As its core business consists of making “medical devices,” Safilo has continued manufacturing both prescription frames and sunglasses in Italy despite harsher governmental regulations for the lockdown of non-essential activities in the country to stop the propagation of the Covid-19 virus. We could not determine at press time how many other Italian companies are still in operation, but the country’s other major eyewear producer, Luxottica, has decided to keep its Italian facilities shut, with the exception of a lens laboratory, until at least April 3.
On March 22, the Italian government issued a decree enforcing the shutdown of manufacturing, transportation and retail activities for non-essential products from March 23 to April 3, toughening previous measures that resulted in a nationwide lockdown starting on March 10. But it did continue granting waivers for some industries such as the manufacturing and supply of medical equipment.
The Italian eyewear industry association, Anfao, asked the government to specify which activities were authorized, and the legal department of the industry ministry indicated that the production of ophthalmic lenses and the manufacturing of frames for “all types of glasses” were allowed.
Safilo pointed out that it had previously scheduled the stoppage of its Italian plants at Longarone and Martignacco on March 27 and March 30 and at Santa Maria di Sala on March 30 and 31, as its Italian suppliers of components have had to shutter their own sites.
Safilo stressed that it has applied all required health measures in its facilities, including social distancing and the cleansing of the premises.
Net loss declines but sales fall sharply from mid-March
Releasing its final results for 2019 on March 11, Safilo said it expected a significant drop in sales in the second half of March due to the Covid-19 pandemic that has brought economies throughout Europe and North America to a standstill. The group stressed that in the first two months of 2020, the demand from retailers had been strong, leading to unexpectedly high sales.
Safilo’s chief executive, Angelo Trocchia, noted that until then the group had not suffered supply problems, thanks to “a good level” of inventory, and that the supply chain is “normalizing and not an issue.” The company’s Chinese factory in Suzhou resumed production on Feb. 10, after a closure for the Chinese Lunar New Year break, and has gradually ramped up production, reaching 85 percent of capacity. It noted that its Chinese third-party suppliers also resumed their activities faster than expected.
Safilo’s European plants had suffered from a delay in the delivery of components, a problem that has been largely overcome with Italian factories functioning “properly” in March. Safilo pointed out that its Slovenian factory, in Ormoz, was not in an area affected by the pandemic.
Safilo’s Milan offices were closed, with people working from home. In the company’s head office in Padua, 400 staff members were also working from home, while the personnel at its distribution center and in customer service were still present on the premises. Trocchia stressed that the Padua distribution center was shipping all available products.
Safilo indicated on March 11 that the outlook on the demand side is “very uncertain” and that it will remain “very vigilant” and will enact contingency measures such as freezing discretionary expenses, adapting marketing budgets and rebalancing investments. With the outbreak in Italy, which was the first European country to apply lockdown measures, orders started falling, or being cancelled, from the beginning of the second week of March. Trocchia believes that lost orders can be recovered if the Covid-19 crisis comes to an end in April, adding that sunglasses are the category most affected by the decline.
Safilo confirmed that it reached a turnover of €939.0 million in 2019, up by 3.1 percent on a reported basis and by 0.9 percent in local currencies, and that the adjusted Ebitda margin narrowed to 5.5 percent from 6.3 percent (see Eyewear Intelligence Vol. 21 n°1+2). It added that the adjusted net loss declined to €4.0 million from €14.0 million. But the reported net loss surged to €301.9 million from €19.8 million in 2018 due to €295.9 million in one-off items.
Free cash flow was a negative €13.8 million, on an adjusted basis, against €25.6 million a year earlier, while the adjusted net debt slipped to €27.8 million from €32.9 million. The adjusted financial leverage dropped to 0.5 times from 0.7 times.
For 2020, Safilo reiterated its full-year guidance of revenues reaching €960-1,000 million, an adjusted Ebitda margin around 6 percent and a financial leverage of 1.0-1.5 times. But it noted that the forecast includes the acquisition of Blenders, which it expects to close in April. It does not include Privé Revaux, which it bought on Feb. 10, or the impact of Covid-19.
Equita, a brokerage firm that follows Safilo closely, cut its forecast for this year’s sales growth to 1 percent from 4 percent previously, with a partial recovery of lost sales in 2021. It now anticipates Ebitda at €46 million for the group this year, against a prior forecast of €60 million, compared with €51 million in 2019.
Moody’s has placed under review for a possible downgrade Safilo’s B2 corporate family rating and its B2-PD probability of default rating. The rating agency explained that the review has been prompted by the spread of the coronavirus across Europe and its likely impact on the group’s earnings. It noted that Safilo’s rating was “already weakly positioned” because of the uncertainty about its ability to compensate for the loss of the Dior license, which expires at the end of 2020.
Moody’s pointed out that a severe and prolonged contraction in consumer spending affecting Safilo’s summer collection might “strain the company’s liquidity and challenge it,” making it difficult to maintain the adjusted gross debt below 5.5 times Ebitda in 2020. According to Moody’s calculations, Safilo will have an adjusted gross debt of 3.8 times Ebitda after the acquisition of Blenders and Privé Revaux. Moody’s expects to conclude the review within the next three months.
Safilo will trim its workforce
Meanwhile, the Italian industry ministry has cleared Safilo’s restructuring plan, which had previously been agreed with the trade unions. It calls for 700 job cuts and the closure of the company’s Martignacco manufacturing site, located in the Italian region of Friuli Venezia Giulia, which employs 250 people.
The agreement allows the use of a state-subsidized layoff scheme, known as “cassa integrazione straordinaria,” for the workers at Martignacco from July 1. An adviser will be appointed to seek a solution for the relaunch of the site by a different owner, and Safilo did not exclude any type of acquirer.
At the Longarone factory, where Safilo plans 400 job cuts, the group will apply a renewable 12-month time-sharing scheme to avoid layoffs, accompanied by a package for voluntary departures.
At the head office in Padua, where Safilo plans 50 job cuts, the group will offer incentives for voluntary departures. It plans to introduce other measures at a later stage if it does not reach the target level.