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Edited Transcript of EI.PA earnings conference call or presentation 6-Mar-20 10:00am GMT

Full Year 2019 EssilorLuxottica SA Earnings Call

Charenton-le-Pont Mar 6, 2020 (Thomson StreetEvents) -- Edited Transcript of EssilorLuxottica SA earnings conference call or presentation Friday, March 6, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Giorgio Striano

Luxottica Group S.p.A. - COO

* Laurent Vacherot

EssilorLuxottica Société anonyme - Deputy CEO of Essilor

* Paul du Saillant

EssilorLuxottica Société anonyme - Deputy CEO

* Pierluigi Longo

EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A

* Stefano Grassi

EssilorLuxottica Société anonyme - Co-CFO

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Cedric Lecasble

MainFirst Bank AG, Research Division - Research Analyst

* Domenico Ghilotti

Equita SIM S.p.A., Research Division - Co-Head of Research

* Elena Mariani

Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands

* Francesca Di Pasquantonio

Deutsche Bank AG, Research Division - Research Analyst

* James Robert Grzinic

Jefferies LLC, Research Division - Equity Analyst

* Julien Dormois

Exane BNP Paribas, Research Division - Research Analyst

* Piral Dadhania

RBC Capital Markets, Research Division - Director of Premium Brands

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Presentation

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Operator [1]

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Hello, and welcome to EssilorLuxottica Full Year '19 Results. My name is Molly, and I'll be your coordinator for today's event. Please note that this call is being recorded. (Operator Instructions)

I will now hand you over to your host, Laurent Vacherot, CEO of Essilor, to begin today's conference. Thank you.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [2]

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Thank you, Molly. Good morning, everyone. Today, we are in a special configuration to lead this call because, obviously, because of travel ban and all what's happening in Europe. The Italian team is in Milan and the French team is in Paris. So to report on the 2019 figures, we will have in Milan, Stefano Grassi, Co-CFO of EssilorLuxottica; Pierluigi Longo; Giorgio Striano; and obviously supported by the IR team, led by Giorgio Iannella. And in Paris, I will be supported by Paul du Saillant; Ariel Bauer, which is our new named Co-IR in EssilorLuxottica; and is present David Wielemans, which has been named Co-CFO recently.

So as you have seen, the results are quite solid, and I will comment the figure in a few minutes. Maybe we go to the first slide. I think I have a few key message on why those results are so good, I would say: Number one, it confirmed the strategic rationale of combining those 2 great leaders in this industry. Number two, the structural decision that we are taking and have been presented at the Capital Markets Day last September in London is in progress and making progress. And also, the 2 operating companies are performing well and both of them contribute to those numbers, all of that, as they continue to invest in the future, especially in innovation, product innovation, frame and lenses combined and so on, but also digitalization of the company and store remodeling, to name a few of them. Also, we continued the strategy of acquisition and bolt-on acquisition. Just to name a few, Barberini in the summer, and more recently, entering in Ukraine with Optical House. At this stage, what we can say as well is that 2020 looks very promising, and I will comment a little bit more at the end of this presentation. But we see, obviously, aside from the pandemia of coronavirus that affect us at the moment, we see growth and we see synergy delivery and we see profitability at good level.

My last opening comment will be on -- to put everything in perspective. You know we are in -- decided to again provision. And in the last few years, we have created 33 (sic) [33 million] new consumers, that not only those consumers they see better now and they see well, but also it's a consumer base for the future. And the 33 (sic) 33 million new consumers -- 33 million, sorry, 33 million. Okay. 33 was very small, 33 million, obviously. And 33 million, to give a perspective, it's the size of Canada, right? That's the population of Canada. So it's like in the last few years, we, together with one sight and the mission of Essilor, we created a new consumer base that see better up here and will buy our fantastic product for the future.

So if we go to our next slide, please. Okay. So the figures you have seen there in the press release this morning, great growth acceleration -- great growth there -- acceleration of growth versus 2019 to 2018 and acceleration in the second half. A very high level of profitability, operational profitability, and net profit growing, and cash flow, very solid.

On the next slide, you see that we delivered the guidance, the objective we had and even better on almost all the dimension of the KPI that we did guide at the beginning of the year.

So at that moment, I will give the mic to Stefano that -- and Paul that will comment more operationally what sustained those results.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [3]

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Thank you, Laurent, and good morning, everybody.

Let's go to Page 6 of the presentation where you do have a snapshot of our full year 2019 performance for EssilorLuxottica. As Laurent reminded, our top line grew, for the 12 months of 2019, 7.4% on a current FX basis. Our growth on a constant FX was positive 4.4%. What I would highlight over here is the different velocity between the first and the second half of 2019. In the first half, the group grew top line, on a constant FX basis, 4%, while in the second half of the year, our velocity was actually up 5%. So a remarkable acceleration, an improvement of our performance between H2 and H1.

Foreign exchange created some nice tailwinds in our results. In the first half of the year, the difference between constant and current FX was 3.4 percentage points. While in the second half of the year, that tailwind was a little bit slower, 2.6 percentage points. On the overall result for the 12 months, you can see down there on the page, we do benefit 3 percentage point from the 4.4% to 7.4%. And that is very much due to the strengthening of the U.S. dollar against euro, which in the course of 2019 was about 5.5%.

Now let's get directly into our different geographies, beginning from the most important one, the North America, which I remind you, account for more than 50% of our total revenue. North America grew on a full year basis 3.1% on a constant FX. The nice thing here is that the growth between Essilor and Luxottica was fairly balanced. Both of them grew at the same velocity in our main geographies. And the other nice thing is that if we look at our fourth quarter, we do see an acceleration in our performance at plus 4.3%.

If we now dig into more details of Luxottica, and then I hand it over to Paul for more color on the Essilor side. There are a lot of things to be happy with on the Luxottica side. North America posted in 2019 the best quarter -- the best year actually, since 2015. The fourth quarter in North America was actually the best for Retail. The fourth quarter in 2019 was actually the best for Wholesale. The Wholesale division posted high single-digit growth rate in the fourth quarter. Very much all the channels that we have in North America, whether the independent channel, which you know accounts for slightly less than 50% of our customer base, or a top of key accounts, our department stores, our e-commerce website partners were all solidly positive in North America during the fourth quarter. So a nice way to close out the year in 2019 for our Wholesale in North America. And the growth in itself was very much driven by volume.

If we now move to Retail. Retail was mid-single digits on the fourth quarter. LensCrafters, our optical leading brand, were actually on the best quarter of the year during Q4. We had a very solid insurance week, which is really the last week of the year. And the growth in itself was very much driven by price mix, in particular, on the lens side of the business. And that is very much the result of the lens penetration that very much are due to the partnership and the synergetic work that is done between Essilor and Luxottica to really enhance the quality of the product that we sell every day in LensCrafters. We do continue to see higher penetration of photochromic lens. We do continue to see a higher penetration of progressive lenses. The Blue IQ coding lenses now represents about 1/3 of the total lenses that we sell in LensCrafters. Last but not least, the continued penetration of Oakley and Ray-Ban authentic lenses, it's an improvement that we continue to see month-after-month, quarter-after-quarter.

Last two cents on North America. E-commerce, you see down on the page, plus 27% growth rate on a constant FX basis, a remarkable performance for our e-commerce division. Q4 was the best quarter of the year. We were double digits in ray-ban.com. We were double digit in oakley.com. We were double digit in sunglasshut.com. So a really nice way to really close out the year for our dot-com business.

Before I hand it over to Paul, just a last remark on the Oakley brand. Our iconic brand lead a very important year in 2019. If you remember, in the month of August, we announced the partnership between Oakley and the NFL, the National Football League in North America. Since the announcement, we see a lot of momentum in North America, a lot of the enthusiasts of -- around the Oakley brand, and we also identified a testimonial for the Oakland brand. And that is the guy that you see on the front page of our presentation. That guy is Patrick Mahomes. He's the Kansas City Chief quarterback. And the Kansas City Chief is actually the team that won the Super Bowl few weeks ago in Florida. And guess what, Patrick Mahomes, the Oakley testimonial, has been named MVP player for the league. So we got a lot of visibility of our Oakley brand, and we're truly happy for the success that Oakley and Patrick were able to achieve in 2019 and 2020.

With that, let me hand it over to Paul for more color around the Essilor performance in North America.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [4]

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Thanks very much, Stefano. So a bit of color on the Essilor activity. And before talking about North America, let me take 2 minutes to talk you through the business performance of Essilor overall in 2019.

You saw a constant FX growth rate of 5.8% for the full year. But like it was pointed rightly by Stefano, I want to insist that we had an acceleration of more than 100 basis points from the first half to the second half. And that acceleration, that growth came from all our regions and all our division businesses.

So the organic growth that is underlying this dynamic is built on a few very clear and important pillars, as you know. First, the product innovation, and 2019 was a very active year on that front with Transition GEN 8, Eyezen Start, the Blue Capture category, just to name a few. We had very strong volume growth in Eyezen, and of course, in the instruments, the new Vision-R 800. The second pillar is the category development through a large product offering covering all consumer needs. Third, our partnership with independent ECPs and key accounts through programs, like in the U.S., Essilor Experts, covering now 6 -- close to 6,000 practice; digital initiatives, including our e-commerce platforms; and supporting the growth for demand, a network of interconnected plant and lab at the heart of each markets.

So North America now. Looking at the fourth quarter, it was a solid growth for all activities, and including specifically, the lens. Just think a second. Only a few months after the launch of Transition GEN 8, we achieved a conversion from the GEN -- 7 generation to GEN 8 across all the markets in the U.S., close to 90%. Great execution by our teams. We expanded the Essilor Experts and doctor alliance program, finishing with over 5,000 practice in this program, targeting to deliver the best eyecare and vision correction to consumer.

Another key area in the U.S. for focus of our team was on the digital side, which is more than just e-commerce and digital marketing. As we shared on the 25th of September in London at the CMD, our goal is to connect 100 million unique visitors on our platform, on our web properties to progressively our retail ecosystem made of stores and e-commerce capability and improve the consumer awareness and access to a good eyecare solution.

Finally, in the U.S., we had a good solid performance from our Sun & Readers activity, including in the fourth quarter, driven by Costa, which now, as you know, has been integrated in the grand portfolio of Luxottica Wholesale following the Integration Committee decision.

So Stefano, I hand it back to you for Europe.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [5]

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Thank you, Paul. And just a quick touch on Europe. The overall performance for the full year is on the mid-single-digit territory for EssilorLuxottica. On the Luxottica side, we are in the low single-digit territory on the fourth quarter.

A couple of things to highlight on the Wholesale side of the business. We had solid growth in some of the countries that are actually located in the Southern part of Europe, namely, Spain, Portugal, Greece. But we also experienced solid growth in United Kingdom and double-digit growth in Turkey and Eastern Europe.

So the capital-important assets that we have in Europe and we continue to leverage, one, it's very well-known, is the STARS program that continue to boom in this part of the world. We exceeded the 10,000 doors recently, and more than 20% of our total revenue in the Wholesale in Europe are generated through the STARS program.

Now if we look at our Sun business, in the fourth quarter, we continue to see a strong growth in the business there, and that is very much instrumental to our performance in Europe.

The other important growth driver in Europe is very much Retail. Retail is positioning on another quarter of growth. And if you just look at our history here, we are on the 24th consecutive quarter of growth in Europe.

Sunglass Hut business, very solid across all the countries, double-digit growth rate for Sunglass Hut. Last but not least, our Salmoiraghi & Viganò, which delivered another year of growth, and in particular in the fourth quarter, was solid positive.

With that, let me hand it over to Paul.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [6]

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Thank you, Stefano.

Europe. So Europe on the Essilor side, very good year, strong fourth quarter. All activities performing well, lens and instrument in particular, leveraging new product innovation. I named some of them in my introductory words, so I won't repeat them. But clearly, Europe is best-in-class at taking the innovation of the group, the brand of the group and driving them into the market with our independent practice partners and key accounts.

For lens, this was in the progressive lens territory, in the blue light category with the Eyezen, contributing the double-digit global volume growth for this brand. We had Eyezen global volume of plus 30%. It's a new category. Very promising. In instruments, the beginning of the deployment of the new phoropter, VR800, which is going to revolutionalize the eye exam.

From a country geographical standpoint, as always, in Europe, some contrast: growth driven by very good performance in key markets such as France, Northern Europe, Southern Europe and Eastern countries; a bit more flat in the center of Europe; and solid growth, including the fourth quarter, in the e-commerce activity, driven by VisionDirect.

Moving to Asia, Oceania, Africa. Stefano, do you want me to continue?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [7]

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Yes. Sure.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [8]

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Okay. So now we move to Asia, Oceania, Africa, with quarter up 5% for EssilorLuxottica. On the Essilor side, strong growth in the lens and instrument division, China being the major contributor of that growth with branded lenses, but also strong growth in the mid-tier offers, close to 15% growth for our lens activity in China in 2019. And part of this activity is focused on investing in myopia control, and we are starting to see the benefit of this focus as we prepare the ground for a major launch in the second quarter of 2020 in China with a very disruptive innovation in lens design.

Bolon had a great year, including the last quarter, and we are pleased to report double-digit growth for the business. Other markets in the region did well, including Southeast Asia, South Korea and Japan. So these are a few colors on Essilor side.

Stefano, I hand it back to you.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [9]

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Sure. Thank you, Paul. And so moving to the Luxottica side. Well, I got to tell you, in this part of the world, we did have a couple of challenge in 2019. First of all, we experienced a slowdown on our traffic on our travel retail. And that was very much true for this part of the world, in particular. The second thing that we observed is especially during the second half of the year, we had severe protests that impacted Hong Kong, all of you know the political turmoil that took place over there, and that caused kind of a slowdown in our performance, especially in the B2C side of Hong Kong where our footprint experienced double-digit negative traffic for several days. And this trend, unfortunately, is still continuing on 2020.

On the positive side, when we look at our Wholesale division, we had very solid performance in Mainland China. And this is something which we need to feel very proud of. As you may remember, a couple of years ago, we undertook an important repositioning of our business. And now, couple of years after, we continue to benefit from that strategic repositioning in Mainland China. We also opened a new subsidiary in the Middle East, and we can already benefit the successful results of that direct presence in the Middle East. We had a solid performance in India and Southeast Asia, in Israel as well as in South Africa.

If we now quickly touch our Retail performance. There's a couple of things on which I think is important to highlight and kind of give you a flavor for 2 robust assets for us. One of them is our performance in Mainland China for the largest store footprint that we have over there, Ray-Ban. We have about 140 stores over there. And if we look at their performance during the last quarter of the year, our comp sales were actually up 6%. And that growth was very much balanced between volume and price/mix, so something that which we're very pleased about it.

Last but not least, it's something that you already know, our optical retail performance in Australia was solid positive once again. And quarter-after-quarter, we continue to see growth in volume, growth in AUR, growth in doctor appointments, growth in multiples. So the overall underlying KPIs continue to trend in the positive territory.

But now let's go to another, what I would define a fast-growing region, that is Latin America before I hand it over to Paul. Latin America delivered a year very close to double digits, 9.5% top line growth on a constant FX basis for EssilorLuxottica. If you look at the fourth quarter, we do see a deceleration in that trend. We were around 4% still on a constant FX. If we talk about Luxottica, that's where the deceleration comes from. And we have a capital challenge in this part of world. On one side, we experienced the protests that took place in Ecuador and Chile during the course of the fourth quarter. We had several days in which our stores were closed, and that clearly created some disruption during our fourth quarter. The good news is that as we approach 2020, that trend is now reverted. So we are in a positive territory on GMO. We are in the positive territory in Chile and in Ecuador. And we are on track to be back where we need to be from a GMO standpoint from a [Luxottica] and some Retail standpoint in that part of the world.

The other challenge that we experienced is the Mexico business. We did see a deceleration of our trend during the second half of the year compared to the first half. We saw Retail being more promotional than ever in Mexico, and the overall economy is a bit slowing down in that part of the world.

But on the positive side, we continue to see strong performance in Brazil. The overall performance in Brazil for Luxottica was in the high single-digit territory, solid positive during the last quarter. We look at our Óticas Carol business model, and we report that approximately 200 new franchisees joined Óticas Carol business model, witnessing the fact that we have a very successful business model. The other important assets are Retail in Brazil. We look at Sunglass Hut, on the fourth quarter, we comped at a double-digit territory. We look at Oakley, we were solely positive. And all of that really makes a compelling story for our Retail footprint in Brazil.

But now let me hand it over to Paul that will give us a little bit color on this part of the world. Paul, please?

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [10]

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Yes. Thanks, Stefano. So Latin America, a great year, a great quarter, which follows a very strong 2018. That is 2 years in a row where we have a very good dynamic. On the Essilor side, it's half of our Latin America business is in Brazil and half outside of Brazil. And solid performance was across the region in lenses with a little bit, Stefano, like you said, a slowdown in the Q4 in Brazil because of the preparation of the launch of GEN 8, Transition GEN 8, which is happening in the first quarter of 2020. But that was a very rational little deceleration. But actually, as we see the year starting, like Stefano, you commented, on the Essilor side, we also have a very good entry into 2020 in LatAm, including Brazil. So solid performance across the region in lenses.

Of course, some difficult time in Chile, but that is now behind us, as you said.

In Mexico, a new partnership, a very important partnership with Devlyn, the leading optical chain in Mexico, where we have on the lab side, created a lab for them and to support the growth of their retail activity. And this is driving double-digit growth in Mexico.

In e-commerce, which is a small base in LatAm for Essilor, mainly in Brazil, we have now a strong growth and acceleration in this capability. But this is the beginning.

So a great year for LatAm. A very good start of 2020 for our activity there.

Stefano, I hand it back to you for the consolidated profit and loss statement.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [11]

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Absolutely. Thank you very much, Paul.

And let's have a look at our profit and loss results on Page 12 of the presentation. What you're seeing here is our 2019 results compared to our 2018 full year pro forma restated as per IFRS 16. I won't comment our top line, as we already discussed that in the previous page, but I will focus here more on our profitability profile for 2019 compared to 2018.

On a gross profit basis, you're looking at 40 basis points dilution on a current FX, while if you exclude currency fluctuations, you're looking at about 50 basis points dilution on our gross profit. Couple of readings here. On one side, we do experience some slight dilution due to our insurance business in North America. While on the Essilor side, we kind of have a mixed effect. On one side, we have the positive impact there of the profitable launch of Transition GEN 8 lens that was more than offset by the fast growth of our online total lens business as well as the growth that we experienced in our Sunglasses & Readers business.

If we look at our operating expenses, I would say pretty good results here. The OpEx are down 40 basis points compared to 2018 level on a constant FX basis. That is very much due to our strong cost control. Our G&A was slightly more than flat on a full year basis, still on a constant FX basis. And our selling expenses were slightly reduced very much in line to the progressive reduction of our store footprint in Sears Optical in North America. And just as a reminder, we took the decision to exit from the Sears Optical business as of February 1, 2020. So overall, our operating profit, it's flat on a current FX basis, 20 basis points dilutive on a constant FX.

If we look below that, on a net profit basis, you're looking at 10 basis points accretion of our net margin at 11.1%, and we are flat on a constant FX basis. Couple of readings here. On one side, we continue to see a lower cost of debt throughout 2019. We have the repayment of outstanding debt at a high interest rate, which has been replaced with lower -- with new debt at lower cost of funding. And the other one, as we largely expected at the beginning of the year, we delivered an improved tax rate, which was actually down, about 100 basis points at our -- compared to the 2019 level.

Now on the next page, you just see a recap of where are we on a free cash flow basis and our proposal for dividend. Those bullets are very much commented on the press release.

So in the interest of time, I will hand it over to Pierluigi that will give us a little bit more color with respect to the integration process. Pierluigi?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [12]

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Thank you very much, Stefano, and good morning to everyone. I'm very pleased to be here today to give you an update on the results of the integration process, which started almost 12 months ago and that in its first year has generated very good results. This is thanks to the hard work of the integration team, which is, as you know, is led by Eric Leonard and myself and the support of the entire organization, which put a lot of efforts in delivering the synergies so that today, I'm happy to confirm that the initial range which was announced in the Capital Markets Day of 300 -- between EUR 300 million and EUR 350 million to be achieved by '21 is confirmed. And similarly, we can confirm also the -- our commitment to reach between EUR 420 million and EUR 600 million in '22 and '23.

2019 results are also in line with our expectation. This is due to a number of activities which have been started in '19 despite the soft start. There are a number of initiatives and workstream which have already generated strong and solid economic results and others which are still undergoing and which will generate results in 2020 but have built the foundation for acceleration of the integration exercise in the following years.

If we focus our attention on the ones which are more relevant in '19, for sure, as Stefano mentioned before, the penetration, the expansion of Essilor lens assortment in our Retail network has been very productive. As of today, all our Retail banners across the geographies have Essilor lenses in their assortment. There is an increased penetration of high-value and advanced technology lenses in our Retail banners. So photochromic, progressive and all the other, let's say, the key brands of Essilor are very well received by our customer base.

We have also launched a number of initiatives on cost control in order to optimize the way we interact with our suppliers. So in direct procurement and indirect procurement, we have renegotiated all our -- most of our contracts with the key suppliers in order to leverage on best practices and making sure that we're able to align best terms and save money. So this has had very well results in the direct procurement. Indirect procurement is accelerating, and we're going to see more in 2020.

We have also started our activities to unify our prescription laboratories. As you know, we had -- before the combination, Luxottica had its own footprint, Essilor had as its own, but we are now working in order to make sure that we can leverage on both, making sure that we can serve our customer in a better way.

Also in the in-sourcing, we did a lot -- we made a lot of efforts and we see good results. So we tried as much as possible to move services and products which were outsourced to third parties into our own business. For example, we made very good results with the integration of Costa, which was previously produced by third parties, and now it's completely managed by the Luxottica organization.

Obviously, these are the key ones which generated economic results in '19, but a lot of other initiatives have been started, which are, let's say, not necessarily linked to financial opportunities but are very much important in order to build as a single organization and to create the foundations for the future.

So we are working on a single IT platform which would be rolled out across the company. There is a pilot in Italy. And as soon as this is going to be up and running, we're going to replicate a mirror data in other key countries. We are -- we keep working on the creation of a single network of prescription and laboratory in order to optimize and make more efficient our integrated supply chain.

We -- as we discussed in our Capital Markets Day, there are a lot of efforts and a lot of work on the creation of a single platform for complete pair of branded glasses, leveraging on Ray-Ban -- first of all, Ray-Ban and Oakley, as Stefano mentioned before, this is an initiative which is up and running very successful in our Retail network, but we want to make it broader and expand it and make it successful also in Wholesale. We started the integration of Costa in the Luxottica brand portfolio, and we launched a common employee shareholding plan in order to make sure that all our employees across the world are part of the new group.

Now let me move on the GrandVision opportunity, which was announced in July '19, which is another important project of our group. As of today, we have received unconditional clearance in the U.S., Russia and Colombia. We started very soon immediately after the announcement to work on antitrust procedures. So this is a very good result. In EU, we are in Phase 2, which is the similar process that we experienced during the combination of Essilor and Luxottica. And the transaction is still under review in Brazil, Chile, Mexico and Turkey. On the basis of the conversation that we're having with the authorities, we are pretty confident to be able to close the transaction in the time line that was announced at the time of the GrandVision announcement. And we're very pleased also to hear about the good results that the company posted in '19, which confirmed the strategic -- the solid strategic rationale of the transaction. And we look forward to closing the deal as soon as possible in order to start to work together.

And with this, I hand it over back to the Laurent for -- to conclude the presentation.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [13]

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Yes. Thank you, Piergiorgio (sic) [Pierluigi]. Thank you, Stefano. And thank you, Paul.

So as you have seen, the group is performing very well, and the perspective are very good for 2020. Piergiorgio (sic) Pierluigi explained how the integration team and synergy are in progress and how we are building together the solid foundation for this wonderful group. GrandVision is foreseen in the near -- in the future, and the only -- the perspective are good.

The only things that -- this pandemia of coronavirus pushed us to have a guidance which is larger than usual because of the uncertainty. What we can say at the moment is that in China, we see a recovery of the plant, and the production are almost back to normal. Obviously, the market is not yet at -- there. We don't see major effect outside of China at the moment, except in South Asia. So this is why we have put this -- assuming that this pandemia resume in the next few months, we have projected sales growth between 3% and 5%, adjusted operating profit between 0.7 and 1.2 and adjusted net profit between 0.7 and 1.2 of sales.

So having said that, I think we will open the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes the line of Elena Mariani calling from Morgan Stanley.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [2]

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I'm going to start with your guidance and the moving parts underneath the top line and profit outlook. First of all, on the synergies, I understand you're still committing to EUR 300 million to EUR 350 million by 2021. But how much should we assume specifically for 2020? Is it half of this amount, less than half? And how much are you reinvesting? Because your profit guidance, in my opinion, assumes quite a big chunk of reinvestment of these net synergies.

And still on the guidance, could you isolate the effect of the coronavirus, which specific assumptions you're taking on the first half of the year versus the second half for China, Asia, Europe, travel retail? Is there a sort of quantitative effect that you could share with us, please?

And just in essence, for the guidance, is it reasonable to say that without the virus, your guidance could have been in line with the medium-term one you provided at the Capital Markets Day?

Second small question is about the fourth quarter. Could you share with us the like-for-like of your business, specifically for Luxottica Retail, LensCrafters, Sunglass Hut? I haven't seen it in the release. And maybe clarify what was organic growth for the lens business as well because it has slowed down a little bit versus Q3. I guess it's because of the comp base getting more difficult, but maybe you could clarify.

And then the final question is on GrandVision. I'll just take the chance to have Pierluigi on the line. And I wanted to better understand your level of confidence on the closure of the transaction. There has been quite a lot of capping. And we read a statement from the antitrust regulator -- I understand you cannot comment in detail, but I think you have been quoted in saying that you would not accept any potential ph behavioral remedies that could compromise the implementation of your strategy. So could you clarify your positioning, and in general, comment on the level of confidence on the deal closure?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [3]

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Wow. A lot of questions. So on the last quarter, I will let, maybe, Stefano cover that. On GrandVision, maybe Pierluigi, you will cover that.

On the guidance -- and yes, we are reinvesting. We are reinvesting both in Essilor and both in Luxottica. And the impact of the coronavirus, I guess, without coronavirus, I guess the guidance will have been in line with the long-term guidance we gave at the CMD.

So having said that, Stefano, maybe there is a question on the like-for-like performance, specific for Luxottica Retail.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [4]

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And maybe just before moving on that one, what is the synergies that you're assuming for fiscal year '20 out of the EUR 300 million to EUR 350 million that you are committing to deliver by 2021?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [5]

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So that, Pierluigi, he may give a little bit more color on the question. So Pierluigi and then Stefano, right?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [6]

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Yes. I will probably just step in, Laurent, and just give a little bit clarification and color on top of what you just clarified on the guidance, which will obviously encompass also a touch on synergies. So once look at our synergy number for 2020, we do have a plan to double those synergies compared to the 2019 level. That growth of synergies is very much in line with our expectation that was portrayed at the Capital Markets Day, the EUR 400 million to EUR 600 million over the medium term, of which 6% of those synergies will be delivered by 2021. So Elena, the path and the trajectory of our synergy delivery, it's very much in line with what we were expecting at the CMD, and it's very much confirmed as we speak.

In 2020, you have an important dynamic that is going to happen on a profitability basis. You have a vast majority of those synergies that are reinvested into the business. And I'll give you a couple of examples that really help you to put things in perspective and better understand the profitability dynamics that will impact 2020. On one side, we will continue to invest in marketing more and more in 2020. We're going to take the NFL investment partnership with Oakley to the next phase. And we've already seen how successful and how important are the returns for the Oakley brand with that partnership.

We're going to take that to the next level. We're going to have a major investment on the Tokyo Olympics under the assumption that obviously, the Olympics will be held in 2020. And Oakley will be a brand that will get a lot of visibility over the Olympics. We know how to do the job, and this is something that is going to be very important for our brands.

You already seen the partnership announced with for Millie Bobbie Brown for Vogue Eyewear. We're going to support the launch of new lenses and new product introduction on the Essilor site. So we're going to push furthermore our marketing investments. Again, we're investing some of the synergies that we just discussed before. And additional ROE investment is going to be our diversification of our manufacturing footprint.

The third area of important investment for us, which is primarily CapEx but also OpEx, is the continuous and widespread renovation of our store footprint in the different regions. And just to give you one simple example, we're going to undertake a major renovation on our LensCrafters stores. Many of them needs to be now, at today, with the latest and greatest technology. And we're going to undertake that renovation plan, which is unprecedented for LensCrafter brand, in 2020 and will be carried forward in the next couple of years.

So the dynamic that you're going to see, Elena, it's really going to be a balance between the synergy delivery, right on track with our expectation, and reinvesting the vast majority of those synergies to further nurture our brands, to further nurture our future growth.

Now with respect to the comp sales on the fourth quarter, you're looking at a flattish number overall for Retail Luxottica.

With the question on GrandVision, I hand it over to Pierluigi.

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [7]

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(foreign language), Elena. With respect to the antitrust process, there is nothing new. We are working very well with all the authorities. We are responding to all their questions. There are solid analyses which have been put together and submitted to all the relevant authorities. Obviously, this is a complex process which requires a lot of interaction, a lot of questions-and-answer back and forth. So this is very similar in an event of what we experienced during the combination with EssilorLuxottica. So with respect to your specific question on the closing, no, we do not have any reasons to believe that the closing will not occur in the way we are envisaging it. And we do not see any reason for remedies, which could deviate, which could change the economic and strategic rationale of the transaction.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [8]

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Okay. Just 2 small follow-ups. The number one is on the lens business in Q4 and about the slowdown, whether that was just related to the more difficult comp base? And then going back to the like-for-like of Luxottica Retail, is there any effect from like less retail days in the quarter? Or is that just like an apples-to-apples like-for-like?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [9]

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Yes. So Paul, maybe on the like-for-like Q4 for the lens business?

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [10]

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Yes. Behind the little slowdown that you see in the lens business, the Q4 versus the full year, it's actually linked. It's not a like-for-like deceleration. Actually, the like-for-like is constant or slightly growing. But it's actually the perimeter effect, the bolt-on effect that's linked to the GrandVision acquisition. We slowed down the acquisition, the M&A activity in the second half, which -- so the perimeter effect in the Q4 is lesser than it was in the quarter before. So it's actually -- this is the main driving factor on the total growth depreciation that you refer. So like-for-like actually was robust despite a little slowdown in Europe, which had a base effect from the year before, which was quite tough to compare to. That's what is behind it.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [11]

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To answer the second part of your question, Elena, with respect to the Retail business. Yes, we did have a bit of a calendar shift which impacted optical Retail, in particular, in North America. We have, from a comp sales perspective, one last insurance date to be accounted on a comp sales for the fourth quarter. That last insurance date is going to be recovered -- it's actually recovered already in the first quarter of 2020. But again, it's pure for comp sales calculation, which, as you know, run on a fiscal calendar. But from a sales growth standpoint, there is no really change as we run on a Gregorian basis. So the good thing, as I said, is that if you look at the overall underlying performance, especially on LensCrafters, it's very positive at the end of the year. And on a normalized basis, it's very positive on the first quarter 2020. The impact of that calendar shift accounts for about 0.5 percentage point on the fourth quarter, and I would say, fairly marginal on a full year basis comps.

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Operator [12]

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The next question comes from the line of Julien Dormois calling from Exane BNP Paribas.

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Julien Dormois, Exane BNP Paribas, Research Division - Research Analyst [13]

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One is -- and I'm sorry, I'm not going to be very original here, but it comes back to the coronavirus impact. I think that the guidance you presented this morning is quite solid given the circumstances. Would you be able to maybe discriminate between when you expect from -- coming from M&A? Because if my math is right, you would probably be getting about a 1 percentage point from M&A into 2020 based on the acquisition you have already announced. So is that fair to say that your organic growth guidance would be to the tune of, let's say, 2% to 4%? So that's the first statement.

Secondly, I'm also interested in the discrepancy between what I see as a pretty solid top line guidance. Maybe we had a slightly disappointing bottom line guidance, which, if we take the midpoint, implies a slight margin dilution. Does that come from coronavirus? And the same question then before about -- without the coronavirus, would have -- could we have seen a flat to slightly up margin in line with the midterm guidance?

And the last question is on -- is a housekeeping one, back to the question on like-for-like growth. Would you be kind enough to provide us the numbers for the Wholesale division of Luxottica? Because I think Barberini has an impact here. And it would be extremely helpful if you could give us that comparable number also for the 3 divisions of Essilor in Q4.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [14]

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Thank you, Julien. So I think at this point, it may be important or interesting that maybe Paul and Giorgio Striano, you comment about what's exactly happening and what we see at the moment as far as coronavirus. So maybe it will help every one to understand, and maybe that's the way to leave it. Maybe Paul, you can start.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [15]

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Happy that. Giorgio, do you want to start or I give a little?

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Giorgio Striano, Luxottica Group S.p.A. - COO [16]

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I can start, then I hand to you, Paul.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [17]

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Great. Good.

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Giorgio Striano, Luxottica Group S.p.A. - COO [18]

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So from Luxottica investor footprint, I will say that we're running at a good pace. In this moment, the Chinese factory are going towards 90% of their capacity. We had to adjust the beginning of February, just a few days of stoppage because of the disposal from the [Lakka] government. But I will say thanks to the stronger local and expert management team in China, we were able to guarantee the safe -- safest condition for our people. Therefore, we were in the position to restart the factories. We started around 50% in the -- by the end of the first week of February, and now we are going into the -- over 90%. And it's stable, and we have good confidence to continue to grow and overachieving the 100% in the next 2 weeks.

At the same time, the Italian plant are running at full speed. We moved production from China to Italy in order to recover quickly. We moved production from China to Brazil in order to recover quickly. And all the logistics network is running, no issue, no trouble. And also all the lab in the Luxottica perimeters are running very well at this moment.

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [19]

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Well, on the Essilor lens manufacturing and Prescription Lab situation is very much the same tone as the one that you hear from Giorgio, meaning that we had in the -- end of January, beginning of February, a clear, strong slowdown of our manufacturing, certainly, during the Chinese New Year extended period. And then as from the second half of February, we have been ramping up the production in our mass manufacturing and the lens production as well as our lab in China. And we are very much in the same range as the one commented by Giorgio, meaning in the 80% to 90% plant utilization, plant loading in China.

Now during the whole month of February, we did leverage the network of plants that we have in Americas, in Europe, in Thailand, in Philippines. And we were able to leverage those plants for the lens and semifinished -- finished and semifinished lens supply. And our labs, our large labs that we have both in the Mexico, in Poland, in India, in Thailand, we're running at full capacity, and we leverage the full interconnectivity, including the interconnectivity with Luxottica labs. And so we have been able to manage our way in term of supply, so far, with no issue because of this global footprint and interconnectivity. So this is where we are.

I should mention that we've been extremely rigorous on both sides, on the safety aspect, on the people safety aspects, anticipating both in China and outside of China all of the right policy and to protect our people and make sure that we don't have issues. So that has been also extremely carefully managed on both sides.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [20]

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Thank you, Paul. Yes. What we can add as well is that we, obviously,

EssilorLuxottica supported the Chinese population by many means, donation and the donation in kind, like goggle, protective goggle for doctors and policemen and also providing mask because the key resource at that moment in China was mask to protect the population.

Going back to the question, Stefano, on the organic and acquisition and on then Luxottica, and then we'll -- maybe we'll elaborate a little bit more on the reinvestment that we are doing on both side of the company.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [21]

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So from an M&A perspective, there is no material impact on our growth rate profile that has been disclosed.

With respect to the expected growth rate that we do have for our Wholesale division in 2020, first of all, let me say that the Barberini impact, it's very much immaterial with respect to our Wholesale business. Remember that more than 50% of the Barberini revenues are very much intercompany revenue. So the true contribution is fairly immaterial. We do expect, in that respect, our Wholesale business to grow on a low single-digit territory for the full year 2020.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [22]

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Yes. And on the Essilor side, there is 0.5 point, maybe the impact on -- the impact on growth for EssilorLuxottica for M&A will be 0.5 point.

Reinvestment. That's an interesting question because there is, on the Essilor side, at least 3 major programs where in the last few years we invest, and that will start to deliver in 2020. There is all the discussion about myopia and myopia management where, as Paul mentioned, there will be a great innovation that will be developed and implemented in China, was supposed to be in Q2. Probably, it would be more in Q3, because at the moment, the hospital in China, either they're closed or either they're dealing with coronavirus. But it's a very promising solution with eye care to help myopic people to see well and to slow down the evolution of myopia.

There is -- the whole digitalization program that Paul mentioned as well, where we will see in 2020, the first implementation in a few hundred -- with a few hundred stores. And maybe that's new to you, but we have developed in Essilor total competitive solution with equipment, automatic equipment and lenses to deliver a much more precise prescription, the measurement of the eyes and lenses so to improve vision of consumer in the world. And this will be implemented in, I think, the first 100 -- 1,000, sorry, stores in 2020. So those require investment to make it, [hopefully]. That are part of the reinvestment we do from the synergy to developing the business for the midterm.

There is also a few headwinds like the implementation of tariff in -- tariff from China and U.S. as obviously we have to support. And those are the elements on the top of the uncertainty because of the business itself in China that, at the moment, is not performing as usual that led us to have this wide range the guidance for operating profit.

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Julien Dormois, Exane BNP Paribas, Research Division - Research Analyst [23]

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Okay. Sorry, just a quick follow-up then on the profit guidance. Here again, would you say that without the uncertainties on coronavirus, then your 2020 guidance for profit growth would have been broadly in line with your midterm expectations?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [24]

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Close to.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [25]

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Close to. (inaudible) If you put coronavirus on the side, the company is doing what we said we will do. And Giorgio mentioned that on the integration and synergy, and we continue the acquisition. And obviously, it's quite difficult to estimate the the impact of coronavirus. Hopefully, the impact of -- the size of China the -- in the total overall sales, but despite the success we have in China, it's kind of -- it's only 5% compared to other companies where China is more 30%, 35% of their sales. So this is where we are, and we'll be able to give you more update in 2 months or when we do the call for the first quarter.

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Operator [26]

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The next question comes from the line of Francesca di Pasquantonio calling from Deutsche Bank.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [27]

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Yes. I have a couple of follow-up questions. The first one is still regarding synergies. I struggle to understand what the shape of net versus gross synergies is therefore likely to be over the next years to 2023 as you are reinvesting, probably more in the short term for the benefit of the medium term. Is it correct to assume that your net synergies will be growing much more sizably over the next few years and this year and the next might be still delivering, on a net margin expansion level, a lower benefit? I don't know if my question is clear. But I think this is quite important for me to understand.

The second question back on coronavirus. Are you seeing -- or what kind of impact -- we've spoken about china. Are you seeing any major impact in other geographies as well? As it started filtering through, are you expecting a delayed Wholesale business dynamic? And how are you going to manage that from an assortment and inventories positioning? And that's it for now.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [28]

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Stefano, on the synergy, are you able to answer?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [29]

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It's Pierluigi. I'm going to take it. I'm going to take it. I mean the profile of synergies are pretty much the one illustrated in our presentation and in the Capital Market Day. So obviously, there is an acceleration. We expect an acceleration of the synergies at the time (inaudible) because we're going to -- we are going to learn, and we're going to do things in a better way. As we discussed in the past, there are some limitations in the interim period as such until at the end of '21 due to the governance in place, which might slow down certain initiatives, which we see them -- which we see accelerating after that.

But with respect to the investment, which were mentioned by Stefano, those are not necessarily related to the synergy is -- those are new available resources that we decided to reinvest in the business in order to fuel the growth of the business in the future. So the synergy pattern will go ahead in any event as we planned.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [30]

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So sorry if I am quite direct here. Does it mean we actually don't see anything in 2019 and anything in 2020 in terms of synergies from your guidance?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [31]

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No. We didn't say that. I mean we said that we see an acceleration in 2020. We see twice as much. We expect it to generate at least twice as much what we generated in '19 in terms of net synergy.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [32]

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But will we see it on the margin? That's my question. I understand that. But will we see it on margin, on the profit margin?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [33]

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In '19 and in '20, we -- there is -- this connected with the synergy numbers. There are some investments in the existing businesses and in the future business which might dilute the effect of the synergies on the profitability.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [34]

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Paul, maybe on the coronavirus effect? Do we see something in other geography than China?

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [35]

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So I will -- Laurent, will comment for Essilor. And maybe, Stefano, if you want to give some color on the Luxottica side for the coronavirus impact. On the Essilor side, at this point, meaning early March, the main business impact have been localized in China, where clearly the traffic in the store, in the shopping malls were way down in February. Outside of China, so far, we have seen a little bit of impact in Asian, namely Singapore, some little impact in Korea, South Korea. And so far, in Europe, we don't see any impact. So we'll have to monitor, and we monitor daily, weekly the dynamic of the market. But so far, on the business impact, it's mainly in China. And we'll see in March if the traffic in the store will build progressively. And as Laurent said, on the call for the first quarter, we will have a good view on where we are. But that's where we are on the 6th of March.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [36]

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Then on the impact in other geographies?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [37]

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Yes. Yes. I'll probably add a little bit more color on the B2C side of the business. We do continue to see traffic deceleration on a double-digit territory clearly, in the Asian part, Mainland China, Hong Kong, and some of our Retail footprint, as Paul explained, is actually trending on the double-digit negative. Where do we see slowdown? We do see slowdown in some of our Retail operations in Europe, the one that are at least more affected by the coronavirus, whether because there is a lack of touristic traffic in certain parts of Europe or because there are specific restriction to mall and, therefore, that is impacting our Retail store footprint performance.

But just to put in perspective our guidance, as Laurent explained before, the way we portrayed this guidance is to have a low start of the year, first quarter and the first part of 2020 and then progressively improve our performance month-after-month, quarter-after-quarter. That is what behind our performance assumption that we have from a top line perspective.

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Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [38]

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Can I actually have a follow-up question please? And it's regarding the one-offs, and whether with the exception of the goodwill and the intangible adjustments, we should probably see the one-offs reducing over time or the time frame of the guidance.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [39]

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So Stefano, I think this is a question for you about the one-off in goodwill and amortization and so on.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [40]

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Well, the -- with respect to the goodwill amortization, you know the number. It's pretty much there. And I mean it's not going to materially change in years to come.

With respect to the other adjustments, if you look at our amount of adjustments in 2019, the biggest one is very much represented by the impact of the time growth, which over the EUR 400 million of pretax adjustment that you see there represent slightly less than 50%. And obviously, that is not going to be recurring for the years to come, obviously.

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Operator [41]

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The next question comes from the line of Antoine Belge calling from HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [42]

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It's Antoine Belge, HSBC. I've got 3 questions. First of all, I'm sorry about coming back to the synergies, but please understand, this is just reflecting the conversation we have with investors. And there's been already a lot of discussion about the gross versus net. But even on the gross, my understanding is you said that, in 2020, the amount of gross synergies will be twice the amount of 2019. I don't recall that number. I think maybe in one conference call, it was said that it would be a bit below EUR 50 million. So I don't know. I mean is it -- so if the number was EUR 50 million cost synergy in 2019 and you double that in 2020, so that's EUR 100 million? So then it's a big step to get to 2021 between EUR 300 million and EUR 350 million. So maybe a sort of simple table with the 3 numbers for the 3 years would've been helpful. So -- and also maybe dividing what's coming from the top line and what is coming from the the bottom line.

My second question is about gross margin. Because when I look at 2019, actually, you did -- in spite of the reinvestment, you did quite a good job in terms of OpEx, but the -- there were quite a lot of pressure leading to the 60 or 50 basis points gross margin deterioration. I think you mentioned a few of the drivers. So are there like sort of one-off? But -- or what are the -- actually, what's the outlook for gross margin in 2020?

And my third question is about maybe the search of a -- for the new CEO. What's the latest on that? And also in terms of management changes, I mean, we -- it's just the fact that we will see more people from the Essilor side leaving than on the Luxottica side. So yes, what's the -- how could look the transition phase between now and when the full matter takes place in 2021?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [43]

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So we have 3 questions. So Pierluigi, maybe you can continue to explain the synergy profile. And then the gross margin, maybe on the Essilor side, Paul will take it and maybe Stefano on the Luxottica side. And we'll see for the first question.

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [44]

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Yes. On the synergy front, I think that what you described is exactly that -- how we see that. I mean there is an acceleration in 2020 on the basis of the good results achieved in '19. As you know, we had a soft start in '19 because the process started later in the year. There are a number of activities which started immediately other, which were initiated at -- in the first half or in the second half. So in the second half in the 2020, we're going to see, first of all, the full impact, the full annual impact of those initiatives starting in '19. We're going to see the results, economic results on a number of other initiatives, which haven't produced a significant result in '19 yet but are going to be live in 2020. So in 2020, we believe and see a synergy, very solid synergy patterns with ability of generate more than 50%, between 50% and 60% of the synergies targeted for '21 with, as I said, an acceleration in '21.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [45]

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Stefano, do you want me to comment on the gross margin on the Essilor side.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [46]

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Yes. Why don't you get started for me Essilor side for -- then I'll give them more color on that.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [47]

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Yes. On '20 -- I would say it's the combination of 3 elements: the tariff element toward the last 4 months of the year; the second one is the business mix; the profile of our growth. We had strong growth in the Sun & Readers, in (inaudible) online, which are a bit dilutive to the overall gross margin of Essilor. And then we did support our customers in the period post-GrandVision announcement to maintain the good dynamic in Europe, namely with them. So there was some report given to to manage the effect of the announcement that came through on the 31st of July, and that was to be managed in those last months of the year. So these are the elements.

And as you pointed, Antoine, rightly, we tightly managed the OpEx at that same time to protect the contribution margin.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [48]

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On the Luxottica side, I would say we do expect gross margin broadly unchanged. There's a capital dynamics in there. The insurance solution that I described for 2019 is going to be carried out through 2020 as well. We're going to experience the full year impact of duties due to the trade war between China and United States, but this will be largely offset by our price/mix, first of all, because of the price/mix that we see on lenses and, we described before, the benefit of the impact of the synergetic work at Luxottica and Essilor are doing together in our retail floor on the optical side to really enhance the quality and the value of the lens that we offer to our consumer. And on the other side, we decided to take a price increase, progressive price increase on a global basis within the next 2 to 3 months. The value of that price increase in -- it's anywhere between 1 to 2 percentage points, and that will allow us to kind of hold the margin in that respect.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [49]

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So on your last part of your question, the third one, on the CEO search, not much to say more than what is in the communique, which is the search is ongoing. And we consider also candidate, internal candidate, and the good news is we have a lot of talent pool inside the company. And as far as nomination of David Wielemans as Co-CFO side of Stefano, we just -- we have agreement, and both parties respect those agreements.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [50]

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Maybe just to -- so just -- so if I understand correctly, for 2020, in terms of gross synergies, I think you mentioned 50% to 60% of the 2021 number. So if I take the lower end, which is EUR 300 million, and if I take 50%, that gets me to a minimum of EUR 150 million worth of synergies in 2020. Is that correct? And then so I understand, on Luxottica side, so flattish gross margin in 2021. So is it pretty much also the outlook for the Essilor side? So on the combined level, gross margins and outlook is sort of flattish at this stage.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [51]

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On synergies, I can confirm that directionally that we're right.

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Operator [52]

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The next question comes from the line of Domenico Ghilotti calling from Equita.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [53]

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Three questions. The first is a follow-up on the coronavirus, in particular. So looking at what's going on here in Italy, I'm trying to understand what kind of assumption you have made on the Retail part of the business. So you were mentioning some double-digit decline in the traffic. I'm trying to understand if you are assuming probably not any kind of similar impact moving to the U.S.? And if you can be -- can provide some more color on this double digit and, together with this, also, maybe your exposure to travel retail. That is another very affected area.

Second question is on the free cash flow and CapEx. I'm trying to understand if the reinvestment that you are talking about are, in some way, diluting the free cash flow and CapEx compared to the -- so changing the free cash flow and CapEx compared to the 2019 level. So we should expect more CapEx or similar and lower free cash flow or similar.

And third is on the -- an update on the retaliation situation. So if you have -- you were mentioning the call that Central Europe was a bit softer compared to the rest of Europe in terms of performance of the group. Is it related to any kind of retaliation? How do you see the situation evolving?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [54]

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So on the last part of the question, maybe, Paul, you can elaborate on that. And then on the impact of coronavirus in Italy, Stefano will take it, maybe also the CapEx discussion for 2020. So Paul, maybe...

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Paul du Saillant, EssilorLuxottica Société anonyme - Deputy CEO [55]

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Okay. Yes. I think the -- like we said in previous discussion following the GrandVision announcement, we have been extremely close to our customers in the second -- in the period from September to the end of the year with road shows in Europe, namely animating the market with our innovation, with our brands. So that has been the first answer.

And as we go into -- and I commented on the Europe performance, which was quite fair in the end of the year and which is starting 2020, also, in a good way. So we don't see too much of this effect. But what is most important is the activity that we have with our key -- our customers around new product, about the launching of a Transition Gen 8 in Europe, which is just starting with the new progressive lens Varilux Comfort Max. So we have those tools, the new instrument, Vision-R 800. So I think that is the best answer to be animating the market, giving good tools to our customers and also reinforcing the partnership programs.

So, so far, as I said, Europe is okay starting the year, LatAm is very strong and the rest of the geography have less exposure to the GrandVision acquisition.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [56]

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Yes. To the coronavirus impact that we talked before, Domenico, well, there's a capital impact that we see in here, right? One is the most obvious locations that are more exposed to touristic traffic inflow are the ones that are feeling the highest impact, and that is true for some of our location in Europe. On the other side, our retail footprint in Italy is obviously challenged by the recent events that we all eat and breathe on a day-to-day basis.

Then if we move on the other side of the ocean, in North America, I got to tell you, I mean, if I look at our year-to-date performance, I'm very satisfied with what we've been able to achieve so far. The LensCrafters trend is very much in continuation with the positive trends that we've seen at the end of 2019 of the fourth quarter. Sunglass Hut is trending on the positive territory, too. So far, no reason to raise concern in North America. Clearly, it's a situation that we all have to look at on a day-to-day basis. And -- but that's really where we are.

From a travel retail standpoint, yes, that is the other area which we were challenging. That, to be honest with you, has been a challenge in 2019 as well. And so the severity of that deceleration on a business that, just to put in perspective, represent slightly less than 1 percentage point total (inaudible) only on Luxottica business. So it's a relatively small part of the business, but it's still feeling a bit of a deceleration in light of the lower touristic traffic, especially in airports.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [57]

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And are you assuming any kind of slowdown in the U.S. or you're saying, okay no impact so far and so we are putting the guidance that it will continue like that?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [58]

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You mean on the travel retail, Domenico?

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [59]

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No. No. In the Retail in general, so U.S. Retail. Are you assuming the...

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [60]

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Look, (inaudible) so far, Domenico.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [61]

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There was a question, part of the question on CapEx as well.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [62]

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Yes. Exactly. So the other question with respect to our free cash flow generation, we do expect our free cash flow to further improve in 2020. That improvement will come with an additional boost in capital investment, and that very much relates to the vast majority to our left in the capital investment that pertain to our renovation of our store footprint in North America as well as outside North America. So we do expect a lift, in particular, on the Luxottica side of our capital investment profile, and that is very much concentrated on the Retail side.

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Domenico Ghilotti, Equita SIM S.p.A., Research Division - Co-Head of Research [63]

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So just to be sure I understood properly. So you say, okay, you are expecting an improvement in free cash flow and, on the CapEx side, a bit less of investment on the renovation.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [64]

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We are expecting an improvement on the cash flow despite a higher investment (inaudible).

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Operator [65]

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The next question comes from the line of Piral Dadhania calling from RBC.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [66]

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Firstly, if I could maybe ask the coronavirus impact question in a different way. Could you perhaps let us know what percentage of your sales are driven by tourism in total, so travel retail plus tourist flows in downtown locations? That would be really helpful.

And then my second question is just around -- well, it's an accounting one, actually. There's been a release of provisions in the magnitude of about EUR 350 million off the balance sheet. Just wanted to understand what that relates to and whether that's positively affected the P&L in the year 2019?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [67]

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Okay. So on the first question, I guess it's back to the Luxottica team. And then the second one, I don't know if we have the full answer, but maybe we could take it. The IR could take it separately if we don't have it real time. So on the first part, Stefano?

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [68]

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Yes. So with respect to the coronavirus, I mean, it's hard to tell, honestly. I mean there are certain location which, clearly, the touristic traffic is permanent. We think about it some of the locations that we have in Europe, in the main cities, in downtown, and some other is not that relevant. So it really may vary. For example, in North America, our Sunglass Hut location exposed to touristic traffic are about 10% of the total, and that's really where we are. But it really depends by geography and is not very consistent anyway. But again, so far, in North America, nothing to report with that respect. It's more affected Asia, mainly, and obviously partially Europe.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [69]

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Okay. So on the second part of the question.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [70]

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Yes. The second part of the question was with respect to a reclassification on the balance sheet, which pertain to IFRIC 23, which is an accounting principle that require reclassification of our tax provisions into our tax payable. That is very much the explanation of the reclass on the balance sheet.

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Operator [71]

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The next question comes from the line of Cedric Lecasble calling from MainFirst.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [72]

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I have 2 follow-ups. The first one on Italy. Would it be correct to assume that Italy is roughly 4%, let's say, 4% of the total sales? Is it too much? And are you 100% secure on the made in Italy for your luxury frames? I would imagine that remedies in case of tougher situation in Italy would be challenging for the luxury side, your luxury brands that need to be made in Italy. That's my first questions -- question.

And the second one, I heard in the comments that in terms of acceleration of gross synergies as per 2020, so starting in 2021, a change in governance could help. Could you maybe update us on the governance -- on potential changes beyond the AGM of 2021 and how it could impact the deployment of the expected synergies?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [73]

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So there is a question on made in Italy and for luxury. So I guess it's Giorgio Striano that will give the answer.

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Giorgio Striano, Luxottica Group S.p.A. - COO [74]

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Yes. Laurent, thank you. So I will take that. So for sure, Italy, made in Italy accounted for the 100% of the luxury products, let me say, to be honest, 98% and the 2% % is made I Japan, the high end that we do with our new plant in Japan in Fukui. So all the entire plant, as I said, are up running.

In this moment, to be honest, the service level on luxury products is better than last year. We have a good stock that we preferred. We introduced just 2 days ago the new collection, which is, in this moment, in distribution into our stores and also into the Wholesale. We are secured in terms of raw material and components. There were some parts that were in production in our Chinese factory that we quickly moved to the Italian plants. We increased the level of production into the Italian plants in the recent couple of weeks. And therefore, there is no -- absolutely no disruption in terms of supplying for the made in Italy and for the luxury product.

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Stefano Grassi, EssilorLuxottica Société anonyme - Co-CFO [75]

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And with respect to the weight of Italian business in the overall scheme of EssilorLuxottica, we're talking about 4% of the weight of Italian business on the total EssilorLuxottica.

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Giorgio Striano, Luxottica Group S.p.A. - COO [76]

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Just a last comment on the logistic distribution. So since the -- for a few days, as I said before, the distribution center in China was down because of the government indication. We were able to serve our customers, starting from our Retails, e-commerce and then immediately after on the Wholesale in the APAC region from our Italian distribution center. So the Retail stores and e-commerce, absolutely 0 impact, and the store in stock is a good level. The supplier product is good level. For the Wholesale side, on the APAC region, literally, few days of just increasing lead time and then back to normal situation after mid of February.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [77]

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There was a second part to the question, Cedric, on the synergy and what could accelerate or not the synergy, correct?

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [78]

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Yes. Absolutely. On gross synergies, because I understand the cost would be more in 2019/'20. But what synergies will accelerate possibly in '21?

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [79]

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Well, I think the -- I think what we may refer to is that the synergy coming from sales and development will probably accelerate '21, '22, '23, because that's the -- maybe the most important part. That will be what I will comment. Maybe, Pierluigi, you have something else.

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [80]

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No. That is correct. I mean there is an evolution of those initiatives, which are going to accelerate over time with the kickoff of other work stream that for the time being are under valuation or they haven't produce any economic effect but are in the, let's say, evaluation phase. So that's why we see an acceleration in 2020 and then '21 and '22.

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Cedric Lecasble, MainFirst Bank AG, Research Division - Research Analyst [81]

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Just to be clear about the organization, do you still see a dual organization with this holding company on the top beyond 2021?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [82]

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We do not have any visibility on what the organization would be in the future.

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Operator [83]

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The final question comes from the line of James Griznic calling from Jefferies.

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [84]

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I had 2 quick questions, both for Pierluigi. And first one is, Pierluigi, can you first tell us and clarify what the rate of penetration of Essilor lenses through the Luxottica distribution channels were at the start of the process and where they were currently, I guess, at the end of 2019? That would be very helpful.

And the second one was -- I was listening with interest to your comments around the IT integration road map. Could you give us a little bit more details, please? I'm particularly be interested to understand when you expect the Italian trial to end and when you would expect to deploy that platform, particularly in the U.S.?

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [85]

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Okay. I'm not sure I got the second question. But with respect to the first one, when we started -- so before, let's say, the initiative or the cooperation between the 2 companies started, I think the penetration of Essilor lenses in our Retail network was about 1/3, and now we are above 80%, 90%. Then obviously, this is -- the percentage might vary in certain countries. But the most important part of the assortment strategy is to elevate the quality of the lenses, is to elevate the interaction and the communication that we had with our final customer and consumer. So that they could really appreciate how to satisfy their visual needs with the best product the possible. So also the introduction of Generation 8 of Transition and the introduction of blue light and the way we present this new lens technology really makes a difference. So we saw a significant increase also on the satisfaction our customers, and we're fully committed to continue on this pattern in all our, let's say, Retail network.

On the second question, I think, was on the development of the IT platform in the U.S., is that right?

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James Robert Grzinic, Jefferies LLC, Research Division - Equity Analyst [86]

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Yes. It was -- specifically, when you think the trial in Italy will end so that how -- when you start then moving on to the deployment across major markets, I presume the U.S. will take precedence there. So I'd be particularly interested as to when you expect that implementation to happen in the U.S. because I presume that's an important piece for the synergy delivery.

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Pierluigi Longo, EssilorLuxottica Société anonyme - Chief Integration Officer & Head of M&A [87]

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I think -- I mean the implementation, as you said, will start after the pilot and the results of IT -- sorry, of the Italian initiative. So we expect that to happen second half '20 and sometime in '21. We always said that one of the most important objective that we have is to integrate the companies without significant disruptions. So we really want to make sure that all our integration activities will result in a win-win proposition. So we improve without disrupting. We improve without suffering or without creating issues in our -- in the way we operate and in the way we serve our customers. As you said, that the U.S. is our key market. So we are going to put a lot of focus in making sure that the IT platform will be integrated there because we really need and want to make sure that the 2 companies will operate as a single entity. On the other side, we're going to do it carefully and thoroughly in order to make sure To make it happen without disruption and very smoothly.

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Laurent Vacherot, EssilorLuxottica Société anonyme - Deputy CEO of Essilor [88]

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Thank you. That was the last question. So thanks all of you for your time and interest in EssilorLuxottica. And the next rendezvous is a message for the sales of the first quarter. Thank you very much.

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Operator [89]

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Thank you for joining today's call. You may now disconnect your lines.