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Luxottica Group S.p.A. [LUX]

Q1 2014 Earnings Conference Call

April 29, 2014 12:00 p.m. ET

Executives

Alessandra Senici – Group Investor Relations Director

Andrea Guerra – CEO

Enrico Cavatorta – CFO

Analysts

Bassel Choughari – Joh. Berenberg, Gossler & Co. KG

Antoine Belge – HSBC Bank Plc

Domenico Ghilotti – Equita SIM SpA

Daniel H. Hofkin – William Blair & Co., LLC

Julian Easthope – Barclays Capital Securities Ltd.

Operator

Good afternoon. This is the Chorus Call Conference Operator. Welcome and thank you for joining the Luxottica Group First Quarter 2014 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask a question. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Alessandra Senici, Group Investor Relations Director of Luxottica. 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-IFRS financial information within the meaning of Regulation G under the U.S. 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 2014, which may be found on our website, under the reading Investor Relation, 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 projection or other forward-looking statement may be made regarding Luxottica Group’s future financial performance or future event. We wish to caution you that such projection or statement 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 projection or forward-looking statements.

We will begin with Andrea Guerra.

Andrea Guerra

Thank you, Alessandra. Welcome to all of you to our Q1 2014 business review. It's one of those quarters where underlying results, performances, behaviors, motivation, feelings are better than the numbers. Fortunately if we needed to have a challenging quarter really appreciate the fact that it happened in Q1.

Currencies have been tough. U.S. weather, yes I talk about U.S. weather has been tough in some sheets and calendar change some performances and results between March and April. Having said this we have been able to grow like-for-like 4.2%. I really think that this is an outstanding result. And like-for-like growth as operating profitability level another 60 bps of improvement.

And this is normally a quarter where our generation of cash normally has been flattish because this is one of those quarters where we create inventory for the season. We have done a really great work and generated €60 million free cash flow this quarter. So, 4.2% like-for-like growth currency neutral plus 60 bps operating profitability currency neutral and €60 million of free cash flow. Looking at the two business divisions, all sales delivered another great quarter almost 8% like-for-like with Europe above expectation and I would say all the rights of the regions at level we expected.

Orders taking is some of our emerging market has been great, but we shifted a little bit less because at the end of 2013, I would say December probably some of this customers were shifting, some of these countries shifted a little bit more than needed. Ray-Ban has been in great shape. Same thing we could say about Oakley. And really successful with the heritage collection celebrating and marking 30 years of history of Oakley, s o Ray-Ban and Oakley always leading the pack.

In terms of retail, let’s start from LensCrafters, Q1 slightly negative comps with two regions out of five really hit by freezing temperature. It finished east region in U.S. finished minus three. North and central finished in the minus four and with the segment of more matured consumers remaining home for entire weeks. As weather changed, as we are progressing with our jobs and projects for like-for-like growth in April has been plus two. We began updating you about LensCrafters journey in October in Cincinnati many differencing have been completed and now we are ready to execute. We have a totally new store segmentation in a more clear way based on consumer profile with a new product location and new supply chain with different price points and some absolutely more convenient.

Again, our lens performance consumer segments are those asking for more convenience in Q1 with household income less than $70,000. I think that we are approaching this topic pretty well and I am pretty optimistic looking forward. Optical retail is the rest of the world did a great job. LensCrafters China double digit like-for-like for the third in a row and a great performance in Latin America and good performance in Asia Pac.

Sunglass Hut never stops. Another quarter of total cost and counts double digit and U.S. a plus three and three and moving to another 6% including April therefore having Easter neutral between March and April like-for-like, year-to-date Sunglass Hut end of April plus 6%, very positive in Europe, Asia and Latin America.

So, all in all, we are happy, challenging we have to work harder and ready for the season. I would love now to turn to Enrico and give you some more numbers, some more colors and then I will come back.

Enrico Cavatorta

Thank you, Andrea. So let's have a little quick look at our key numbers and as Andrea said. We had like-for-like total group sales growth of 4.2% of constant forex. One of the important basis negative one. So more than 5% point has been negative effect of forex sale, we will see the details in a minute. Strong performance in wholesale close to double-digit and overall 2% of for like growing a little bit more in the (inaudible) by division we had Africa, North America, slightly negative. Australia positive on a gross single digit and then outstanding performance for our energy market chain China double digit and Latin America close to double digit. We have sang ourselves overall worldwide in the high single digit.

If I look at the currency, you see here the impact of our main five currencies Dollar, U.S. and Australian Dollar, Brazilian Rhea, Chinese and Japanese yen and I’ve shown to you for clarity the impact of the devaluation of those currencies during 2013. Certain during the first quarter of 2014 and as you can see a size of the devaluation of those currency in this first quarter has been very much in line with what we’ve experienced during the second half of 2013. It has been much worse than in the first half.

Now, if I look for the balance of the year, and I compare what is the average exchange rate of those currencies today as compared to what it was a year ago so in order to prepare to project the impact of those currency in the second quarter, I see more or less the same impact that we have experienced in the first quarter. So, I would expect the second quarter broadly in line with the first. While the head win that should diminish quite substantially in the second half of 2014, so I hope that by June, a stronger head win will diminish.

So, not surprisingly the impact in our sale and the impact in our EBIT margin in the first quarter 2013 has been pretty much in line with what you have seen in the second half of 2013. So, as we said, we have lost 5.5% point of sales and we have lost 60 basis points of the EBIT margin better than 90 basis points that we are in the second half so the situation is likely improving but probably we will continue to be negative as I said also in the next quarter, the current one.

So, if I look at our operating performance our profitability with debt currency impact I think we are satisfied with the numbers. We were flat on the reported basis of the group level, 14% of operating margin but as I said, excluding the head win of the currency, we have grown by 60 basis points. That is a satisfactory performance given our 4% sales increase like-for-like.

Looking by division, outstanding result in wholesale 90 bps of like-for-like improvement, so again flat on a reported basis but 90 basis points has been the impact of currency and this is very good result. I would say in line with our 8% growth on a like-for-like basis and this has been also helped by reduction in manufacturing cost and in that particular area clearly the devaluation of the Chinese or one time helped.

Looking at retail, is a more mixed situation. Overall on a reported basis, we have declined our profitability by 20 bps, but it is exactly the other way around if I looked on a like-for-like basis, though 20 bps up. The currency head in this division has been 40 bps in total.

If I look at our profitability on a like-for-like basis by division again is more or less is in line with our sales results. So, in North America where our comps has been slightly negative, our like-for-like profitability has been in line with last year. So, we have been able to preserve our profit margin in our key regions for retail division. Also we did slightly declining comp. All other regions in the retail division have seen their profitability growing by substantially in the emerging markets China, Latin America. They have grown in excess of 200 or 300 basis point a year ago and our more established mature retail division like Sunglass Hut or Australia Optical grow in the region (inaudible) percentage point each with the comps that are assets.

So, moving to net income. Again, we have been flat on a reported basis by the improvement of 50 basis points on a like-for-like basis. I would say that the most outstanding result as mentioned this quarter has been our cash flow performance. You might recall that for seasonality our first quarter is one of the weakest quarter of the year. Sometimes we have been – it has been a cash negative quarter or flattish a bit. So, I see the 60 million British flow, 60 million Euro British flow generation the first quarter is one of the best results of our group and we have to go back more than five years to see the first quarter bigger than 60 million Euro. It was 2009 but that was due to extraordinary measures that we put in place five years ago because of the financial crisis.

So while these 60 million has been the kind of organic or non- performance of which we are very satisfied. One of the key contributor has been the inventory reduction. We have been – we have decreased our days in inventory versus a year ago by 17 days. That is clearly an exceptional result quite outstanding. I would say part of it is explained by the (inaudible) year ago some of you might recall that our DSI increased versus 2012 by eight days. And that was due to their money and the SAP introduction in our factories.

So now we have done 17 days. If you want we are fully record of debt build up and we are adding another nine days of reduction again I think this has been quite a very good performance and is a performance that was expected to certain extent. You might recall that inventory is one of the components of the working capital from which we expect a large contribution this year.

I would like to finish just refreshing the rule of thumb. As we said, we think the rule of thumb will be valid also in 2014 and these results in Q1 are fully in line with the rule of thumb. On a like-for-like basis our sales has grown 4%, our operating income 8% and our net income by 10%. So even if the sales growth has not been in the high single digit region and more in the mid single digit still we are able to leverage our operating profitability in order to preserve our targets.

Andrea Guerra

Thank you, Enrico. Q1 has also been pretty intense in terms of building our future, shaping our future and helping the industry to really engage with new things happening in the world. Three things happened in Q1, on one side we accomplished and finished the acquisition of glasses.com we had a number of events in which we have been talking about it. It's a great asset for our future, great people, great culture and a very good e-commerce platform and great pieces of that launch.

I have to tell you that our Q1 in terms of e-commerce has been another quarter in the region of the plus 30% average between our three different platforms. The agreement with Google to develop together the new glass platform with introduction of our great brands, Ray Ban and Oakley. I am not ready here to give you much more color than what we have been able to give in the last four to six weeks. The project is really important to us and it's now basically a year we are dedicated to it, great energy, great heart and great talents.

Then last in terms of where it happened the agreement with Michael Kors, great brand, great success, very hot. It's the new agreement for the next ten years. It's another American very successful luxury brand with an opportunity to reach more than $100 million in the next three years.

Now we are in April Q2. April is over, great month, we are happy. We were really expecting and waiting to see that it really was a cause of weather or other factors and we have been happy to see everyone performing well. LensCrafters positive plus two like-for-like, Sunglass Hut positive double digit. Great recession of our new sun collection an order book of plus 10 in all our wholesale division. We are really working hard and really we are looking at the remaining part of the year with optimism.

Now we need to go in May and June as usual these are the two most significant months to really understand how the year will develop and here we were to really to do a great job in May and June. Hopefully the weather will assist us.

Thank you very much for listening and ready to answer to any question you may have. Alessandra, we get back the operator, correct? So back to your operator, thank you very much.

Question-and-Answer Session

Operator

Thank you. Excuse me this is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Bassel Choughari of Berenberg. Please go ahead.

Bassel Choughari – Joh. Berenberg, Gossler & Co. KG

Hello, two questions from me please. The first one is, I remember it was either at the end results or at the quarter before, you were talking about making acquisitions. And given that you will have Michael Kros for next year and the Google Glass do you think you have enough on your plate or you are still looking for acquisitions? And I’m specifically thinking about brand here that’s my first question. And my second question is could you please give us hand on how volume versus value has been evolving because I remember that you have been increasing prices for some of your products? Thank you.

Andrea Guerra

So, in terms of the question you were posing in terms of other acquisitions, as usual we are out in the world talking to different partners and people and obviously as I always repeat we are not always the people that define moments and the period where certain things may come available. I don't see anything coming tomorrow morning. Sometimes in a quarter we close to three, sometime we close to zero. So, I don't see major things happening in the next two-three months and we are working for some other things happening in the midterm and the plate is heavy but the thing we also have the talent and the energy to fill it up. In terms of volume and mix in our wholesale division obviously, currency neutral, I would say again that we were in the 75% - 80% volumes, 20% - 25% mix and price where price was more than mix.

Bassel Choughari – Joh. Berenberg, Gossler & Co. KG

Okay. Thank you very much.

Andrea Guerra

Thank you.

Operator

Your next question is from Belge of HSBC. Please go ahead.

Antoine Belge – HSBC Bank Plc

Hi, it's Antoine Belge from HSBC. Three questions. First, in Q1 can you comment on your performance in wholesale between your house brand on the one hand and the modern license on the other hand and maybe measuring qualitatively, one had done better than the other and one which is less well? And the second question is I think you mentioned that your wholesale orders were 10%, do you consider to other comment maybe region and finally on the Michael Kros, you licensed is it possible to explain how you will position the brand with the rest of the portfolio on a particular coach and how in terms of leverage and how many you people you need to hire for that bond and into what extend you will leverage existing resources you already have? Thank you.

Andrea Guerra

Thank you Antoine. In terms of licenses I would say that all our premium and luxury brand portfolio performed well. So starting from Armani and moving towards our $160 million - $165 million objective Q1 was rightly lined with. We had a good Q1 with product, we had a good Q1 with (inaudible), so I wouldn't say that we had any specific below average, but we had a solid portfolio in this first quarter in terms of luxury.

In terms of orders I would say that the peak is in the emergent markets now. We really have a solid book and we have in the average and a little bit above U.S. and Europe moving between a four and six. Always keep in mind that our order book is not long term and we will make the performance of the Q1 with the Sun between mid May and end of June. In terms of Michael Kors and Michael Kors positioning is a couch, I think it is little bit in the marketplace not in the eye wear, one is more traditional American, the other is more contemporary global and I think the difference of the consumers are there, there is some overlaps and we will be a little bit more fashion driven and little bit more colorful, a little bit more contemporary with Michael Kors.

In terms of portfolio leverage, as they always repeat, we do no increase the number of licenses. We are dropping one license at the end of the year and we have communicated that we are not renewing the contract. It is not channel obviously, is a minor license that in any case has the people behind it in terms of sales, in terms of manufacturing, in terms of style and design. So at the end in terms of costs is basically the same, in terms of revenue should be something around 10 million Euros again what we will be able to perform with Michael Kors in 2015.

Antoine Belge – HSBC Bank Plc

Okay. Thank you. And maybe just since you mentioned (inaudible) when do you think you will be in the position to make an announcement regarding the renewal of the license?

Andrea Guerra

Beginning of summer.

Antoine Belge – HSBC Bank Plc

Thank you very much.

Andrea Guerra

Thank you.

Operator

The next question is from (inaudible) Raymond James. Please go ahead.

Unidentified Analyst

Yes, my questions have been already answered, but I would like to have the phasing in retail in North America for LensCrafters Sunglass Hut as a like-for-like between January, February and March. If I remember well you said that some points that Sunglass Hut was plus five and LensCrafters was basically flat despite as a difficult weather that was for the annual results if I am not wrong, so what happened in March. March seemed to be a little weak. Am I correct or is it wrong?

Andrea Guerra

So, you are perfectly correct with regard Sunglass Hut which is why I was giving to you April as well. We were up to mid April plus six then we got the two up to mid March. Then we had two Easter week of 2013 where we lost and we really gained in April again at the end of the April we are in the plus 6% like-for-like in Sunglass Hut U.S. In terms of LensCrafters, let me give you exactly. So, we finished the January positive. February was dark night. So it was the minus four point something. In March we began the recovery in the second- third week, then again Easter was a little bit negative. Then April came back to be plus two. So this is exactly how we gave you probably mostly at the end of January we gave you some figures at the – when we were announcing our results. So February has been tough for LensCrafters. It’s that Sunglass Hut had this poor calendar shift of Easter from March to April.

Unidentified Analyst

Okay. Thank you.

Andrea Guerra

Thank you.

Operator

The next question is from Domenico Ghilotti of Equita SIM. Please go ahead.

Domenico Ghilotti – Equita SIM SpA

Good afternoon. Couple of questions. The first is on Optical Australia, that was quite beyond the jaw target for the full year so if you can give us some color on the situation there. And the second is on emergent markets little down in wholesale. You mentioned that some markets were delay in shipment. Do you see – so can you elaborate a little bit more on what are the markets that are suffering more and if you see the risk of more structural over staffing?

Andrea Guerra

No, let me be very clear on the emergent markets. So, we began our shipments more in February, March and April is moving on fantastic as we can think. January was low but January was low because some of our markets wanted to reach one million units in China, two million units in South East Asia. So, we had a number of record breaking in December that we paid a little bit in January. If you look 12 months rolling we are still pretty high in the sky with our percentages. So it's purely the way we have shipped between December and quarters and things like that. No worry at all for this. In terms of Australia, I mean it was a plus two, I think plus two and it was again the best quarter of last year and fine.

Domenico Ghilotti – Equita SIM SpA

Okay. Thank you.

Andrea Guerra

Thank you.

Operator

Your next question is from Daniel H. Hofkin of William Blair & Co. Please go ahead.

Daniel H. Hofkin – William Blair & Co., LLC

Yes. Good afternoon. Can you hear me okay.

Andrea Guerra

Sure.

Domenico Ghilotti – Equita SIM SpA

Okay. Sorry about that. My line got dropped and I apologize if this question was already asked. I just kind of wanted to understand so I see what you are describing between the March quarter and then I guess January through April, if you put all of that together are you kind of fully year-to-date where you would have expected to be starting the year and if not what are some of the things that you expect can help in terms of making kind of the full year rule of thumb if you will. That’s my question. Thank you.

Andrea Guerra

This is regarding U.S. exchange or globally?

Domenico Ghilotti – Equita SIM SpA

I would say starting more globally but if it's appropriate to zero and on U.S. retail that’s fine?

Andrea Guerra

I would say that our velocity and cruise velocity has no issues across the world. I would say that U.S. was tough as I was saying before. April has been a much better month for I would say LensCrafters from a weather point of view and putting January through April for Sunglass Hut has been another fantastic four months in a row after the three years and plus ten and four and plus six. So we are inline. Wholesale has been delivering another plus seven. So we are always trailing and recovering our fair share. So, I would say that especially February was tough for LensCrafters. Second part of March because of Easter shift was impacted for Sunglass Hut and April we are back where we have to be. And now let's move to May and June very significant for LensCrafters. A little bit less significant for LensCrafters.

Domenico Ghilotti – Equita SIM SpA

Okay. And then I guess my other question.

Andrea Guerra

It is important for Sunglass Hut May and June, less significant for LensCrafters May and June.

Domenico Ghilotti – Equita SIM SpA

Okay. My other question was just related to Michael Kors and again if this may have been asked already, the question was given that they have that the brand Michael Kors has probably more of a diversified geographic strength then certain other brands, can you talk about where you see some of the greatest opportunities to grow their eye wear presence?

Andrea Guerra

The figures is United States. It obviously has a good international appeal. I think Europe will be another market where we will do a good job. And the third I think Asia. But U.S. will be the region where we will put most of our efforts in year one.

Domenico Ghilotti – Equita SIM SpA

Okay thanks. Best of luck.

Andrea Guerra

Thank you.

Operator

Your next question is from Julian Easthope of Barclays. Please go ahead.

Julian Easthope – Barclays Capital Securities Ltd.

Hi! good evening. Just one question actually. In terms of LensCrafters you are going through the store network with different segmentation and assortment. Is it possible to sort of give some indications as to how many would be done at the end of the first quarter and how long it will take to complete that segmentation and if it's possible to sort of give some indication as to the uplift you get once that’s actually put in the place? Thank you.

Andrea Guerra

So I would love to give you some more details but I was asked thoroughly not to do it because we have got few stores already changed in the new scenario that are doing pretty well but it's few stores. So the segmentation has been done in three parts and this is linked to consumer profile. This is linked to geographical differentiations and this is due to the size of the different stores. So linking it to more digital during eye exam and down the floor retail, this is also drives sun. This is also driving some of our luxury brands. And moving downwards, I think that there are 180-200 stores in the let's call it lower segment. I think that that is the focus we have that is where we have lost a little bit of traction as I always repeat in our enterprise points and I think that this is where we need to dedicate lot of attention to a little bit less wealthy consumers but still pretty affluent to LensCrafters through manage vision care through enterprise, through the display a little bit more of some brands and some more work done on service and really attention to certain consumers. And we will finish up by July/August.

Julian Easthope – Barclays Capital Securities Ltd.

Okay. Just to sort of clarify that there is very little of the 2% that you see improvement and come through because of this, okay, this is on top that’s good to know.

Andrea Guerra

I can tell you that and this has been our best performance in our last six/seven months. I can tell you that there is one part which is always gratefully important and this is the link today we got between stores, field management and corporate in LensCrafters, motivation, hearts, people really willing to give the extra mile. I think that we are in a different world today, but we need still some months to go by.

Julian Easthope – Barclays Capital Securities Ltd.

Excellent. Thank you very much.

Andrea Guerra

Thank you.

Operator

[Operator Instructions] Ladies and gentlemen there are no more questions registered at this time.

Andrea Guerra

Alessandra.

Alessandra Senici

Yes okay. Thank you very much. I have no other questions. Thank you to following today's call and we will be available either tonight or in the next few days for follow-up information. Thank you and good evening. Bye. Bye.

Operator

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

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