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Rating Action:

Moody's changes outlook on EssilorLuxottica to stable; affirms ratings at A2

21 May 2019

Paris, May 21, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the A2 long-term issuer rating of world leading prescription lens and frames maker EssilorLuxottica. Concurrently, Moody's has also affirmed the (P)A2/(P)P-1 ratings of EssilorLuxottica's senior unsecured MTN program and affirmed EssilorLuxottica's short-term issuer ratings and commercial paper ratings at P-1/ P-1. The outlook has changed to stable from positive.

We've changed the outlook to reflect a degree of uncertainty for stakeholders stemming from corporate governance issues, tempering the positive pressure on EssilorLuxottica's credit profile," says Knut Slatten, Vice President -- Senior Analyst at Moody's and lead analyst for EssilorLuxottica.

The list of affected ratings are as follows:

Long term/short term Issuer ratings affirmed at A2/P-1

Senior unsecured ratings affirmed at A2

Senior unsecured MTN Program ratings affirmed at (P)A2/(P)P-1

Commercial Paper ratings affirmed at P-1

RATINGS RATIONALE

Today's stabilization of EssilorLuxottica's outlook reflects Moody's view that a longer track record of operating as one entity is required for further upward pressure to build in the future, although quantitative credit metrics are at a level that could be commensurate with upward pressure on the ratings. Whilst operating performance has been good since the deal to combine the two entities closed on October, 1 2018, EssilorLuxottica's credit profile has been tempered by developments related to its corporate governance which have created a degree of uncertainty for stakeholders. Nevertheless, the stable outlook reflects Moody's expectations that EssilorLuxottica will continue to perform strongly over the coming quarters, allowing the combined entity to continue to display credit metrics that make it very solidly positioned in the A2 rating category.

Whilst some of the corporate governance issues now appear to have diminished, further evidence of a smoothening of the integration, both on an operational level and at the executive level, could lead to positive rating pressure over time. Moody's continues to believe that the combined entity exhibits a certain degree of event risk as Essilor emanates from a research-driven organization and its corporate culture may be different from that of Luxottica, which is more oriented towards consumer brands and fashion. At A2, EssilorLuxottica remains very strongly positioned in its rating category with some headroom for potential discretionary spending.

--AFFIRMATION OF EXISTING RATINGS

The A2 issuer rating continues to reflect the positives of the combined entity. Essilor and Luxottica have complementary businesses that provide the opportunity to offer customers combined solutions including Essilor's lenses and Luxottica's frames, thereby driving the value of their products. In addition, Luxottica has gained access to Essilor's network of independent opticians for the sale of their frames and sunglasses. Similarly, Essilor will increase the penetration of its brands within Luxottica's extensive network. In the first quarter of 2019, the company reported higher penetration of the antireflective and Transitions lenses into the LensCrafter network which supported the optical chain's results during the period.

EssilorLuxottica's A2 rating continues to reflect (1) its position as the global leader in corrective lenses and eyewear market by a large distance to its competitors, illustrating the group's strong innovation capabilities and strong brand portfolio; (2) the group's wide offering within its product category and its vertical integration, allowing it to cater to all customers and develop strong relationships with opticians; (3) a very solid track record of steady growth and resilient operating performance; and (4) the group's strong financial profile, underpinned by a healthy free cash flow (FCF) generation.

EssilorLuxottica's A2 rating also factors in (1) the group's concentration of sales generated by its corrective lenses and frames business, as well as relative concentration in the US market; (2) the still subdued economic environment in some of the group's key markets, which can weigh on lenses' renewal rates or result in some trading down by consumers; (3) the risk of a competitor making a breakthrough innovation and; (4) some uncertainty around appetite for future external growth.

--LIQUIDITY

Moody's expects EssilorLuxottica's liquidity profile to remain excellent over the next 12 months. We expect the combined group to generate free cash flow (after dividends) in excess of EUR1 billion in 2019 for then to steadily increase thereafter partly driven by the achievement of EUR420-600 million of cost and revenue synergies that the company has set out to achieve.

At the end of December 2018, the combined entity had cash balances of EUR1.8 billion and outweighing current liabilities of EUR1.1 billion. A further liquidity cushion is provided by access to EUR2.3 billion worth of undrawn bank facilities.

WHAT COULD CHANGE THE RATING UP/ DOWN

Upward pressure on EssilorLuxottica's A2 rating could develop if there is evidence of good execution of the integration plan, commitment to a higher rating and a longer track record of operating as one entity. Quantitatively, upward pressure could build on the rating if the company maintains a ratio of retained cash flow (RCF)/net debt above 35% and a ratio of (gross) Moody's adjusted debt/EBITDA below 1.5x on a sustainable basis.

Downward rating pressure on the A2 rating could develop if the performance of the company weakens sharply resulting in RCF/net debt declining to below 25% and (gross) debt/EBITDA moving above 2.5x for a prolonged period of time (including Moody's adjustments). A temporary deviation from these metrics could be accommodated in the event of a larger M&A transaction.

The principal methodology used in these ratings was Consumer Durables Industry published in April 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Knut Slatten
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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