Good evening and welcome to the Safilo third quarter and first nine months 2024 trading update. This call may contain forward-looking statements related to future events and operating, economic, and financial results of 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 the call over to Mr. Angelo Trocchia, Chief Executive Officer. Mr. Trocchia, you may begin, sir.
Thanks, thanks so much. Good evening, good evening everyone, and thank you for joining us today to review Safilo quarter three 2024 trading update. As expected, in the third quarter, we continue to face a complex and volatile market environment, particularly in July and August, where sales performance was impacted by soft reorders of sunglasses and ongoing uncertainties across several key markets. In September, we saw a recovery, particularly in Europe, where the launch of our new collections delivered a promising start in terms of order collection. Despite the headwinds, we maintain our focus on our long-term priorities, and I'm very pleased to report that we ensured growth in margin and in cash generation. The quarterly performance showed ongoing soft trends in North America and Asia, while Europe remained more resilient despite the slowdown, which was due to a subdued sunglasses business.
As said, throughout the quarter, we stayed committed to improving our operational efficiency, which has allowed us to grow our gross margin and deliver an improvement also at operating level. Additionally, our focus on financial discipline allowed us to achieve another period of positive and higher free cash flow, thanks to an effective management of our working capital. Let me hand over to Michele, who will take you through our trading updates in more detail.
Thank you, Angelo, and good evening to all of you. Starting from our total net sales performance, revenues in the third quarter were down constant exchange rates, 4.1% at currency exchange rates, following the appreciation of the euro on the US dollar and against other currencies, mainly from emerging countries. This brought our sales performance in the first nine months to minus constant exchange rates, 3.5% at current rates. As you know, the impact due to Jimmy Choo exit was more moderate in Q3 compared to the previous two quarters. However, it was not insignificant in such a complex business environment. Excluding this headwind, both the quarter and our year-to-date performance were flattish versus the corresponding period of last year.
In Q3, looking at our underlying driver, on one side, Carrera, David Beckham, Tommy Hilfiger, and Marc Jacobs kept very solid growth rates, up mid-single- digit to low- double- digits, benefiting from a favorable product and channel mix. On the other, in eyewear, we saw Polaroid and other brands penalized by their higher exposure to sunglasses, while in the sports segment, Smith's performance remained affected by a highly cautious market environment. Let's now look at what happened in our regions. In the third quarter, Europe was down 1.4% at constant currency and flattish at current currency, with the performance in the first nine months remaining positive by 2.2% at constant rate, 1% reported.
Excluding Jimmy Choo, the underlying sales performance in Europe saw a slight growth also in Q3, up mid-single- digit in the first nine months, proving that the market remained resilient despite a deceleration compared to Q1 and Q2, which was due to the soft sunglasses sales over the period. Prescription frames were instead very solid, particularly in France, where independent opticians and chains continued to see a nice growth. Germany and Eastern Europe market were also ongoing positive drivers, while Italy and Spain were softer. I would name Carrera, Tommy Hilfiger, Boss, Carolina Herrera, and Isabel Marant, our solid bestseller in Europe, while Polaroid was on the soft side. As mentioned by Angelo, the exit to the quarter was positive, with September partially offsetting July and August, as the months saw the first delivery of our new autumn-winter collection, marking a promising start to order collection.
Moving to North America, excluding Jimmy Choo, the underlying performance of the area remained weak and volatile, down low- single- digits, with varying trends across product categories and distribution channels. The performance was weighted down by still prudent demand in winter sports equipment, as not only clients but also consumers in the D2C channel maintain a cautious approach to purchases, waiting to understand how the season will kick off. In eyewear, our sales revenues of prescription frames and sunglasses performed reasonably well, maintaining a good recovery path, thanks mainly to the growth achieved by Carrera, BOSS, David Beckham, Tommy Hilfiger, and Marc Jacobs. On the contrary, the end of the quarter was subdued for sunglasses in the D2C channel, meaning Blenders was in the end soft in the period.
As you know, the couple of months ahead of us are pretty crucial for North America, in particular on the D2C front, with the Black Friday and holiday season kicking in. You may remember that last year there was a very strong period for Blenders, thanks to the launch of the new partnership with Coach Prime, which in this year is in the second round. In sports, Smith instead runs against easy comp, as the start of the winter season was particularly soft in Q4 last year due to the unfavorable weather conditions with no snow. Moving to emerging markets, in Asia, the third quarter was very much a continuation of the second quarter, with net sales down 12% at constant exchange rates, closing the first nine months at -7.8%. This was largely due to a slowdown in China.
The feedback we received, however, at the Beijing Optical Fair in September was encouraging, which we expect will help drive recovery in the months ahead. Our key positives in Asia were Polaroid and Marc Jacobs, while Carrera continued to make a nice progress in Australia. Sales in our rest of the world were still negative in Q3 but improved compared to the previous quarter, down 1% at constant exchange rates, with the first nine months at -8.1%. It was still a soft quarter for the area, although trend improved compared to the first half of the year, especially in the EMEA markets driven by Boss, David Beckham, and Tommy Hilfiger.
Turning to our economic performance, we are pleased to report another solid improvement of our gross margin, which in the quarter increased by 140 basis points, rising to 59.1% of sales compared to the adjusted level of 57.7% in the third quarter of last year. This was largely driven by the overall efficiency of our new industrial setup and price mix dynamics, which remained in the period slightly favorable. Thus, our gross margin in the first nine months was solid at 59.7%, confirming an improvement of 120 basis points over the adjusted gross margin of last year. At the operating level, despite the operating de-leveraging coming from a lower level of revenues, we managed to bring some of the gross margin improvement to our adjusted EBITDA margin level. In the quarter, selling general and administrative expenses recorded a decrease of 2.8%, primarily driven by the ongoing normalization of IT investments.
On the other hand, I would like to highlight that despite the challenges in the top line, we remain committed to supporting our strategic initiatives. Marketing expenses saw a slight decrease versus year ago, but we continue to support the launch of our new collection and campaigns through quite sustained investment, which we believe will drive long-term growth. In the quarter, our Adjusted EBITDA margin improved by 20 basis points, from 7.7% to 7.9%, closing the first nine months with an Adjusted EBITDA margin of 10%, 40 basis points better than in the same period of last year. Finally, on our financial performance, in the third quarter, we generated a positive free cash flow of EUR 16.9 million. This was largely driven by a tight control over Working Capital, in particular on effective inventory management, which allowed us to maintain our financial efficiencies despite the market challenges.
Therefore, over the first nine months, we almost completely offset the cash absorption recorded in the first half of the year, closing the period just slightly negative by EUR 2.1 million. You will certainly remember that this flow included investment made in the second quarter for approximately EUR 35 million to acquire the perpetual license of eyewear by David Beckham brand, while in the first nine months, the cash flow from operating activity was positive for approximately EUR 50 million. At the end of September, the group net debt decreased to EUR 96.1 million, or EUR 56.6 million pre-IFRS 16, compared to EUR 100.4 million at the end of June.
As you know, our position at the end of September also includes the share buyback program we launched on July 1st, which by the end of the period accounted for around EUR 7.9 million Safilo Group ordinary shares, equal to approximately 1.9% of the outstanding capital for a total transaction amount of EUR 8.7 million. Thank you all for your attention, and I'll now hand over to Angelo.
Thanks, thank you, Michele. While we remain cautious in the outlook for the near term, particularly in North America, we will continue even more to focus on executing our long-term strategy, driving operational efficiency and a very, very strong financial discipline. This will allow us to invest in the future opportunities while navigating tightly the ongoing uncertainties. 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 touch-tone telephone. To remove your question, please press star and two. Please pick up the receiver when asking questions. The first question comes from Cédric Lecasble of Stifel.
Yes, good evening, team. I would have three questions, please. So the first one on your comment on the U.S., on what happened at the end of the quarter, as the D2C deterioration you mentioned and your caution in the U.S., if you could maybe elaborate a little bit. The second one is on the drivers of gross margin expansion, which remained extremely strong. Could you maybe recall us in terms of phasing when you start annualizing the positives, especially industrial setup and price mix? And the last one is on your marketing activity. Maybe you can come back a little bit on this new collection that went well and maybe elaborate a little bit on marketing as a percentage of sales in the next quarters. Thank you very much.
Okay, so thanks very much. Thanks for your question. I will try to answer on question number one on the D2C. I think this D2C we are discussing since a while. So till quarter three, our D2C business was really running on a completely different rate than what was the wholesale. In Q3, still the D2C runs by far more positive than the wholesale, but we have been seeing some signs of getting a little bit smoother. Which are the main reasons? One reason is more related, let me say, to us, that maybe Blenders and Smith have been really growing quite a lot in the first bit, and they couldn't keep that pace.
But I think the second element, which we need now to understand in the next week, if it's true or not, I mean, getting closer to the election time in North America, we have seen quite a lot of what I call wait-and-see mood. So I think more and more we were getting towards the election day, more and more we saw a consumer which was more waiting, more nervous. So the real answer that we have, we have two, the real question we have, but we need to await the answer, is to be honest in the next three weeks. Now elections are gone. I leave it to America to judge it, but now the elections are in the back. So now we need really to see if the nervousness, the wait-and-see was related to the uncertainty.
So the next three weeks will give us the answer to say, was a short-term slowdown related more to the overall environment in North America, or is something which is going to stay? So crucial are going to be the next three weeks, honestly, starting already from yesterday. On gross margin and commenting the Q3 results, I would say half of the 140 basis points of gross margin improvement were driven by the industrial restructuring, and the rest mostly from pricing, while in the quarter mix was substantially neutral due to the, I would say, softness of the D2C in the quarter compared to last year. In terms of execution of the last industrial restructuring initiative, later on last year, it happened at the end of Q3.
So we have seen, let's say, the impact, the positive impact from Q1 this year, and I would say the vast majority of the impact will, I would say, the positive impact will end with the end of Q3. So Q4, the impact should be marginal on this side. Answering on the question number three, marketing, I think it's obviously in the end of August, September, we have started presenting the winter collection, and a combination of a good reception of the new brand like Stuart Weitzman for North America, Etro more for Europe and Asia, but surely the collection and the brands have been received very, very well. Obviously, we are not talking about game- changer in the short, but the reception of these two, the collection of these two new brands has been very, very positive.
Going on the rest of the portfolios, I mean, the big brands, Carrera is definitely keeping very positive, and the new collection has been appreciated even more than the January collection. At the same comment, I would say for David Beckham, David Beckham and Boss. So on some of our main brands on top of the new brands, the new collection has been seen very well. Take also into account one element, which is very important, because if we look both to Europe and North America, don't forget that the sun has been really heated by the sunglasses have been really heated by the season, where obviously in the winter collection, the optical has more space, and the optical has been performing well, both in Europe than in North America.
I will summarize new brand, our big brand collection very well received, and obviously there is a more optical weight in this collection, and the optical has not been suffering, not in North America, not in Europe, where the main suffering was on the sunglasses bit. Just to close on the market, to be a bit more specific on the investments, in the nine months, we have been more or less 80 basis points lower in terms of marketing on sales, while in Q3, we have been just slightly down, and we have been also accelerating pretty significantly in September, as we wanted to support strongly the back-to-school launch of the fall winter collection. Q3 was roughly 20-30 basis points below year ago in terms of marketing investments.
Thank you very much, gentlemen.
Thanks.
The next question is from Cédric Rossi of Bryan, Garnier & Co.
Yes. Good evening, everyone. I have two questions on the U.S., please. The first one is coming back on the U.S. elections. Of course, so the sourcing topic will become a hot topic again. So I was curious to have your view on how do you see the potential threats regarding the China sourcing, and have you anticipated any issues with regard to the imports coming from China? And my second question is coming back, so referring to what you were saying regarding the wholesalers' mood, have you seen any discrepancies between optical chains and independent opticians? Thank you.
I mean, I would not understand if the last question is also just related to North America or was more.
Yes, yes, Angelo, yes.
Okay, so the focus is North America. Okay. So I mean, obviously, as I said before, North America, if I look to the wholesale, so to the physical shops, we have seen a different dynamic looking to optical and sun. So also the chain which are more exposed to sun have been suffering more, where on the optical, to be honest, the market is growing low- single- digit, but is on the positive territory where the sun is not. So obviously, the chain or the optician more exposed on sun have been suffering by far more than the optical bit. This is something that should help, let me say, the end of the year for the same reason I was expressing before, that obviously the optical has a bigger weight.
On North America, let me say, I think still our view is that the context is still complex, and we see quite a high volatility, and both in-store and online. Now, as I said before, October, sorry, October was a positive month also for North America. True is that the comp was much easier, but at least October has been positive. The real question now is in front of us is November and December. The mood of the consumer, is it going to change now that the elections are not there? And somehow, in a way, on the other, there is a stability. So this sort of anxious mood should be out. This, honestly, we need to wait a little bit the next weeks or the next month. Too early to say now. But this is, for me, one important element that we should really now try to understand.
What is going to happen in the Black Friday is going to tell us something more about the mood of the consumer. Is really the mood of consumer getting more relaxed, getting more positive? Honestly, we need to wait. We need to wait some weeks. Looking specific to Safilo, North America, in North America, there are two elements which it's important that we take into account. You remember that last year, Blenders had a significant important quarter four thanks to the launch of Coach Prime. This year, we have Year 2 of Coach Prime, where we see good results, but not on, let me say, the astonishing growth of last year. So this is something that, again, we need to see in the next week. And on the other side, we have Smith, where last year there was really not a good winter season.
So now we need to see really if there's no season kicking in. The brand is healthy. We have done also some analysis on brand health and market share. So the brand is healthy. The question mark will be, are we going to have a normal winter season? Yes, yes, or no. With reference to China, I think, to be honest, it's too early. I think, obviously, the topic is very clear in our minds. We have the experience of the previous situation, but to be honest, any speculation now is a little bit too early. We need to wait. We are prepared. We know a little bit what the pictures can be, but I think now on this, we need to wait a little bit, really understand where the political, which are going to be the political choices.
And just to complement a bit what Angelo is just saying, of course, it's important to record that more or less 80% of our supply for North America is China-based. So this is and will be a relevant topic. But we can also confirm that based on our past experience, I would say the impact at the time was not material.
Okay. Thank you to both of you.
Thanks.
The next question is from Oriana Cardani of Intesa Sanpaolo.
Yes, good evening. Thank you for taking my questions. The first one is about gross margin. What is your expectation for next year in the sense that you see room for a slight improvement also in full year 2025 compared to this year? And my second question concerns the Smart Glasses Business. Last year, you launched Carrera Smart Glasses in partnership with Amazon. How did the launch go? Do you plan to release an update version? And what is your position in relation to this new market niche? And the third question is clarification on October trend. You say that it was positive for North America. Was it positive also for Europe? Thank you.
I will start from the last, which I think makes my life a little bit easier. October was positive in all our regions. So we saw a continuation of the positive exit to quarter three in Europe, and we've been positive both in Asia and in the rest of the world. So the exit speed of October definitely positive in Europe, definitely positive in Asia, definitely positive in the rest of the world. As I said, in North America, we saw also this positive trend in October, but the rest of the comment is what I've answered before. I leave Michele to the gross margin, and I answer to the second question.
Yeah, so I would say on gross margin so far, the greater efficiency or industrial footprint and the price mix, as I was commenting before, were the key drivers that have been playing in our favor to achieve a very strong improvement at the gross margin level throughout the last quarter, but it's important to recall last year, our Q4 gross margin was already very, very high, being the result on one side of a lower sport business and an extremely positive D2C business, also connected with the success of Coach Prime on Blenders. This year, the probability is to register more balanced performance between the sport business and the D2C, with a therefore less favorable channel mix that is to be expected.
If this will be the case, then our aim will be to remain as close as possible to last year level in Q4, which in turn will give still the opportunity to maintain our full year gross margin well above 2023.
On smart glasses, let's say it like this. The Amazon Carrera was intended to, I mean, obviously has been a launch, but has never been intended like a sort of game- changer in terms of sales in the short term. The main aim was to learn, and we are taking very, very clear learning both on the D2C and on the physical shop. So honestly, the numbers we had in our P&L were non-significant. The aim was, let's have a learning on the consumer behavior on one side and how D2C channel and physical channel can be played on this new business opportunity. This is the specific answer related to Amazon Carrera. Amazon Carrera, for choice of Amazon, was limited to North America and limited to a specific area of North America.
With reference to the broader question, which is on smart glasses, I think that I'm reading all what is happening with them. I'm very happy what is happening in the sense that I think that it's a great opportunity for the market to become bigger. So any activities, any initiatives that are going to enlarge the market is by us, I mean, very well received. It's an area that we are looking and working tight, but I cannot answer to, let me say, on obviously when and how we will have news on that specific category. But for sure, the fact that looks like it's working, we consider as a great opportunity the market gets bigger, and we are ready at the right moment to catch that opportunity.
Understood. Thank you very much.
The next question is from Domenico Ghilotti of Equita.
Good afternoon to everybody. Three questions. The first is related to price. Because if I understand properly, so your channel mix is maybe a little bit less favorable going into Q4, and the industrial footprint is behind us. So I wonder if you have been implementing some price increases or if this is not appropriate for the current market condition. And second is on the CapEx, if I'm not wrong. So trying to extract the data from your press release. You were running at around EUR 13 million CapEx in nine months. So a bit some acceleration. So I'm trying to check if this is true and if you are really increasing the pace of investments. And the third on the European situation. So you have been flagging the uncertainty on North America, but you sounded a bit more comfortable with the situation in Europe.
If you can elaborate a little bit more, because at the end, this is a quite relevant market and would be quite interesting to see an acceleration or sustainable growth there.
Thank you, Domenico. Starting from price, as you know, we don't comment on specific price initiative. What we can confirm is that pricing will continue to be a tailwind also in Q4, between low to mid- single- digit impact in Q4 from pricing, and we do expect also pricing to continue to be a positive element also in 2025. In terms of CapEx, we don't comment specifically financially in Q3, but just to confirm, we are not increasing level of spending. As you recall, H1 was impacted in terms of CapEx by the acquisition of the David Beckham Perpetual license for roughly EUR 35 million-EUR 45 million. If we add this amount, we continue to spend more or less aligned to what has been our CapEx spending last year.
Yeah. Answering to your last question on Europe, let me say Europe, as I said before, we had a positive feedback in September on the presentation of the collection. October has been a positive month for Europe. So our position is that Europe remains for Safilo the most resilient market. Obviously, we follow tight, let me say, what is happening in Germany, what is happening in other geographies. We see clearly a sort of consumer confidence in Germany going obviously down. So if you say Germany is in this moment the market that we see a little bit more nervous from a consumer perspective, but I can openly say that Germany, we have been positive in quarter three. We don't see reasons why this positive trend should not keep going for the rest of the year. France, we are seeing now for quite some months a positive trend.
October was positive, quarter three was positive. Where obviously we see Spain and Italy a little bit on the slow pace. Why that? I think the portfolio that we have been working and focusing in Europe is working very well. Carrera is going well. David Beckham is going well. Boss and Tommy are going well. So I think the portfolio we have been putting our priority is working well in Europe. The other dimension, which I think is a competitive edge that we are building in Europe, is the B2B. I think we have been talking many times about that, but I think one of the reasons why our business in Europe is so resilient is also related, is a combination of go-to-market, is a combination of brand, but there is a strong contribution on this digital new way how to talk and how to deal with our customer base.
Can I follow up on when you're commenting on Spain and Italy a bit softer? Do you attribute this to the sun? And so clearly more relevant for these two markets, or have you seen softness also in prescription?
No, I think you are absolutely right. Obviously, Spain and Italy, for geographical reasons, are more exposed to the sun, and as I was saying before, obviously we see a different trend. The sun, the sunglasses, is negative low- single- digit where the optical is up low- single- digit, and obviously, Germany and France, their country and the north country, which are more skewed around optical.
Okay. Thank you.
Thanks.
As a reminder, if you wish to register for a question, please press star and one on your touch-tone telephone. The next question comes from Carmen Novel of Banca Akros. Ms. Novel, your line is open. There's a bit of interference. Novel, would you like to change your telephone?
Can you hear me now?
Yes, we can now. Thank you.
Thank you for taking my question. I had only a quick follow-up question on marketing expenses. Can we expect those expenses to increase in absolute terms in the last quarter of the year? And if not, when you are planning to further accelerate those marketing expenses, always in absolute terms? Thank you.
I mean, I will not expect a big change in trend over quarter four. I will summarize with the statement that I don't think it makes sense to push water uphill. So obviously, some of our brands are more sun-related, so we took a conscious decision to slow down because, I mean, in the peak of the season, I think everyone remembers what I mean, the weather in what was it? May and June. Obviously, next year, we will come back in investing mainly on the priority brands. We will invest more compared to this year. So I think also thanks to the fact that most of our investment now is in digital, we have this opportunity to retune and reschedule very, very, very fast our investment. But there is no intention to cut marketing.
This year, as I said, we did in a conscious way on some specific brands, but next year, we will keep investing again where we need. There is no intention to reduce the marketing support.
Okay. Thank you.
Thanks.
Once again, if you wish to register for a question, please press star and one on your telephone. For any further questions, press star and one on your telephone. [Foreign language] , gentlemen, there are no more questions registered at this time.
Okay. So thanks very much. Thanks for everyone, and have a nice evening. Thanks very much.
Thank you.
Bye-bye.
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