marcolin bond report h1 2015 · viva optique, inc. (new jersey). ... and also between eyeglasses...

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MARCOLIN BOND REPORT

AS OF AND FOR THE SIX MONTHS ENDED

JUNE 30, 2015

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DISCLAIMER

The following information is confidential and does not constitute an offer to sell or a solicitation of an offer to buy any

securities of Marcolin S.p.A. or any of its subsidiaries or affiliates.

Statements on the following pages which are not historical facts are forward-looking statements. All forward-looking

statements involve risks and uncertainties which could affect Marcolin’s actual results and could cause its actual

results to differ materially from those expressed in any forward-looking statements produced by, or on behalf of,

Marcolin.

The financial information contained herein has not been subject to audit procedures, and has been derived from the

management accounts, which could differ in some instances from the statutory financial statements.

*****

This report as of and for the six months ended June 30, 2015 should be read in conjunction with the Annual Report for

the year ended December 31, 2014. This report focuses on the material changes in our results of operations and

financial position from those disclosed in the report for the year ended December 31, 2014.

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TABLE OF CONTENTS

I. OVERVIEW ....................................................................................................................................................................... 4

II. PRESENTATION OF FINANCIAL INFORMATION ............................................................................................................... 7

III. SUMMARY CONSOLIDATED INFORMATION .................................................................................................................. 8

IV. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 12

APPENDIX – OTHER CONSOLIDATED FINANCIAL INFORMATION .................................................................................... 25

1. Summary Pro-Forma Consolidated Financial Information for the Twelve Months Ended June 30, 2015 ................. 25

2. Other Financial and Non-Financial Data ................................................................................................................... 26

Marcolin Bond Report as of and for the six months ended June 30, 2015

Presentation of Financial Information

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I. OVERVIEW

Marcolin is a leading global designer, manufacturer and distributor of branded sunglasses and prescription frames. We

believe we are the world’s third largest eyewear wholesale player by revenue, with a broad portfolio of 22 licensed

brands that appeal to key demographics across five continents. We manage primarily a licensed brand business, and

we design, manufacture (or contract to manufacture) and distribute eyewear primarily bearing the brand names we

have obtained pursuant to long-term, exclusive license agreements. We focus on high-performing brands with

eyewear lines that enjoy international awareness.

The Marcolin portfolio includes iconic labels such as Tom Ford, Roberto Cavalli, Tod’s, Montblanc, Zegna, Pucci,

Swarovski, Guess, Diesel, Timberland, Gant and Harley-Davidson. The long tenure of licenses provides Marcolin with

strong revenue visibility. The Group is now present in all leading countries throughout the world through its affiliates,

partners and exclusive distributors.

In December 2013, Marcolin bought the Viva International group (hereafter also “Viva”) by acquiring a 100% stake in

Viva Optique, Inc. (New Jersey).

Viva is a leading eyewear wholesale designer and distributor of premium eyewear. Viva’s net sales are concentrated

mainly in the mainstream (“diffusion”) category, with a strong position in prescription frames.

Consistent with the growth strategy being pursued by Marcolin, the Viva acquisition has developed the Group into a

true global player by expanding its scale, geographical presence, brand portfolio and product range.

The Viva Group has added to the diffusion portfolio the brands Guess, Guess by Marciano, Gant, Harley Davidson, and

other brands targeted specifically to the U.S. market.

The diversity of the brands managed, the completion of the diffusion product range and the balance achieved

between men's and women's products, and also between eyeglasses and sunglasses, are among the strategic factors

behind this important acquisition.

Moreover, Viva’s strong presence in the overseas market has enabled Marcolin, which had been concentrated in

Europe, to become stronger in the United States by covering one third of the independent opticians, while continuing

to focus on the Far East and Europe.

The Marcolin Group has a strong brand portfolio, with a good balance between luxury brands (high-end products

distinguished by their exclusivity and distinctiveness and often characterized by a higher retail price) and mainstream

("diffusion") products (products influenced by fashion and market trends positioned in the mid and upper-mid price

segments targeting a wider customer base), men's and women's products, and prescription frames and sunglasses.

The luxury segment includes glamorous fashion brands such as Tom Ford, Tod’s, Balenciaga, Roberto Cavalli,

Montblanc and from 2015 Zegna and Pucci, while the diffusion segment includes brands such as Diesel, Swarovski,

DSquared2, Just Cavalli, Timberland, Cover Girl, Kenneth Cole New York and Kenneth Cole Reaction.

The house brands are the traditional "Marcolin" brand as well as National and Web.

Today Marcolin markets its products in over 100 countries with a wide distribution network across five continents.

The complementary distinctive characteristics and specific expertise of the Marcolin Group and the Viva Group have

given rise to a globally competitive eyewear company, to which Marcolin brings its know-how and background,

enabling it to offer significant added value to the market in terms of both product range and global distribution.

The merger of Viva’s and Marcolin’s operations generates significant cost synergies in terms of organization, sourcing,

production and distribution, as well as cross-selling opportunities arising from the integration of the sales and

distribution networks.

Pursuant to the Viva integration, important cost synergies of approximately €10.0 million will be attained, exceeding

the initially planned €8.5m. We adopted a prudent approach in order to not underestimate the lack of synergies on

the increased volumes of the post-integration business in certain areas (i.e. Italy).



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The main differences between the current estimate and the initial estimate for run-rate synergies are:

U.S.:

• Higher savings related to the New Jersey and Arizona personnel reorganization (executives and sales force)

• Higher savings due to joint participation in fairs and exhibitions

U.K.:

• Higher savings related to the sales force reorganization

• Higher savings achieved on the closure of the Harrogate location

• Higher savings related to the personnel reorganization

All synergies are calculated assuming 2013 as the reference year; the run rate considers the 12-month effect of the

savings. Part of the €10.0 million run-rate synergies was realized in 2014 for €3.6 million, and part in the first-half of

2015 for € 3,2 million, totaling €6.8 million.

Synergies already realized and full-year run-rate synergies are shown below by country (€ thousands):

Realized

At June 30, 2015

Full-year

2015

US

5,038

6,571

UK 968 2,032

France 435 865

Brazil

192

383

Hong Kong

193

191

Total

6,826

10,043

In order to obtain the extra synergies, Marcolin incurred extra one-offs costs, including capital expenditures, related

to:

• Higher severance costs for personnel reorganization (partially due to the higher number of redundancies vs.

what was originally planned);

• Higher consultancy fees (SAP roll-out, integration support, tax and legal assistance, etc.);

• Higher costs/capex for setting up the new facilities to improve performance and optimize the supply chain.

The non-recurring costs (one-off costs) related to Viva integration project impacted the 2015 P&L by €5.6 million.

Those costs consist of:

• France: severance costs paid for dismissed employees, in addition to costs due for the change in status of the

Sales Reps from “VRP” to “Attaché Commercial”. The negotiations eliminated a potential future liability because by

law “VRP” Reps are entitled to sizeable indemnities in the event of contract termination;

• U.S.: consulting fees and other costs related to the closure of the Arizona plant and the moving of the logistic

activities to New Jersey, in addition to severance costs paid to the discontinued employees.

In order to minimize disruptions that could affect the U.S. business, and consistently with management’s policy of

prudence, the Arizona plant continued operating until April.

Consequently, the plan to streamline the logistics structures in North America, reducing the number of operating

plants, was implemented between end of March and beginning of April.

The plan to aggregate the two plants had envisioned a concentration of the integration activities until the end of April

in order to resume operations as soon as possible, in order to have a minimal impact of such activities on the business.

Due to the scale and complexity of the process, few disruptions occurred in product distribution that caused delivery

certain delays in April and May.

At the end of June, activities were underway to fully integrate the two plants, and the objective of restoring all

operations and logistic performance levels according to the targets and schedule set in the plan has been reached.

The performance levels are now in line with the pre-integration levels, and activities are in progress to eliminate the

backlog originating during the integration period.

In order to better understand the business performance and provide future comparability, the costs of the

discontinued Arizona operation, mainly referring to ordinary personnel costs and other operating expenses, have been

restated (in the document "pro-forma" EBITDA shall mean excluding the ordinary costs of the discontinued Arizona

operations). The costs of the discontinued operations incurred in the 1st Half were €2.1 million.



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The Viva integration process was complete at June 30, 2015, as summarized below:

Synergies from Shared Services:

Efficiencies were generated through the elimination of overlaps between foreign subsidiaries, savings in property

executive management and back-office personnel, consolidation of corporate functions, and shared usage of

operational, office, and distribution networks:

• sales force integration fully executed for U.S., U.K., France, Brazil and Hong Kong in 2014;

• restructuring of corporate and back-office functions completed between 2014 and beginning of 2015, fully in line

with the integration plan with respect to the reorganization of the foreign operations in the U.K, France, Brazil,

Hong Kong and U.S.;

• the focus in 2015 has been on the remaining U.S. integration (the AZ warehouse services and utilities were closed

down in April). The plan to streamline the logistics structures in North America by reducing the number of plants

currently operating there has been implemented. Since the Scottsdale, Arizona location was closed down, the U.S.

market has been served by the establishment in Somerville, New Jersey.

Operational Synergies:

Efficiencies through the consolidation of warehouse facilities, IT systems and procurement department savings:

• warehouse and logistics consolidation: in 2014 the UK and HK Distribution Centers have been fully integrated into

Marcolin’s system;

• the France warehouse is no longer operational (the final closing activities are underway) and sales have been

conducted directly from Italy since the end of 2014;

• the Brazil logistics operation was integrated into the Alphaville warehouse at the beginning of 2015;

• in 2015 the two US facilities were consolidated into one in NJ by shutting down the warehouse in AZ, as explained

above. Within the scope of the reorganization process, in early 2015 the business division dealing with the

distribution of Marcolin products in South America (excluding Brazil) was temporarily transferred from the former

Marcolin USA, Inc. (now Marcolin USA Eyewear, Corp.) to Marcolin S.p.A.;

• IT: SAP rollout successfully achieved: all the countries are fully integrated into the Marcolin IT Platform, and VIVA

US went live on October 1, 2014; the US IT services merged in NJ on April 2, 2015; an updated sales force mobile

App was released to support the sales in all countries affected by the integration.

Synergies from eliminated redundancies at a Corporate and Executive level:

The integration process has been achieved fully in line with the defined plans. The main efforts of 2014 were spent on

the U.S., Europe (especially the U.K.) and Hong Kong, whereas France, Brazil and the AZ merger for US integration are

the focus of 2015.

The analysis of redundancies and implementation in U.S., U.K., France, Brazil and Hong Kong was completed between

second half of 2014 and early 2015.

• Within the scope of the Viva U.K. integration, the International Distribution business unit was transferred to the

parent company Marcolin Spa, and the Domestic Distribution business unit was transferred to Marcolin U.K.

These operations were successfully completed during September 2014.

• In July 2014 a new branch was set up in Hong Kong to serve the entire client base of VIVA and Marcolin in the

Asia-Pacific region (APAC), for Marcolin and for Viva products, and to manage the sourcing operations out of

China.

• On January 1, 2015 the corporate restructuring process was in effect by way of the dissolution and absorption of

American companies Marcolin USA, Inc., Viva Europa, Inc., Viva International, Inc. and Viva IP, Corp. into Viva

Optique, Inc. Viva Optique's name was changed to Marcolin USA Eyewear, Corp.

• The integration of Viva Canada is in process of set-up and will take place in second half of 2015, to complete the

organizational and corporate rationalization process.

• Concerning the French market, on October 31, 2014 Marcolin France Sas acquired Viva France Sas (formerly

owned by Viva Eyewear UK Ltd), the distributor of Viva products in France. This transaction, a step toward the

subsequent merger of Viva into Marcolin France (by way of the “dissolution sans liquidation” of Viva France and



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“trasmission universelle du patrimoine de Viva France à Marcolin France”, effective on January 1, 2015), had the

stated objective of reducing and streamlining the structures and related costs by integrating the two businesses

into one organization with a sole management, in order to manage, including prospectively, the related market

more efficiently and effectively. Through the merger, the operations, assets and liabilities of the absorbed

company continue to survive in the acquirer.

• A similar transaction took place in Brazil, where two identical sales organizations existed, one for the distribution

of Marcolin products (Marcolin do Brasil Ltda) and the other for the distribution of Viva products (Viva Brasil

Comercio Produtos Opticos Ltda). In this case as well, after Marcolin do Brasil acquired all Viva Brasil shares (at

the end of December), it initiated a merger to absorb such company (which took place on January 1, 2015).

Similarly to the French market, in Brazil the business management was assigned to a newly appointed manager

with extensive experience in the eyewear industry, in order to fully exploit cost and top-line synergies that only

full integration of the two structures would allow.

At the conclusion of the Viva integration project, the transfer completed the redistribution of international markets in

accordance with the Group's plans for the geographical hubs and a new sales organization.

*****

II. PRESENTATION OF FINANCIAL INFORMATION

Marcolin was acquired by Cristallo on December 5th, 2012, and in October 2013 Cristallo underwent a reverse merger

with and into Marcolin, within the scope of a corporate reorganization of the Group’s holding structure. In December

2013, Marcolin acquired Viva Optique, Inc.

This document focuses on the consolidated results for the Marcolin Group and presents the following financial

information:

1) Summary financial information as of and for the six months ended June 30, 2015;

2) Management’s discussion and analysis of the financial condition and results of operations as of and for the six

months ended June 30, 2015;

3) Pro Forma – Other Financial Information as of and for the twelve months ended June 30, 2015.

The consolidated income statement, consolidated statement of financial position, consolidated cash flow statement

and other financial information of the Group as of and for the six months ended June 30, 2015 are derived from the

unaudited interim condensed consolidated financial statements of the Marcolin Group as of and for the six months

ended June 30, 2015.

Non-IFRS and Non-U.S. GAAP Measures

The summary financial information set forth below contains certain non-IFRS and non-U.S. GAAP financial measures

including “Pro-Forma Combined Adjusted Run-Rate EBITDA,” “EBITDA,” “EBITDA margin,” “Adjusted EBITDA,” “Pro-

forma EBITDA”, “Adjusted EBITDA margin,” “Total debt”, “Net debt,” “Capital expenditures” and “Movements in

working capital.”

The non-IFRS and non-U.S. GAAP financial measures are not measurements of performance or liquidity under IFRS or

U.S. GAAP.

*****


Summary Financial Information

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III. SUMMARY CONSOLIDATED INFORMATION

1. Summary Financial Information

For the six months ended June 30,

2014

2015

(As reported)

(As reported)

EBITDA 21,241

19,124

Adjusted EBITDA 24,126

26,849

Adjusted EBITDA margin(a)

12.4%

12.0%

Capital expenditures(b)

9,831

10,960

Net indebtedness(c)

175,466

230,493

Movements in working capital(d)

(2,223)

(31,627)

(a) We define the adjusted EBITDA margin as adjusted EBITDA divided by revenue. (b) Capital expenditure consists of investments for the period in property, plant and equipment and intangible assets, as presented in the cash

flow statement (see “13. Cash Flow Statement”). The table shown in “5. Other Financial Information” sets forth a breakdown of capital

expenditure for the periods indicated. (c) We define net debt as the total consolidated debt net of cash and cash equivalents. The table above sets forth the calculation of net debt for

the periods indicated. (d) We define movements in working capital as the movements in trade and other receivables, inventories, trade payables, other liabilities, tax

liabilities and use of provisions.

2. Summary Consolidated Income Statement Information


2014

2015

(As reported)

(As reported)

Revenue

194,338

222,869

Cost of sales

(76,692)

(90,744)

Gross profit

117,646

132,124

Selling and marketing costs

(88,253)

(103,071)

General and administrative expenses

(14,853)

(17,465)

Other operating income and expenses

1,596

1,868

Effects of accounting for associates 194 249

Operating profit

16,330

13,705

Net finance costs

(9,640)

(8,137)

Profit before taxes

6,690

5,568

Income tax expense

(4,337)

(4,308)

Net profit for the period

2,353

1,261

Within the same consolidation perimeter, net sales are up by 14.7% from 2014. The increase in the revenues at

previous year exchange rates is 4.5%.

Reported operating profit was affected by a number of extraordinary items both for the six-month period ended June

30, 2014 and for the six-month period ended June 30, 2015.

Excluding the effects of the transactions described above, the 2015 normalized ("adjusted") Ebitda is euro 26.8 million

(12.0% of sales), against the 2014 adjusted EBITDA amount of euro 24.1 million (12.4% of sales).

The normalized (adjusted) key performance indicator, filtered of the effects of the non-recurring costs, are described

in the following (please see “Adjusted EBITDA” in paragraph 5 for further details on such items).



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3. Summary Consolidated Balance Sheet

As of December 31,

As of June 30,

2014

2015

(As reported)

(As reported)

(In € thousands)

Property, plant and equipment 24,657

28,232

Intangible assets 37,213

39,596

Goodwill (a)

278,010

285,706

Inventories 100,075

110,668

Trade receivables 80,576

101,217

Cash and cash equivalents 36,933

22,948

Other current and non-current assets 62,854

59,547

Total assets 620,318

647,913

Long-term borrowings 199,152

200,954

Short-term borrowings 41,353

59,059

Trade payables 102,322

99,902

Other long-term and short-term liabilities 54,678

55,671

Total liabilities 397,505

415,586

Total equity 222,813

232,328

Total liabilities and equity 620,318

647,913

(a) Goodwill is affected by translation differences regarding the U.S. dollar (goodwill related to Viva acquisition).

4. Summary Consolidated Cash Flow Statement Information


2014

2015

(As reported)

(As reported)

(In € thousands)

Net cash from operating activities 10,404

(11,579)

Net cash (used in) investing activities (9,767)

(10,866)

Net cash from/(used in) financing activities(a)

(8,339)

8,925

Effect of foreign exchange rates and other non-cash items (222)

(466)

Net increase/(decrease) of cash and cash equivalents (7,925)

(13,985)

(a) The interest paid was reclassified to “financing activities” for both periods.

5. Other Financial Information

We define EBITDA as profit for the period plus income tax expense, net finance costs, amortization and depreciation

and bad debt provision. EBITDA is a Non-GAAP Financial Measure. The following table sets forth the calculation of

EBITDA for the periods indicated.


2014

2015

(As reported)

(As reported)

(In € thousands)

Net profit for the period 2,353

1,261

Income tax expense 4,337

4,308

Net finance costs 9,640

8,137

Amortization and depreciation 4,612 5,015

Bad debt provision 299 404

EBITDA 21,241 19,124



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The following table sets forth the calculation of Pro-Forma EBITDA and Adjusted EBITDA for the periods indicated.

“Pro-Forma EBITDA” is the normalized (restated) EBITDA excluding the ordinary costs of the discontinued operation

regarding Arizona plant closed down, as explained in I. Overview Section.

“Adjusted EBITDA” is EBITDA adjusted for the effect of non-recurring transactions which consist primarily of one-off

charges, non-recurring costs in relation to changes in management, and other extraordinary items related to Viva

integration project.


2014

2015

(As reported)

(As reported)

(In € thousands)

EBITDA 21,241 19,124

Ordinary costs of discontinued Arizona operations(a)

- 2,073

Pro-Forma EBITDA 21,241 21,197

Costs related to VIVA integration(b)

2,183

5,652

Senior management changes(c)

701

-

Adjusted EBITDA 24,126 26,849

(b) The Ordinary costs of the discontinued Arizona operation refer mainly to ordinary personnel costs and other operating expenses of the

discontinued Arizona plant closed down at the end of the first quarter, as explained in I. Overview Section. (c) Costs related to Viva integration project were incurred for the integration process of Viva as described in I. Overview. In particular they refer to

France (severance costs paid for dismissed employees, in addition to costs due for the change in status of the Sales Reps from “VRP” to

“Attaché Commercial”) and U.S. (costs related to the closure of the Arizona plant and the moving of the logistic activities to New Jersey, in

addition to severance costs paid to the discontinued Arizona employees). (d) Senior management changes relate to non-recurring employment termination expenses incurred in connection with the change in top

management.

Capital expenditure


2014

2015

(As reported)

(As reported)

(In € thousands)

Property, plant and equipment (a)

1,221 5,360

Intangible assets(b)

8,611 5,600

Total capital expenditure 9,831 10,960

(e) Investment of €5.4 million in Property, plant and equipment mainly related to new asset purchase, specifically €1.9 million in lands and

buildings to purchase the manufacturing plant in Fortogna; €2.6 million in commercial and industrial equipment; €0.7 million in hardware and

office fixture and €0.2 million in other tangible assets. (f) Investment of €5.6 million in intangible assets mainly related to the lump sum agreed by the Parent Company for some licensors in order to

extend licensing agreement periods and improve terms and conditions. In addition, intangible assets under formation include the U.S.

Subsidiary and Parent Company’s software and business application implementation totaling €1.8 million.

Net Indebtedness

As of December 31, 2014

As of June 30, 2015

(As reported)

(As reported)

(In € thousands)

Cash and cash equivalents (36,933)

(22,948)

Financial receivables (7,497)

(6,572)

Long-term borrowings 199,152 200,954

Short-term borrowings 41,353 59,059

Net indebtedness 196,074 230,493



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Movements in working capital


2014

2015

(As reported)

(As reported)

(In € thousands)

(Increase)/decrease in trade receivables (16,941) (22,057)

(Increase)/decrease in other receivables (2) (1,978)

(Increase)/decrease in inventories 471 (7,293)

Increase/(decrease) in trade payables 13,711 (1,078)

Increase/(decrease) in other liabilities 892 2,975

Increase/(decrease) in current tax liabilities 969 365

(Use) of provision (1,323) (2,562)

Movements in working capital (2,223) (31,627)

*****


MD&A

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IV. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations in the periods set forth

below.

The following discussion should also be read in conjunction with “Presentation of Financial Information and Other

Data” and “Selected Consolidated Financial Information.” The discussion in this section may contain forward looking

statements that reflect our plans, estimates and beliefs and involve risks and uncertainties.

Unless the context indicates otherwise, in this “Management’s Discussion and Analysis of Financial Condition and

Results of Operations” references to “we,” “us,” “our,” or the “Marcolin Group” refer to Marcolin, including Viva and

the consolidated group.

Key Factors Affecting Our Financial Condition and Results of Operations

1. General economic conditions and consumer discretionary spending

Our performance is affected by the economic conditions of the markets in which we operate and trends in consumer

discretionary spending.

Based on the latest forecasts from leading economic institutes, 2015 seems to be a watershed year, when the long,

deep recession that began in 2008 should end accompanied by a growth in GDP and employment figures.

This crucial transition will be the result of three factors:

- a favorable combination of external elements: the sharp drop in oil prices, the falling Euro, and lower long-term

interest rates;

- pro-growth policies that could have a positive impact on employment and investments;

- some economic indicators which are pointing to a situation of stable domestic demand and production, offering a

potential new starting point.

Italian eyewear continues to dominate the international market, demonstrating the sector's extreme dynamism and

competitive strength, which make it one of the most successful sectors of the Italian economy.

The most recent available data still confirms the favorable trend for exports, which grew 14.2% in the first quarter of

2015 (January-March data). Frame exports increased by 15.1% and those of sunglasses by 14% (source: ANFAO).

The 2015 outlook is being confirmed, with stronger growth in the USA, some European countries and emerging

countries.

The changing global scenario imposes new competitive rules for all businesses. In this fast-paced economy the product

itself is of central importance, with innovation, quality, originality and added value making all the difference.

The key to recovery is an emphasis on such characteristics, particularly specialization, penetration of high added-value

niche markets, certified quality, and Italian manufacturing, which is increasingly appreciated throughout the world.

In this respect, there are consistent signs of “reshoring” in the eyewear sector, i.e. manufacturing activities are being

brought back to Italy.

In keeping with the above-described scenario, the first half results of 2015 indicate a positive trend for the Marcolin

Group, which continues to pursue its growth targets; in particular the revenue for the six months ended June 30, 2015

has grown by about 14.7% compared to that of the same period of 2014.

As of July business was accelerating, with the Marcolin Group’s YTD total net sales up by about 18% compared to the

same period of last year.

2. Licensing agreements

Licenses – key facts for the six months ended June 30, 2015

In the six months ended June 30, 2015, the Marcolin Group continued with its efforts to rationalize and optimize the

brands and collections offered to its clients, a process that was launched in 2013, developed in 2014 and is being


MD&A

13

stepped up by the Group in 2015. This process has included in 2014 the following activities:

• Balenciaga was re-launched, after the fashion house's designer change, with a sophisticated and elegant

collection having great complexity, which was presented at the end of 2013 to a distinctive group of selected

retailers; during 2014, the group of distributors was extended, while continuing to focus on just a few

prestigious names;

• an important strategic alliance was created with the stipulation of licenses for the prestigious eyewear

brands Ermenegildo Zegna and Agnona. The licensing agreement has a ten-year duration and involves the

exclusive design, manufacture and global distribution of sunglasses and prescription frames. The Ermenegildo

Zegna and Zegna Couture collections have been launched in January 2015;

• at the end of April 2014 Marcolin exercised its option to renew the Tom Ford license, extending the license

period; in addition, other two existing licenses have been renegotiated and extended, resulting in improved

terms and conditions for the Group;

• on May 6, 2014, Viva renewed its licensing agreement with Skechers USA, Inc., an award-winning global

leader in the lifestyle and performance footwear industry;

• on June 9, 2014, Marcolin Group and Emilio Pucci announced the stipulation of a worldwide exclusive license

agreement for the design, production and distribution of sunglasses and eyeglasses for the Emilio Pucci

brand. The five-year, renewable license will become effective in January 2015;

• on July 2, 2014, the Group and M.lle Catherine Deneuve announced the renewal of their licensing agreement,

initially launched through a licensing partnership with Viva International in 1989, for the design, production

and worldwide distribution of Catherine Deneuve optical frames and sunglasses;

• on October 8, 2014, the license agreement with one of our licensor was renegotiated, resulting in strongly

improved terms and conditions for the Group. The negotiation recently finalized can be summarized as lower

minimum royalties and advertising royalties over the course of the life of the License in exchange of one-off

cash disbursement;

• on December 23, 2014, Marcolin Group and Harley-Davidson announced that they extended their licensing

agreement for the design, production and distribution of eyewear collections of sunglasses and optical

frames to December 2018.

Licensing events occurring during and after the 1H 2015 closing are:

• on January 19, 2015, Marcolin Group presented a new exciting project with Marcelo Burlon County of Milan,

one of the most versatile and influential designers at this time, from which an exclusive eyewear collection

will emerge combining tradition, trends, know-how and innovational design;

• on February 18, 2015, Marcolin Group and Timberland announced the early renewal of their licensing

agreement ending December 2018 for the design, production and distribution of eyewear collections of

sunglasses and optical frames.

• on April 30, 2015, Marcolin U.S.A. Eyewear Corp. and Iconix executed amendments to renew the Candie’s

license for five years through 2020 and the Bongo and Rampage license for two years through 2017. Key

business terms were re-negotiated to significantly reduce minimum guaranteed royalties for Candie’s and to

eliminate all minimum guaranteed royalties for Bongo and Rampage.

• on June 11, 2015, Marcolin has signed an agreement with Tom Ford International regarding the extension of

the licensing contract for the design, production and worldwide distribution of Tom Ford Eyewear sunglasses

and optical frames until 2029, extending the license period of further seven years.

3. Commercial and Distribution

Important investments have been carried out in 2014 and 2015 aimed to strengthen relationships with the

distribution network, with the objective of greater penetration into the markets sustaining the Group's growth.

In addition, within the scope of the Viva integration plan, the distribution networks and international sales

organizations have been rationalized.

The new company structure set up in Hong Kong in July 2014, with the objective of combining the distribution of

Marcolin and Viva products through a new organization operating directly in the Far East, became fully operational in

2015. After absorbing the business division relating to Viva products in 2014, in 2015 the Hong Kong branch's mission


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14

will include the distribution of Marcolin products in the same areas of the Far East, with clear advantages in terms of

economies of scale and cost and top-line synergies.

The Hong Kong branch sources directly from Chinese suppliers thanks to the size and scale achieved, thereby

saturating overheads by distributing into outlying markets autonomously and fully exploiting the cost benefits arising

on operational gearing to improve sales.

The transactions made it possible to create the Group's third sales hub, due to the critical mass represented by the

sales of Marcolin and Viva brands, enabling to invest in structures and means to better penetrate markets cost-

effectively as a result of the streamlining and synergies realizable from the new size.

Currently the Group's business operations are organized into three geographical hubs:

• the U.S. hub, directed by Marcolin USA Eyewear, Corp. (sole legal entity, which will focus on distribution in the

North and Central American markets);

• the European hub, directed by Marcolin S.p.A., which will address the European rim and its complementary and

neighboring countries (in terms of both geography and business, such as the Middle East), including through

direct affiliates and all joint ventures;

• the Asian hub, where companies have been set up to manage the Far East markets, distant and difficult to

penetrate. Indeed, only by operating there directly may such markets be developed (in fact, the business divisions

dealing with the distribution of Viva products in the Far East, and then the division dealing with Marcolin product

distribution division in Asia Pacific were transferred to the Marcolin UK Ltd Hong Kong branch).

The reorganization entailed overhauling the logistical flows on an international scale through the establishment of the

three main hubs (for distribution management) in order to render the integrated logistics more agile and efficient,

thereby reducing costs, shortening the distance to the end customer, and consequently improving the effectiveness of

response to the market.

Joint ventures

China

In order to manage distribution directly in mainland China, at the end of 2014 a joint venture was set up with the Gin

Hong Yu International Co. Ltd group (Ginko Group), a well-known and respected business operating in the Chinese

eyewear market.

Distribution operations are managed by Ginlin Optical Shanghai Ltd Co., based in Shanghai, a subsidiary controlled

indirectly (through Ging Hong Lin International Co. Ltd), by way of joint ownership by Marcolin S.p.A. and the Ginko

group.

The joint venture has led to more than double the revenues from the “Rest-of-World” segment in the first half of 2015

compared to those of the corresponding prior period, confirming the successfulness of this strategic decision.

Russia

Still regarding the Group's international development, a joint venture was set up with Sover-M, a well-established,

prestigious company operating in the eyewear business in Russia, for the distribution of all Marcolin and Viva

products.

The Italian Parent Company controls 51% of Sover-M. Sover-M's shares were acquired in December 2014. Although

geopolitical tensions continue to hamper this developing market, the joint venture began operating as planned and

according to expectations.

Nordic

In Europe, an affiliate was started up in Frösundaviks (Stockholm), Sweden. Marcolin Nordic began operating at the

end of February 2015, and its mission is to manage the Nordic market (Denmark, Finland, Norway, Iceland and

Sweden) closely and effectively in order to distribute there all brands in the Marcolin/Viva portfolio.

UAE

Marcolin is examining the opportunity of setting up a new joint venture in UAE with a well-known, prestigious local

player.


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15

5. Production

After the purchase of the Fortogna building in January 2015, Marcolin is preparing to double its Italian manufacturing

operation with a new 3,500 square meter factory in Longarone (Fortogna locality), in the heart of the eyewear district,

close to its historic headquarters, also benefitting employment levels by dedicating important resources to

production.

The production layout of the Longarone plant (currently housing the acetate production, which will be transferred to

Fortogna) has been changed by overhauling the Metal, Product Development and Prototype divisions, with an

investment of €4.5 million (partly for the purchase of the Fortogna factory, and the rest to transfer and outfit the new

acetate division in Fortogna, renew the floor space that will be made available in Longarone, and purchase plant and

machinery to expand production capacity).

Reasons for which the consolidation and development of its production capacity in Italy are important to Marcolin

include:

• reduced dependence on external suppliers, which will enable to shorten the manufacturing lead time, and thus

increase the ability to seize market opportunities (and improve the time to market);

• made in/made out realignment according to the eyewear industry standards (and those of the main competitors);

• expansion of the capacity to produce more Italian-made products, which are increasingly perceived as having

added value by the Italian and international clientele;

• as an essential condition for managing the inflation risk in the Chinese sourcing market, production insourcing will

allow greater control of production factors, and not only in terms of cost-effectiveness.

With respect to the stated forecasts and at a record time, Marcolin’s new acetate division in Fortogna started

production on May 20, 2015 ensuring the production expansion necessary to meet the demands arising from both the

new brands added to the brand portfolio and the structural expansion of some markets.

Consistently with the Company's medium/long-term growth plans, the operation aims to create value by maximizing

the opportunities offered by the development of the high-end collections that have always represented Marcolin's

design concept.

This will enable to immediately undertake the business plan necessary to promote the Group's growth, and to obtain

savings from the insourcing of production beginning in the second half of 2015.

Group Comparison of six months ended June 30, 2014 against six months ended June 30, 2015

1. Presentation of Financial Information

The consolidated income statement, consolidated statement of financial position, consolidated cash flow statement

and other financial information of the Group as of and for the six months ended June 30, 2015 are derived from the

unaudited interim condensed consolidated financial statements of the Marcolin Group as of and for the six months

ended June 30, 2015.


2014 (As Reported)

% of revenue

2015 (As Reported)

% of revenue

(In € thousands, except percentages)

Revenue 194,338 100.0% 222,869 100.0%

Cost of sales (76,692) -39.5% (90,744) -40.7%

Gross profit 117,646 60.5% 132,124 59.3%

Selling and marketing costs (88,253) -45.4% (103,071) -46.2%

General and administrative expenses (14,853) -7.6% (17,465) -7.8%

Other operating income and expenses 1,596 0.8% 1,868 0.8%

Effects of accounting for associates 194 0,1% 249 0.1%

Operating profit 16,330 8.4% 13,705 6.1%

Net finance costs (9,640) -5.0% (8,137) -3.7%

Profit before taxes 6,690 3.4% 5,568 2.5%

Income tax expense (4,337) -2.2% (4,308) -1.9%

Net profit for the period 2,353 1.2% 1,261 0.6%


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2. Revenue by Brand Type and by Product Type

The following tables set forth an analysis of our revenues by product type and brand type for the periods indicated.

Due to the need to present homogeneous data for the two years, the 2014 figures have been restated in order to have

a “like-for-like” perimeter. Consequently, the 2014 figures below have been reclassified with respect to the

breakdown by country in order to have comparable data.


2014 (As Reported)

% of total

2015 (As Reported)

% of total

Change

Revenue by brand type (In € thousands)

amount %

Luxury brands 81,171 41.8% 107,819 48.4% 26,648 32.8%

Diffusion brands

113,167 58.2% 115,049 51.6% 1,883 1.7%

Total 194,338 100.0% 222,869 100.0% 28,531 14.7%


2014 (As Reported)

% of total

2015 (As Reported)

% of total

Change

Revenue by product type (In € thousands)

amount %

Sunglasses 99,034

51.0%

118,347

53.1%

19,313 19.5%

Prescription frames 95,304

49.0%

104,522

46.9%

9,218 9.7%

Total 194,338

100.0%

222,869

100.0%

28,531 14.7%

Revenue amounted to €222.9 million for the six months ended June 30, 2015, an increase of €28.5 million, or 14.7%,

from the €194.3 million for first-half 2014.

At previous period exchange rates, the revenue for the half-year ended June 30, 2015 was €203.1 million, up by €8.8

million, or 4.5%, from the same period of the previous year.

An approximately 10.0% difference is due to the depreciation of the Euro against the US$. We calculate the 2015 net

sales at constant exchange rates by applying the prior-year monthly average exchange rates (of the US$ and the other

currencies relevant for the Group against the €) to the current financial data expressed in the original currency, in

order to eliminate the impact of currency fluctuations.

Overall, about 7.4 million frames were sold in the first six months, down 8.1% compared to the first six months of

2014.

Luxury sunglasses frames had the largest increase both in terms of value (+32.8%) and quantity (+25.8%), confirming

the success of the strategy that focuses on this particular product.

Due to the sales mix favoring luxury frames, the average unit price of prescription frames is in general rising.

Brand Type

Diffusion brand revenue increased by 1.7% in the first half compared to the same period of the previous year, while

the luxury brand revenue grew 32.8%. At constant exchange rates, diffusion brand sales are 9.8% lower than those of

the same period of 2014, while the luxury brand sales increased by a significant 24.7%. Therefore, the revenue

increase derived mainly from luxury brands, specifically the most important brands: Tom Ford, Montblanc, Balenciaga

and the newly acquired Zegna.

Regarding diffusion brand revenue, Timberland, Swarovski and Web were among the best performers, compensating

for a decrease in revenue from other diffusion brands.

From a pricing standpoint, the unit prices of diffusion brands rose over the two periods, more than for the luxury

brands (which however increased). This trend is mainly due to the exchange rate effect (of the USD in particular).

Product Type

The revenue increase for sunglasses was 19.5% and that of prescription frames was 9.7%, both increases being driven

by luxury brands.

At constant exchange rates, revenues from prescription frames are slightly lower compared to those of the same

period of 2014, while revenues of sunglasses are up by 9.9%.

The average unit prices rose as a result of more luxury products in the sales mix.


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3. Revenues by destination market

The table below sets forth Marcolin’s revenue by destination market.

This is relevant from a commercial standpoint, showing the geographic concentration of our customers.

In order to show the same data by distribution entity, the segment reporting is presented in the final section (“2.

Other financial and non-financial data”), where the revenues are segmented by reference to the geographical area in

which the reporting entity resides.


2014 (As Reported)

% of

total

2015 (As Reported)

% of

total Change

Revenue (In € thousands)

amount %

Italy 11,071 5.7% 13,900 6.2% 2,829 25.5%

Rest of Europe 52,837 27.2% 53,178 23.9% 341 0.6%

Europe 63,908 32.9% 67,078 30.1% 3,169 5.0%

USA 80,381 41.4% 94,341 42.3% 13,960 17.4%

Asia 16,385 8.4% 21,720 9.7% 5,334 32.6%

Rest of World 33,664 17.3% 39,731 17.8% 6,067 18.0%

Total 194,338 100.0% 222,869 100.0% 28,530 14.7%

Italy

Sales in the domestic (Italian) market rose 25.5% during the first six months of 2015.

Diffusion brands, led by Guess, Swarovski and our house brand Web, had a double-digit growth.

Average unit prices increased thanks to an increase in the price points of the diffusion brands, which in turn helped

the net sales performance.

Rest of Europe

Revenue from the rest-of-Europe market, totaling €53.2 million, was slightly better than that of the previous first half-

year.

Luxury brands were more prominent than in 2014. The prescription frames segment growth (+5.1%) was partially

offset by the slowdown of sales in the sunglasses segment (-3.6%).

The market was characterized by a stagnant economy and was heavily impacted by the recent Viva/ Marcolin sales

force integration in France, offset by positive sales in other countries (i.e. Spain gained market share and the new

Russian and Nordic subsidiaries performed well) and sales by large international chains.

Average unit prices rose due to the direct control of sales through the newly created subsidiaries and the direct

control of Viva product sales that had previously been conducted by distributors.

North America

In the U.S. market, revenues grew by 17.4%, showing the great impact of exchange rate fluctuations.

Net sales decreased by 3.7% at constant exchange rates: the positive performance of luxury brands, fostered by

greater consumer confidence and an improved U.S. economy, was offset by some issues faced in the new distribution

center resulting from the move from Arizona to New Jersey, as explained in the first part of this report. Those issues

have been resolved, resulting in very good performance in July, the beginning of the recovery period for meeting the

annual targets set for 2015.

The American market raised its share to 42.3% of total Group sales, and it represents the Group’s main market.

Retail department stores and independent opticians are the most important channels in the U.S. market and revenues

from both channels grew significantly from one period to the next.

Average unit prices also rose primarily thanks to exchange rate gains and to the greater share of luxury product in the

sales mix.

Asia

The Asian Far East market experienced high double-digit growth of +32.6%.

This result is attributable entirely to fashion brands, which performed extremely well especially in the Chinese market,

also thanks to the new joint venture initiative. In particular, revenue from luxury sunglasses had the best

performance, growing by 70% from the previous year.

Average unit prices rose as a result of more luxury products in the sales mix.


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Rest of World

From a geographical standpoint, “Rest of the World” includes the Middle East, Central and South America, Africa and

Oceania. The revenue produced in this market rose by 18.0%, or 13.9% at constant exchange rates, in the first half of

2015, totaling €39.7 million.

The largest increases came from the Middle East (up by 15.6% at constant exchange rates) and Central America, while

Brazil and Latam had a weak first six months (at constant exchange rates) . Revenue growth was driven in particular by

luxury brands (+50%).

4. Cost of sales

The cost of sales amounted to €90.7 million for the six months ended June 30, 2015, an increase of €14.1 million, or

18.3%, from the €76.7 million for the six months ended June 30, 2014. The cost of sales as a percentage of revenue is

40.7% for the six months ended June 30, 2015 compared to 39.5% for the six months ended June 30, 2014.

The June 2015 gross profit is €14.5 million higher than that of the previous year, growing from €117.6 million (or

60.5%) up to €132.1 million (or 59.3%) in 2015.

The gross margin is influenced by a price effect due to a management decision to selectively reduce prices for certain

product lines to accommodate specific market demands. Average prices were lower especially indirect sales and sales

to distributors, also as a result of some close-out sales.

Compared to last year, volumes decreased especially in the direct and distributor channels, influenced by the

disruptions (now completely resolved) occurring in the new U.S. distribution center resulting from the move from

Arizona to New Jersey.

Such effects were however more than counterbalanced by an important brand mix effect, especially due to the

introduction of new luxury brands and the improved performance of some portfolio fashion brands, which provide

higher margins than diffusion brands.

Another factor contributing to gross margin growth is the positive impact of exchange rates, which raised business

profitability by increasing the share of the Group’s profits in euros.

The following table sets forth an analysis of the cost of sales for the periods indicated:


2014 (As reported)

% of

revenue

2015 (As reported)

% of

revenue Change


(amount)

%

Material and finished products 55,415 28.5% 65,915 29.6% 10,500 18.9%

Personnel expenses 9,837 5.1% 10,406 4.7% 569 5.8%

Outsourcing 4,657 2.4% 5,837 2.6% 1,180 25.3%

Other expenses 6,783 3.5% 8,586 3.9% 1,802 26.6%

Total 76,692 39.5% 90,744 40.7% 14,052 18.3%

The total cost of sales is affected by non-recurring expenses in 2014 (in 2015 these costs are not significant).

Excluding such non-recurring costs, considered in the calculation of Adjusted Ebitda, the total cost of sales would be

respectively 39.3% of revenues in 2014, and the same 40.7% in 2015.

The increase in cost of sales is attributable to the combined effect of the following changes:

• For the six months ended June 30, 2015, Materials and finished products amounted to €65.9 million, an increase

of 18.9% from the €55.4 million for the six months ended June 30, 2014. In 2015 Materials and finished products

as a percentage of revenue is 29.6%, compared to 28.5% for 2014. These costs are affected by non-recurring costs

of €0.4 million in 2014 and of €0.1 million in 2015 (included in the calculation of Adjusted Ebitda).

Due to the adjustment being so slight, excluding such non-recurring costs, the incidence of costs of materials and

finished products is the same as that presented in the table above (40.7% of revenue).

• Personnel expenses relating to production amounted to €10.4 million in 2015, an increase of 5.8% from the €9.8

million of 2014. Compared to 5.1% for 2014, in 2015 personnel expenses as a percentage of revenue is 4.7%,

indicating improved efficiency in this area, thanks to the synergies realized.


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• In 2015 Outsourcing amounted to €5.8 million, an increase of €1.2 million, or 25.3%, from the €4.7 million for

2014. In 2015 Outsourcing as a percentage of revenue is 2.6%, compared to 2.4% of 2014.

• In 2015 Other expenses amounted to €8.6 million, an increase of €1.8 million (or 26.6%) from €6.8 million of 2014.

Other expenses are 3.9% of revenue in 2015, compared to 3.5% for the six months ended June 30, 2014. In both

periods, other expenses primarily relate to transport and customs charges, direct and indirect temporary work in

the production area and, to a lesser extent, depreciation and amortization of assets associated with production

activities. The 2015 increase is partially due to higher personnel and other costs related to the Fortogna plant

(made-in production vs. made-out production), which will be completely absorbed when the plant will be

operating at full capacity.

5. Selling and marketing costs

Selling and marketing costs amounted to €103.1 million for the six months ended June 30, 2015, an increase of €14.8

million, or 16.8%, from the €88.3 million for the six months ended June 30, 2014.

In 2015 Selling and marketing costs as a percentage of revenue is 46.2%, compared to 45.4% of 2014.

The following table sets forth an analysis of selling and marketing costs for the periods indicated.


2014 (As Reported)

% of

revenue

2015 (As Reported)

% of

revenue Change


(amount)

%

Royalties 23,956 12.3% 27,797 12.5% 3,841 16.0%

Of which VRA 21,025 10.8% 24,050 10.8% 3,025 14.4%

Of which MAG 2,931 1.5% 3,747 1.7% 816 27.8%

Personnel Expenses 34,373 17.7% 39,295 17.6% 4,922 14.3%

Advertising and PR 13,845 7.1% 16,621 7.5% 2,776 20.0%

Other costs 16,079 8.3% 19,358 8.7% 3,279 20.4%

Total 88,253 45.4% 103,071 46.2% 14,818 16.8%

The €14.8 million increase in selling and marketing costs is primarily attributable to the combination of the following

changes:

• In 2015 Royalties amounted to €27.8 million, an increase of 16.0%, from the €23.9 million for the six months

ended June 30, 2014. In 2015 Royalties as a percentage of revenue is 12.5%, compared to 12.3% of 2014.

Pursuant to certain operations and agreements stipulated during the last year, regarding the revision of minimum

guaranteed royalties due over the term of the licensing agreement, 2015 improves the profitability of some

licenses, thanks to better absorption of royalties and advertising contributions which in 2014 were not fully

saturated by the sales realized. This effect has been partially offset by a negative brand mix effect, causing an

increase below the minimum royalties.

• In 2015 Personnel expenses relating to selling and marketing amounted to €39.3 million, an increase of €4.9

million (or 14.3%) from the €34.4 million of 2014. Personnel expenses as a percentage of revenue is 17.6% for the

six months ended June 30, 2015, compared to 17.7% of 2014. These costs were largely affected by the foreign

exchange rate difference for €3.9 million and excluding this effect they would be €35.4m or 16% of revenues.

In addition, the costs referring to agents, which grew in proportion to the sales growth, are affected by non-

recurring costs of €0.6m in 2014 and of €0.7m in 2015 (included in the calculation of Adjusted Ebitda). Excluding

such non-recurring costs, personnel expenses is respectively in 2014 17.4% of revenues, and in 2015 17.3% of

revenue.

• Advertising and PR in 2015 amounted to €16.6 million, an increase of €2.8 million, or 20.0%, from the €13.8

million in the same period of 2014, due to costs incurred for additional advertising and public relations activities,

in addition to greater corporate advertising investments and advertising made in the house brands. As a

percentage of revenue, Advertising and PR expenses in 2015 is 7.5%, compared to 7.1% of 2014.

• The Other costs refer principally to transportation expenses on sales, business travel, rent and services. In 2015,

Other costs amounted to €19.4 million, an increase of €3.3 million, or 20.4%, from the €16.1 million for the six

months ended June 30, 2014. As a percentage of revenue, Other costs is 8.7% , compared to 8.3% for the six

months ended June 30, 2014. These costs were largely affected by the foreign exchange rate difference for €1.5

million and excluding this effect they would be €17.9m or 8% of revenues.


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In addition, the distribution costs are affected by non-recurring costs of €0.2 million in 2014 and €1.7 million in

2015, and the commercial costs by €0.8 million in 2014 and €1.3 million in 2015 (one-offs included in the

calculation of Adjusted Ebitda). Excluding such non-recurring costs, Other costs is respectively in 2014 7.8% of

revenues, and in 2015 7.3% of revenue.

6. General and administrative expenses

General and administrative expenses amounted to €17.5 million for the six months ended June 30, 2015, with an

increase of €2.6 million (or 17.6%), from the €14.9 million for the same period of 2014.

As a percentage of revenue, in 2015 General and administrative expenses is 7.8%, compared to 7.6% for 2014. These

costs were largely affected by the foreign exchange rate difference for €1.4 million and excluding this effect they

would be €16.1m or 7% of revenues.

In addition, the costs are affected by non-recurring costs of €0.9 million in 2014 and €1.9 million in 2015, also included

in the calculation of Adjusted Ebitda. Excluding such one-offs, general and administrative expenses is respectively €

13.9 million (or 7.2% of revenues) in 2014, compared to €15.6 million in the same period (or 7.0% of revenues).

The increase in the adjusted figures is €1.7 million, from the €13.9 million in 2014 compared to €15.6 million in 2015,

and is mainly due to Arizona cost (restated on Pro-Forma Ebitda) and to an exchange rate impact on the US part of the

business. The decrease in terms of percentage on revenues in General and administrative expenses is the result of

successful actions taken by the Group to improve efficiency and contain costs, as part of the synergies realized and

will be more evident in the second part of the year after the ceasing of Arizona.

7. Other operating income and expenses

Other operating income and expenses resulted in net income of €1.9 million for the six months ended June 30, 2015,

compared to the net operating income of €1.6 million for the six months ended June 30, 2014 (in line with the same

period of the previous year as a percentage of revenue, equal to 0.8%).

In both periods other net operating income primarily relates to prior period adjustments, refunded transport costs,

insurance refunds and compensation for damages regarding product returns, and other income and expenses.

8. Net finance costs

Net finance costs amounted to €8.1 million for the six months ended June 30, 2015, compared to €9.6 million for the

six months ended June 30, 2014.

Both in 2015 and in 2014 this item was affected primarily by the interest for €8.5 million on the bond notes issued by

Marcolin S.p.A., paid in May, in addition to bank interest expense of Marcolin and its subsidiaries, other finance costs

regarding actualization and translation differences and financial discounts, nearly entirely attributable to Subsidiaries.

9. Income tax expense

The estimated income tax expense amounted to €4.3 million for the six months ended June 30, 2015, in line with the

amount for the first half of the previous year.

Income tax expense as a percentage of revenue is 1.9% for the six months ended June 30, 2015, compared to 2.2% for

the six months ended June 30, 2014.

The increase in the consolidated tax rate compared to June 2014 is primarily attributable to the increase in the profit

before taxes of Marcolin S.p.A., and refers mainly to deferred taxes.

The cash inflows arising from taxes are a positive €0.3 million, due to reimbursements from U.S. tax authorities in the

first half of 2015, compared to cash outflows of €1.9 million in June 2014.

* * * * *


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21

10. Working Capital

The table below sets forth a summary of the movements in the Group’s Working capital, as derived from our

consolidated Cash flow statements for the periods indicated.


2014

2015

(As reported)

(As reported)

(In € thousands)

(Increase)/decrease in trade receivables (16,941) (22,057)

(Increase)/decrease in other receivables (2) (1,978)

(Increase)/decrease in inventories 471 (7,293)

Increase/(decrease) in trade payables 13,711 (1,078)

Increase/(decrease) in other liabilities 892 2,975

Increase/(decrease) in current tax liabilities 969 365

(Use) of provision (1,323) (2,562)

Movements in working capital (2,223)

(31,627)

• Trade receivables at the end of June 2015 were higher than in the previous year, they were largely affected by

the foreign exchange rate difference for €7.0 million, and by the increased sales for 2015 compared to the same

period of 2014. In comparison with December 2014, the figure considers also the impact of the business

seasonality. Credit quality remained consistent with that of recent past. In 2015 the recent improvement in the

average collection period, or "days sales outstanding" (DSO), lost momentum, but the emphasis on credit

management and client selection made it possible to keep the Group’s days sales outstanding (DSO) at June 30,

2015 under control even with difficult markets and rising sales (up by 3 days vs June 2014);

• The increase in closing inventories is attributable to an increase in “current” finished product inventories, due to

the higher sales and management's decision to improve customer service by reducing delivery time and

investing in supplies of continuing products (to be “never out of stock”). In contrast, inventories of products

from former collections (obsolete and slow-moving stock) fell from those of 2014. In comparison with the

previous year, the inventory increase is also attributable to the foreign exchange rate difference for €7.1 million

and the discontinuity represented by products with new brands, Zegna and Pucci, launched in 2015, by the

additional inventory for the new joint ventures of €1.6m, and by the increase in collections offered and models

produced. In 2015 the total "days on inventory" (DOI), including raw materials, work in process and finished

goods, has been 127 days.

• Trade payables are substantially stable at the end of June, despite the higher turnover and the growth in

inventory. Some of the improvement in the Group’s days payables outstanding (DPO) shown at the end of 2014

and due to the adjustment of payment terms for suppliers shared by Marcolin and Viva to the longest time

period between the two, is decreased at June 30, 2015, mostly due to seasonality and to the concentration of

payments of supply in the first half of the year.

11. Capital Expenditures

Our capital expenditures over the period covered by this analysis primarily consisted in:

• the investment in the new Fortogna plant aimed to increase the internal manufacturing capacity of Made in Italy

products (property, plant and equipment);

• the maintenance, replacement and modernization of our production and logistics facilities (plant, machinery and

equipment);

• investments in extending/improving terms and conditions of existing licenses (intangibles).

The following table sets forth our capital expenditures for the periods indicated as derived from our cash flow

statement.


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22


2014

2015

(As reported)

(As reported)

(In € thousands)

Property, plant and equipment (a)

1,221 5,360

Intangible assets(b)

8,611 5,600

Total capital expenditure 9,831 10,960

(a) Investment of €5.4 million in Property, plant and equipment mainly related to new asset purchase, specifically €1.9 million in lands and

buildings for the new manufacturing plant in Fortogna; €2.6 million in commercial and industrial equipment; €0.7 million in hardware and

office fixture, and €0.2 million in other tangible assets. (b) Investment of €5.6 million in intangible assets mainly related to the lump sum agreed by the Parent Company for some licensors in order to

extend licensing agreement periods and improve term and conditions. In addition, intangible assets under formation include the U.S.

Subsidiary and Parent Company’s software and business application implementation, totaling €1.8 million.

12. Liquidity (Cash and cash equivalents)

At the end of June 30, 2015 the Cash and cash equivalents decreased from June 30, 2014 of about €7.7 million.

The changes in the Group’s cash position as compared to June 30, 2014 are presented in the Cash Flow Statement

below.

* * * * *

13. Cash Flow Statement

The following table sets forth our consolidated Cash flow statement for the periods indicated.

As of June 30, As of June 30,

2014 2015

Marcolin Group Marcolin Group

(As reported) (As reported)

(In € thousands)

Operating activities

Profit before income tax expense 6,690 5,568

Depreciation, amortization and impairment 4,515 5,015

Accruals to provisions and interests expenses 3,401 9,146

Cash flows from operating activities before changes in working capital and tax and interest paid 14,605 19,730

Movements in working capital (2,223) (31,627)

Income taxes paid (1,979) 319

Net cash flows from operating activities (13.a)

10,404 (11,579)

Investing activities

Purchase of property, plant and equipment (1,221) (5,360)

Proceeds from the sale of property, plant and equipment 64 -

(Purchase)/Proceeds of intangible assets (8,611) (5,600)

Acquisition of investments - 93

Net cash (used in) investing activities (13.b)

(9,767) (10,866)

Adjustments to other non-cash items (595) (1,608)

Financing activities

Net proceeds from/(repayments of) borrowings 543 18,279

Interest paid (8,883) (9,354)

Other cash flows from financing activities - -

Capital contribution payment - -

Net cash from/(used in) financing activities (13.c)

(8,339) 8,925

Net increase/(decrease) in cash and cash equivalents (8,298) (15,127)

Effect of foreign exchange rate changes 374 1,142

Cash and cash equivalents at beginning of period 38,536 36,933

Cash and cash equivalents at end of period 30,611 22,948


MD&A

23

13.a Net cash flows from operating activities

Net Cash flows from operating activities absorbs €11.6 million for the six months ended June 30, 2015.

The higher cash absorption shown in 2015 is primarily attributable to financial needs related to the investment in

working capital, as explained in “11. Working capital”, in addition to the usual the Bond expenses paid in May.

13.b. Net cash flows used in investing activities

Net cash flows used in investing activities amounted to €10.9 million for the six months ended June 30, 2015,

compared to €9.8 million for the same period of previous year.

Investing activities for the six months ended June 30, 2015 primarily related to:

• Investment of €5.4 million in Property, plant and equipment mainly related to new asset purchase,

specifically:

- €1.9 million in lands and buildings to purchase the manufacturing plant in Fortogna;

- €2.6 million in commercial and industrial equipment;

- €0.7 million in hardware and office fixture;

- €0.2 million in other tangible assets;

• Investment of €5.6 million in intangible assets mainly related to the lump sum agreed by the Parent Company

for some licensors in order to extend licensing agreement periods and improve terms and conditions. In

addition, intangible assets under formation include the U.S. Subsidiary and the Parent Company’s software

and business application implementation totaling €1.8 million.

13.c. Net cash flows from/used in financing activities

Net cash flows from financing activities amounted to €8.9 million for the six months ended June 30, 2015,

consisting of net drawings of borrowings and the interest paid.

14. Capital Resources

As of June 30, 2015, our total gross financial debt was €260.0 million (as of December 31, 2014 it was €240.5 million).

The main component of the total financial debt is the HY Bond, which was issued in November 2013, with maturity on

November 14, 2019, a nominal value of €200 million, and 8.5% interest (paid semiannually).

The other components of total financial debt relate primarily to current financial liabilities, including bank payables

and the revolving credit facility for €25.0 million that was fully drawn at the end of June 30, 2015.

In particular, the Company was granted a medium/long-term credit amortizing line to cover medium/long-term

financial requirements associated with investments in joint-ventures in China and Russia, which have been drawn on

at the end of 2014. This credit line is for €5.0 million, 50% of which backed with an irrevocable guarantee from SACE

S.p.A., granted specifically to fund Italian companies that invest in projects aimed to make their businesses more

international, whether directly or indirectly.

The growth in gross financial debt shown as of June 2015, compared to the same figure at the end of December 2014,

is mostly due to an increase in bank credit in the form of a bill discounting facility used in the ordinary course of

business and the financial facility partially drawn by U.S. Subsidiary.

Moreover, additional medium-long term amortizing financing, committed and unsecured, has been agreed upon

between the Parent Company and another important Bank and drawn in March for €3.0 million, with the purpose of

supporting the Fortogna project (building acquisition). The financing of the Fortogna project was also impacted by a

finance lease of some €1.5 million, related to the acquisition of new machinery and equipment for the refurbishment

of the new Acetato plant.

Finally, the financial liabilities include an amount of US$5.0 million due to the HVHC, Inc. Group, of which US$2.0

million is due in the short term; the remaining portion, due at the end of 2016, is recognized as non-current financial

liabilities, and discounted in accordance with the applicative accounting standards.


MD&A

24

15. Other information/Quantitative and Qualitative Disclosures about Market Risk

As of June 30, 2015, there were no material changes in the risk factors disclosed in our report as of December 31,

2014.


25

APPENDIX – OTHER CONSOLIDATED FINANCIAL INFORMATION

1. Summary Pro-Forma Consolidated Financial Information for the Twelve Months Ended June 30, 2015

The summary financial information presented for the twelve months ended June 30, 2015 is calculated by taking the

results of operations for the six months ended June 30, 2015, and adding to them the difference between the results of

operations for the full year ended December 31, 2014 and for the six months ended June 30, 2014.

The financial information for the twelve months ended June 30, 2015 is not necessarily indicative of the results that

may be expected for the year ended December 31, 2015, and should not be used as the basis for or prediction of an

annualized calculation.

(in € thousands except percentages)

As of and for twelve

months ended

June 30, 2015 (pro forma)

Pro-forma combined revenues …………………………………………..……………………………………………………………………………………….. 390,664

Pro-forma combined EBITDA ………………………………………………………………………………………………………………………………………. 27,267

Pro-forma combined adjusted EBITDA ……………………………….………………………………………………………………………………………. 46,553

Pro-forma combined adjusted EBITDA margin ………..…………….……………………………………………………….…………………………… 11.9%

Pro-forma combined adjusted run-rate EBITDA (1)

…………………….………………………………………………………………….……………... 49,770

Pro-forma combined adjusted run-rate EBITDA margin ……………….…………………………………………………………….………………… 12.7%

Consolidated cash and cash equivalents ……………………………….……………………………………………………………….….….………….. 22,948

Consolidated total financial debt …………….………………………………………………………………………………………………….……………..... 260,013

Consolidated net financial debt ……………………………………………………………………………………………………………….….……….……… 230,493

Pro-forma combined cash interest expense …….……………………………………………………………………………….………..……………... 17,000

(1) The following table sets forth the calculation of adjusted run-rate EBITDA for the periods indicated:

(in € thousands)

As of and for twelve

months ended

June 30, 2015

Adjusted EBITDA (a)

…………………………………………………………………….……………………………………………………………………………… 46,553

Additional synergies (b)

…………………………………………………………………………………………………...……………………………………… 3,217

Adjusted run-rate EBITDA ……………………………………………………………………………………………………………………………………. 49,770

(a) “Adjusted EBITDA” is EBITDA adjusted for the effect of non-recurring transactions which consist primarily of one-off charges, non-recurring

costs in relation to Viva integration project and, and other extraordinary items. This amount has been normalized (restated) excluding the

costs of the discontinued operation regarding Arizona plant closed down, as shown in “4. Other Financial Information - Section III. Summary

Consolidated Information”.

(b) Pursuant to the Viva integration, important cost synergies will be realized which will reach approximately €10.0 million, above the initial

planning of €8.5 million.

(c) Synergies primarily are generated by shared services, operational synergies and elimination of duplicate executive functions and include

efficiencies generated through the reduction of overlaps between foreign subsidiaries, savings in property executive management and back-

office personnel, consolidation of corporate functions, and shared usage of operational, office, and distribution networks. Operational

synergies include efficiencies generated through the consolidation of warehouse facilities in the U.S., consolidation of IT systems and

procurement department savings.

At the end of 2014 Marcolin’s Group achieved synergies of €3.6 million, and from 2015 the full amount is expected. The estimated synergies

already realized in the first half of 2015 has been about €3.2 million.


26

2. Other Financial and Non-Financial Data

Revenue is segmented by reference to the geographic area in which the reporting entity resides.

The following tables set forth an analysis of our revenue by “geographic segment” for the periods indicated.

Revenue, sales volume and average price per unit by geographic segment


2014 (As Reported)

% of total

2015 (As Reported)

% of

total


Italy 46,382

23.9%

60,589

27.2%

Of which Italy Domestic(1)

10,513

5.4%

13,970

6.3%

Of which Italy Export(2)

35,869

18.5%

46,619

20.9%

France 21,925

11.3%

18,731

8.4%

Rest of Europe 30,003

15.4%

28,448

12.8%

North America 85,193

43.8%

97,032

43.5%

Rest of World(3)

10,836

5.6%

18,069

8.1%

Total 194,338

100.0%

222,869

100.0%

Sales Volume(4)

(units in thousands)

Italy 1,040

13.0%

1,480

20.1%


173

2.2%

228

3.1%


867

10.8%

1,251

17.0%

France 482

6.0%

398

5.4%

Rest of Europe 944

11.8%

571

7.7%

North America 5,178

64.5%

4,491

60.9%

Rest of World(3)

381

4.8%

436

5.9%

Total 8,025

100.0%

7,376 100.0%

Average price per unit(5)

(€ per unit)

Italy 44.6

40.9


60.8

61.2


41.4

37.3

France 45.5

47.0

Rest of Europe 31.8

49.8

North America 16.5

21.6

Rest of World 28.4

41.4

24.2

30.2

(1) Italy Domestic relates to the revenue generated by Marcolin’s sales of products to the Italian market.

(2) Italy Export relates to the revenue generated by Marcolin’s sales of products to the markets in which we do not have an operating subsidiary,

mainly in the Far East and Middle East. (3)

Rest-of-World sales relates to the sales generated by Brazilian and other non-North American and non-European subsidiaries (for example

Marcolin do Brasil Ltda, Viva Brasil Ltda, Marcolin Asia Ltd.).

(4) Sales volumes correspond to sales made to wholesale customers expressed in thousands of units.

(5) Average price is calculated as revenue divided by sales volume.

Revenue, sales volume and average price per unit by brand type


2014 (As Reported)

% of total

2015 (As Reported)

% of

total


Luxury brands 81,171

41.8%

107,819

48.4%

Diffusion brands 113,167

58.2%

115,049

51.6%

Total 194,338

100.0%

222,869

100.0%

Sales volume(1)


Luxury brands 1,083

13.5%

1,362

18.5%

Diffusion brands 6,942

86.5%

6,013

81.5%

Total 8,025

100.0%

7,376

100.0%


(€ per unit)

Luxury brands 75.0

79.1

Diffusion brands 16.3

19.1

24.2

30.2

(1) Sales volume corresponds to sales made to wholesale customers expressed in thousands of units.



27

Revenue, sales volume and average price per unit by product type


2014 (As Reported)

% of total

2015 (As Reported)

% of

total


Sunglasses 99,034

51.0%

118,347

53.1%


49.0%

104,522

46.9%

Total 194,338

100.0%

222,869

100.0%

Sales volume(1)


Sunglasses 4,614

57.5%

4,511

61.2%


42.5%

2,865

38.8%

Total 8,025

100.0%

7,376 100.0%


(In € per unit)

Sunglasses 21.5

26.2

Prescription frames 27.9

36.5

24.2

30.2

(1) Sales volume corresponds to sales made to wholesale customers expressed in thousands of units.


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marcolin bond report h1 2015 · viva optique, inc. (new jersey). ... and also between eyeglasses...

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