4, again, we don't expect major movement. We will have... some positive effect from the winter business that of course we are currently delivering for Smith and partially offset by of course the increase on inventory for the startup of the next year's season, the January season. Moving to Longarone, so Longarone we have been posting in Q3 of course some no recurring costs, roughly 4 million euros, mostly related to to the phase-out and inefficiency in the Longarone plant, which in this period stood still, while we of course continue to expense the related wages and plant costs. As the closing of the transfer occurs at the end of October, in Q3 we will still incur some restructuring charges, I mean minor, but still something also in Q4. From a cash standpoint, the net impact of the deal is around $5 million cash absorption, and this would be recognized at closing and therefore during Q4.

If I may follow up with another question, tough question, but any interest for, so what is your position on Marcolini? So we read that he's up for sale potentially. Are you interested in the asset? Are you discussing?

I mean, it's an asset that we all read on the newspaper. I mean, obviously, it's an asset which has some value. We will see in the next months what the developments are going to be, but not more than that.

I understand. Thank you.

The next question is from Adam Crocker with Logbook Investments. Please go ahead.

Hi. My question was around the Coach Prime partnership. It's kind of probably unexpected success. Can you just frame the potential size and, more importantly, what things that you can do to drive Blender's brand awareness beyond just the short-term phenomenon? And also, how long does that partnership continue for? That was all I had.

Okay, so first of all, I mean, to be transparent, we have been all surprised about how big has been the fact. But not only, to be honest, in terms of net sales, but more in terms, as you were correctly referring, brand awareness, because we saw a very positive effect in the overall blenders business. So I think that the intuition was to, independent from Coach Prime, to target the world of football college. That was the initial intuition. Obviously with Coach Prime, Coach Prime has been acting like an enabler of this huge phenomenon. I don't like to get too much into detail on the kind of agreement, but it's not a one goal. So there are discussions going on with them to really understand how we can make this phenomena even bigger and how we can explore it. So I think there is a very good relationship with them. We are in contact. But they were surprised, we were surprised, we are working together now to really understand how much we can build out of that. So I think that it's an open discussion, but sure it's not going to be one show and one step thing. But in general, let me say, independent from Coach Prime, Coach Prime has been the beginning laborer of the intuition to change. enlarge the customer base of Blender tackling the world of football and the world of football into the college. So that is going to be a consumer arena in which we will keep playing in the future also. On top of the Red Bull, which is also another good element, which is helping blenders. With all that the Formula One is becoming quite an attractor of people in Austin, there were 400,000 people attending to the Formula One race. There is a lot of work going on with blenders, between blenders and Red Bull. So let me say two strategic choices. One is Formula One, keeping working on Red Bull, and by sure, keeping enlarging the relationship with Coach Prime and, in general, football college.

Okay, and so between both of those, like how – How have you been able to, is it just by osmosis kind of thing that people also become aware of the Blenders brand or are there particular plans in place to, you know, now that people have been introduced to it through Red Bull and Coach Prime to also let them know what else the company offers and stands for?

Absolutely. I think the two activities have been activating a new customer base for blenders. So the brand awareness of blenders has been enlarged in a very fast way and we see a low effect. because we are not only selling the Koch Prime blender eyewear, we are selling more on the overall blender. So that is exactly the idea. So we see in the numbers a very, very positive effect on enlarging the consumer base and having a low effect on the overall blenders portfolio.

Okay, thank you.

The next question is a follow-up from Domenico Ghilotti with Equita. Please go ahead.

My question, you were referring to wage inflation as a reason for some headwinds on the cost side. What is the level of wage inflation? Do you see wage inflation continuing into 2024 or do you see moderation or really fading away?

Thank you, Domenico. Now, of course, wage inflation is one of the key headwinds of this year. I mean, it's been impacted roughly both in the quarter and also in the year-to-date, roughly 100 basis points for us. Of course, more marked in the North American market than in the rest of the world. We definitely expect next year this impact to normalize and to ease a bit. Of course, we'll still be there, but we do expect at least this impact, I mean, at least to be reduced by 30-40%, something like that.

Okay, thank you.

Gentlemen, there are no more questions registered at this time. Mr. Trocchio, I hand the conference back to you for any closing remarks.

So, thanks very much. Thanks for having been with us and enjoy the rest of the evening. Thank you very much. Bye-bye.