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Edited Transcript of SFL.MI earnings conference call or presentation 2-Aug-19 4:30pm GMT

Half Year 2019 Safilo Group SpA Earnings Call

Padova Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Safilo Group SpA earnings conference call or presentation Friday, August 2, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Angelo Trocchia

Safilo Group S.p.A. - CEO & Director

* Gerd Graehsler

Safilo Group S.p.A. - Group CFO

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Conference Call Participants

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* Cédric Rossi

Bryan Garnier & Co Ltd, Research Division - Analyst

* Domenico Ghilotti

Equita SIM S.p.A., Research Division - Co-Head of Research

* Henry Hillgarth

Quaero Capital SA - Fund Manager & Research Analyst

* Marco Baccaglio

Kepler Cheuvreux, Research Division - Deputy Head of Research, Italy

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Presentation

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Operator [1]

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Good evening, and welcome to the Safilo Group's H1, Q2 2019 results. This call may contain forward-looking statements relating to future events and operating, economic and financial results for 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; Gerd Graehsler, Chief Financial Officer; and Barbara Ferrante, Director of Investor Relations. I will now pass the call over to Mr. Gerd Graehsler, Chief Financial Officer. Mr. Graehsler, you may begin.

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [2]

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Good evening, and thank you for attending today's conference call on Safilo's first half 2019 results. As done in May, I will give you very briefly a couple of important introductory topics, which are necessary in order to clarify the way in which we treat and analyze our performance in this first semester and consequently for the rest of the year. First of all, let me remind you that on July 1, we closed and finalized the transaction to sell the Solstice retail operations, which are out of our perimeter for the entire second half of the year. As done when analyzing our Q1 results, we look at and comment on our Q2 and H1 performance with reference to our continuing operations, thus excluding the discontinued retail business.

Full information on this is provided to you in the annexes of the presentation and let me here just highlight that the impact of the Solstice retail operations on our H1 total activities equaled a loss of EUR 26.2 million, of which EUR 17 million emerged from the asset disposal itself, slightly below the impact we had anticipated in our press release in May, while EUR 9.2 million was the net loss of the chain in the period.

Before handing over to Angelo for the highlights of our continuing operations, my last reminder to you is that our comments are given on the results before the impact deriving from the first adoption of the new standard IFRS 16 on the semester 2019. As already explained in May, we elected to implement the new standard applying the modified retrospective approach, whereby the cumulative effect of adopting the standard has been recognized at its relevant effective date on January 1, 2019, without the restatement of 2018 comparative information.

The table provided in Slide 4 shows you the impacts detailed by continuing and discontinued operations on H1 2019 consolidated statements of income and net financial position. Just looking at the continuing operations, you can see that we have a material impact in terms of EBITDA, EUR 7 million, which benefits from the reduction of operating rental expenses as the majority of the current operating rental cost is now presented as a depreciation of right-to-use assets and interest expenses on the lease liabilities. This becomes a minor positive at the EBIT level for the increase of the depreciation expenses and a minor negative at the net level -- the net result level due to the increase in interest expenses.

IFRS 16 had a total impact on the group net debt of EUR 73.5 million for the increase of lease liabilities, of which it is important to highlight that EUR 38 million pertains to the discontinued retail operations, thus disappearing from our total group net debt with the deconsolidation of retail.

I stop here and hand over to Angelo.

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [3]

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Thanks to you, Gerd, and good evening to all of you. The results we achieved in the first 6 months of '19 showed a positive sales progression with our continuing operation growing by 6.5% at current exchange rate and 3.9% at constant exchange rate.

The performance of the second quarter was solid. Sales growth accelerate as we had somewhat anticipated when commenting the positive start of the period recorded in April. The Q2 growth overall was -- has been by 9.7% at current exchange rate and 7.4% at constant exchange rate. And this was very much behind the acceleration posted by our own core brands and some of the main license brands across all our key geographical areas. Certainly in Europe, but more meaningfully we saw a return to a small growth in North America, taking the performance of the first 6 months into positive territory. I am very, very happy about the results of North America.

We saw positive momentum also in emerging markets, where the significant progress in Asia Pacific was accompanied by the recovery of the Latin America area. From a profitability standpoint, we are pleased with the evolution of our gross and operating margin, which continue to benefit from efficiencies and savings in cost of goods sold and from all the actions we have put in place to reduce the overhead expenses. The pre-IFRS 16 adjusted EBITDA of our continuing operation was up by 12.9% in the first 6 months after recording a plus 25% in the second quarter compared to the corresponding period of the last year. I think it's important to underline as a reminder that Q2 and H1 '18 included an accounting compensation for Gucci of EUR 9.8 million and EUR 19.5 million, respectively. So clearly, 2019 underlying performance called for a much more significant recovery. A positive economic performance, which together with favorable working capital dynamic, had allowed us to return to a positive free cash flow after 2 years of cash absorption. So in H1 2019, we had a positive generation of EUR 10.4 million, which in turn lead to a record low group net debt at the end of June of EUR 3.9 million and a financial leverage of 0.1x. Also in this case, we are quoting our net debt position pre-IFRS 16.

Let me go now in more detail of the sales performance of our continuing operations, focus on what happened in the second quarter.

As said, Q2 net sales were up 9.7% to EUR 248.6 million, benefiting of 2.3% positive ForEx impact mainly related to the U.S. dollar appreciation.

At constant exchange rate, excluding the production agreement with Kering, as expected, substantially stable in the period, our wholesale business was up by 7.5%, thanks to a strong performance by our sunglass business recovering from last year's weak track. I am particularly pleased to outline the double-digit growth recorded in the period by our Own Core Brands, Carrera, Smith and Polaroid, a good performance, which was driven in particularly by Carrera and supported by the continued positive momentum of Polaroid and Smith. It was indeed a positive quarter also from some of our main license brands, namely Dior, Boss, Tommy and Max Mara.

Looking at our best-performing channel, I would like to outline the outperformance of our travel retail channel as well as the ongoing development of our e-commerce business through Internet through (inaudible) and through our Smith e-commerce.

First half sales were up 6.5% to EUR 495.9 million, with the wholesale business at constant exchange rate, up by 4.1%. The total performance of Carrera, Polaroid and Smith in H1 2019 was positive around 8% at constant exchange rate.

If we look now to our geographies and starting from our biggest region, Europe, our continuing operation reached there EUR 121.7 million in the second quarter, reporting a plus 4.5% or 4 plus 8% (sic) [plus 4.8%] at constant exchange rate.

In H1, Europe represented close to 50% of our total sales, up 2.6% reported and 3.0% at constant exchange rate, and plus 3.3% excluding the production agreement.

Back to Q2, sales growth was pretty broad-based, high in the countries more impacted by the contraction in sunglasses sales experienced in the second quarter of last year, namely Italy, France and Spain. In Europe, I would like to mention the ongoing positive performance of Polaroid growing very consistently on sun.

In line with the plan we presented last year with regard to our own core brands, we are focusing our investments on key projects and in key and fewer markets, in a locally relevant way and in a locally relevant execution mode.

If we refer to Polaroid, Polaroid is today a clear and good example of how we are executing, what last time we have defined, our glocal approach, investing in fewer regions or countries, with endorsement of local celebrities relevant both for consumer and customer, and using digital more and more and a kind of digital channel to create content and to build a brand awareness through different rules of engagement with the final consumer.

Year-to-date, this project are paying out with more to go following up in our latest best practice, like the ambassadorship of the Italian rapper and showman, Fedez, in Italy, and for the 2nd year by the Spanish journalist, Sara Carbonero, but also project of exclusive Polaroid SKU in the global retail channel, like Dufry in its main airport. It is worth mentioning that the Italian Polaroid campaign with Fedez has been selected as the best Instagram campaign in Italy for the month of May by Facebook Italia and engage.it readers.

Let's move now to North America, where our revenue stood at EUR 80.6 million in the second quarter, up 8.4% on a reported basis, benefiting from a 5.7% positive effect from the appreciation of the U.S. dollar. At constant currency, our wholesale business was back to small growth at 2.7% that for us is meaningful as it represents a first important step in the right direction. As you know, Steve Wright is running the show there and I think Steve with all the American team, I think they are doing the right steps to move the North America business in the right direction. Compared to Q1, our performance continue to be positive and very supportive for our Smith sport business as well as for our wholesale business in Canada driven by very positive trends in particular for Hugo Boss and Kate Spade.

In U.S., sales recovery was driven by the positive trend recorded in chains as well as by a more stable performance in department store. Trading in the sales channel improved quarter-on-quarter, but as said during our call in May, work is going on to recover and the sustainable and agile business model in the channel, moving in the same direction, but still a work to grow. For reference, Q2 underlying performance in North America excluding the terminated Céline and Bobbi Brown business from the base period was plus 4% at constant exchange rate.

In the period, outperforming brand in the most important consumer segment of the region, the fashion contemporary were Carrera and Tommy Hilfiger, while it's also worth mentioning the positive reception from the market of the rag & bone brand. North American sales were back to growth in the first 6 months, up 7.8% at current exchange rate, 1% at constant exchange rate or 2.8% on an underlying basis, excluding the terminated sales.

Let me take this opportunity to look at how also in the case of Carrera, we are executing a glocal approach developing digital strategies and focusing investment in key markets. Among all, I would like to outline a couple of examples, the Carrera Formula 1 activation following our multiyear sponsorship agreement with Alfa Romeo Racing and Gumball 3000 event sponsoring that generated a great PR bar, raising brand awareness and effective trade and social media engagement.

Leveraging on the global Alfa Romeo Racing sponsorship, several countries boosted Carrera visibility and at the same time, engaged with top customer and activated many consumers.

We can mention, as an example, the 360 activation around the Canada Grand Prix in Montreal last June. Many initiatives ran in parallel, a Carrera pop-up store was custom-built at the race marketplace, digital out-of-home advertising in Downtown Montreal. So a really 360-degree, which is playing around the race, but is really trying to activate as much as possible the consumer around the Carrera brand.

Gumball 3000 is another big initiative where I see Carrera playing there. It's one of the world's largest live annual events and it combines access for cars, music, action, sports and celebrity culture, all around in an approximately 3,000-mile long road trip, that since its first edition, has been traveling through 50 countries and capital cities in front of thousands of fans and attracting thousands of people around the event. For these occasions, Carrera presented 2 limited edition style, Carrera Glory and Carrera HyperFit, which were on an exclusive presale at Selfridges, London, and from June 7, and Carrera world on -- and on the carrera.com (sic) [carreraworld.com].

Moving to our emerging market, so let's come back to the geography, in the second quarter, our Asian Pacific region reached EUR 25.7 million, up 41.6% on a reported basis and 36.2% at constant exchange rate, confirming and further accelerating the positive business momentum recorded in the first quarter. Key driver of this strong recovery are, again, our travel retail business, Greater China and the positive development of Smith and Marc Jacobs in Australia. In the first semester, Asia Pacific grew to represent 8.8% of our total continuing business from 7% in the same period last year, up 33.7% at current rate and 27.9% at constant ForEx.

The second quarter saw also a promising recovery in our rest of the world, which grew by 16.2% reported and 14% at constant exchange rate. Taking back to a slight positive also the performance of the region in the first half to the year up 2% at current, 0.8% at constant rate, to a total of EUR 36.7 million. Key positive drivers were in particular 2 markets, Brazil and Mexico, where our new commercial organization is working well, reactivating key customers to speed up penetration of our core brand. Also in this case, Carrera, Hugo Boss and Tommy were our top performers.

I stop here and hand over to Gerd for additional outline on the more economical and financial performance.

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [4]

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Thank you, Angelo. Let's then get to the drivers of our operating performance, starting from the results we achieved at the gross profit level. These were very supportive. Operations at the cost of goods sold level improved compared to the same quarter of last year and sequentially on the previous quarter of the year. Second quarter 2019 gross profit reached EUR 136 million, up 14.7% versus Q2 2018, and with the margin on sales up 240 basis points to 54.7%. As we saw in Q1, the industrial performance of the period reflected a solid stream of production volume, supporting in turn our projects of plant efficiencies, which continue to materialize very well. Sales mix was again a positive contributor to our performance, while we had 30 basis points negative effect from foreign exchange.

In half year 1, the gross profit of our continuing operations increased 11% to EUR 266.2 million or 53.7% of sales, up 220 basis points in the first half. As already highlighted in this first semester, Gucci production volumes were pretty much stable compared to last year and its dilution effect on our gross margin also remains stable at around 300 basis points.

Now before moving to our adjusted EBITDA performance, I will highlight the nonrecurring items which impacted our reported operating and net results. These equal EUR 255.4 million, a significant amount, mainly reflecting the noncash impairment of EUR 227.1 million, representing the entire goodwill on our balance sheet. This resulted from the impairment test that we run for the purpose of our semiannual financial statements taking into account the most recent market portfolio in competitive context for the company. In the same exercise, we also wrote down deferred tax assets for EUR 23.3 million, while we incurred nonrecurring expenses of EUR 5 million, mainly related to the group's cost-saving and restructuring projects.

Going to our adjusted EBITDA. In the second quarter, our gross operating profit grew by 25%, reaching EUR 17.7 million or 7.1% of sales, taking H1 adjusted EBITDA to EUR 34.2 million or 6.9% of sales. This represents a significant underlying operational improvement, which was achieved thanks to the already commented positive impact of sales growth and product supply efficiencies plus further progress at the operating expenses level, mainly thanks to overhead savings. These improvements, year-to-date, allowed us to overbalance the other income of EUR 9.8 million and EUR 19.5 million we booked respectively in Q2 and H1 2018 as accounting compensation for the Gucci anticipated exit. Overhead cost savings totaled EUR 9 million in the first half of 2019, whereas our marketing investments in Own Core Brands actually increased by around EUR 3 million in the period as we invest in the activities to grow them.

Further down our P&L, some additional items to mention are stable depreciation and amortization of EUR 21.3 million, thus the lower incidence on sales, the interest expenses decreasing by more than 40% to EUR 2.5 million, thanks to the significantly lower average debt and exchange rate differences which were flattish compared to their negative EUR 2.8 million impact in H1 of 2018. All this further contributed to the positive net adjusted results of the period, which equaled EUR 8.7 million against an adjusted loss of a EUR 4.3 million in the first half of 2018.

Moving to the financial highlights of the group total operations in the first half of 2019, always before IFRS 16, it is mainly thanks to the significant improvement of the underlying economic performance that we recorded a positive free cash flow of EUR 10.4 million. On the other 2 important fronts, we had favorable working capital dynamics with the generation of EUR 11.2 million, mainly thanks to the decrease in inventories and an increase in payables, while cash flow for investments totaled EUR 15.8 million. The latter were devoted to our product supply for malls and machineries and our latest new logistics center in Denver as well as the ongoing rollout of new ICT.

Our total group net debt at the end of June 2019 pre-IFRS 16 stood at EUR 3.9 million, a record low for Safilo, resulting from the remaining proceeds received on the 2nd of January and equal to EUR 17.7 million from the share capital increase executed in 2018 and the positive free cash flow just commented. At the end of June, the adjusted financial leverage decreased to below 0.1x compared to 0.7x at the end of last year.

Over to Angelo for his final remarks.

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [5]

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Yes. I think it's quite important, the second half of the year in this kind of business, that we have to deliver in these coming months. So obviously, the Q3, the September, the September numbers are going to be crucial to outline to top line and characterize the full year. The priorities are clear, the plans are set and now we just need to do it. We aim to see our wholesale business, excluding the production agreement with Kering, consolidating the path of the top line growth achieved in the first half, and closing the year with the first step to restore by 2020 an adequate and sustainable level of profitability.

As is known, I mean, we have been announcing the closure of the Dior eyewear license by 2020, but I think that as Safilo, we have the right portfolio, we have the right people, we have the right capabilities and we remain absolutely committed to building even a stronger Safilo for the future, leveraging on what our competence are, what our unique [strategy] has and our people to even expand more our brand portfolio, which is going to be based, as I said, on our own brands, on a significant and very important number of license on which we have added the latest signed agreement with Levi's, with Missoni and with David Beckham.

We remain fully committed to our 2020 group business plan, aiming to reignite sales growth, focusing on key geographies, brands and channel, while keep recovering the operating performance enabled by our obsession for cost, which is translating in a very focused cost reduction grower. And by the end of the year, as we have already announced, we will present the new plan, which is going to look beyond 2020.

Thanks very much. And ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question for today is from Domenico Ghilotti from Equita.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [2]

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I have 2 questions. The first is a comment on what are you planning in case of tariffs applied by the U.S. on China from September 1. That, if I am not wrong, should include also frames. Second, I would like to have your view on the market environment, so the consumer environment, maybe for sort of an outlook for the second half in different regions because you have been posting more than satisfactory results and here and there you are commenting quite positively, so that to defend that, if you see it is driven by the market conditions or more company specific?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [3]

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I will ask on the second question, then I will let Gerd to answer to the first one. In terms of consumer, obviously, we see that in Hong Kong and in China, there is a slowdown of the economy, which we are assuming that somehow we'll have a little slowdown effect for the H2. Where on the other side, to be honest, we see -- we keep seeing a positive trend and we expect the positive trend to keep going on in Europe and in U.S. So the main area of concern in this moment is the Asia Pacific area. The results of our -- the reason behind our result is a combination of a positive, I think, in this moment, attitude of the consumer also have, especially in Italy -- in Europe, from a good sun season. But I have to say that is also partially related to 2 main changes that we have done, one is to get closer and closer to our customer, which I think we have not been close like this in the past; and second, I think moving to activate some of our brands more and more digitally. And to be honest, we see that where this activation has been done properly, we see a very, very big uplift. So I think we will keep shifting more and more to sort of social engagement, digital-driven campaign that I think are going to pay back more and more.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [4]

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Just a follow-up on this topic that is quite interesting. So you are mentioning, you were saying -- you were shifting, so apart from the, whatever, you were mentioning some increase in marketing cost, but overall, I should look at this engagement as a shift from the traditional to new media, social media and digitalization?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [5]

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I think it's never black-and-white, it's like it's never all offline or all online. But by sure, I think that we see that the most successful activation that we have done, and it's not only in Italy, it's not only in Europe, it's, to be honest, it's all over the place. When we have been activating socially and digitally our brands, that is where I think is working, and that is where we will be always looking and investing our money. But the point is the success -- the key of the success is a combination. I was mentioning before that the Gumball experience is really when you are able to do what now, I mean, the guys, which speak great English, say the 360-degree activation is really a combination on the social-driven campaigns digitally embedded, but also with a sort of personal and experiential contact. When we create this click, we see in Italy, we have seen with Gumball, we saw in India, we saw in other country, that is working. So we will move more and more toward this kind of activation of the brand.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [6]

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Okay. What about the LatAm? Sorry, just to compare, what about the LatAm?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [7]

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LatAm, I think it's the effect of 2 things. I think as you know, we have changed -- we have the new country manager for Brazil. And we have the new guy which runs the full region. So let me say the main effect there is people. We have great people in place, great knowledge of the market, great connection, great connection with the customer, and I think a new, more concrete and operational approach toward the region. These are the main driver behind the numbers.

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [8]

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Okay. I'll just give some perspective on the tariffs. I mean the topic per se is not new. A couple of months ago, we were looking at a potentially even higher tariffs than the 10% that seems to be envisaged by the latest tweet. Let's see what will really happen in the coming weeks and months. Certainly, it's a topic that is on our enterprise risk management radar. It is something that we have contingency plans in place for on the one side looking at importation procedures, looking at distribution, logistics, looking at sourcing and siting, working with our suppliers. And then at the end of the day, what actions we will implement to mitigate this effect will depend on what exactly will eventually become the new regulation. So we'll stay close to it.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [9]

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What is the, say, time for a reaction? So if the tariffs are applied from September 1, how fast can you react?

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [10]

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I think that we are able to react within approximately 1 month.

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Operator [11]

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Our next question for today is from the line of Cédric Rossi from Bryan Garnier.

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Cédric Rossi, Bryan Garnier & Co Ltd, Research Division - Analyst [12]

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Actually, I have got 2 questions. The first one is on Carrera. So I think it was an impressive performance in Q2. I think it's been a year that you haven't posted a double-digit growth at Carrera. What are the drivers of this rebound? So you talked a little bit on the digital initiatives, but I have the feeling that a few years ago, you tried to reposition Carrera as a more lifestyle brand, and now it seems that you are more focusing on motor sports, which used to be the DNA of Carrera. So do you think that now you feel that you have the right positioning and thanks to a better execution, we can expect more positive momentum on Carrera going forward? And the second question is on -- sorry, I don't know if you...

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [13]

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No, no. Keep going, keep going.

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Cédric Rossi, Bryan Garnier & Co Ltd, Research Division - Analyst [14]

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Okay. Sorry. And the second question is the H2 outlook. So to follow up on Domenico's question. So I believe that you posted 7.5% excluding the Gucci agreement. So we know that the Gucci volumes would have in H2, so do you believe that there is also a more sustainable pace of growth that you can achieve in H2, notwithstanding the decreasing Gucci volumes?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [15]

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Okay. So I will take the question on Carrera and Gerd is going to answer on your second question.

I think that on Carrera, in terms of when -- where the brand stands now in terms of brand positioning, I think we have the right position, which is not only sport. I would say that our mission is drive your story. It's interpreting the sport, but not really like a sort of extreme sport, it's more like an experiential and sort of style of living. And I think that in terms of positioning of the brand, I think that we have the right position. So we are going to stay in that position also for the year to come. Because I think that consistency in the brand message is going to be one of the key element of the success. So I think the position is right and we are going to stay there, twisting more, trying to give this personal touch of drive your story, so be yourself in what you do, you can drive your way of living. All this in terms of positioning, I think enriched by the collection, which I think are outstanding, also the collection we are presenting now for September, we are getting very, very positive feedback from the main customer, will help to keep Carrera growing and then on top of all the digital activation, digital/social activation I was referring to. So I think that now is -- we have the right platform, we have the right positioning, we just need to be consistent and keep investing and activating more the brand.

And personally, I think that there are some regions of the world where Carrera is still not expressing the full potentiality, and we will work in the next month to exploit this region more.

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [16]

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And so I'll comment on the second question. So for the top line, our remain objective this year overall is to get back to growth with our wholesale business after we have had 2 consecutive years of decline. The expectation that we will return to growth for the year, I think we can confirm. We are pretty pleased to see the 4% at constant exchange rates in H1. I would probably look more at the H1 number as an indicator for the second half here rather than the Q2 number, which was quite an acceleration, but benefited also a little bit by the base period in Europe. I think that what we are looking at for now is to continue the kind of trend that we have delivered in H1 also in H2, and then also into 2020 as this is also consistent with what we published for the strategic plan. Clearly, in the first half year, we have seen quite strong production agreement volumes from Kering. And you know the relationship is going very well, I'd expect in the second half year somewhat lower volumes, and therefore, the 4% probably in the second half on an all-in basis should be lower, which is again also consistent with our overall guidance that we gave for the CAGR up to 2020.

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Operator [17]

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(Operator Instructions) We have a follow-up question from Domenico Ghilotti from Equita.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [18]

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Sorry, but I was missing the most trivial question. So what's your view on the impact on the acquisition of GrandVision on the business of Safilo and the industry in general?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [19]

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Obviously, it's one of the element which is going to impact the overall industry. So obviously, it's a 7,000 point of sale. It's a significant add to the Luxottica retail. I think this is it. I mean this is the new reality. And as a Safilo, we will take this reality into account moving forward. I think obviously together with some other changes which have been happening, this is an additional disruptive force for the market, and we need to find different solution and try to design different options. I will -- that's it from my side. I mean this is part of the life of this industry, which has been stable for quite a while and actually now is under sort of acceleration of structural changes.

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Operator [20]

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Our next question for today is from the line of Marco Baccaglio from William Blair (sic) [Kepler Cheuvreux].

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Marco Baccaglio, Kepler Cheuvreux, Research Division - Deputy Head of Research, Italy [21]

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I had a question about your second half of the year because the last 3 or 4 years have been extremely difficult to read in terms of seasonality of the business. So in the second half, you have the cost-cutting which will continue. You will have less operating leverage due to the volumes of Kering. So you ended H1 with a net profit of EUR 9 million more or less. Is it fair to assume that you would be able to more or less retain a breakeven on an adjusted basis on a full year?

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [22]

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I mean on the second half year -- or let me say for the full year when it comes to the profitability, our aim for the year for the continuing operations now was to rebuild the level of profitability more or less in line with last year, when we did have EUR 39 million of accounting compensation to support that mid-single-digit adjusted EBITDA. The objective then was, therefore, to achieve a significant underlying improvement and considering what we achieved in H1, but also the seasonality of the business where we tangentially have higher sales and profits in the first half of the year. And also, we had a very good chunk of the savings that were planned for the year materializing in H1. I think we would still remain committed to this initial objective. Clearly, it will depend very much on the sales development for the coming months. So far, we've had a good first half. On Dior, for example, we just announced 3, 4 weeks ago, the exit, which makes it a little bit more unpredictable, let's say. Let's see what happens. But I think we would still see that kind of operating profitability as we anticipated.

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Marco Baccaglio, Kepler Cheuvreux, Research Division - Deputy Head of Research, Italy [23]

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So if I may follow up then, on top of this EUR 39 million, if you succeed, you should not have around, if I remember well, EUR 11 million, EUR 12 million of losses of Solstice?

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [24]

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Exactly. So we do not have any more the losses of Solstice. We have recorded EUR 9 million of losses, just the operating performance of the chain in half year 1. It included the EUR 1.5 million of the costs to sell it, so EUR 7.6 million. Without that, we will not have that drag anymore on the company going forward.

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Operator [25]

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Our next question is from the line of Henry Hillgarth from Quaero.

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Henry Hillgarth, Quaero Capital SA - Fund Manager & Research Analyst [26]

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Just a couple of questions. The first one is on the goodwill and I am just trying to understand what that goodwill is tied to? I mean from memory, I think you had about EUR 125 million that was actually tied to the U.S. or the Americas in general, but I imagine that's mostly the U.S. So just trying to understand that. And then the other question is really around the deal licensing and maybe you could help us understand how the termination works. I mean is it a phase-out or is it an abrupt termination? And what you're doing to replace the volumes?

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [27]

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Yes. I think on the first question, so our goodwill, let me say, casually, it's an accounting artifact from a very distant path -- past. It's something that's been there for 20 years, at the time, more than EUR 700 million relating to some extraordinary operations that happened a very long time ago. And that amount was then allocated to the various cash-generating units of the group, have been impaired successively in the past years. We still have, indeed, as you said, some goodwill left on the Americas cash-generating unit and some goodwill at the level of the EMEA cash-generating unit. So as we looked at the semiannual financial statements, as we looked at some of the evolution and the dynamic market context that also Angelo was mentioning, we thought as we ran the impairment test that it would be prudent to impair the remaining goodwill. And this leaves us with the shareholder equity in the books of EUR 395 million, which in any case, is still quite above of where the market valuation is today.

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Henry Hillgarth, Quaero Capital SA - Fund Manager & Research Analyst [28]

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And just on the second point, sorry?

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [29]

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The second question was on Dior. I mean Dior is that we have the license till this end of December 2020. So we will keep running the business as business as usual. So we are not going to have any difference in the level of investment or in the level of focus or in the level of attention. So for me, it's a license which is going to be run till the last day. So I don't know if you had a special angle to that, otherwise for me, it's till 2020. Our salespeople, they will keep pushing Dior. They will have in all the sales activities. So there's not going to be any give up till the last day in which we own and we run the license.

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Henry Hillgarth, Quaero Capital SA - Fund Manager & Research Analyst [30]

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There's no real angle. I mean it's just trying to understand in -- when we were looking at the Gucci contract, there was an agreement that was terminated and then you ended up having volumes that were no longer -- that weren't distribution volumes, but you still had volumes coming through. So just trying to understand whether there's a similar arrangement for Dior that means you still have the volume...

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [31]

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No, no, sorry, then I missed your -- no, no, I think in this case, there is not going to be any production. There is no production agreement with Dior. So we will run and manage the license till the end of December 2020. As from January 2021, they need to produce, distribute, activate. There's not going to be any activity done by Safilo with reference to the Dior license.

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Operator [32]

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And our next question is another follow-up from Domenico Ghilotti from Equita.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [33]

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My last 2 questions. A follow-up on Dior. Are you still discussing potential repurchase of inventory at the end of the termination of the license in order to keep the market clean? So it's something that we should still expect? And the second, on the cash generation in the first half. In terms of working capital, so the performance was very, very good. I'm trying to understand if there is something specific behind this trend, it is something that is sustainable? And how do you see the debt level, maybe at year-end?

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [34]

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Yes. I think, I mean, on the first question of Dior, I mean, I don't want to go into any contractual specifics. The way it generally works with a license is that until the very end, the last day of the license, or December 31, 2020, we can sell the product. Then in terms of the remaining inventory, we will do the stock count. We will typically have a period in which the licensor has the right to purchase the stock. They may or they may not opt to do that. In the case of Gucci, indeed, the licensor opted to do that. And then after that in the first half of 2021, there is a sell-off period during which Safilo can then deplete the remaining inventory that has not been purchased.

With regards to the second question, I mean, what is really driving the cash flow is on the one side, we have a positive flow from operating activity before the movement of working capital, because we have posted a solid EBITDA, and we have lesser financial charges, lesser taxes paid in the period, we had a positive effect from the inventory and we had a positive effect from the payables, but a negative effect from the trade receivables, which, however, if we look at it on a DSO basis, is quite normal because we recorded strong sales in May and in June. And so there's a lot of invoicing on the balance sheet that then will be collected in the following months. And it is similar with the payables because we have, of course, the marketing investments impacting mainly May and June period.

And then I think on other payables and receivables, let me say we have classified as another payable or an advance payment, the $3 million that we received for the sale of Solstice at signing, which is something that is 1/3 of the total purchase price. The rest will then be paid over the coming 12 months. But since the deal closed on the 1st of July, it was captured still as an advance payment, so it impacts positively on the working capital side. And we have made some further progress on managing actively, I think, our various credit positions on VAT because these are always to liquidate a bit the balance sheet. I think for net debt, I think we closed very well at the end of half year 1. What we will achieve in half year 2 and the full year will depend on sales profitability and the working capital dynamics in the second half. Our initial ambition for the year was to close 2019 with a net debt always pre-IFRS 16 below the EUR 32 million of last year, and we will continue to stick to this objective.

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Operator [35]

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(Operator Instructions) There appears to be no further questions coming through, sir.

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Angelo Trocchia, Safilo Group S.p.A. - CEO & Director [36]

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Okay. So thanks very much to all. Thanks very much to everyone.

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Gerd Graehsler, Safilo Group S.p.A. - Group CFO [37]

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We wish you a good summer.

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Operator [38]

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Thank you very much. Ladies and gentlemen, that does conclude the conference for today. Thank you all for your participation. You may now disconnect your lines.