Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lovisa Holdings Limited Annual General Meeting. I would now like to hand the conference over to Mr. Brett Blundy, Chairman. Please go ahead.

Good afternoon, ladies and gentlemen. Welcome to the Lovisa Holdings Limited 2021 Annual General Meeting. My name is Brett Blundy, I am the Chairman of Lovisa. It is now past 4:30 p.m., and I'm advised that we have a quorum and I declare the Annual General Meeting of the shareholders open today. In light of the restrictions imposed as a result of COVID-19, we have elected to hold the meeting virtually. Every effort has been made to ensure that it runs smoothly. We have today published on the website and on the ASX online guide, which explains how to attend and participate in the AGM virtually. If we do encounter any technical difficulties, and I am unable to chair the meeting, my fellow director, John Charlton, will take over as chair until we're able to be reconnected. The Board has temporarily appointed John as Deputy Chair for this purpose, with the appointment as Deputy Chair ending at the conclusion of this meeting. If we do encounter technical difficulties, which result in us being unable to continue the meeting, I will adjourn the meeting for 30 minutes, after which the meeting will be reconvened. If the meeting is unable to be reconvened, we will adjourn the meeting to a time and place to be announced and lodge an ASX release setting out the next steps. I would like to take the opportunity to introduce to my fellow directors. We are present, thankfully, together. I have Tracey Blundy, Non-Executive Director; I have Jim King, Non-Executive Director; online, Sei Jin Alt, who is based in the U.S.A.; and online, John Charlton, who is in South Australia. I'd also like to take the opportunity to introduce our new executive -- our newest Executive Director and the new Global Chief Executive Officer, Victor Herrero.This is Victor's first AGM since his recent appointment. It is very exciting. Victor, welcome to have you on board. He's officially arrived in Australia and been in the role for 10 days. Also like to welcome Shane Fallscheer, who's in the room. Shane is working closely with Victor to ensure a smooth handover. Also Chris Lauder, who will read out any written questions submitted during the meeting. As well, we have Rachel, who is our partner at KPMG on the line and is also the company's auditor. Traditionally, the Chairman presents an address at the AGM and the Managing Director would then present an operational update. However, given the virtual format of this meeting, we have taken a different approach. An operational and trading update was lodged on the ASX this morning which contains an update on current trading conditions. I therefore don't intend to formally present this update at the meeting today. I will now outline the procedures for the meeting. Voting on the resolutions will be conducted by the way of poll using the electronic voting card you should receive after clicking Get a Voting Card button. Shareholders can also submit written questions during the meeting by clicking on the Ask a Question button. Or if you would like to ask a question live on the call, please follow the instructions on how to join the meeting by phone included in the virtual meeting guide previously issued with the Amended Notice of Meeting and available on our website. I do encourage shareholders who have questions to actually submit them as soon as possible. If you do have any trouble using the platform, please check the online portal guide on our website or contact the help lines shown on the screen. We will now deal with the formal business as set out in the Notice of Meeting. And at the close of the formal business, my fellow directors and I will answer any general questions already submitted as well as those submitted during the meeting. There are 4 items of business on the agenda today. As we set out in the Amended Notice of the Meeting, namely items 1, 2, 3 and 5, with item 4 having been removed in the Amended Notice of Meeting, and therefore, not for consideration today. I will introduce each item separately and then answer any specific questions from shareholders in relation to the item of business. After any discussion on the item, I'll advise the proxy votes. The proxy votes that have been submitted will be set out on the slides shown for each resolution. Valid proxies have been received from shareholders representing 79,720,462 shares that being 74.2% of the company's issued capital voting either for, against or with discretion for all resolutions. As indicated on the proxy form and in the Notice of Meeting, my intention as Chair is to vote all discretionary or undirected proxies held by me in favor of each resolution. Our share registry provider, Link Market Services, will conduct the voting by way of poll, and Andrew Farrell of Link will act as returning officer. Votes will be counted either at the end of the meeting -- sorry, they will be counted after the end of the meeting and results published on both the ASX and Lovisa website. Shareholders can cast their vote using the electronic voting card received after validating online registration. To validate registration, you'll be asked to enter your securityholder reference number or holder identification number, plus the postcode if you're in Australia or country if you're outside of Australia. To then cast your vote, click the Get Voting Card button. If you are intending to vote, you'll be able to finalize and submit votes up until 5 minutes after the meeting ends. I'll remind you at the end of the meeting. With that, we move to the first item of business, and that is to receive and consider the financial report of the company for the year ended 27th of June 2021 together with the Director's Report and the Auditor's Report. Chris, have we received any specific questions in relation to the financial statement?

No written questions at this point. Operator, are there any questions on the phone in relation to this agenda item?

No, Chris, there are no questions at this current time.

Thank you.

As there are no questions in relation to the financial statements, we shall move to the next item of business. Thank you very much. Item 2. Item 2 relates to the adoption of the Remuneration Report. The Remuneration Report, which sets out directors and executives' remuneration for the financial year ended 27th June 2021, must be submitted for adoption by shareholders. The Remuneration Report forms part of the Directors' Report and is set out in the Annual Report. The Board supports the adoption of the Remuneration Report and recommends that shareholders vote in favor of this resolution. Chris, do we have any questions specifically related to the Remuneration Report?

Yes, Brett, we've got one question specifically tied to this agenda item. And it's from Mike Robins from the Shareholders Association. It says, "We are sorry to see the Founder departing after creating such able company and wish him well. Can you tell us how much, if any, of the outstanding LTIs from 2019 and 2020 were paid out given he didn't finish either of the 3-year terms?"

Mike, thanks for that question. We wholeheartedly agree with Shane's departure being a historic moment for today. I'll hand you to Chris to answer the specific part about 2019 and 2020.

Thanks, Brett. So the 2019 grant has already passed. That didn't vest because the performance hurdles weren't achieved, so that they've lapsed and the 2020 grant will lapse because Shane would not be employed at the end of the performance period. So neither of those will pay out. Brett, anything else to add?

So I think the short answer to that, Chris, was no. Any more questions?

Are there any questions on the phone? Thanks, operator.

No, Chris, there are no questions on the telephone.

Thank you. There are more questions related to this topic, but they're in general business, so we'll cover them at the end.

Okay. Thank you. I can confirm there's no further questions on this resolution. And the proxy votes received in relation to the resolution are now shown on the screen. I now propose resolution 2 as set out in the Notice of Meeting and put the motion to a vote. If you haven't already done so, please cast your vote now. We will now move to the next item of business, which I will hand over to Jim King to introduce as it concerns my own reelection. Thanks, Jim, over to you.

Thanks, Brett. Item 3 relates to the reelection of Mr. Brett Blundy as a Director of the company. Under country -- the company's constitution and ASX listing rules, a Director who is not Managing Director, must: one, stand for election at the first AGM following their appointment; or two, not hold office without reelection beyond the third Annual General Meeting, at which the Director was last elected or reelected. We know a Director is required to stand for election or reelection under either well or 2 above. The Board may determine which director will stand for reelection. Accordingly, Mr. Blundy has elected to retire as a Director at the conclusion of the meeting and being eligible offers himself for reelection by shareholders at the AGM. Brett was appointed as a Non-Executive Director of the company on the 1st of November 2018, and is also the Chairman of Lovisa, Co-Founder and substantial shareholder of the company. Brett is one of Australia's most successful retailers and entrepreneurs and brings a wealth of retail and leadership experience to the board. He's Chairman and Founder of the BBRC, a private investment group with diverse global interest across retail, capital management, retail property, beef and other innovative ventures. The board, excluding Mr. Blundy, supports the reelection of Mr. Blundy and recommends that shareholders vote in favor of this resolution. Chris, have we received any specific questions in relation to Brett's reelection?

Yes, we have, Jim. 2 questions on this agenda item. The first one is from Stephen Mayne. He asks, "How much would the Australian tax rate have to reduce by the temp rent to move that from the most famous European tax haven, Monaco to Australia? In what year was Brett's last tax paying resident in Australia and does the management of its tax affairs in any way influence our dividend or capital management policies?"

What do you mean? These questions are a personal note. These questions are a personal note. I'm not convinced that some of these questions -- and some of these questions need to be answered in the way in which the question was asked because they don't really relate to the management of the business. So I can tell you that Brett is a resident of Monaco. He has been a resident offshore for a number of years. He lives there with his family as he has an international business. And in fact, it's much easier to manage the international business part of the world. And the relation of does the management of these tax fairs in any way influence our dividend or capital management policies, as Chairman of the Board, I can say absolutely, categorically, no. Chris?

Thanks, Jim. The next question is also from Stephen Mayne. "Congratulations to Brett for being, along with Holman Lou, Australia's most successful retail entrepreneur with multiple successful plays, including Sandi, Brand Things, Accent Group and now Lovisa. Is Lovisa his proudest and most successful play of all? And what is the average purchase price for his 41% stake, which is now worth around $1 billion with the stock at $22.07 even after today's 3.3% fall?"

I can answer that. Look, we've just had a farewell of Shane Fallscheer today. And Brett took us back to the start of Lovisa. He and Shane started this and Brett backed Shane for nearly 30 years. It's one of the great success stories, it's one of the great success stories, and I can say again that. And in relation to his average purchase price or 40% stake, he was an original shareholder. The fact that it's now -- that the stock is worth what it is now is a result of Brett's foresight and his mentoring of Shane. And I think we should all be very proud of the stock being over $22 -- at $22. Those have been shareholders have all shared in the success of Lovisa. So thank you very much to Brett and Shane for their wonderful series of this business over the last 14 years.

Thanks, Jim. Operator, are there any other questions on the line?

No, Chris, there are no questions on the phone at this time.

Thank you.

I now propose resolution 3 as set out of the Amended Notice of Meeting and put the motion to a vote. If you haven't already done so, please cast your vote now, and I will -- cast your vote now. Allowing you to do that, I will now hand back to Brett for the next item of business.

Thanks, Jim. As I noted earlier and as set out in the Amended Notice of Meeting, item 4 was removed from the agenda as it related to the grant of securities to Shane Fallscheer, which is no longer relevant and has been replaced by item 5, which relates to the approval of the grant of securities to our new Director and Global CEO, Victor Herrero. The details of the grant included in the explanatory statement accompanying the Amended Notice of Meeting. The Board supports the grant of securities and recommends that shareholders vote in favor of the resolution. Chris, have we received any specific questions in relation to the proposed LTI grant for Victor?

Yes, Brett. There's 2 here. So let me just get them up. So the first one is from Mike Robins from the Shareholders Association. "This resolution permits the payment of up to $68 million over 3 years to the CEO, which is more than tenfold higher than companies in your peer group offer their CEOs. Whilst we understand that the EBIT hurdles are substantial, can you explain what it is acceptable that the Board can make such an astronomically large offer?"

Thanks, Mike. This is Brett. The question around remuneration and packages is an enormously difficult one for the Board. The replacement of Shane, finding the right person to take the lead and continue the growth and deliver on the opportunities that we have from now and into the future is always a challenge. We can only say that we have put together the package that attracted the exact right person to be able to take Lovisa from what it is today and ensure that we deliver on our global aspirations and the enormous runway that we have in front of us. And in the sense of our peer group. I can't help you because I'm not sure what peer groups you were referring to. But I would like to point everybody in the right direction that our peer groups are not, from our perspective, Australian retail companies. We operate in a global market. That's where our growth is coming from. That's where it will come from. That's what will allow us to deliver continuously into the future. So we do operate in the world, our peer companies are in the world. And this package from my perspective is very much a package that is required. It's very much a market package. But thank you for the question.

Thanks, Brett. The next question is from Stephen Mayne again. "This is one of the most generous incentive grants we've ever seen offered to the CEO of an ASX-listed company. The private equity style arrangement where Victor could potentially make around $70 million equivalent to almost 3% of the company. Could Victor comment on whether this arrangement is comparable to pay deals he has had elsewhere? And do both he and the Chair agree that having an EBIT hurdle creates an incentive Fed-funded debt acquisitions -- big debt-funded acquisitions?"

I'm not sure that it's appropriate for Victor to comment on his package. Victor didn't vote on it and is excluded from it. But I would probably refer to the same answer to the previous question because it's important to point out that we may be an ASX-listed company, but we are very much a global company. The requirement of running a global company is extreme in the effort and the requirements of time, commitment and energy. The idea that we might end up transferring 3% of the company is something that is very much on the minds of the Board when we think about these things. It'll probably be a good day for all of us, should that happen. And we perhaps look forward to that happening. Chris?

Operator, are there any questions on the phone?

No, Chris, there are no questions on the phone at this time.

Sorry, there is -- that's all. Thanks, Brett.

Thanks, Chris. I can confirm that the company has received the following valid proxy votes in relation to the resolution. The proxies are shown on your screen. I now propose resolution 5 as set out in the Amended Notice of Meeting and put the motion to a vote. If you haven't already done so, please cast your vote now. We have now dealt with all items set -- sorry, I'll start again. We have now dealt with all items of business as set out in the Amended Notice of the Meeting. I now declare that the polls in respect of each item will be closed in the time, which is 5 minutes after the time the meeting is closed and formally ask Link Market Services as returning officer to count the votes at the expiry of that period. I will now address general questions raised by the shareholders both in advance of and during the meeting to the extent that they have not already been covered. Our Company Secretary will read out any questions submitted in writing, and I will provide a response. Or where relevant, I will hand the question to the appropriate director. We will also take any questions live on the phone. Over to you, Chris.

So the first question is from Mike Robins of the Shareholders Association. "Lovisa received about $18 million in JobKeeper payments in FY '20 and '21. They made profits and also issued dividends to shareholders in both years and awarded the CEO of the maximum STI and LTI in FY '21. May I ask, A, how much the former CEO earned in total in the last year; and B, why Lovisa has chosen not to hand back the substantial JobKeeper payments as most prominent public companies have done, given how well the business has survived through COVID?"

Thanks, Mike. Chris, while your -- actually, I think the total package for Shane is set out on Page 28 of the report. And I would -- might refer you to that, it's in full detail there. In terms of JobKeeper, I think it's important to take this opportunity that around the world Lovisa has received support from multiple, indeed, almost all governments and landlords in some form or other. In Australia, it's called JobKeeper. We've been enormously grateful for that support. Lovisa would have been in a lot of trouble without that support. Indeed, as a matter of record, one of the only countries not to have some sort of assistance program was Spain, where we neither had assistance from our landlords or any assistance from the government in terms of supporting the employees and the team members. And we unfortunately closed that business. The specific details of JobKeeper in Australia, I can share with you that all -- and not only just JobKeeper in Australia, but other countries, it's completely being used to the purpose that it was designed for, that is being enormously well received by the team and has been very helpful in making sure that we can survive COVID. Thanks for the question.

The next question comes from Stephen Mayne again. "Could the CEO and Chair both comment on what steps we have taken to ensure we are complying with Australia's modern slavery legislation? From which countries are we most reliant on in terms of accessing fast and affordable jewelry? Are we comfortable that workers in these countries are being paid a fair wage and are not being exploited?"

I think, Shane, might -- would that be appropriate for you to...

Sure. Good afternoon, everyone. So Lovisa has -- had a modern slavery policy for a number of years now, and we continue to revise that. So each year, we revisit this policy to ensure it remains updated and relevant to the current markets that we source our products and goods from. Obviously, China at the moment is the predominant market in which we source our goods from. So we continue to monitor market conditions and that Modern Slavery Act to ensure that we comply. Thank you.

Okay. The next question comes from Mike Robins from the Shareholders Association. "This is a business for which women are the majority target market. Can you advise the percentage of women who are direct reports to the CEO and in the middle management, please?"

I think, Shane, you might answer that one again. Thanks.

Sure -- I currently have, handing over to Victor, we have 6 female and 3 male direct reports.

The next question comes from Peter Kelly, Aero. "I had the opportunity to attend more annual meetings this year than in the past 3 years combined, thanks to the virtual nature. If we can get back to in-person meetings, will you commit to also maintain some aspect of virtual meeting to allow more shareholders to attend?"

That's an interesting and good question. I'm not sure that we have a perspective. We haven't actually thought about that. So we might take that on notice. I for one would think that virtual meetings are very efficient, and they allow much more participation. But equally, we miss the in-person. So let's see what happens. Chris?

The next question comes from Simon Louise. "Regarding the trading update, one, can you provide some details on which country/cities the 31 stores have been opened in? Two, what is reasoning behind the decision to open Cyprus stores as a franchise versus direct company ownership?"

We'll let Shane answer this question.

To answer the first part, the bulk of the stores that have been opened are in the U.S. with some stores opening in France. So -- and a small handful in Australia. So the majority of those store openings have been in the U.S. The reasoning behind Cyprus being a franchise market, we have a certain criteria for any markets that we go into, whether they're company owned or franchise. Due to some of the complexes -- complexities in the market of Cyprus and then the potential for store growth, we took a view to operate in that market under a master franchisee, reminding everyone that our basic model in a franchise market is we supply the store design and the stock as an ongoing basis. And therefore, the local operator trades at local level with the team and any of the local issues, company, et cetera. So that way, we don't have a large amount of exposure in markets that we don't believe have got the potential to grow to a substantial amount of stores.

The next question is from Stephen Mayne. He asks, "Rather than getting minority shareholders to help pay for this massive incentive grant, did Brett consider offering Victor 2% to 3% of his own stake in the company? Also, can Brett please comment on the first strike on the Remuneration Report? And does he agree we will probably suffer a second strike and a board's bill vote next year unless the structure is amended?"

Thanks, Chris. Stephen, I don't think the first part of the question is even a relevant or sensible question. In terms of first strike on the Remuneration Report, these things need to be carefully considered, and we need to understand why I do agree that, that's not something that we would like to see happen. The Board and I will take on the views of, I think you're calling the minority shareholders. I'm not sure that's the right way to really talk about the shareholders that sway the vote on the remuneration, but I accept it. And we will do our best to make sure all views are heard and understood.

Thanks, Brett. Operator, are there any further questions on the phone?

No, Chris, there are no questions on the phone at this time.

Thank you. I think we've covered the relevant questions already that have been sent through in writing. So I think that covers everything today, Brett.

Thank you, Chris, and thanks for those questions. Ladies and gentlemen, as there are no further questions, that does bring us to the end of the meeting. In a moment, I'll formally close the meeting. If you're intending to vote on the formal business of the meeting, you should now finalize and submit your votes as voting will close in 5 minutes time. As mentioned earlier, the results of the voting will be released on the ASX once the votes have been counted after this meeting. Before I do call the meeting to a close, I would like to really take this opportunity with all the shareholders of Lovisa to thank Shane. As Jim said just before, Shane Fallscheer and I have worked together for more than 35 years, which is an extraordinary amount of time. Shane's character is of just unbelievable integrity. And rather than acknowledge to Shane that on behalf of all the shareholders that this is essentially the end of the tenure of him being the CEO and Managing Director of Lovisa. I just wanted to point out and thank Shane formally. Shane is the creator of Lovisa. We all exist, thousands and thousands of team members exist, our stores exist, the millions of customers that we are serving all around the world, it's all come about because Shane created Lovisa from an idea to the first store to now a global company across 21 countries or 22 countries in the world, and that is a remarkable achievement for any individual. It's a remarkable achievement for any company in Australia. I sit here in and along with the Board is proud of that achievement and that result, and we owe enormous thanks to Shane Fallscheer for what he has done. I have no idea how to thank Shane for the 12 years, except on behalf of the Board and all the shareholders. Shane, enormous gratitude and thanks. And we wish you nothing but the best, and we appreciate sincerely the creation of Lovisa and the great company that it is today. Thanks so much. Thank you for indulging me on that. I'm sure most shareholders are heart felt as they should be. Thank you all for your attendance, and I formally declare the meeting now closed. Thanks.