Safilo Group S.p.A.

Good afternoon and welcome to SAFILO Group's full year 2023 financial results. This call may contain forward-looking statements related to future events and operating, economic, and financial results for the SAFILO Group. Such forecasts, due to their nature, imply a component of risks 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 Mr. Angela Trocchia, Chief Executive Officer, Mr. Michele Melotti, Chief Financial Officer, and Ms. Barbara Ferrante, Director of Investor Relations. I will now pass the call over to Mr. Angela Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.

Hi, thanks. Thanks very much. Good evening, everyone, and thank you for attending today's conference call on the South Philadelphia full year results. In a complex year like 2023, in which a pretty tense and unstable geopolitical and macroeconomic environment added to our direct challenges, it was particularly important to us to achieve a level of revenue and adjusted operating margin very close to the strong performance we recorded in 2022. More than that, the passion and constant dedication of Safilo people has allowed us to further strengthen our group on all its main strategic pillars, from our brand portfolio to our supply chain to sustainability of the business model in the long term. During the year, we faced the undisputed challenge of our main market, North America, which after a weak end of 2022, continued to be affected by the prudent order attitude of customers in our main distribution channels, plus an unfurlable sun season which clearly did not help. Above all, we had to manage the expected decline of our business in the former Grand Vision chain, a significant headwind for our European market, which we countered with great determination by strengthening existing commercial relationships, but also by establishing new partnerships. It was an incredible job. by our teams, which allow us to close the year with the European market suspension in line with an extraordinary year like 2022, when Europe grew 12% over the previous year. This, I think, further demonstrates the resilience of our group and the value of the strategy that sees our clients as the focus of the entire company. 2023 was also characterized by exchange rate headwind as the euro strengthened against the US dollar and most of the other currencies, and continued inflationary pressure, in particular on personal costs. Our headwinds last year did not prevent us from addressing all our priorities. starting from the undoubtedly very difficult one of having to take another look at our industrial footprint in light of a brand portfolio that was no longer aligned with the know-how present in the historic Longarone plant. The project to look for an alternative solution was complex and not without challenges. But we believe that thanks to the active support of all the parties involved, we managed to reach the condition for the best possible outcome with the disposal of the production site, the full employment of all the workers, allowing in turn for the preservation of the sector's existing know-how. 2023 was also an extraordinary year as the quality of the work carried out, combined with the passion and constant dedication of South Africa people, allowed us to accelerate the consolidation of the licensed brand with a series of early renewal, which involved both our core license from Kate Spade and Tommy Hilfiger to the icing on the cake coming in January, This year with the early renewal of Bosch and Hugo, but also many other important brands like Fossil, Giuseccatura, Vajanas, Moschino, Levi's, and the renewal a few days ago of Missoni. Last year, we also signed two new partnerships with ETHRO and Stuart Weitzman, which were added to what is today a rich and complementary license portfolio, which provides us with unprecedented visibility and business continuity over our six years. This is a very important achievement for us, which sits alongside the key project, the pillar of our medium-term business plan. the solid and long-lasting growth of our home brands and almost unique portfolio in the industry, which in 2023 grew to represent approximately 44% of our sales from 42% the year before, thus progressing on our mid-term target to bring in it to represent over 50% of the group ranks. A project that was successfully executed during the year thanks to a focused action plan which gave continuity to the planned investment, allowing us to advance in the development and strengthening of all our main home brands, from Carrera and Polaroid, which continue to gain market share outside of the former GV chain, to Blenders, our flagship brand in the online channel, which in 2023 returned to growth. And together with Smith, further progress in its direct-to-consumer channel, allowed the share of online channels to increase to 16% of our group revenue from approximately 16% in 2022. I look to 2023 as a very resilient year that has set close with the level of sales approach in 2022 when the growth was 12% compared to the pre-pandemic 2019. And if we look at our organic performance, also net of the business in the former GB chains, we grew also thanks to the positive exit to the year, with quarter for sales growth at constant exchange, which marked our best performance of 2023. At the operating level, the year was characterized by the significant improvement in gross margin. Also in this case, we were coming from the sizable improvement recorded in 2022 compared to the lowest level of roughly 50% in 2018. Last year, we invested this strong performance in those projects instrumental to the growth and solidity of the company in the long term. progressing with marketing investment to support our home brand and the new IT and digital system envisaging the business plan. We closed the year with an adjusted EBITDA margin just slightly below the 2022 level, which was the best of the last seven years. 2023 was above all one in which we returned to a positive cash generation, the first after many years. recording a positive free cash flow in each single quarter of the year, with this leading to a lower net debt and a lower financial leverage. Let me stop here and then 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 me start from our top line. We closed the year with a total net sales of 1,024.7 million euros, down 4.8% at current exchange rates and 2.3% at cost of exchange rates compared to 2022. While our organic business, which represents the most significant indicator of our underlying performance, recorded a minor deviation of minus 1.3%. a level very close to the revenues recorded in the previous year, despite the headwind represented by the well-known weakness of the North American market and by the decline of more than 60% of the business recorded in the foreign exchange following their integration into the Asilo Luxottica network. If we look at the performance of the business, also net of this latest effect, in 2023, The business grew by 1.7%, in particular thanks to Carrera and Polaroid, which made some progress for the second consecutive year, and Blender, which was back to growth after the post-pandemic normalization phase of sales in online channels. As far as our license brand is concerned, 2023 conferred POS and TOMIL figures to our collection as key points of reference in the industry. while among our most recent partnerships, Carolina Herrera, which joined our licensed portfolio in 2022, and David Beckham, launched for the very first time in Iowa in 2020, stood out for a double-digit growth, and both have already become core brands for the group. As said, Q4 was a positive exit to the year, with both North America and Europe back to growth. Net sales stood at 239.6 million euros, down 2.4% at current exchange rate, but up 2% at constant exchange rate, and 3.6% net of the former Grand Vision chains. On our specific sales trend by geographical area, in 2023, revenues in North America amounted to 452.9 million euros, down 9% at current exchange rate, 6.4% at cost of exchange rate, and by a minor 3.7% at the organic level. The North American market started to more measly weaken in Q4 2022, with customers in our traditional high-worth channels kicking off the new year with a prudent order attitude. with the greatest difficulties emerging during the second and third quarter of the year, when also the sun season was not particularly favorable. As discussed during the year, to suffer the most were the contemporary segment, where our product offer is more skewed to, and sunglasses to do the summer season, which was not particularly favorable. On the other hand, as far as our sport business was concerned, last year's meat was penalized by the general significant stocking in the market of bike products following the strong growth during the pandemic year, while it kept growing nicely in its D2C channel, which today represents almost 40% of the brand's North America business. As allotted by Angelo, in the United States, 2023 was a year of growth for blenders, also following the successful collaboration launched in the last quarter with the American football icon Coach Prime and the visibility provided to the brand by the explicit partnership with Oracle Red Bull Racing. And it was the growth of Blenders and Smith in the respective D2C channel which drove North America in positive territory in Q4, up 3% at constant exchange rates. If we just have a look at the traditional channel of independent optician and chains, Our business was more stable than in the previous quarter of the year, thanks to an easier comp base, while in Q4, mid-sales in physical sports shops were affected by a weak start to the winter season. In Europe, Q4 sales were also back to a positive performance, up 2.5% at cost of exchange rates compared to the same quarter of 2022. while the progress net of the former GB chains accelerated from plus 1% in Q3 to roughly plus 6% in Q4. Very meaningful for us, Europe closed the year substantially in line with the strong growth sales recorded in 2022, precisely at minus 0.06 at cost of the exchange rate, while the organic performance also before the former GB chain stood to a growth of around 7%, achieved thanks to the growth progress recorded by the business in the main market of the area, in particular Italy and France, where the group continued to enhance its commercial partnership, and also thanks to its state-of-the-art digital platform, namely EU and South Africa. The year was also characterized by the continuous growth of more dynamic market of the region, in particular Turkey, Hungary, and Poland. where we have been investing in recent year through the creation of direct commercial operation. Moving to our emerging market, 23 was a positive year for both Asia Pacific and the rest of the world, together reaching 15.6% of group sales versus 14.3% they represented the year before. In the full year, sales in Asia and Pacific grew by 3.9% at current exchange rate and 9.1% at constant exchange rate. Up also in the last quarter, plus 4.5% at constant exchange rate, thanks to the positive performance of the brands such as Boss, Force, and Polaroid in China and Hong Kong, and the continuing strong development of Smith in both Australia and Japan. In the rest of the world, revenues reached an important level of 100 million euros, roughly 10% of our total business, growing in the year by 3.9% at cost of exchange rates, thanks to the meaningful double-digit growth posted in the year by India and the Middle Eastern market, where in particular Carrera and Tommy Isiger, but also Boss and David Beckham, recorded significant progress, driving the upside. Last year was instead flat-fished in Latin America, mainly reflecting a difficult con base for Brazil in Q4. The exit of the year was in fact mixed in the rest of the world, overall weak-ish at minus 6.6% at constant exchange rates, driven, as said, by more challenging quarterly dynamics in our second-biggest Latin American market, while the Middle East continued its growth trajectory. Turning to our economic performance, our following comments refer to the adjusted result, excluding the cost incurred in the year for the non-recurring activities, which were mainly related to the disposal of the Longarone plant, the fact of which partially fell also in Q4 as the deal was completed at the end of October. In Q4, we then booked no recurring costs for determination of activities related to the exit of Jimmy Choo and for a write-down of some intangible assets related to Prevariable. The total of these no recurring costs were $16 million at the gross profit level, $29 and $42 million respectively at the EBITDA and EBIT levels. Leaving these expenses aside, throughout the entire year, our just economic performance was characterized by two very distinctive dynamics. 2023 was certainly the year in which our gross market nearly reached its all-time high, posting significant year-on-year improvement in each single quarter. This was a very meaningful achievement for us, reflecting some very clear drivers. In primis, an effective Pricing policy implemented over the last year with the main purpose of offsetting inflationary pressure. Then we achieved higher efficiency in procurement activities, and we also benefited from the decline in transportation costs, which had mostly impacted the group in 2020. Q4 in particular was also favored by a very positive channel mix, which reflected the positive performance we recorded in our direct-to-consumer business as previously commented. In Q4, the adjusted gross margin was in fact the highest of the year, reaching 59.5% of sales, 280 basis points higher than the margin achieved in Q4 2022, and bringing our full year gross margin close to the 59% level, precisely 58.7% of sales, 320 basis points higher than the 55.5% gross margin recorded in 2022. The other clear dynamic for us last year was the negative leverage on our operating expenses, which now we stand in the top line, increased by roughly 1.7% due to the high personal costs following inflationary pressure and the peak of the investment in the group digital transformation and in the marketing activities that we intentionally continue to implement in order to execute the development of our own brands. More specifically in Q4, if the growth of our D2C business supported an enhancement of the gross margin, on the other hand, it drove a quite sizable increase of logistic costs to fulfill order deliveries. All in all, our adjusted BDA margin in Q4 stood at 6.9 percent, 40 basis points higher than in the same quarter of 2022, while 2023 adjusted BDA margin reached 9 percent, 40 bps of the peak we recorded in 2022, our highest of the last seven years. Below the operating lines, our full year group net results were burdened by the same two dynamics we had seen in the semiannual results, in particular a pretty significant negative variation of explaining 90% of the decline compared to the year before due to the valuation of the put and call option of non-controlling interest. As a reminder, while last year we booked an income of €31 million as a positive accounting effect resulting from the reduced liability on non-controlling interest due to the revision of the related financial plan, this year, on the contrary, we booked a charge of around €8 million in relation to the extension of the second and third tranches of the put and call option in blenders. In the year, we then recorded higher net financial charges from €15.5 million to €19.2 million, mainly due to the increase in interest rates. All this brought our group-adjusted net result to €14 million from €58.3 million in 2022. Concluding with our financial performance, thanks to a positive cash generation also in the fourth quarter, equal to around €30 million, we close the year with a free cash flow of €35.1 million before a €6 million payment made in Q3 to exercise the first option on an additional 10% of Blender non-controlling interest. This is our first free cash flow generation in many years. In 2023, cash flow from operating activities increased to 47.7 million euros, thanks to 21.5 million euros of cash generation at the working capital level, mainly driven by an effective management of inventories and a good cash collection, with the latter also supported by the performance of the direct-to-consumer business in Q4. The cash flow from investing activities was reported at 2.7 million euros, and this is the result on one end of 13.3 million euros of capital expenditure, while on the other end of sales consideration for the disposal of the Longarone plant equal to approximately 11 million euros. Let me add here that it is partially counterbalanced the total cash out of around 16 million euros connected to the deal, which were mainly accounted for in the cash flow for operating activities before the change in working capital. As commented in the previous occasion, the total negative cash impact from the disposal of the Longarone amounted to around 5 million euros. Finally, at the end of December, our group net had decreased to 82.7 million euros, 43.7 million pre-IFRS 16, corresponding to a financial leverage also per IFRICSAS of 0.5 times. I stop here and end back to Angelo.