Safilo Group S.p.A.

Good evening and welcome to the Safilo Group's Q1 2024 Trading Update. 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 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, Michele Melotti, Chief Financial Officer, and Barbara Ferrante, Director of Investor Relations. I will now pass you over to Mr. Angelo 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 Safilo Group's first quarter 2024 trading update. The start of the year was overall in line with our expectations and with the trends we had partially outlined and discussed during our earning call in mid-March. The first quarter was once again a very positive confirmation of the strengths and the resiliency of our European business. We were particularly pleased about the dynamic business environment we continue to experience in our core European markets, where among all brands, Carrera had a really strong start to the year, also making its debut with a brand-new women's collection that is gathering excellent feedback. And we continue to register the strong progress of David Baker in the premium segment, where the brand plays, an increasingly relevant role among different man-consumer targets thanks to David's credibility both as a fashion icon and British gentleman with refined tastes. I would, therefore, say so far so good in Europe. On the other hand, as anticipated, it was a difficult start in North America, reflecting both a pretty poor winter season for our sports business stores as already seen in quarter four, and a weak wholesale hour market in the contemporary sunglasses segment, where a more cautious order approach persists, while consumers buying online remain more dynamic. It was, above all, a solid quarter at the economic and financial level. We delivered another significant improvement of our gross margin and has been more moderate and improved also on our operating performance. Very meaningfully, we then maintained a good grip on our cash flow, slightly declining the group's net debt. Before I hand over to Michele for some additional comments on the top and bottom line of the period, I would like to stress that our main focus remains the execution of our medium-term strategic objectives. continue to enhance the uniqueness and innovation of our product and service, and to solidify the core asset of our business model. I would like to come back to this at the end of my presentation. Michele, over to you.

Thank you, Angelo, and good evening to all of you. Starting from our top line, revenues in the first quarter reached 277.2 million euros, down 3.5% at current exchange rates, with Forex negatively impacting for 170 basis points. So, at cost of exchange rates, sales softened by 1.8% compared to Q1 2023. Starting from this quarter, we stopped reporting the organic performance, a KPI which was particularly helpful to highlight our underlying performance during our transition out of the LWMH licenses. This is over, and any current and future entrants or exits will be specifically spotted where relevant. As you know, in the first six months of the year, we will be phasing out Jimmy Choo, meaning that we are doing some depletion sales with the brand, with a reduction compared to the one done in the same period last year. This largely explains the drop in sales recorded in the quarter. Therefore, in Q1, before the Jimmy Choo drop, our sales were flattish. Let's now look at our top-line performance by geography. It was a very positive first quarter for us in Europe, where sales were up 5.8% at cost and exchange rate versus last year. I remind you that Q1 2023 was a challenging comparison period when organic sales grew double-digit, net of the decline recorded in the former Grand Vision chains. The start of the year was particularly positive in the French market, where we kept strengthening and expanding our commercial network, as already mentioned during our previous earning call. And we had a good quarter also in our central and eastern European markets, driven by the positive performance of the Internet Pure Player channel in Germany and the excellent progress of the business in Poland and Turkey. Angelo has already highlighted the strong performance of Carrera and David Beckham in Europe, were the brand-new BBBs. I would also like to add that it was a positive quarter for the majority of our licensed brands, and we also had a promising debut of our new Heathrow collection. In North America, Q1 sales dropped 7.2% at cost of exchange rates compared to last year, which you might remember was still a decent quarter in terms of organic performance. The drop in US started to become more meaningful in Q2. As already highlighted by Angelo, the weakness in sales concerns both mid-business in physical sports shop, which was impacted by a soft winter snow season that started slowly in Q4 and continued with a low level of reorder in Q1 this year, and also the high-worth business in the contemporary sunglass segment, where we continue to experience the cautious order attitude of the main wholesale clients. On top, we were penalized by the Jimmy Choo phase-out. A positive note in the United States was the growth of our direct-to-consumer channels, continuing the strong performance we achieved last year. And, as you remember, a particularly strong Q4. In Q1, Blenders and Smith's B2C business did very well, up respectively high single digits and double digits. Moving to our emerging market in Asia-Pacific, our net sales were up low single digits at cost of exchange rate by 2.3%. The quarter was positive for our business in China, also supported by the initial positive effect of the good result of our product and the Shanghai Fair held in March. In China, we had another strong quarter with ports and with Polaroid, which keeps solidifying its business. Q1 was a quarter of growth also for the business in Australia, where we continue recording the positive growth of Smith, our second largest brand in the market after Carrera, which is a strong asset for us in the country, and where we have now launched CarreraWorld.com to accelerate bank growth through e-commerce. To conclude with our geographies, sales in our rest of the world recorded in the quarter a decline of 12.7% at cost of exchange rates, which was mainly explained by the different timing of some deliveries in our Middle Eastern markets. The quarter was also a soft period for the travel retail business in Latin America, while on the positive side, I would like to highlight that both Carrera and Polaroid continue to make good progress in India. Moving to our economic key performance indicator, Q1 was another confirmation of our ongoing strength of our industrial performance. Our gross margin soared to 60% in the quarter, 160 basis points higher than the 58.4% recorded in the same period last year. Overall, we benefited from the higher production efficiency resulting from the industrial restructuring we accomplished in Longarone last year, which also resulted in a decrease of depreciation. Pricing remained a favorable lever together with the positive channel mix due to the ongoing development of our direct-to-consumer business. This driver more than offset the dilutive effect we had in the quarter due to the Jimmy Choo phase-out sales. Below the gross margin, the expected normalization of the IT investment and the marketing expenses allow us to keep better under control the still negative operating leverage, bringing home part of the improvements achieved at the gross margin level. We thus close the quarter with an adjusted BDA of €32 million, equal to an adjusted BDA margin of 11.5%, 20 basis points higher than the 11.3% recorded last year. Clearly, at the BDA level, we missed the benefit of lower DNA, which impacted the cost of goods sold, and also DNA, for approximately 50 basis points. We conclude, as usual, with the gross net debt at the end of March, which stood at 81.3 million euros, or 41.8 million euros pre-FRS16. Better than the position pre-FRS16 of 43.7 million euros, reported at the end of December last year. As stressed by Angelo, we are very glad to be able to confirm a positive free cash flow generation also in this quarter, notwithstanding the seasonality of the business and Q4 last year, which was better than expected in terms of cash generation. The period was driven by a positive operating performance and a lowered cash absorption from networking capital thanks to declining inventories. I stop here and I hand over to Angelo.

Thanks. Thank you, Michele. Before we move to the Q&A session, I would like to make a final point on our licensed brand portfolio. As I think we have in the month of April, FATHER enhanced the work initiated more or less one year ago when we started to secure our most important license agreements for the long term. The renewal of the partnership with Marc Jacobs until December 2031 is relevant for us. It is an accredited asset of our portfolio, a very long-time partnership with still many new opportunities for growth in its core U.S. market as well as worldwide. I am particularly happy then to comment on the signing a few days ago of a perpetual license agreement for eyewear by David Beckham. As you may remember, we began This collaboration five years ago in 2019, introducing the brand to iWear for the very first time. And in a few years, making it one of the most successful iWear brands of the recent year. A top male brand in the global premium segment and for sure a great force in our digital universe thanks to David's global audience. This new agreement now marks another milestone within our strategy. By transforming David Beckham into a perpetual license, we secure another constant of our brand portfolio, which is today in a position never occupied before. Let me highlight here two meaningful facts. First, if we look to the revenue we make today with our home brands, plus the perpetual license with David Beckham, which in terms of its risk profile can now be assimilated to the home brand, we are today already very close to 50% of our total turnover. Second, approximately 75% of our licensed portfolio is today secure to the end of 2030. So we have over six years of a solid license portfolio in front of us, with all our core licenses fully secured and the remaining part of the portfolio made by a number of smaller brands, all low single-digit. So again, I think that our current setting as far as our home and license portfolio are concerned has positioned us very safely for a quite long time. This concludes our presentation. We thank you for all participation 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 the 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 give us an update on the trend that you have seen in April and early May with some details on what is happening in America? The second question is on the perpetual license agreement signed with David Beckham. Do you expect that this formula can be replicated for other licenses? And the third question is on M&A. In the past, you have said that You are interested in brands positioned in the sport segment and in small luxury brands. So has the licensing agreement with David Beckham replaced one of these opportunities, or have you remained interested in finding targets in these two segments? Thank you.

Okay, thanks for the free question. I tried to take all three, and then eventually I will ask the help to Michele. Now, overall, April was a positive month, driven by a continuation of a very solid trend we see in Europe, where in North America, the performance were better than quarter one, but still negative. The comps are now becoming easier both for eyewear and sport business in North America, but the real area of attention is the contemporary segment. The contemporary segment remains quite volatile in North America. Plus, I like just to remember, as I think we had the opportunity to say in some other occasion, we don't need to forget the Jimmy Choo effect, mainly as a headwind, mainly in the H1 part of the year. On the perpetual, I think, first of all, allow me to say that David Beckham has, as a position, has a strategic position in terms of brand. I mean, we have developed this brand from zero. I think it's been growing double digits fundamentally from day zero for a simple reason. It's clearly positioned in what we call the premium segment, so the segment which goes above $180 but below $250. which is quite a big segment, which keeps growing, and where I think David Beckham is really catching this segment in the best way. On the more broader question on perpetual, I think personally that the volatility of the market push this industry to have more stability on the license. We cannot afford any more licenses that keep changing too fast. So personally, I think that we will look, we will try to discuss with other fashion houses which have an open mind to think or understand if we can have other perpetual agreements along the line of the David Beckham one. With reference to the last question, which is M&A, no, I don't think that the David Beckham perpetual license is changing the approach toward the M&A. I think that we will keep. We have now signed the agreement with David Beckham, but we will keep being looking, and we are keeping looking to M&A. As I said, as you were remembering, sport, optical, that are the two main areas where we will keep looking for potential brands which have a role in our portfolio. So we will keep looking to M&A.

Understood.

Thank you very much. The next question is from Cedric Rossi of Brian Garnier.

Yes, good evening everyone. Thank you for taking my questions. The first one is coming back on David Beckham. I was just curious to understand whom had the initiative to launch these negotiations for this perpetual license. And given the fact that Authentic Brands has a huge portfolio of brands, especially in the US, does it give you any ideas of maybe trying to negotiate further licenses with them? Another question related to David Beckham, you mentioned a strong start to the year in Europe, but what about the US given the fact that David Beckham is also well known in the US, he owns a football club there. Do you think that it is also an opportunity to develop David Beckham in the US? And my second question is coming back on the marketing investment. So as you said, bring the full year results conference call. So you are benefiting from a normalization of investments in marketing. But if you consider that the US market could be still a bit challenging, could you also plan to maybe increase a little bit the marketing investment this year in North America to revitalize growth there? Thank you.

Okay. I'll answer the first question on David Beckham. But look, I think to be honest, we've been initiating this idea with David Beckham, but there is a starting point which is very important, which is a strong relationship that we've been building. You know, David Beckham is really involved in the collection. He really believes in the category, and it takes any kind of opportunity, you know, to put the eyewear on his face and any social media explode. So the starting point was a great relationship with him. But we have initiated the discussion, and to be honest with David, it has been quite an easy discussion because he likes what we are doing, and he sees the results. With reference with authentic brands, I think, to be honest, that is also a sort of side effect of this agreement because obviously now we are getting to a closer relationship with authentic brands, There are options that we may evaluate. They have some interesting brands in their portfolio, and why not for the future? With reference to North America, I mean, you are absolutely right. I think in this moment, North America is the smallest market for David Bacon, but thanks to the fact that And thanks to authentic brands and thanks to the Inter Miami, so it's becoming quite popular in North America, you are absolutely right that North America will be one of the markets where we should have great growth in the next years. Michele, you will take the marketing one.

Hi, Cedric. I take the second one on marketing. I believe on marketing, I mean, considering the market environment in Q1, we have taken a prudent stance. But definitely, we always maintain a degree of flexibility, mostly in relation to the opportunity that may arise on the D2C channel. So as soon as we see a supportive channel development of a supporting market reaction, of course, we are always flexible to reaccelerate investment. But at present, considering the still persistence that Edwin also in Q2 always commented, as we commented, we continue to have a prudent stance on the market investments.

Okay, very clear. Thank you, Angelo and Michele.

Thanks to you.

The next question is from Domenico Ghilotti of Equita.

Good afternoon. A few questions. I start with the performance. It's a bit weird to see the strength of the D2C and the performance. I wonder if you see something different apart from the winter season. Is there any say, channel conflict or something that is explaining, say, this divergence. And second is on the gross margin level, so a very good level at 60%. Do you think that this is a sustainable level also going into the second quarter? And the last... Well, on free cash flow generation and networking capital, typically the seasonally weaker in Q1, is there anything to highlight that is explaining the very good performance in terms of free cash flow?

Okay, so I take the first one. Look, I mean, let me say... The consumer is slightly different when you talk about D2C and wholesale. So, obviously, the D2C consumer is a bit younger, is more on trend, is the consumer which is more flexible in the pattern of the buying process. So, I don't see a contradiction with the fact that D2C keeps performing better than wholesale. Also, because when you opened wholesale, I think today, and this is something that we see that remaining like this, somehow you have a different trend between the different segments. So luxury, which has been growing aggressively in the last year, now has been slowing down, but still is growing. The problem today, the slowdown today, is really in the contemporary area. And this is more really specific for the wholesale because in the wholesale you have one consumer dimension but you have also sort of customer dimension that we see mainly on the contemporary bid are quite conservative in the buying. So I believe that at least For the quarter two, we don't see a change in D2C growing faster than the wholesale. This is if you look mainly to North America. If you look to Europe, this year, I think we see that the IPP, which last year had quite a bad performance, we see that the IPP, they are coming back in Europe. Obviously, with a decent growth rate, we were used to high double-digit growth. grow rates. Obviously, they are growing at a low rate, but this year we see the IPP in Europe growing again. So at least for us, quarter two, looking to North America, we see that the difference between the trend D2C and wholesale will stay there.

On the second question, Domenico, so as we discussed also in our previous conversation, the significant growth margin improvement achieved last year is, I would say, structural, and this year, also thanks to the greater efficiency of our industrial footprint and the pressing lever, which supported overall a gross margin built, are all factors that are supporting the additional improvement that we have seen that we have achieved in Q1. As you may remember, we were also expecting the inbound transport cost to rise in Q1, but eventually such rise did not yet materialize, and we have actually closed a bit better than our own expectation on this front. So 60% gross margin, back to your question, is challenging, but I would say it's not an unreasonable target, of course, provided that some of the top line speed in the second half of the year and then a continuous support in the channel mix from our B2C business. On the free cash flow, I would say the positive Q1 result, as we've also seen last year, has been mostly driven by the favorable dynamic on B2C. On the working capital, while despite, let's say, the adverse seasonality, we have been able to control the overall working capital, mostly thanks to a reduction in inventory, more than offsetting the, of course, receivable bid up as Q1, of course, is the strongest quarter of the year in terms of sales versus Q1 that is the weakest.

And if I may follow up, can you clarify the one-off cost? Because you are saying potentially affecting, so there is some provision probably put into the Q1 number.

Yes, that's correct. And the cost mainly relates to the potential exposure in a litigation of a license that expired a few years ago.

Okay, so it's really one-off related to that. Thank you.

Ms. Ferrante, gentlemen, there are no more questions registered at this time.

Okay, good. So thanks very much for the time you have dedicated to us, and have a nice remaining part of the evening. Thanks very much. Thank you.

Bye-bye. Bye-bye. Thanks. Bye. Bye-bye.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.