U.S. Markets open in 2 hrs 58 mins

Edited Transcript of LUX.MI earnings conference call or presentation 23-Jul-18 4:30pm GMT

Half Year 2018 Luxottica Group SpA Earnings Call

Belluno Jul 24, 2018 (Thomson StreetEvents) -- Edited Transcript of Luxottica Group SpA earnings conference call or presentation Monday, July 23, 2018 at 4:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alessandra Senici

Luxottica Group S.p.A. - Group IR and Corporate Communications Director

* Stefano Grassi

Luxottica Group S.p.A. - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Anne-Laure Bismuth

HSBC, Research Division - Analyst

* Cedric Lecasble

Raymond James Euro Equities - Financial Analyst

* Domenico Ghilotti

Equita SIM S.p.A., Research Division - Analyst

* Francesca Di Pasquantonio

Deutsche Bank AG, Research Division - Research Analyst

* Piral Dadhania

RBC Capital Markets, LLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Luxottica 2018 First Half Earnings Results Call. My name is Bella, and I'll be your coordinator for today's event. (Operator Instructions) I am now handing over to your host, Alessandra Senici, Group Investor Relations and Corporate Communications Director, to begin today's conference. Thank you.

--------------------------------------------------------------------------------

Alessandra Senici, Luxottica Group S.p.A. - Group IR and Corporate Communications Director [2]

--------------------------------------------------------------------------------

Good evening, and good afternoon to everyone. I'm here with our CFO, Stefano Grassi, and the Investor Relation team.

Before we begin, as usual, we have a couple of quick items to cover. As a reminder, the slide presentation, which we will informally follow during this call, is available for download from our website under the Investors Relations section. Today's call may include forward-looking statement.

These statements may be made regarding the announced combination with Essilor, Luxottica Group's future financial performance or future events that, by their nature, are uncertain and outside the group control. The group's actual performance may differ, possibly materially, from what is indicated in any forward-looking statements. Please see the group's filings with the Italian securities authorities for additional information and discussion of certain risks that could impact the group results. This conference call is also available via audio webcast on our corporate website.

Let's start with a brief update on the proposed combination between Luxottica and Essilor. The 2 companies are finalizing discussion with the Chinese antitrust authority and remain confident to obtain its approval by the end of the month.

In parallel, the 2 companies are also finalizing their discussion with the Turkish antitrust authorities and evaluating the timing for the closing of the transaction. Pending final antitrust approval and in respect of the process, we are not yet in a position to answer questions on the combination and future plans. We thank you in advance for your understanding on that.

Moving to results. Sales in the second quarter, as expected, were back to positive and constant ForEx and improving month after month, driven by robust retail and e-commerce growth. While still negative, Wholesale improved best with the first quarter. As summer gets underway, we are pleased with the trend we continue to see globally. In our Wholesale division, all key markets with the exception of Europe, show positive results in the quarter. Retail was strong across the board, backed with the best quarter in 2017. Comps have been back to positive since May.

I would like to share a few highlights on the quarter. So first of all, Sunglass Hut globally and Optical Retail in Australia and in China continue to post robust growth. Our Wholesale business in China expects to grow 1 year after we reorganize our go-to-market approach. LensCrafters in North America is showing improvement. In June, comps were flattish and we expect a positive comp in 3Q.

We are seeing mixed performance in Europe. Europe's solid Retail and e-commerce grow on one end, but negative Wholesale on the other. We are experiencing a somewhat cautious approach to order intake from our customers, wholesale customers, as a result on the standardization of commercial policy and some delay in the sun season.

Our e-commerce continue its journey of double-digit profitable growth thanks to the strength of our directly operated website and Stefano will share with you more color on that. We are pleased with profitability performance driven by the solid growth of our Retail division. The division is reaping the benefits of the transformed operating model with improved store execution and quality of the consumer experience.

In recent year, we invested in new stores as well as in a more compelling omnichannel experience. Strategic initiative and the recent repositioning were instrumental to the healthy growth we are experiencing. Other key factors include managing our Retail platform in a smarter, more effective way, thanks to fully integrated supply chain and major investment in new lens capabilities for the optical business.

Furthermore, the new stores opened in the past couple of years are supporting the growth, and most of them already contributed to division profitability. We set higher and higher standard for branded eyewear and the results are there. In the quarter, we continue to work on partnership and acquisition. Our agreement to roll out the Sunglass Hut retail concept in 170 Bass Pro Shops and Cabela's stores gave us a new avenue for exposure for our profitable brands.

By the way, all shop-in-shops were successfully opened during the second quarter. In addition, we continue to invest in know-how and production capability in both frame and sun lenses. We continue our upstream integration with the acquisition of Barberini, a long time lens supplier of our premium and luxury portfolio. Before turning the call over to Stefano for an in-depth look at results, I want to say a few words about the new Ray-Ban initiative that really speaks to the authenticity and cultural relevance of the brand today.

This summer, Ray-Ban will reconnect with its deep musical roots with the launch of Ray-Ban Studios. Ray-Ban Studios is a creative think tank for artists to share their story and celebrate individuality and self expression. Bronx-raised DJs, The Martinez Brothers, are the first artists chosen by Ray-Ban Studios to launch a limited edition capsule collection of 500 pieces available on ray-ban.com and in select Ray-Ban stores.

A video and print campaign titled, Feel Your Beat, is given life to the project, which will draw new and unique artists into the Ray-Ban fold. Now I will hand it over to Stefano.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [3]

--------------------------------------------------------------------------------

(foreign language) Alessandra, and good evening, everybody. Welcome to our call tonight. We'll start our journey talking a little bit about our top line performance. We'll then give you a little bit more color around our profits and loss and free cash flow generation. And then we'll have together a journey through our different geographies, and then we'll open up for the Q&A.

So let's start with our top line perspective. On the left-hand side of the page, the group recorded for the second quarter positive growth at 1.4% on a constant FX basis. For the first 6 months of the year, you're looking at group results, slightly positive at 0.3%, still on a constant FX basis. If you look at our numbers on a current FX basis, we recorded a minus 5%, minus 8%, respectively, for the second and the first half of the year on a current FX basis.

Now from a currency standpoint, the U.S. dollar devaluation created a little bit of headwind in our results, but to a lower extent than the first quarter. You might remember during Q1, the U.S. dollar devaluated approximately 13% versus euro. And in the second quarter, the U.S. dollar devaluation was about 7.5%.

If dollar stays at current levels, we do expect during the second half of the year, the gap between constant and current FX to significantly diminish and really get the 2 numbers close to each other. But now let's start looking at the 2 divisions. Let's begin in the middle of the page with the Wholesale. Wholesale was negative 3% on a constant FX basis for the second quarter, negative 3.6% for the first 6 months of the year. On a current FX basis, Wholesale posted negative 8%, negative 10%, respectively, for the second quarter and for the first half of the year on a current FX basis. Talking about the Wholesale, I would say that the overall figures -- despite the fact that the overall figures for the quarter look pretty close to the ones that we posted in Q1, the underlying trend in our Wholesale division is quite different. More specifically, we experienced pretty healthy growth in our North America and in Asia-Pac, where China was finally back to double-digit growth in the quarter. As you might remember, we now anniversary our strategic repositioning in the area. And now, I would say, we are ready to start a new exciting journey with our Wholesale, Retail and e-commerce channel over there.

The soft spot for the quarter was the Wholesale in Europe. There was a high single-digit negative. I will give a little bit more color later on as we go through our different geographies. But now let's turn into Retail. On the right-hand side of the page, Retail posted a 4.3% constant FX growth for the second quarter, an acceleration versus Q1 trend. So for the first 6 months of the year, you're looking at Retail division, it posted positive 2.8% on a constant FX. On a current FX basis, we're looking at negative 3%, negative 6.5%, respectively, for Q2 as well as for the first half of the year.

Comp sales in Retail were positive 1.3%. Those were the best comps in the last 8 quarters for Luxottica Retail division. So very happy about that. We have to go back to Q1 2016 to find better comps than those. LensCrafters trend, as Alessandra mentioned, significantly improved throughout the course of the second quarter. Comps were slightly negative. The overall sales were positive territory. And you'll remember that the journey that we undertook in LensCrafters was quite challenging. In Q3 2017, we were negative 8% comp sales. In the fourth quarter 2017 -- in first quarter 2018, we posted minus 5%. And now we have a remarkable improvement in the LensCrafters performance.

Sunglass Hut was positive 5.5%. Total sales growth at constant FX growth -- at constant FX. The continued growth story appeared once again during the second quarter. Happy to report solid growth in Sunglass Hut North America despite Easter shift created a little bit of headwind in Q2, tailwind during the first quarter. Happy to see Europe growing high single-digit from Sunglass Hut. And then happy to report double-digit growth in Australia and in China. I would say, a very, very compelling picture for our global sun specialist retail chain, Sunglass Hut.

Before we turn page, let me just give you a quick touch on e-commerce. We can't forget that. 16% up during the second quarter at constant FX. With all our directly operating websites, Ray-Ban.com, oakley.com, SunglassHut.com that posted positive growth during the course of the quarter. With Ray-Ban leading the way, also thanks to the new Ray-Ban campaign -- Ray-Ban Studios campaign that Alessandra mentioned to you is creating incredible visibility, with almost EUR 290 million of impression on social. And I can tell you, with further plans for Q3 and Q4, there are more exciting news to share with all of you.

But now let's have a look at our profit and loss. Let's turn the page. We're pretty happy with our profit and loss results for the first half of 2018. With top line that was substantially flat on a constant FX basis, 0.3%, we were able to improve our margin, operating income as well as net income on both an adjusted and a reported basis on a constant FX. So we're pretty happy about that. Let me give you a little bit more color around the key driver of this performance.

First of all, gross margin. This is an area which you've seen in the last couple of years, we were a little bit challenged. Gross margin was quite dilutive. We're now back to margin accretive from a gross margin perspective. We are up 20 basis points on a constant FX. The main driver of that gross margin improvement is price mix and improved efficiency on our industrial cost. The other area, and this is not a new, which we got pretty efficient, is the G&A. General and Administrative cost. The G&A adjusted were down once again over 2% on a constant FX basis and down 7% on current FX. If you look at this reduction, this comes on top of a 13% reduction still on an adjusted basis constant FX last year versus the year before, and if you go even furthermore in the history, we have about 8% reduction versus the year before. So over 3 years’ time period, our G&A cost infrastructure was down about 25%.

So we made our organization leaner, more efficient and we also freed up some costs for further investments in other critical area for the group.

From an operating margin perspective, the natural summary of that is 10 basis point margin accretion, despite top line that is flat. And this is very important because you might remember we always talked about that we need about 3% top line growth to hold our margin. And we've actually been able to improve our margin despite a top line that was flat. If you look at our 2 divisions, Wholesale first. Wholesale was slightly dilutive despite a top line negative 3.6%. So I would define the Wholesale margin very resilient. And just to put in perspective, the Retail -- the Wholesale division, we are talking about a division that between 2012 and 2017 improved their operating margin on a constant adjusted basis, 350 basis point, becoming probably one of the most profitable Wholesale division that I have really seen around. So high base and a very resilient business is our Wholesale division.

Let's now move to Retail. 60 basis points is the improvement on our Retail division. Extremely exciting results over here. Those margin improvements were driven by solid price mix and improved store labor management, I would say across all the major retail chain. They helped a lot. And this was achieved despite the fact that throughout the year, the first half of the year, we opened about 400 stores in Retail. And as you know, as we open stores, there is a natural dilution in the margin at the early stage of a new store. If you look at our different divisions, I'm very happy about the profitability of our Sunglass Hut business in North America, especially during the second quarter. And let me share with you that even the LensCrafters business showed material progress in improving profitability between the first and the second quarter versus last year performance.

So you know how important is to get the LensCrafters on track. And I think, we are definitely on the right direction for that. In addition, we continue to experience solid result in our optical and Sunglass Hut in Australia.

So what we've done over there is continue to paying back are giving us very solid results. So very happy about it. From a net income standpoint, you see the number down there, 130 basis points improvement on a constant FX basis. 12% growth of our net income number year-over-year on an adjusted basis. 50 basis points was our net income accretion for the first semester on a current FX basis. The 2 major driver of this performance from a net income perspective was, one, the reduction of our interest expenses. Two, the improvement of our tax rate. And when we talk about the tax rate, I think it's important to mention the fact that during 2018, we are accounting since the beginning of the year for the Patent Box benefit, which you might remember, in 2017 was accounted during the end of the year. So we really have for the first half of 2018, what kind of -- a kind of apples-to-oranges comparison. But even if you exclude the benefit of the Patent Box, you will be looking at a net income growing about 7% on a constant FX basis, on an adjusted basis.

With respect to the adjusting items, just to give an idea, we're looking at approximately EUR 16 million after tax on a constant FX of adjusting items, EUR 20 million pretax for the first 6 months of the year. Those adjustment items really pertains to fees related to the Essilor-Luxottica business combination as well as a few other reorganization projects that we undertook during the course of the first semester.

But now, let's take a look at our cash flow generation. If you move to the next page, I will just rub your attention to the number in the middle of the page, EUR 400 million. That is the free cash flow generation for the first semester. EUR 135 million below last year record level. But again, this number is impacted by FX rate. So if you would kind of strip back for a second the FX rate, you will be looking at underlying free cash flow generation that is very much aligned with last year record number of EUR 535 million.

From an operating working capital days, we are down 12 days, with all the Critical Mass, with DSI, DSO and DPO all trending on the -- on an improved territory versus 2017 level.

But now let's switch gear, and let's have a kind of a sanity check, of where we -- with respect to the guidance that we share with all of you at the beginning of the year. If you look at the blue boxes that you see on the page, those are the guidance shared with all of you from a top line and profitability and net debt-to-EBITDA ratio standpoint. From a top line perspective, we guided you between 2% to 4% on a constant FX. And for the first half of the year, we're reporting 0.3% top line growth at constant FX. We are clearly behind our full year target, but we believe that we're going to achieve our target, probably positioning on the lower end of the range. And let me give you a couple of key items, this will reassure you about the trend that we're going to see in the second half of the year, which is going to be an accelerated trend versus the one that you see in the first half.

First of all, in the second half of the year, you're going to have an easier base of comparison for our Retail division where I'm sure you will remember, LensCrafters had a very soft base in Q3, minus 8%, and Q4 minus 5% comp sales. Secondly, we're talking about soft base also in the second half of the year for our European division in Wholesale, especially during the last quarter where we experienced a deceleration of our Wholesale division.

Thirdly, we do have a true like-for-like comparison in China. We've seen already in the second quarter, our top line boosting at a high pace after we pass our strategic repositioning in the area. And now, we're ready to grow at a very high pace over there. Last, but not least, the contribution of our Bass Pro Shops that Alessandra mentioned, will give us furthermore help lifting our top line during the second half of the year.

From a profitability standpoint, the adjusted operating income is 1.4x our top line growth versus a guidance of 0.8 to 1. So we are exceeding our expectations so far. And from an adjusted net income perspective, we are exponentially higher than the target of 1 to 2x sales growth. Even excluding the benefit of Patent Box, we're still looking at a number that is exponentially higher than our top line growth from an adjusted net income standpoint still on a constant FX. Net debt-to-EBITDA ratio, we're at 0.5. That number is -- was expected to be higher than the 0.3 to 0.4 due to the higher disbursement in 2018 for dividends. But we will be able to get to the 0.3 to 0.4 target by the end of the year.

But now let's start our journey through our different geography, and as usual, let's start with the most important one, North America. In North America, we have a second quarter top line growth of 3.4% on a constant FX basis, with both our Retail and the Wholesale division acceleration versus the first quarter trend. Very excited about it. Let's start with our Wholesale division. Wholesale posted a second quarter with sales up mid-single digit. Those were driven by volume in a nice price mix lift. Pretty much all the channel in our Wholesale North America division were trending on the positive territory. Independent, department stores, key accounts, e-commerce channels, were all extremely profitable -- were all extremely positive. And this is proving, once again, the benefit of our MAP policy that we implemented a couple of years ago, and that since we anniversary, we're seeing a very different trend in our Wholesale North America. As a matter of fact in H2 last year, Wholesale actually grew high single-digit and during the first half of this year, we have very solid growth as well in our Wholesale North America. Very good news.

Before I move to Retail, let me just remind you that I share with you that during the second quarter, we see positive growth on a channel that traditionally has been pretty challenging for us in terms of top line growth. That is the Oakley sports channel. We were able to report and record positive growth in this channel. And we have a pretty good hope that this trend is going to be kept throughout the second half of the year. But fingers crossed and stay tuned for more news.

Moving to Retail now. Very pleasing to see progress here as well. Sunglass Hut continues its journey with sales a touch less than mid-single digit, comps around 2.5%, driven by healthy volume despite again, the Easter shift that created a little bit of headwinds during Q2. Before we move to optical, I want to just to reemphasize what Alessandra shared with you before. We have probably completed the rollout of Sunglass Hut shops in Bass Pro and Cabela's stores, and now we are offering our full suite of products in approximately 170 new locations.

Now LensCrafters, good progress has been made here. Top line is 2% positive on constant FX basis. As I said before, comps are slightly negative. We continue to bounce up from a nice price mix. Volume, yes, are still on the negative territory, but to a lower extent than what we've seen in the previous quarter. So the trajectory is definitely the right one. July trend it's very, very promising. So we are happy with the trajectory of LensCrafters. Let me also add just a further more note on LensCrafters. The location that we have in Macy's are performing really well with comps that are in kind of the double-digit territory. And this is very important because it's proving to us after a couple of years, that the overall format of LensCrafters development in Macy's is proving to be a successful one.

Before we switch gear and we move to Europe, let me just give you a little more of color on brand trend, especially in North America. If you look at our brand trends in North America from a wholesale perspective, we had Ray-Ban up double-digit, and Oakley, up high single-digit in our North America wholesale channel. So very happy with the performance. We then look in our e-commerce business and Ray-Ban there was very strong and posted actually double-digit growth. So our brands are extremely healthy. They live and breathe thanks to the success of our new collection that all our customers have appreciated during the Luxottica Days in Cernobbio. So extremely happy with that. We launched in the month of June the loyalty program in Ray-Ban, that is creating a lot of excitement with the Ray-Ban fans that are enrolling into this loyalty program and allow them to see event premier and novelties about our leading brand. So extremely exciting about the shape of our brands in North America, and I would say in the rest of the world. But now let's turn gear and let's move to Europe.

In Europe, I think, the best way to describe our performance there it's really the title, mixed result. Our overall top line is up 4.5% on a constant FX basis. But really, really 2 different trends between Retail and Wholesale. First of all, Retail was up high single digits on -- in Europe, and our Wholesale conversely was high single-digit negative. But before we dig into the performance of those 2 divisions, let me just put Europe in perspective. We're talking about a region that in the last 2 years grew approximately 25% to 30%. So each year, you're looking at a region that grew a little bit less than 10%. And if you remember, every time we were making a bet at the beginning of the year, what was going to be the region that was going to be exceeding our expectations at the beginning of the year. And if asked about the euro, that euro would have gone always to Europe. And actually, every single time Europe [beated] our expectation. So we have a high base, just to put in perspective when we talk about Europe. So I'm sure then you want to understand a little bit more what's going on the Wholesale side of the region. And I'll start exactly from there, just giving you, sharing with you 3 well-spotted things on Wholesale in Europe. First of all, we had a late start of the warm and sunny season, especially in the southern part of Europe, which we would normally identify as Mediterranean Europe. The inclement weather that we experienced and we shared with you during the first quarter call, actually led throughout the month of April. And probably let the clients to take a little bit more cautious approach in the reordering process during the second quarter.

The second aspect that, I think, is important to be considered is the harmonization of our commercial policy around the different markets. The aim to align our discounting practices across the different countries. The third aspect that is important to remember and is not new to you, is the continuous and restless effort to clean up the market from actions of clients that are not adhering with our brand protection guidelines. And you know how strict in divisions we have been when we're implementing policies like this in any part of the world.

These 3 aspects are pretty clear to us. And I would say, some of them should mitigate your impact during the second half of the year. And just to add a little bit more statistic to the performance of Wholesale, if we would exclude those 3 aspects to the Wholesale Europe performance of the second quarter, you will be looking at a number around the low single digits for the second quarter in Wholesale in Europe. But now let's talk a little bit about Europe. Very same story. Very happy with that. Retail comps are on the positive territory, with both Sunglass Hut and Salmoiraghi & Viganò. Our store expansion project is executing as we planned with over 13 new Sunglass Hut opening in U.K., Turkey, Spain and Germany. And we're planning to add about 30 to 50 additional stores to be opened in Europe during the second half of 2018.

So here we are extremely happy with the execution of the store development plan that we have as well as with the comps sales that we're achieving. Good job Retail team. But now let's move to the Asia-Pac. Asia-Pac is an exciting story, finally, I would say. The second quarter sales growth was an acceleration, 7.5% in constant FX. I'm very happy to start our description of Asia-Pac beginning with Mainland China. Since you might remember, during the first quarter, we wanted to reassure you about the overall performance of Mainland China. If you remember, we said, "Look, this is going to be the last quarter on which we're going to be challenged on Mainland China." During the second quarter, as we're going to come to anniversary of our performance in Mainland China, you're going to see a very different trajectory in China. And here we are. We are double-digit in Wholesale, we are double-digit in Retail, we are double-digit in e-commerce. So we are now ready to start a new exciting journey of strong growth in Mainland China. And let me couple that with another area that has been quite challenging in the past, like Hong Kong. We are now happy to report a strong growth in high single-digit territory for Hong Kong. And I have a pretty good degree of confidence that, that strong growth is going to continue throughout the second half of the year. Last, but not least, Australia. Without single-digit growth. This is not a news, but we are happy to see good performance in Sunglass Hut as well as in our Optical Retail. In particularly here, we continue to experience positive volume growth thanks to the performance of our Ray-Ban and Oakley brand. So very compelling story in our Asia-Pac and happy to report progress over here as well.

Latin America. The last region before we open to Q&A. Latin America posted 2.3% growth at constant FX basis. I would say, Latin America it's always on the news because of the political turmoil, because of the challenges, because of strike. But despite that, we still continue to grow. In Brazil, we posted a high single-digit, thanks to a strong Óticas Carol performance. And again, you hear about the news on the president, you hear about the strike that impacted the Brazilian infrastructure during the course of the second quarter, in particular, during the latter part of the second quarter. But despite all of that, we continue to be on a growing position in Brazil.

In addition, in Brazil, we continue to pursue, thanks to Óticas Carol, our successful strategy of developing the franchising business model with 18 new locations that we opened through the first half of the year. And we'll continue our expansion plan of franchising business in Brazil throughout the second half of the year as well. And with that, I will hand it over to the operator as we completed our journey through different geographies and open for the Q&A. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) So the first question comes from the line of Cedric Lecasble.

--------------------------------------------------------------------------------

Cedric Lecasble, Raymond James Euro Equities - Financial Analyst [2]

--------------------------------------------------------------------------------

Cedric Lecasble from Raymond James. So I have 3 questions, if I may. So first one on the LensCrafters. You used to have some traffic issues in the stores. And the commercial repositioning seems to be starting to work little better. You seem very confident about H2. Could you maybe help us give us some metrics, maybe some traffic metrics? And explain us what makes you so confident for H2? The second question relates to Europe. How would you compare the situation in the repositioning, discount, in particular, aligning discounts, so you're strengthening the commercial policy between the European situation and the U.S. situation. It took more or less a year in the U.S. to solve the issue. You came back to growth. What would be the timing in Europe? Is it comparable to U.S.? And last one, in China, you've changed the trend of organization there. Could you maybe help us understand what is the mix of operations now between Wholesale, Retail and e-commerce?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Okay. So I will start with the LensCrafters trend and what we see here. I would say, traffic is still on the negative territory. And again, to be honest with you, we are planning for that negative to be also in the second half, just to play on the safe spot in a way. But what we're doing is an incredible job and improving conversion. It's an incredible job of keeping the price mix on the positive territory. So yes, I think you're going to see definitely a continuous improved trend in LensCrafters. And again, if I look at July performance so far, we're already trending on that direction. So again, it's a lot of work, heavy lift on conversion. There is a lot of work on marketing campaign. We're actually going to be on air throughout the back-to-school period as this is obviously, a very important time period for LensCrafters. We have the campaign ready to be on air. And we also got other important indicators that are proving our strategy to be successful. We see a double-digit increase in our online appointment booking, which is a very important metric to really understand the consumer behavior. And that is definitely helping our underlying performance in LensCrafters. Europe versus U.S. To me is obviously, the efforts that we're doing here in Europe to clean up the market, aligning discounting practices across the different markets. And I think when you're talking about U.S., you're clearly referring to MAP. I mean, it is a different concept here. Europe in a way, it is a cleaner market. The magnitude of the exercise that we're going through is definitely lower than the MAP. So we're not talking about the MAP impact over there. And I do expect to see Europe to have an improved trend during the second half of the year. And again, that is important that we all understand that really is not MAP, is not MAP because of the -- MAP, first of all, cannot be executed in Europe. Secondly, is not MAP because of the magnitude of the impact that we've seen here versus the MAP that we experienced in North America. The third point is around the mix of sales. Well, I would say that the vast majority of our top line growth right now is supported by Retail. And it's nicely coupled by e-commerce. So when I say nicely coupled, it means that really day after day we continue to see higher pace in our e-commerce business, which makes us very happy. You know that we are developing our business throughout our platform that are available in China, JD, VIP and Tmall and that is trending really positive. So e-commerce and brick-and-mortar are the 2 main constituents. But now we're finally back into the positive territory for our Wholesale business as well, which is going to be definitely a third leg of growth for us for China.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from the line of Anne-Laure Bismuth.

--------------------------------------------------------------------------------

Anne-Laure Bismuth, HSBC, Research Division - Analyst [5]

--------------------------------------------------------------------------------

It's Anne-Laure Bismuth from HSBC. Just to come back on Europe, so when do you plan to have completely looking up of the channel and should we expect a positive performance in H2 at constant FX for Europe? And my second question is about the tax rate. So it was 27.7% in H1. Is it a good proxy for full year IT for full year?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [6]

--------------------------------------------------------------------------------

So I will start with the overall cleanup in Europe that we've seen over here. Let me tell you, first of all, the work that we're doing is continuous and extrapolates, I mean as I described it before. I would say, we're doing it to the extent that is necessary. We're not going to diminish. If you want to keep it more on the conservative side, I would say, we will continue throughout this year. But again, let me reemphasize that we do expect an improvement in our performance in Wholesale in Europe. The other question around tax rate, the answer is yes. We do expect the first half proxy that you see of 27.5% to be a good proxy for the full year from a tax rate perspective.

--------------------------------------------------------------------------------

Anne-Laure Bismuth, HSBC, Research Division - Analyst [7]

--------------------------------------------------------------------------------

And just regarding new guidance for the full year. So I know that you have commented on the positive and the right -- the acceleration that you are seeing in July and also -- but the low end of the guidance will imply an acceleration to 4% organic sales growth in H2. Is this something you are confident with?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [8]

--------------------------------------------------------------------------------

Yes, that is the implied growth rate for H2. That's correct. And I would say, higher velocity on Retail, and low single digit on the Wholesale side, correct. Just to qualify a little bit more.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question comes from the line of Domenico Ghilotti.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [10]

--------------------------------------------------------------------------------

I have a question on the FX transaction impact because clearly there is a big impact on the transaction so on the FX side if we compare, particularly the profitability. So you're moving from 10 bps up to more than around 100 bps down. Could you elaborate a little bit more and just to understand also if this will continue in the second half, the current rates. And if you see this gap narrowing in the second half. And I'm a bit surprised to see the transaction impacting also on Retail where I was expecting a more natural hedge.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [11]

--------------------------------------------------------------------------------

Domenico, so from a currency perspective, I mean, if we look at historically, the difference between constant and current FX at sales and operating income level, the trend and the ratio between the 2 is not very different from what we got. I mean, that has been the case. So one of the factors that we need to take into account is also the U.S. dollar devaluation, which clearly creates some heavy headwinds versus the devaluation of the RMB. And do you remember the dollar devaluated in the first half of the year about 10.5%? The RMB only devaluated about 3.4%. So that has an impact on our margin in not just the Wholesale, but also the Retail one. So again, I think that throughout the second half of the year as we're going to realign the marginality of the top line, I think you're going to see also marginality that's going to be much closer between constant and current FX.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [12]

--------------------------------------------------------------------------------

So it's just -- sorry, follow-up. Is it not mainly related to emerging market currencies are still heavily down Brazil, Turkey, India?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [13]

--------------------------------------------------------------------------------

We got the only one -- yes, there is a little bit of that. I mean, Turkish lira and Australian dollar are the kinds of 2 currencies that are a little bit and also the Brazilian real still got the other ones. But again, for the second half of the year, as we're going to realign the currency, I do expect that gap to be bridged and to have the 2 numbers much closer.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [14]

--------------------------------------------------------------------------------

Are you also raising prices in these emerging markets?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [15]

--------------------------------------------------------------------------------

Sorry. Say that again, Domenico.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [16]

--------------------------------------------------------------------------------

So are you also raising prices in these emerging markets in order to ...

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [17]

--------------------------------------------------------------------------------

No, not for the time being. Not for the time being, not even in countries like Brazil. Because obviously, we have the possibility to take actions that at this stage we're not planning to increase prices in emerging markets.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. And my last question. On the CapEx level, if I'm not wrong, your Retail CapEx were below last year level. But you are saying that you are accelerating. Well, clearly, same-store sales, but also probably, I'm trying to understand there is also a growing contribution from new openings and if we need to see a pickup in the CapEx for Retail?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [19]

--------------------------------------------------------------------------------

Yes. You're right, Domenico. The Retail CapEx are down year-over-year. But first of all, there is a little bit of FX that probably explains half of the gap versus last year. If we look at the CapEx in 2017, there was a pretty heavy investment in our lens manufacturing capacity in North America. As we completed our setup of lens manufacturing in North America, obviously, there is not any longer capital absorption over there. We are now concentrating all our CapEx investment to either open new stores or refurbish the existing stores, which we had seen that, that has been very, very promising every time we refurbish the store. So right now the priority for Retail is very much around new stores and refurbishment program. And that's where you see for each one of the Retail brands pretty much an increase in CapEx because we give this as a priority.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

There are no further questions in the queue. (Operator Instructions) We do have a question that comes through from the line of Francesca.

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

I have 2 questions, please. One is about LensCrafters, and what is to date the turnover of your store portfolio if you can update us on where you stand? And secondly, going back to your comment on China e-commerce and the strong growth that you are experiencing, how much is your e-commerce in China? Let's say, a like-for-like growth? And how much is it the opening of new, let's say, store-in-stores on platforms of Chinese e-commerce players?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [22]

--------------------------------------------------------------------------------

So Francesca, just to be sure, for the expansion of our store portfolio, we are looking at about 20 stores net for the LensCrafters in last the 12 months. That's the magnitude that you're looking at. And I don't know if that was the question.

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

Yes. How many gross openings and how many closures?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [24]

--------------------------------------------------------------------------------

Well, we got about 36 openings and about 14 closures, 22 net. And the China e-commerce business, I would say, it's for the vast majority like-for-like. I mean, the only platform that probably opened a little bit later was the VIP. But the vast majority of our e-commerce business is very much like-for-like because the biggest constituents of that is really Tmall and JD.

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

And so also the Retail growth is mostly like-for-like?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [26]

--------------------------------------------------------------------------------

Yes. We are very solid like-for-like, absolutely. Absolutely strong comp growth. Absolutely.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question, again, comes from Domenico Ghilotti.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [28]

--------------------------------------------------------------------------------

I have -- I had a question on the gross margin side. You, if I am not wrong, you had mentioned that currency neutral was up 20 bps in the first half. So I wanted to check if it is basically coming from the mix, because or if you are really having some contribution from price increases? Just as a follow-up from my previous question.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [29]

--------------------------------------------------------------------------------

Domenico, it's both actually. We got a nice mix, obviously of frames but also mix from lenses. And we got a little bit of help of certain selective price increase that we took. So it's really a combination of both.

--------------------------------------------------------------------------------

Domenico Ghilotti, Equita SIM S.p.A., Research Division - Analyst [30]

--------------------------------------------------------------------------------

Okay. While -- if I understood properly, you are not expected to raise prices or I don't know if your answer was focus on emerging markets. So ...

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [31]

--------------------------------------------------------------------------------

No, not exactly. We're not expecting to raise price, we -- so we're probably going to see more of contribution from mix. And I would say, during the second half of the year, the price mix contribution will probably diminish. Will not disappear. Will not disappear, but will diminish. And we're probably going to see volume trending and improved during the second half of the year, generally speaking.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

Francesca would like to ask another question.

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

A follow-up on European Wholesale, please. So you reminded us that Europe has seen a very significant growth over the last few years, and so did North America over the previous several years. My question is regarding the reset that you're having in Wholesale distribution in Europe, which looks a little bit like an unwinding of this growth. And what is going to be the delta between more organic wholesale distribution or reflecting demand as compared to what looks in retrospect as being a bit of an inflated market size? So what kind of gap are we looking at? Let's say, it's a 10%, it's a 15%, it's a 5%?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [34]

--------------------------------------------------------------------------------

And Francesca, when you're talking about gap, you mean that what is the gap of between the U.S. and the European one?

--------------------------------------------------------------------------------

Francesca Di Pasquantonio, Deutsche Bank AG, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

Between the real potential and the inflated distribution, which has been generating year after year of very strong wholesale expansion.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [36]

--------------------------------------------------------------------------------

Yes. Again, I think, Europe is definitely not going to be as high single-digit growth going forward on a sustainable basis. I mean, this is a market in which really you have to consider a couple of things. On one side, we're going through the cleanup of the channel. And first of all, it's important that we all understand that this is not as severe as the MAP in the U.S. So the marketplace is much cleaner than it is in the U.S. So the impact of that is much lower. The other important thing is the commercial realignment of discounted practices across the different countries. I mean, we got certain countries where discounting was really the weight of the business in a way. And one country that should be an excellent example is Spain. And we got to a very natural realignment of our commercial discounting policy, discounting practice in Spain to align that to the rest of Europe. And we're getting a little bit of a disruption there. But again, the potential in this country is high. We've been able to prove in the past that we could grow Retail with Wholesale at the same time. And that's what we are expecting to see. So again, it is a place where we do believe we can continue to grow the portion of independence it's still a relevant one. And we want to have a tighter partnership with them on a go-forward basis.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

The next question comes from the line of Piral Dadhania.

--------------------------------------------------------------------------------

Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [38]

--------------------------------------------------------------------------------

Just following up on China, as you accelerate your growth in that market across different distribution channels, how clean are you that the market is -- sorry, how confident are you that the market is clean from a gray market and counterfeit perspective? There are some examples of other companies who are seeing significant gray market activity in China. So just want to kind of get an understanding of that. And could you just remind us how big your price gaps are for Ray-Ban in China versus Europe? And then secondly, do you have any update in terms of any work that's been done in terms of potential impact from any trade war escalation in terms of U.S. versus China? How big is the exposure? And any update there from a numbers or quantitative perspective would be helpful.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [39]

--------------------------------------------------------------------------------

Piral, let me start with China. How clean is the market? I think if you would ask me this question 1 year, 18 months ago, I would've probably give you a very different answer than now. I think the market is much cleaner now. We've done a lot of work with our asset protection team to go after not just diverter, not just the seller of fake products, but also to go after through the manufacturers. So there is a lot of work. With that said, China is China, right? And I mean, you know that you can't say, in my view, we are 100% clean in the marketplace there. But I can tell you because we look at it and we measure it, that we're much cleaner now than we used to be 12, 18 months ago. From a price gap standpoint, there is not much of a gap between Ray-Ban pricing in Europe and in China. So again, we got through the price immunization a few years ago. And now that we very much we are aligning our discounting practices, there is not much of a gap. With respect to the impact of the tariff and import between U.S. and China. Again, it's a bit hard, because there a lot of intercompany flows between other different legal entities. But let me make sure that we all put in perspective here, this is the automotive industry. This is an industry in which we have the capability as we do and as we've done in the past to switch capacity from one location to the other as necessary. And it might be required because of specific operational requirements. So we do have the possibility to switch production over to the U.S. Well, you will know we already have manufacturing capacity in Foothill Ranch. We do already have manufacturing capacity of lenses in several different locations. So to the extent that it's needed, we are ready to make that happen in a relatively short amount of time. Obviously, there hasn't been any specific indication on what could be the impact of this charge. But if that happens, we are ready to react.

--------------------------------------------------------------------------------

Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [40]

--------------------------------------------------------------------------------

Okay. Great. And maybe just a follow-up on the European Wholesale question that's been asked a few times. Could you just give us an indication of what direction the number of doors that you're selling into is doing in European wholesale? Is it declining? And by what magnitude, if so?

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [41]

--------------------------------------------------------------------------------

So the number of doors that we have is probably slightly declining because we're going through the selection process of making sure that our clients adhere with our commercial policies. So whenever the reason is bad compliance, we go through a decline of our doors over there. So the numbers are slightly declining.

--------------------------------------------------------------------------------

Alessandra Senici, Luxottica Group S.p.A. - Group IR and Corporate Communications Director [42]

--------------------------------------------------------------------------------

Yes, maybe just other piece of information, early this year, in Europe, we launched a new authorized retail agreement for our customers and this probably -- and also not only for Ray-Ban and Oakley but also for all our brands. So this could bring to a slightly reduction in number.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [43]

--------------------------------------------------------------------------------

Absolutely.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

We currently have no more questions in the queue. (Operator Instructions)

--------------------------------------------------------------------------------

Alessandra Senici, Luxottica Group S.p.A. - Group IR and Corporate Communications Director [45]

--------------------------------------------------------------------------------

Okay. So given that there are no other questions. We thank you very much for your attention for listening to our call. And as usual, Investor Relations team is available for any follow-up questions. We wish you all good evening, and of course, also a great summer. Bye-bye.

--------------------------------------------------------------------------------

Stefano Grassi, Luxottica Group S.p.A. - CFO & Executive Director [46]

--------------------------------------------------------------------------------

Bye.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Thank you for joining today's conference. You may now disconnect your handsets.