Luxottica Q3 Earnings Call Transcript

123jump.com Staff
08 Nov, 2010
New York City

The eyewear company reported quarterly net sales rose 19.7% to

Luxottica Group S.p.A. ((LUX))
Q3 2010 Earnings Call Transcript
October 25, 2010 1:00 p.m. ET

Executives

Alessandra Senici – Investor Relations
Andrea Guerra – Chief Executive Officer
Enrico Cavatorta – Chief Financial Officer

Analysts

Daniel Hofkin – William Blair & Company
Edouard Crowley – BNP Paribas
Erwan Rambourg – HSBC
Domenico Ghilotti – Equita
Valentina Romitelli – UBS
Allegra Perry – Nomura
Flavio Cereda – Bank of America/Merrill Lynch

Presentation

Alessandra Senici

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 third 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 projectional statements are based on current information and expectations 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 security authorities. These filings contain additional information concerning factors that could cause actual results to differ materially from those contained in management projections or forward-looking statements. We will begin with our CEO, Andrea Guerra.

Andrea Guerra

Welcome to our third quarter review conference. Obviously I am and we are all in Luxottica very pleased with our results. There are a number of reasons why we are pleased. I think the first being one of the main reasons why we live and why we are in this market and it is our brand portfolio, a portfolio which has demonstrated to be effective in very different market conditions. I am so happy to say that we are back with a solid, double-digit, high teens growth in our premium and luxury segments.

And not only what we shipped, but we also have an excellent order portfolio in our hands. The sun season has been good and long and obviously Ray-Ban and Oakley were ahead of the pack. The second growth factor of which we are particularly pleased is our ability to grow in Europe and North America.

In Europe, our growth rate has been 12%. In U.S., in dollars, our growth of all our businesses have been plus 8%. So it means that in all developed markets of the world, we were able to grow and to have a solid growth rate. On the other side, emerging markets, we were much faster and I think this was again another quarter of quick growth in emerging markets above the 20% rate. I would say in all major emerging markets.

Third fact is that our profitability has grown much faster than the sales growth, above 30%. And I would say that even if we have grown 30% obviously, probably we would have grown a little bit faster if we were not comparing ourselves with a third quarter last year in which we had reversed some accruals. And Enrico will tell you more in details about this.

And the second being a continuous, not positive performance in Australia, a geography in which I have to say the last four weeks have shown a solid improvement. So profitability has grown significantly and systematically around the company. And I think that our fourth quarter will drive profitability even faster than what we have done in Q3.

Fourth quarter -- fourth factor of our happiness today is that again we have been able to generate consistent free cash flow, €250 million in the quarter. And I think this is also paying the continuous effort that all of our people daily are putting on working capital with excellent results on inventory and receivables.

Fifth, we have invested for the long quarter. It''s not just -- we are just reaping the efficiency activities of a year ago of higher growth rate of sales. We also reinvested back in the business and in the first nine months of the year we have invested €40 million more in our marketing activities and I think this is very important for our long-term. Enrico, if you want to give us some more details. Thank you.

Enrico Cavatorta

Thank you, Andrea and good evening. So let''s have a quick look at our main financial highlights for the third quarter and the nine months of 2010. First of all, we are pleased to see that we have an acceleration of sales growth in both division and total group, both at constant exchange rate of current.

Andrea mentioned we are in the 19%, 20% area of current exchange rates in both division and the group. Even at constant exchange rates, excluding the big help that we had in this quarter, we are pleased to report a double-digit growth in wholesale. It was 12.4% so an acceleration versus the first half of the year as well as in retail where we were in 6.5%, again higher than the first six months.

So 8.6% growth; we are in the high single-digit growth even excluding the help of the currency. These, of course, boosted our results and so our operating profitability jumped by more than 100 basis points, 130. In absolute terms, we have reported an operating income above last year of more than 30%, 33.6% margin.

Wholesale, of course, had a bigger growth, also fueled by the strong sales growth and also thanks to a more favorable comparison versus a year ago. On the contrary, retail showed a lower margin, absolute margin versus a year ago, even if in absolute terms it has increased by 13% versus a year ago.

You should remember that last year we added positive effect due to the reversal of variable compensation accrued during the first half of year 2009 that was reversed in the third quarter of ‘09 when it was clear that year-end results were not going to be met. That effect alone, if I compare the variable compensation charge in this year versus last year in the third quarter there is a net effect of around €10 million. Excluding that the retail operating margin would have been higher this year and not lower as it has been reported.

Finally, our net income grew in line with operating income. It rose to 35%. It would have been more if it was not for the higher tax rate versus a year ago. And the reason is that in the third quarter we typically adjust our tax rate for the year to the year-end projection that is more clear in this time of the year versus our estimate at the beginning of the year. Last year in the first half we started with a higher tax rate than what was in the end, the actual one. And so we adjusted downwardly in the third quarter our rate. This year it is the other way around.

We started with a lower rate than our current expectations so we have adjusted the estimate again in this quarter. So that is why if you look at our nine-month results, the tax rate are exactly in line but since we started in a different position at the beginning of the two years, we have made the adjustment. In this quarter, it''s the exactly the contrary than the one that we did last year.

Finally, just a few words on the nine-month results. They are very much in line with the first half but with the improvement given the outstanding results we have reached during the third quarter. I would like just to mention that if we consider our results in U.S. dollars they are, to a certain extent, are a better proxy of our results, excluding the buy or the exchange rate, our net sales in the nine months would have increased by close to 9% and our net income would have increased by approximately 24%. So this is broadly in line with our expectations set at the beginning of the year. So that is why we are confirming today our expectation for the total year in line with what we said last March.

Finally, if you look at cash flow, Andrea mentioned to you we had a very strong cash generation in the third quarter, even higher than our expectation. And all components of the free cash flow have contributed to that and particularly, you might notice the outstanding results of the working capital. We had 18 days less than a year ago and all the components have contributed. Our day sales outstanding were seven days lower than a year ago, our day sales on inventory six days lower than a year ago and our day payable outstanding were five days higher than a year ago. So all three components have contributed positively.

So that is why we have seen a strong deleveraging only three months from 2.6 to 2.3 on real terms, so excluding our -- the exchange rate. On a deposit basis, you are seeing an even higher drop from 2.8 at the end of June to 2.3. Again, this puts us in a very favorable position and so allows us to confirm our initial guidance of approaching two times EBITDA at the end of the year.

Andrea Guerra

Thank you, Enrico. A few more facts, I think that we have discussed in length in the last 12 months, let me say, our EBITDA price mix effect. This quarter was up, excluding any currency fluctuation, by 3.4%. So again this is the second quarter in a row and yet we need to compare ourselves with what it was the worst quarter a year ago, which was Q4 in which we lost somewhere around 5% in price mix. So I think we have a huge opportunity in Q4.

Other important facts, LensCrafters and Sunglass Hut very strong. LensCrafters is on an 8.4% comps. I think this is the best result in the last three years given by a slightly better traffic, improved conversion, excellent sun prescription season behind, I think, a very well-done merchandising investment in the stores and a better lens mix. LensCrafters strength has not been so strong in October but yet absolutely positive and happy to report October as well.

Sunglass Hut accelerated in October even. And we are back into what it was our five years of trends, which except last year is a trend of double-digit positive comps. This 12% was made by two-thirds volumes, one-third price mix. And I would synthesize that the results are coming from a much better marketing and storytelling of our brand and products, a better and much faster product inflow in the stores and polarized lenses begin to be somewhere in the region of 50% of the total mix.

Other important fact is that Europe, we were saying at the beginning, has been very solid. I want to just highlight one small thing here. We were obviously highly focused on Italy and Spain, two big markets, sun season being very important and we were -- we had a very good performance, very positive performance there or else, as you can imagine, we wouldn''t have reached a 12% in Europe, Central Nordic and U.K. extremely well. And I have to tell you that two year''s effort around our prescription frame business is really paying off in the first nine months of the year with very solid results.

Oakley in Europe, I would say, has had the first normal summer, normal being outside integration or outside big issues in the European business conditions. And it was a success. We grew better than 20%. We have grown across the region with a much better than average in France, Italy and Scandinavia. A very balanced growth between sun, polarized and prescription, really, if I had to say enough to give a headline to Oakley in Europe, really more to come.

Emerging markets, excellent all across and, again, as we said for Sunglass Hut, we are back to our historical trend and average rate of above 20% growth. This has been valid for China, India, Korea, Brazil, Turkey, Mexico. And we have reorganized our team so that now we have a complete new team approaching a second equally potential tier of emerging markets as we have discussed in previous meetings.

So working in Southeast Asia, Vietnam, Philippines, Thailand and Indonesia and the other markets in Latin America, where as you know we are already hugely present in retail with our joint venture in China -- Chile, Peru and Ecuador and Colombia. So at the end of all of this, really I think that we have a strong platform.

We are confident in coming back, obviously depending a little bit on the dollar, ending the year in the region of the €400 million net profit. And as Enrico was saying, to have our net debt to EBITDA targeting the two times. So it''s only two months to go so we have started planning and discussing around the 2011. And I think that discussions are quite solid and positive.

And we will focus on, again, on few things. I think one -- and we will be boring, but I think finally it''s so visible the power and the dimension of Oakley in our numbers. So Oakley will continue to be our priority, number one in 2011 as well, with hopefully another year of growth as 2010.

We want to post another successful year with LensCrafters and Sunglass Hut. And, again, we have selected a number of very specific projects in order to have success. And, again, in emerging markets, I think that rate of collections have been highly successful in these markets and we are now working and planning to have more brand and product collection localized for this huge market that we are facing.

So at the end of all, I think on one side we are happy of how we executed in this first 10 months of the year, only two are remaining to go. And we really think and hope that the good execution of this year, the great platform we have, the nice growth engines that we planned can allow us to look to 2011 again with a positive look.

With this, I think we have finished, so I give back the word to the operator and we wait for your own questions or comments. Thank you.

Question-and-Answer Session

Operator

First question is from Daniel Hofkin of William Blair & Company. Please go ahead, sir.

Daniel Hofkin – William Blair & Company

Good afternoon. I had a question I guess regarding if you could quantify the retail margin performance for us, excluding the year-to-year change in accrual. If you could just quantify how much that was up versus last year. And then second, recognizing there is still a couple of months left in 2010, can you discuss what sort of end-demand patterns you are seeing in your wholesale segment and maybe what kind of outlook you might have looking into next year for further operating margin expansion in the two key divisions? Thank you very much.

Andrea Guerra

Enrico for the -- regards to the retail margins.

Enrico Cavatorta

Yes. As I mentioned, the net difference between the reversal last year and the accrual this year was in the region of €10 million so this counts in the quarter for approximately 110 basis points. It means that the negative 60 would have been a positive 50.

Andrea Guerra

In terms of end of year, as I said October was another good month. The order portfolio we got in our hands that, as you know, it''s not long-term but I think we can look at November with a positive attitude. I think that the only other two aspects we have are to be ready with Sunglass Hut for the Christmas season. I think we got excellent stories to be told.

Then on the other side is the insurance week in optical retail. Normally, I have to say when in the United States we have seen events the demand partner has always been quite positive along the different months. Sunglass Hut is doing phenomenal in the last couple of months. Obviously, we are also looking to Australia now.

Australia is now entering the sun season. We had, as I was saying before, some much better weeks. And therefore we hope that the sun, together with some more consumers coming to the stores, we can level out the year somehow. But I think that, as I was saying at the beginning and at the end, I am pleased of the year and I do not expect surprises for 2010. For what regards 2011, as I said, we are in the middle of initial discussions. We always said that our long-term objective is to have a mid single-digit growth and to have profitability leveraging on the scale effect and therefore growing much faster than the sales growth. And I would continue to be in that range in that specific metrics.

Daniel Hofkin – William Blair & Company

All right. And that would be for 2011 as well?

Andrea Guerra

Yes, sir.

Daniel Hofkin – William Blair & Company

Great. Regarding I guess just Pearle Vision, if I could ask, any commentary regarding this?

Andrea Guerra

Sure. Yeah. Profitability is up and this is why I was not talking about it because I am not worried at all by the comps. The comps are absolutely in line with what we wished. We have ripped off at least two, three weeks of promotion per quarter. And, as I was saying, profitability is up and this is it.

Daniel Hofkin – William Blair & Company

Great. Thank you very much.

Operator

Next question is from Edouard Crowley of Exane BNP Paribas. Please go ahead.

Edouard Crowley – BNP Paribas

Hello, good afternoon to everybody. Just two quick questions. The first one is regarding the emerging markets performance. So at 20% could you just come back to detail what is the way of emerging markets now in the total sales as far as the run rate was around 15%, if I am correct? The second thing is could you elaborate a little bit on the price mix trend, Europe versus the U.S. I would like to understand if you are thinking of the dichotomy, i.e. possibly a price mix recovering sharper in the U.S. than in Europe? And are you seeing some more positive signs on the U.S. now than on Europe that when we look at the performance of the some lens makers with the impression that the U.S. are picking up better than Europe at this stage? Thank you.

Andrea Guerra

When we look to emerging markets, obviously the growth is faster than the rest but I didn''t do any kind of calculations. But I think we gained probably another point. But we are always in the region of the 15% of the total wholesale. When we look to Europe and U.S. and you were comparing us to some other lens manufacturers, I guess is it enough.

Edouard Crowley – BNP Paribas

Yeah.

Andrea Guerra

As I was saying at the beginning, lens mix in the states is doing very well. This is one of the reasons why LensCrafters is also doing very well as I was saying before. In terms of price mix, and this is not a gain about lenses or functional items but this is more about brand and luxury. The recovery in terms of price mix has been faster in Europe that U.S. In U.S., we are seeing a picking up in the last -- let me say since August, so I would say it''s a later trend and the wave has come.

Edouard Crowley – BNP Paribas

Okay. Thank you.

Operator

Next question is from Erwan Rambourg of HSBC. Please go ahead.

Erwan Rambourg – HSBC

Good afternoon. I’m Erwan Rambourg from HSBC. Three quick ones I will try to make it short. It seems that you will reach two times net debt to EBITDA quite shortly. Where do you take it from then? Where is your comfort zone in terms of that leverage and what could you be doing in 2011?

Secondly, looking at brands under license, what is the implication of bringing in Coach and by the way, congratulations for that? In terms of your portfolio management, does it mean that you will rationalize your existing portfolio? And can you remind us of how many brands you deal with at the moment?

Thirdly, I just wanted to check I understood correctly the comp figure on Pearle Vision. Should we attribute the minus eight on the nine months and the third quarter simply to less promotional activity hitting traffic or is there anything else going on at Pearle? Thank you.

Andrea Guerra

So debt leverage, Enrico.

Enrico Cavatorta

In the comfort zone, as soon as we go below 2.5 we are in a comfort zone. Having said that, we don''t have a specific target to reach to 1.51, any number, of course, the more we decline that leverage and the more we save on interest expenses it seems that we have the margin increase based on our leverage. But we don''t have any specific target below that level. Clearly, we would like to stay and to remain below 2.5.

Andrea Guerra

In terms of license brands, I think we manage somewhere in the 20 but 10 or 12 are the important ones of which obviously many different activities are done. Yes, we are extremely happy about Coach joining Luxottica. We love the way how Coach approaches U.S. consumer, Asian consumer so I think there is a lot to do together and a lot to learn each other. And we will restructure parts of our brand portfolio, so we are not increasing the number of brands that we will manage in a year''s time. In terms of comps, exactly what you said. Let me say Pearle is 90% -- have taken away promotional activities.

Erwan Rambourg – HSBC

Okay. Thank you very much. Very clear. Thanks a lot.

Operator

Next question is from Domenico Ghilotti of Equita. Please go ahead, sir.

Domenico Ghilotti – Equita

Good afternoon. I have a couple of questions on the retained margins in particular. I would like to understand or have some color on the impact also coming from the weak, let''s say, top-line performance in Australia and New Zealand. So if you have some indication on the margins in North American retail. And the second question is still focused on the retained margin, in particular if you have -- what are the market conditions for renegotiating your rental fees, so if you have still room to operate on this front?

Andrea Guerra

So regarding Australia retail, what happens is that, especially when you are in low seasonality with stores which are not big as LensCrafters can be, obviously we suffer a little bit. We need to have patience as we had with Sunglass Hut a year ago. And the impact is between 50 and 100 basis points on the total retail profitability. But it''s just a question of timing. If you go in Australia and look to our brands, look to our stores, to our people I think that you will all come back with a very positive attitude from the place. So we need to be patient but things will be back.

In terms of leases, I think the last 18 months in the U.S. have been positive from that point of view. So we do not have an inflationary pressure in the States. Obviously, you always keep in mind that every year basically you are renegotiating 10% of the total network being the lease is normally a 10-year.

Domenico Ghilotti – Equita

So you have a cumulative impact going forward, let''s say? If you are able, let''s say, to negotiate in these better conditions…

Andrea Guerra

Yes. And consider that I am saying we do not have an inflationary pressure there, two or three or four years ago, but we are negotiating terms that are 10 years old.

Domenico Ghilotti – Equita

Yes. Thank you.

Operator

As a reminder, if you wish to ask further questions, please press star and one on your telephone. Next question is from Valentina Romitelli of UBS. Please go ahead, madam.

Valentina Romitelli – UBS

Good evening. One small question is on China as I see that the number of stores keeps on falling. Could you please just explain the policy behind your Chinese strategy? And just a small clarification on the bond, the issue you are planning -- you are working on. Can you confirm that it is going to be euro-denominated and if you have an idea of duration you are or the range of duration you are working in terms of potential scenarios? Thank you.

Andrea Guerra

So let''s have Enrico telling you about the bond and I am sorry then probably you can respecify back to your -- I didn''t understand your Chinese question. Enrico is on the bonds.

Enrico Cavatorta

Yes. I am sorry, before I answer on the bond let me remind, the bond is not going -- I mean, the material in regards to -- related to the bond cannot be distributed or disseminated in the United States since those notes will not be registered under the Securities Act in the United States. So there will be no offering in the United States. So for those of you that are listening from the United States, you should be aware that we are not going to disseminate nor to solicit or sell any of the material in the United States.

Sorry for that. Having said that, let me say that we are targeting a medium-term note so the duration would be between five and seven years depending on market acceptance, and decide these are going to be between €300 and €500. And the notes will be all denominated in euros.

Andrea Guerra

Thank you, Enrico. And can you repeat your China question?

Valentina Romitelli – UBS

Regarding your store strategy, I see the number of stores keep on falling. I just wanted to just understand what is the policy there?

Andrea Guerra

Yeah. So, first of all, around China I think that first of all today -- I am extremely happy. It''s now nine, 10 months that we are having constant, very solid growth rates and much improving profitability. So I have to say that the learning period is over. We have decided to close a number of very marginal stores, even if it is somewhere around the 40% to 45% as a number, but are very marginal stores.

And on the other side, we have also continued to open stores. So I would say that today we have a much better network. In 2011, our net growth in China will be in the region of the 50 stores more.

Valentina Romitelli – UBS

Okay. Thanks.

Andrea Guerra

Thank you.

Operator

Once again, if you wish to ask a question, please press star and one on your telephone. Next question is from Allegra Perry of Nomura. Please go ahead.

Allegra Perry – Nomura

Yes. Good evening. Just a quick question on LensCrafters, you obviously have mentioned that the month of October has slowed relative to the trend in the third quarter. I was wondering if you could flesh that out a little bit, perhaps talk also about the timing of your promotion within the back to school period and how that relates to last year if possible. Thank you.

Andrea Guerra

No, everything is the same. I mean we are above the average of the year in October but less than the 8.6%. So it has been another good month.

Allegra Perry – Nomura

Okay. And when was the promotion within the third quarter, during which month?

Andrea Guerra

I think we ended first week of September but it''s exactly the same of a year ago.

Allegra Perry – Nomura

Okay. Thank you.

Operator

For any further questions, please press star and one on your telephone. We go a follow-up question from Valentina Romitelli of UBS. Please go ahead.

Valentina Romitelli – UBS

Thank you. One more is regarding net working capital improvements that was extremely positive in Q3. Just wondering what the further upside and room for improvement there. Of course, I was a bit surprised on the positive sense and just checking for the further room you have there.

Andrea Guerra

As we said, it''s a continuous work and as we said already a couple of times during 2010, I think that there is still some room around inventories. And obviously, as Enrico was saying, we had some results which exceeded our expectation, especially on the receivable sides. I think the good work done a year ago when the market was so and so, we really had a major positive effect now during the summer. Having said that, we started off the year thinking that this could have been a neutral year in terms of working capital and I think there is still work to be done.

Valentina Romitelli – UBS

Thank you.

Operator

Next question is from Flavio Cereda of Merrill Lynch. Please go ahead, sir.

Flavio Cereda – Bank of America/Merrill Lynch

Hi. Good afternoon. Just one quick question, you went into some detail about -- quite rightly given the numbers about Oakley. You have been quite modest and quiet about Ray-Ban and I was wondering why that was the case. Thank you.

Andrea Guerra

The case was -- it''s very easy because I wanted to be a very strong on our premium and luxury segments. Ray-Ban was double digit in all emerging markets; sometimes we were in the 50% region. We were double digit in Italy, Spain, U.S., so very happy about it and Rx being very positive. I didn''t talk about Ray-Ban or else it''s a little bit boring.

Flavio Cereda – Bank of America/Merrill Lynch

No, never. Not boring. Thank you.

Operator

Ms. Senici, gentlemen, there are no more questions at this time.

Alessandra Senici

Thanks to all for listening to today''s call. And if you have additional questions, please feel free to contact us. Have a good evening. Bye-bye.