Tabacchi: downsized costs and outsourcing

In an interview with Il Sole 24 Ore, Vittorio Tabacchi, president of Safilo, talked about the industrial reorganization plan, the first part of which has been completed and is now producing results.

Last September 30, Safilo's net indebtedness stood at 781 million due to Vittorio Tabacchi's acquisition of the shares held by his brothers, Giuliano and Dino, in Spring 2001, and by the compulsory public share offer which followed. Repayment of the debt was almost immediately stalled by September 11, and then by Sars and the collapse of the dollar. Two years ago, the downturn in Safilo's operating profit was 34%.

However, the company can rely on a prestigious portfolio of labels, including Gucci, Armani, Boucheron, Ysl, Dior, Ralph Lauren, Burberry and Bottega Veneta. In the first nine months of 2004, Safilo's revenues were 713 million (+5.8%) and Ebitda stood at 109.7 million (+11%). 'We are trying', Tabacchi says, 'to recoup the negative effect of the dollar by cost containment and work on products. We launched an industrial plan which led to the closure of the Austrian facility, the most expensive, and the transfer of production to Italy. At the same time, we worked on the enhancement and exclusiveness of prestigious labels'.

The complete interview follows.

Q: 37.5% of Safilo's revenues comes from the US: have you balanced out the revenue-cost mix against exchange rates?
A: We outsourced, also to the Far East, some of the minor collections which do not require to be Made in Italy. However, in dollars the downsizing of costs is not sufficient to balance the falloff in revenues.

Would it be disastrous if the dollar dropped to 1.35-1.40?
We have already had catastrophic effects. I believe the dollar reached its ceiling of 1.36 during the Christmas period. This year, I expect it to swing between 1.30-1.35.

During the first nine months Safilo's revenues grew by 10% at constant exchange rates and by 6% at current rates. What was the figure for the whole year?
The 10% for the first nine months will also reflect the whole of 2004. But growth at current exchange rates will be positive. Margins will improve.

How are the markets moving?
The Far East will grow and Europe will improve only slightly. America is more uncertain: I hope that after the post-September 11 boom, the investment machine will continue to work. Hopes were raised by sales over Christmas; they were very lively, especially at luxury department stores.

Before he changed stables, Armani's billings with Luxottica were 225 million, but Safilo's revenues don't show this...
Actually, the 225 million was made when the dollar stood at 0.90 euros, at today's rate it would be much lower.

The re-negotiation of the debt with banks includes your willingness and that of Csfb Private Equity to put up 50 million if the guarantee parameters are broken. Is that the case?
I don't entertain this probability: the company generates sufficient cash flow to maintain its commitments and our bond has in fact risen from 74 to over 100.

In effect, however, in 2002 Safilo's Ebitda/revenues stood at 19.7% and in the first nine months of 2004 they had dropped to 15.4%: when will you return to levels of excellence?
We're working on it: but recovery is linked to market conditions.

Financial burdens of seventy million are heavy...
The company generates sufficient liquidity to be able to pay its debts.

Is a return to the Stock Exchange in 2006 still an objective?
Yes, market conditions permitting. At that point, things will be back to normal.

(Source: Il Sole 24 Ore)