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Luxottica Group S.p.A. (NYSE:LUX)

Q1 2010 Earnings Call Transcript

April 29, 2010 11:30 am ET

Executives

Alessandra Senici - Investor Relations Director

Andrea Guerra - Chief Executive Officer

Enrico Cavatorta - Chief Financial Officer

Analysts

Daniel Hofkin - William Blair & Company

Edouard Crowley - Exane BNP Paribas

Allegra Perry - Nomura

Luca Orsini - One Investments

Louise Singlehurst - Morgan Stanley

Operator

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining Luxottica's first-quarter 2010 results conference call.

As a reminder all participants are in listen-only mode. After the presentation there will be an opportunity to ask questions. Please note that the conference will last one hour. (Operator Instructions)

At this time I would like to turn the conference over to Ms. Alessandra Senici, Group Investor Relations Director. Please go ahead, madam.

Alessandra Senici

Thank you, operator. Good afternoon and thank you for joining us today. Here with me are Andrea Guerra and Enrico Cavatorta.

Before we begin, first I have a couple of quick items to cover. As a reminder, a slide presentation which we will informally follow during this call is available for download from our website under the reading Investor Relations Presentation Section.

This presentation includes certain non-GAAP financial information within the meaning of Regulation G under the US Securities Exchange Act. Further information including additional information required by Regulation G is also available in Luxottica Group's press release relating to its results for the first quarter of 2010, which may be found on our website under the reading Investor Relations Press Releases Section. This conference call is being recorded and is also available via audio webcast from our website.

During the course of today's call, certain projections or other forward-looking statements may be made regarding Luxottica Group's future financial performance or future events. We wish to caution you that such projections or statements are based upon current information and expectation, and actual results may differ materially from those projected in the forward-looking statements. You can read more about such forward-looking statements on page two of the slide presentation.

We also refer you to our filings with the SEC and Italian securities authorities. These filings contain additional information concerning factors that could cause actual results to differ materially from those contained in management's projections or forward-looking statements.

Finally, as mentioned in the press release issued on April 16, starting in 2010 we will report our financial results in accordance with the International Accounting and Reporting Standards.

We will begin with our CEO, Andrea Guerra.

Andrea Guerra

Thank you, Alessandra, and welcome to our Q1 business update and review. We called it a sound start of the year, and obviously I totally agree with this. Group sales are up by 6%, 7% at constant exchange rates. And I would say that we had a solid start and promising start in all our main regions.

Wholesale is back to double-digit growth. As you can imagine, it is basically more volume and a little bit negative on price mix. But for sure, the number of products that we put in place and launched in the market gave the proper results.

Retail sales are up mid-single digits. Solid in North America, especially our main two chains – LensCrafters plus 6.6, Sunglass Hut almost plus 11 on the worst quarter of 2009, which was if I remember correctly something around minus 16. I would say that US has been, I would say at the end quite surprising. Improving week after week and having a very strong, sound Valentine, then spring, then spring break, and then Easter.

In Australia instead we had some challenges on both Sun and Retail – Sun and optical. I always remind you that basically Australian performance in all 2009 has been superior and positive; and therefore I am not putting too much emphasis on this.

So, Group sales up by 6. Operating income up by 11. And net profit up by 20 in USD, so basically excluding any kind of currency effect of the dollar; it is plus 28%.

For the second year in a row, we have been able to take seasonality away in our free cash flow generation. We were able again in Q1 to be positive in our free cash flow.

So I think that as I said in London the performance of 2010 is in our hands, and after the first four months I would say I am happy about it. I will give now and turn the word to Enrico so that he can give you some details on numbers.

Enrico Cavatorta

Thank you, Andrea. I would just like to add comment on Q1 P&L results. That – we had margin improvements on both divisions, more importantly on the Wholesale than retail. Of course, part of it is due to our better performance that was 10% in Wholesale versus 10.5 in Retail. And even if I look at constant exchange rates, unbiased number, Wholesale was up 9% and Retail 5.5%.

Consequently our margin grew by approximately 80 basis points in wholesale and 30 basis points in Retail.

Last year in Q1 '09, you might recall it was the worst quarter for our Wholesale Division. And therefore many accruals for, for example, incentive payment or bonus scheme or other costs related to the performance were not accrued last year; and then were then recovered during the year when the Wholesale performance has improved. So the comparison this year versus last year is affected also by that one. In other words excluding that effect, the comparisons this year would have looked more favorably than it actually is.

Anyhow, our operating income growth is almost double our sales growth; and our net income growth is almost – the amount is more than three times our sales growth, in line with our expectation and guidance.

Even more importantly, if I look at the constant exchange rates, our net income in dollar has grown approximately four times faster than our net sales. So we are very pleased with the P&L results of Q1.

Looking at our cash flow, again as Andrea mentioned, the positive free cash flow generation in Q1, despite this was traditionally until 2008 a negative free cash flow generator for our company due to the seasonality. More importantly, basically all the items of free cash flow generation were in line with our expectation.

Not surprisingly, the working capital was a cash drainer, almost double than last year effect. We have always mentioned many times that last year we had no recurring positive effect on working capital that we are not expecting to be recover this year as well.

All our indicators anyhow are in line with budget. We are – in terms of sales of receivables, we are in line with last year, but of course with a much bigger sales in the receivable.

Our inventory days are still down versus year ago, and our payable days are up versus year ago. So our working capital is full under control. But of course, seasonality in Q1 plays against us.

Also, the tax effect is in line with our expectation. This year, we will not see any more the positive tax effect we had last year.

Due to this, our net debt – if I exclude the currency effect – was basically in line with December, 84 million up. We have an 80 million down in terms of translation adjustment, so basically would have been flat excluding the exchange rate.

And also our ratio that on a reported basis actually from December to March you see a worsening from 2.7 to 2.8 – actually if you do that on a constant or, better, excluding the exchange rate distortion that you had between net debt and EBITDA on both periods – you basically see actually an improvement from 2.8 to 2.7 moving from December to March.

Andrea Guerra

Thank you, Enrico. I will give you now some highlights of Q1 and then I will go on some more details on some aspects of Q1.

Going back to our London meeting and presentation, I think that the strength of our portfolio is still there and well demonstrated. Ray-Ban and Oakley are still up double digits. I would give a special mention to Oakley which had a quarter of high-teens. Premium and luxury, I think this is probably one of the best news that I can give to you, is that premium and luxury is recovering. I would say that January has not been a wonderful month in terms of premium and luxury. February, better; March, better. Today we have a good order set in our hands.

Excellent performance of our Rx, frames. And this is again something that we have been talking in length. LensCrafters comps continue to be strong all across the quarter. Sunglass Hut North America, plus 11 and this has been a strong rebound in the Sun market in the States. We have seen it in Sunglass Hut, we have seen it in LensCrafters, we have seen it in the Oakley stores, and we have seen it in (inaudible) stores.

Then I write, are North American growth rates sustainable? I think what I really want to say is we have lived a kind of euphoria for some months. Is this sustainable? I don't think at this level.

I think America will be more than positive. But to imagine to see again quarters as this one, obviously comparables were easier; but this has been really a super performance. So I would be cautious looking ahead, even if – again I repeat it because I want to be clear – I am absolutely positive about the next eight months in North America.

Emerging markets, great. We are back to our normal trends. So happy, plus 30% in all our emerging markets, really proving all the investments we did in the last five years. And we'll give you some more details on that. And as Enrico was saying, costs are absolutely under control and good cash flow generation.

When we turn to North America in Q1, overall company plus 6% sales, obviously in dollars. This includes all our different businesses. So looking to the amount of business that we make in the US, I think this is a good performance.

LensCrafters is strong. There is some more traffic in the malls. Conversion has been good. Price mix effect in LensCrafters due to our lenses mix has been good, and a little bit back to our normal story of multiple pairs.

As I said, Sun was strong. Sunglass Hut Macy's project is absolutely on track. Pearle Visions were down. Pearle Vision comps were down, and we were really comping against an unbelievable and unbeatable promotion we had a year ago. I am not worried. April is back to be well on the positive side.

On the Wholesale, good. Oakley, Ray-Ban Rx. And you will see overall in the Wholesale business in United States we were breakeven. The only reason why we are breakeven and not in the region of 4, 4.5% is the fact that normally in the first quarter we have an engagement with one big box, and we didn't do this action and operation this year. And therefore we are at this level. But we're happy not to have done this normal operation in the first quarter, and therefore we look to a second quarter to a different growth level.

So in North America, things have performed as we hoped and even better.

When I look to Europe, I would say that Continental Europe and Northern Europe and Eastern Europe are better than Mediterranean Europe. We have grown in all European markets. We have grown in all European markets. We are very cautious and watch carefully sellout in Spain, Italy, and Greece, especially now that we go towards the peak sun season. And I think that our selling performance was excellent. Now we have to really watch and be careful on the sellout.

Why have we been successful all across Europe? I think for the number of projects that we put in the market, apart the Ray-Ban and Oakley results.

We have talked at length in London about all the different projects that we were putting in the market from Burberry to Chanel to Dolce&Gabbana, Persol, Prada, Versace, Ray-Ban. So extremely well portfolio of nice events to capture the attention of the trade and consumers.

When we look at emerging markets, I think that it is all over. China excellent, China excellent on Wholesale and Retail. Brazil excellent again. And think that during this quarter we are also going through the final step of the integration between Oakley and Luxottica also with a change in IT. Same thing in South Africa. Therefore, I think that these results are in good shape.

As we said, we launched a first collection especially made for emerging markets for Ray-Ban. Obviously too early, but signals are absolutely positive up to now.

So, looking forward again I repeat my statement. My statement does not change after two months. I am absolutely optimistic about 2010, but cautious. The world is more selective. Demand is more selective. Not all brands can make it. Not all geographies will make it. Not all business will perform graciously. So we need to execute well. We need to be careful. We need to be fast. We need to be adaptive. And I think that we proved a sound performance. Now we enter our peak sun season and therefore in the next two, three months, we make our profit and loss for the year.

So, on track to meet our full-year objectives. And this is all, so we wanted to give you obviously a quick update immediately at the end of our Board of Directors today and our General Assembly today, which approved the dividend to be paid.

And if you have questions, ideas, or comments, here we are to answer you.

Thank you. And I give back the word to the operator.

Question-and-Answer Session

Operator

Excuse me, this is Chorus Call conference operator. We will now begin question and answer session. (Operator Instructions) The first question is from Daniel Hofkin of William Blair & Company. Please go ahead sir.

Daniel Hofkin - William Blair & Company

Good afternoon. Very nice results. Just a question, I guess. First, if you could clarify your comment regarding parts of Europe. And I think you were saying you are a little bit cautious, obviously, in some of the Mediterranean countries regarding the sellout. I assume you mean consumer purchases and purchase behavior going forward. Did I understand that correctly?

And second, I think you made a comment about recent retail trends in North America. And I just wanted to make sure I caught that. I thought you said that there was – one month was not as strong, but that the overall trend is good.

Andrea Guerra

So, regarding Europe I think you got it correctly. And we had positive, good positive result in all Mediterranean Europe, but we are carefully watching patterns, behaviors, weekly demand in orders, reorders. Because I think it is not obvious to be as positive as we have been in the past three months in these parts of Europe. As we go north, performance is more solid even looking to the sellout.

Instead I didn't understand what you understood on retail trend, so if you can reframe it because I didn't get your point.

Daniel Hofkin - William Blair & Company

The audio was fading in and out on my end, so I may have missed part of your comments, so that's fine. I guess if you can talk a little bit about I guess what you are seeing. It sounds like you are seeing a little bit of a return to purchases of multiple pairs.

Andrea Guerra

Yeah, that comment was related to LensCrafters. We have seen and observed some more traffic in the malls. We had an index of conversion which was excellent. And I thank for the performance to our LensCrafters people.

And on the other side, especially in those regions that were really negative a year ago, Florida on one side and California on the other side, we had a rebound of Sun and therefore of multiple pairs.

Daniel Hofkin - William Blair & Company

Okay. And with regard to your commentary on the balance of the year, obviously the first part of last year was the most challenging, so therefore the easiest comparison. But are you – just on an underlying basis are you as optimistic about the balance of the year, considering that comparisons become more difficult?

Andrea Guerra

So if I look to last year, yes, I agree with you that for the Wholesale side Q1 was the easiest. Not for retail. If I look to Retail, Q2 last year was worst.

Daniel Hofkin - William Blair & Company

Okay. Do you have an overall figure for the consolidated same-store sales, by any chance, across the company?

Andrea Guerra

May I say that I do not love that, because really it is making so many different things together. But Alessandra has it and she will be happy to give it to all people that request it.

Alessandra Senici

Yes, it's approximately 3.5%.

Daniel Hofkin - William Blair & Company

Okay. Thank you very much. Nice results.

Andrea Guerra

Thank you.

Operator

The next question is from Edouard Crowley of Exane BNP Paribas. Please go ahead sir.

Edouard Crowley - Exane BNP Paribas

Hi, good afternoon to everybody. Actually I would have two questions. So the first one is regarding the price mix, I understand that price mix was still under pressure in Q1, did you see this reversal going forward during the remainder of the year and especially do you think we can bet on a recovery of the price mix for the high-end luxury licenses starting from Q2? So that is the first point.

On the second point is – when I look at the – I know that you don't comment on the gross margin at the Group level. But I see that the gross margin is actually down 150 basis points year-on-year this quarter. I guess that this is mainly related to the Retail operation. Am I correct? Thank you.

Andrea Guerra

So regarding the price mix, price mix was down 1.5 point Q1, so much better than what we experienced in Q3 and Q4 last year. Let me say gross margin is mainly due to in the Wholesale part of the business, but I am not worried. Really it's something that is moving and it's fine.

There is no really issue. It is more how the different accounting rules are in the leveraging of inventory and having some inventory back in our Warehouses. So do not worry about our gross margin dilution.

Edouard Crowley - Exane BNP Paribas

Okay. And when you say that sequentially the price mix is – of course it is improving. But can you quantify? Because I know for the licenses business it was positive – sorry, for the out-brands it was positive I remember in Q4, even in 309 [ph]. But can we expect, I don't know, mid single-digit growth in the price mix? Or is it progressive?

Andrea Guerra

No, we said we were clear not to expect any gains during 2010. I think that the result we had in Q1 beat our expectations. So we had a price mix at the end better than what we expected. And therefore I really hope that during the year we can have some positive signs in front of price mix. But light.

Edouard Crowley - Exane BNP Paribas

Okay. Thank you very much.

Operator

The next question is from Ms. Allegra Perry of Nomura. Please go ahead madam.

Allegra Perry - Nomura

Yes, good evening. I have two questions please. The first one is on Wholesale. I don't know if I heard this correctly, but I think with respect to April, I think I heard you say that this is a bit more difficult relative to February and March. I just wanted to confirm that I heard that correctly, and if it was specific to the premium luxury segment.

Then the second question, just on LensCrafters within Retail. Have you continued to see a growth here in the insurance customer? And how much does this now represent of your overall sales in this format? Thank you.

Andrea Guerra

So April was as strong as the first three months in Wholesale. Maybe 1 point less, 2 point less, but it was still another strong month. So no, I didn't say that April slowed down in terms of Wholesale.

What I said was that in April we have seen always good positive comps but slightly less strong than what we have seen the first quarter, especially on the Sunglass Hut side.

LensCrafters was still excellent in April. So managed vision care consumers have grown during Q1 2010 and they represent something more of 20% of our customers in LensCrafters today.

Allegra Perry - Nomura

Okay. Thank you very much.

Andrea Guerra

Thank you, Allegra.

Operator

The next question is from Mr. Luca Orsini of One Investments.

Luca Orsini - One Investments

Yes, sorry to come back on the gross margin. But just to update my model for the year, is it still fair to put the gross margin still at the same level in the next quarter or two, before you get an improvement late in the second half? Is that what you were implying? Or what shall I put in my model, and why?

Andrea Guerra

So in Q2 we should see an improvement because the inventory translations are done, gone, and we are seeing an improvement in price mix. We are obtaining good efficiencies on the industrial side. So I would bet on improvement of gross margin in Q2 in the Wholesale, no doubt. More than (inaudible), no doubts.

Luca Orsini - One Investments

Thank you.

Andrea Guerra

Pleasure.

Operator

(Operator Instructions) the next question comes from Louise Singlehurst of Morgan Stanley. Please go ahead madam.

Louise Singlehurst – Morgan Stanley

Hi, good afternoon. Could you just talk a bit about the sentiment across the Wholesale accounts in Europe and the US? I presume we see much better US department store data. And just sentiment looking forward? And in terms of the run rate through the quarter, it sounds as though it accelerated as we went through January, February, and March. Just a bit more color on April, please. Thank you.

Andrea Guerra

Yes. So April was slightly below the average of the quarter. When I look at the Wholesale part of our business – and I exclude emerging markets where the sentiment is really positive – I look to Europe, and I think here there are probably gaining of market share on one side. And on the other side as I said, especially in places which are from France, north, a much better sentiment. When I come to Italy and Spain, I think they had one month, February, which was quite hard. April is not bad at all in terms of sellout.

When I look to the States it has been quite erratic, depending on the weeks and depending on the periods. March much better than February and January. And if you remember, February and January we also had some weather adverse. And March was great for sun and weather.

Louise Singlehurst – Morgan Stanley

Great. Thank you.

Operator

The next question is a follow up question from Mr. Edouard Crowley of Exane BNP Paribas. Please go ahead sir.

Edouard Crowley - Exane BNP Paribas

Yes, sorry. Just a follow-up on the net debt-to-EBITDA kind of target for the full year 2010. I remember that back in March you indicated that you were expecting net debt-to-EBITDA to converge to around 2 times by this year-end. In light of the, well, the strong dollar, do you think this target is still achievable?

Enrico Cavatorta

Well, of course the target is still achievable, and it was based on and excluding exchange rate effect basis. I mean, we cannot predict, of course, what the exchange rate on December 31 would be. So I would assume using the same exchange rate of the EBITDA – so an unbiased ratio – it would be confirmed approaching 2 times.

Edouard Crowley - Exane BNP Paribas

Okay. Thank you.

Operator

Gentlemen, there are no more questions registered at this time.

Andrea Guerra

So, I would thank everybody being on the line and talk to you soon. Bye-bye.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.

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Source: Luxottica Group S.p.A. Q1 2010 Earnings Call Transcript

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