Safilo Group S.p.A.

Good evening and welcome to the SAFILO first half 2024 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 risk of 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 the call 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 South Europe Groups, first half results and Q2 trading updates. The second quarter was mostly a continuation of the main dynamics by market and by brand we saw in the first quarter. Our total sales performance remained soft in Q2. As expected, Jimmy Choo represented our main headwind with its negative impact which was higher than in quarter one. On the other hand, notwithstanding a business environment which was, for different reasons, challenging, our underlying business performance held up, thanks in particular to the strong momentum of Carrera and DeRibeca. In the second quarter, we again delivered economic and financial improvement, and we remained focused on our medium and long-term goals. We recorded another positive cash flow from operating activities higher than last year, which we have reinvested in the continuous strengthening and developing of our brand portfolio. Let me come back to the key business drivers of our underlying performance in the second quarter and your first half of the year. In these first six months, Europe remained positive despite the slowdown recorded in the second quarter due to the poor weather conditions that hit our main market between May and June. On the other hand, the recovery of North America was softer than expected. In Q2, we saw improvement in the eyewear business. with a number of our core brands performing well, while Smith's wholesale business at the sports shop level was still weak. Michele will give you some more color on this data later on. As said, Carrera and David Beckham not only continued to grow, but both gained additional speed, supporting what was a significant achievement for us in the first half of 2024. We had already outlined it when we talked in May, but I think it's important to remind to all of us that today Carrera with the rest of our home brand portfolio including the perpetual license of David Beckham accounts for around 50% of our sales, making it another important milestone of our medium term strategy. I stop here and over to Michele for the additional comments and analysis on the economic and the financial performance of the period. Michele.

Thank you Angelo and good evening to all of you. Starting from our sales performance, revenues in the second quarter were down 3.1% at both current and cost of the change rate, as the depreciation of euro on the U.S. dollar was fully balanced by its application against other currencies, mainly from emerging countries. The first half closed with a net sales down 3.3% reported and 2.4% at cost of the change rate. As highlighted by Angelo and discussed in our previous call, the performance reflected a reduction in sales of Jimmy Choo, which in the second quarter impacted growth in North America and Europe more meaningfully. The brand sales outside, in fact, diminished pretty significantly compared to those recorded in Q1. Thus, we have less business to counter the high base period. Looking at our underlining business by brand, our key growth drivers really in all our regions were Carrera and David Becker, which in the quarter delivered a marked double-digit growth, but also we have seen positive momentum continuing for Caroline Herrera and Marc Jacobs. The period was instead challenging for Smith and Polaroid, and I will come back to this. By channel, the semester benefited from the resilience of the independent optician channel in Europe, also thanks to our advanced B2B platform, UNSafilo, which continues to strengthen the relationship with our customers and does the quality and the volume of our business with them. We also consolidated the progress of our online business, confirming its 16% stake. with a very positive D2C channel and a positive recovery by the internet pure player business in Europe. On the other hand, sports shops and the travel retail channels were the main harbors to grow during the period. Let's now look at what happened in our regions. In the second quarter, Europe was basically flat at current currency and slightly up at cost on currency by 0.8%, taking the first outperformance to a positive 3.4% at cost on the change rate. The deceleration of the region compared to the first quarter was explained by the bad weather that affected the sell-out of most of our channels and also by the more negative impact of the GB2 exits. In Europe, by brand, it was a continuation of much of what we have seen in the first three months of the year, with Carrera and David Beckham leading ahead, but also newer licenses doing well, like, for instance, B-Squared in Italy and Isabelle Maranti in France. Exception to this in the quarter was Polaroid, down by a low single-digit percentage, which was affected more than others by the poor sun season, being the brand still more skewed to sunglasses. By country, our performance in Europe continued to be driven by the positive trend in France, led by a solid prescription-framed business, and by the growth of central and eastern European markets. We also recorded a positive performance in Germany, where the Internet pure player channel continued to recover nicely, and we saw positive business also at some of our major optical chains. Moving to North America, except Q2 was better than Q1, with the sales drop reducing from 7.2% to 4.4% at cost of exchange rate, compared to the same period last year. The improvement was more evident next to the negative impact of Jimmy Choo, as we moved from a mid-single-digit decline in Q1 to a flat performance in Q2. This was below the kind of recovery we were hoping for in the period. We saw some additional recovery in eyewear, while the sports shop channel remained weak. Let me start from the positives. The United States Q2 was a good quarter for Carrera, also driven by the success of its new woman collection, supporting the brand productivity in store, and its further expansion in the market. We saw positive momentum also from some of our core licenses, namely David Beckham, Carolina Herrera, Mark Jacobs, and Tommy Figer, with their distribution growing double digits. Our insights from the field were some consumer demand shifting from pure luxury brands to more after contemporary offer, especially in the dependent optician channel. As a matter of fact, was our best performing business in the quarter, delivering a positive performance in , but also some recovery . On the other hand, in Q2, SmithHorse's revenue of helmet were hampered by the lower reorder of winter products due to the unseasonal weather in Q4 last year, which unfavorably impacted no sell-out and consequently no reorder by sports shop. At the whole sales level, orders were also lower than expected for summer helmet, as the bike channel was still recovering from high stock level built post-pandemic. Smith Performance remained, instead, very positive in its direct-to-consumer channel, which continued to benefit from the greater responsiveness of end consumer, and the more favorable product needs more skewed two sunglasses. I think that it's very important to note that despite the favorable business environment in store, in North America, Smith consolidated its leadership in snow, ready to take advantage of a more positive winter season. Moving to our emerging markets, in Asia-Pacific, net sales were down 11.3% at cost of exchange rates in the second quarter, closing the first half at minus 5.6%. As we know, the quarter had an extremely challenging comparison base versus Q2 last year, when sales grew 38% over the same period in 2022, mainly driven by reopening in China. In Q2 this year, this tough comp mitigated the still positive performance we recorded in China. We continue to benefit from the very positive progress of Brand Life Force and Polaroid, where we continue to invest in locally relevant collections and marketing plans. The main edge win of the region was the weak sales performance recorded by distributors in Southeast Asia. Sales in our rest of the world remained weak in Q2, down 9.6% at cost of exchange rate, with H1 closing at minus 11.3. In the quarter, the main negative driver was the travel retail business in Latin America and in Argentina in particular, while in India, and so better business trend in the Middle Eastern and African markets, while sales in India normalized as they were running against a pretty tough comp base. Moving to our economic performance, notwithstanding the still soft-top line, we made further progress in margin expansion, continuing to post an improvement both in industrial and operating level. Q2 confirmed our gross margin at 60 percent, precisely 60.1, 100 basis points higher than the 59.1 gross margin adjusted recorded in the same period last year. In this quarter, the positive drivers were pretty much the same as those recorded in Q1. In other words, an higher production efficiency resulting from the industrial restructuring accomplished last year, which also resulted in a decrease of depreciation. Price-MIC remained a favorable lever. While in this quarter, the dilutive effect from GV2 phase-out sales was lower than in Q1 when we recorded more of these revenues. Gross margin H1 was 60% sharp, an improvement of 120 basis points compared to the adjusted gross margin of 58.8 posted in H1 last year. Below the gross margin, despite the still unfavorable operating leverage, Q2 performance recorded a more significant year-on-year margin recovery compared to the first quarter, mostly benefiting from the ongoing normalization of IT investments. Similarly, on our marketing and advertising activities, while we continue to focus on all our key projects, these expenses also seen some normalization compared to last year peaks. In Q2, they reduced by around 6% in absolute term, while their incident on sale was some 40 basis points lower compared to last year. As a reminder, this cost became seasonally more marked in Q2 compared to Q1, thus waiting more on sales than in the first three months. In the quarter, our adjusted BDA margins stood at 10.1%, 60 basis points higher than the 9.5% recorded in Q2 last year, while we closed the first half with an adjusted BDA margin of 10.8%, 40 basis points better than H1 last year. Finally, our group adjusted net result equals 24.2 million euro compared to 6.9 million euro recorded in H1-23. As a result, that as you may remember, was affected last year by a charge of 8.6 million euro resulting from the revaluation of the liabilities for option on the interest in blenders. Net of this item, that in this year was around 1 million positive, our adjustment net result grew vastly, 50% compared to last year. In H1, net financial charges decreased to 6.9 million from 9.4 million euros in H1 2023, mainly due to our lower average group net debt, plus a tax rate which in the first half normalized to around 30%. Coming to our financial performance, the free cash flow of the first semester was negative for 19 million euros, reflecting the two distinct dynamics already mentioned by Angelo. On one side, the cash flow from operating activities increased to 27.3 million euros from the 21.1 million recorded last year. This was the result of the positive Generation for around €20 million posted in Q2, which in turn reflected the solid economic performance of the period, which, by the way, also included the settlement of a no-return cost related to a terminated license agreement posted in P&L in Q1. It was also the result of a positive cash generation from working capital, also due to a reduction of inventories. On the other hand, cash flow from investment grew to €41.1 million from last year's maintenance capital of €6.2 million. The increase was explained by the investment we made of around €35 million for the perpetual license of Teddy Peckham Highways. Very meaningful for us, the agreement also caused a significant reduction of the royalties to be paid, making the license one of the most profitable and accretive brands in the portfolio. Finally, our group net debt stood at 100.4 million euros, or 62.6 million euros per IFRS 16, from 82.7 million euros recorded at the end of December last year, and 103 million euros at the end of June 2023. Our financial leverage also predicts that we've been very solid and sound at 0.7 times. We stop here and we are now ready to take your questions.

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 about current trade. Can you give an update on the trend that you have seen in July with some details on what happened in America in sports and eyewear? And my second question concerns the evolution of net debt. Can you give us your expectation for the second part of this year? Thank you.

I take the first one on the carbon trading. I mean, first of all, let me say that you know, when we look to the Q3, September is really the month which is making the difference. But that said, in July, let me say, we have not seen a meaningful change in the market dynamic that we have outlined before. U.S. eyewear is quite important. It's getting better and better month after month. The sport shock chandelier still weakish. In Europe, we see that the reorder of sunglasses continue to be soft. So the visibility remains low in these days and we need to really understand in September when the new collection will kick in what is going to happen.

On the net debt, as you've seen, the H1 has been positive from an organic cash flow generation. Our aim is to continue to be cash positive in the second half and to have a full year free cash flow turning into positive territories.

Understood. Thank you very much. The next question comes from Frederick Rossi of Brian Gagné.

Yes, good evening everyone. I have two questions related to David Beckham. So the first one is, can you elaborate a little bit more on the strategy now that you have the free hands on the license? What are your plans in terms of development in Europe and the US? And my second question is regarding David Beckham as well. So how would you position the license considering that David Beckham also signed with Hugo Bosses? So how would you avoid any cannibalization risk between the Hugo Boss Eyewear and your own David Beckham brand? Thank you. Yeah, thanks.

So let me say, let's start from the first one, David Beckham developer. Obviously, David Beckham has been a license which has been successful since when we launched. Obviously, as soon as we turn now the license in the perpetual, what we are doing, we are giving now to David Begum exactly the same focus than Smith, Carrera, Polaroid, and Blenders have. So there is the maximum focus in terms of distribution. That is going to be an area of development distribution in Europe. distribution in North America and a little bit of productivity improvement in the Middle East. So, obviously, it's going to be now, it's really on the priority rather. We think that there are two dimensions. said, distribution mainly in Europe and in North America, increase of the productivity because only now we also can manage different the marketing investment in the other region. Second question about David Beckham. Let me say, being part of BOSS, I mean, we will keep the two topics separate. I think David Beckham will not be part of any of the BOSS iWork campaign, so David Beckham will work with the fashion houses, but we don't see any conflict because we will keep absolutely separate, so David Beckham on both eyewear will not be used at all in any advertising and in any kind of discussion. So the enrollment of David Baker with both would be in all the categories except eyewear. So we don't see any cannibalization there or any risk of confusing the consumer. In terms of, I think also the role that David Vega is going to have in both is more in the design and the development of the collection, but not in the Irish. So, I mean, we don't see a big issue over there. Okay. Thank you, Andre. Thanks.

As a reminder, if you wish to register for a question, please press star and one on your touch screen on the telephone. The next question is from Domenico Ghilotti of Equita.

Good afternoon. Three questions. The first is a follow-up on your comments related to the North American eyewear market improving. So are you seeing it both in prescription and in sun? So how do you see it evolving also in terms of channels? Second is, well, is a question. question on the Marcolin saga if you want so should we expect any hard date on the topic and last is Angelo probably for you is a consideration on the industry evolution so we have seen a lot of interest about smart glasses we saw Meta and other players interested in it you had a an agreement with Amazon. I'm trying to understand how do you see the category and how are you positioned and how do you want to play this opportunity?

Yeah, okay, thanks for the question. Let's start from North America. I mean, as I said, we are seeing this sort of step-by-step or month-by-month improvement. We see this and we see this improvement and we are expecting this improvement to keep going on also in, let me say, in COVID-3 and in the rest of the year. So we think that North America will move on this trajectory of recovery. Today we see a recovery both in prescription and in some. I think that what is happening Step by step is a different dynamic from what has happened last year. Last year the American market had a luxury growing double digit and the rest of the market suffering. Now we see that the luxury is still growing but definitely at the single digit. And so the rest of the market is, if you like, gaining of this slowdown, slowdown of the luxury. So I think that this is something, this is a trend. We see fundamentally, independent from prescription and sun, we see this trend moving also for the next month. And this also explains why Carrera is doing well. I think that Michele was mentioned before. Carrera is performing very well, David Beck is performing very well, Matt Jacobs is performing very well. So the so-called premium contemporary is the area where they are, let me say, gaining out of this change of trend between luxury and the rest of the market that we saw last year. On Mark Colleen, I mean, no comment. I think you should ask, I think, the owner of Mark Colleen about their intention. On the last question on smart glasses, I think, first of all, I mean, thanks for the question. It's clear. Look, I think the eyewear is a category where, in the future, it's the category where you can have a revolution, which has happened with the Apple Watch. So I think it will come. I'm happy to hear that market leader and other people are going to work in that because it can represent a growth of the category. So I see it as an opportunity, I do see it as a threat. We, on a different scale, let's be very clear, on a different scale, we have been launching, as you know, Carrera with Amazon, or we are keeping working on Amazon. I think the trend is there. It will have the industry. My personal opinion is not a short trend. So I think at least this is how we see that as a South Africa. I'm talking as a South Africa. I don't think it's going to change the P&L of South Africa in the next in the next couple of years. But by sure, the fact that people are investing on that, we are ready to catch the wave. But I don't think that, at least for us, is going to be a game changer in the short term.

Thank you.

The next question is from Cedric Le Casable of Stifel.

Yes, thank you for taking my questions. Good evening. I have two actually. The first one is a surprise for social comments that France was a good market. The political environment and the context in France has been very tough and quite surprised. So that was the first remark. What led the growth in France? Is this sustainable? And the second one is on your comment on current trading in Europe. You said that it was quite tough for sunglasses. Maybe could you elaborate a little bit more with your main markets and tell us what you expect in the next weeks? Thank you very much.

Okay, so I think the first question is about France. I think we are growing in France for two reasons. One, which is true for the whole of Europe, so it's a transversal comment. I think I was mentioning in my speech, or I think Michele was mentioning, I think this combination of having a traditional way of selling and our B2B is making the difference in Europe. I mean, we have the data. I think this combination that we have found is helping France and is helping Europe. So it's partially also entering on Europe. On France, I think we have in this moment the right portfolio for that country. We are growing on Carrera, which is transversal to all the market in the south of the world, but we have Marc Jacobs, but we are growing double-digit on Isabel Marant. So it's a combination there to have And we are going very well with both. So again, it's a combination of what we call global brands. Let me say Marc Jacobs and Bosque. Carrera, which is our own brand, and Isabel Marant, which is very, very successful in France. So I will summarize in two reasons why transversal, the effect of the B2B, and the second element, the fact that the mix between Carrera, Marc Jacobs, Bosch, and Isabel Marant is working very, very well in Europe. Going back, I think, to your second question on Europe, if I understood correctly, to give a little bit more insight of the current trading, only Europe has been hit by the sun. I mean, prescription is going well. I mean, we don't have any problems on prescription, and also from the sell-out data we have from some from some chain in Europe, prescription is going very well, but only we had the market, not we, the market had a positive April, and then May and June, I mean the weather in Europe has been really affecting, affected the sun, so only that effect we see now in the level of reorder. So we saw step-by-step a sort of decelerating of the level of order merely on the sun. So it's not a structured thing. We think it's really related to the season. Now we need to understand when in September we are going to kick in with the new collection, which normally in the second part of the year is more optical than sun, how much is going to be the recover, but it will happen eventually more in Q4 than in Q3. I don't know if I did answer to your question.

Yes, just to be sure to understand, Angelo, Thank you for these answers. Do you think, as far as sell-out is concerned from your clients, in July, after the very tough weather conditions in May and June, do you see any more optimism from your final clients in July?

I think we see in July that the sellout is getting more positive. The question is now how much can compensate the heat that the market has got in May and June. But in July we see a change in the trend compared to May and June by sure. Thank you very much. Thanks.

The next question is a follow-up from Domenico Ghilotti of Equita.

My follow-up is, first of all, on your price mix and volumes balance in the quarter. How do you see the price moving into the second half? The second question is on profitability. You are universalizing the the positive impact of the Longarone disposal. So I'm wondering if now to get really some upside on profitability, you need operating leverage, so you need volumes.

Yeah, I mean, starting from the first question on pricing, as we also commented in Q1, so price miss continues to be a positive lever for us. Let's say low to mid singles, positive. And we do continue to see, let's say, this impact also in H2. When it comes to your second question, so the overall profitability expectation, of course, our aim is to be able to limit as much as possible the unbearable operative leverage that we have seen, of course, on the top line. And this coupled with the normalization of our IT investment and marketing expenses, and keeping always a bit of flexibility on the level of investment in second out to be able to continue to be in the second out. Of course, as commented also before, the aim for this year has always been to bringing as much as possible the operating leverage down to the bottom line. So it clearly will require also some support from the top line.

Can you remind me, because you mentioned before the marketing impact on profitability. I don't know if it was first half or second quarter.

Yeah, I mean, marketing declined roughly with single digits in Q2 and more or less 10% in H1. And this, from a business standpoint, represents 50 basis points reduction in Q2 and roughly 100 basis points in H1. Okay, thank you.

The next question is a follow-up from Mr. Frederick Rossi of Brian Gagné. Mr. Rossi, your line is open, sir.

Yes, good evening again. I have two follow-ups, please. The first one is, can you remind us what the magnitude of negative impact regarding Jimmy Hsu we can expect for for the H2 because you were mentioning a more moderate impact. So I just wanted to be sure that I got it correctly for Q3 and Q4. And the second one is just to be clear. So you are, Michele, you were mentioning a mid-single-digit impact from pricing in H2. So does it mean that you are also planning additional price increases in the second half of the year? Thank you.

So on GMI2, as we said, we continue to see an impact also in H1, but the magnitude will be much lower than the one recorded in H1. On the second question, On the pricing, we don't comment on specific pricing actions. As we said, the contribution will continue to be positive, but mostly coming from action and initiative that we already implemented.

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

Okay, so big thanks to everyone, and for the one which goes on holiday, take your time to be with your family and enjoy the period. I think that we'll catch each other after the summer period. Thanks very much. Thank you.

We'll be with you this evening. Thanks.

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