Ladies and gentlemen, thank you for standing by. Welcome to the Signet Jewelers Limited Q2 Fiscal 2017 Results Conference Call. During the call all participants will be in a listen-only mode. After the presentation we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] Please note that this call is being recorded today August 25, 2016 at 8:30 A.M. Eastern Time. I would now like to turn the meeting over to your host for today's call James Grant, VP of Investor Relations. Please go ahead, James.

Good morning and welcome to our second quarter fiscal 2017 earnings call. On our call today are Mark Light, CEO; and Michele Santana, CFO. The presentation deck we are referencing is available under the investors section of our website, signetjewelers.com. During today's presentation we will in places discuss Signet's business outlook and make certain forward-looking statements. Any statements that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. We urge you to read the risk factors, cautionary language and other disclosures in our annual report on Form 10-K. We also draw your attention to slide number two in today's presentation for additional information about forward-looking statements and non-GAAP measures. And now, I will now turn the call over to Mark.

Thanks, James and good morning, everyone. I would like to start by discussing the key points I want you to take away from our second quarter financial results presentation. First, Signet's sales and earnings were disappointing in the second quarter, given no sign yet of a rebounding trend. This negatively impacts our annual guidance. We'll elaborate on what has happened and the impact to guidance later in this presentation. Second, our synergy work streams remain solid and their financial impact is still intact. We have a long list of synergy activities, which I'll discuss in a few moments. Although some initiatives are unfavorably impacted in a lower sales environment, most are not, so we still expect to deliver on our synergies. The third point I want you to takeaway is that we bought back 4% of the company during the second quarter and several directors and officers made open market purchases as well. We did this in response to our valuation and to demonstrate our confidence in Signet. Fourth, our credit strategic evaluation is moving forward. As you know, we are analyzing opportunities to create shareholder value by optimizing or monetizing our portfolio while continuing to do business with our customers. I have a few comments later, but the bottom line is this, either way we expect shareholder value to be created. Fifth, we are pleased to announce that Signet and Leonard Green & Partners have entered into a strategic partnership in which the private equity firm [indiscernible] $625 million in Signet through a convertible preferred security. Details are described in a separate release. And lastly, and most importantly, our holiday season initiatives are numerous, well tested and ready. So let's get into some more details. So why the disappointing results in the second quarter? What happened? Well it was…

Thank you, Mark and good morning, everyone. All right so let’s start with our second quarter sales performance. Signet's comps decreased 2.3% against an increase of 4.2% in the prior year second quarter and that also compares to a two year hurdle rate of 9%. Now as Mark indicated of our comp sales decline about half of the decline was driven by oil and gas reliant regions. Total sales decreased 2.6% and on a constant exchange basis total sales decreased 1.3% for the quarter. So in looking at total sales and comp performance by operating segment, I’ll share some additional color. In Sterling Jewelers total sales declined 2.2% to $839 million, cost decreased 3.1% compared to an increase of 3.3% last year and that also compares to a two year hurdle rate of 10%. Sales weakness was most pronounced by store banner and geography, notably Jared stores and energy dependent regional economies. Now these declines were partially offset by higher sales of select diamond collections as well as fashion categories. The Zale jewelry operating segment's total sales decreased 1.6% to $331 million and 1% on a constant currency exchange basis. Comps were down 3% and that’s against a two year hurdle rate of 4.8%. So looking on a geography basis our Zale U.S. total sales were flat, comp decreased 2.2% and that's because a two year stack rate of 4%. In Canada total sales declined 9.5% or 5.9% on a constant currency basis, Canadian comp sales declined 6.8% and that’s because of two year hurdle rate of 8.2%. The Zale jewelry operating segment's decline throughout North America was also driven by weakness in energy dependent economies and again this was partially offset by sales of select diamond jewelry collections. Now our Piercing Pagoda total sales increased 7.8% to $57 million…

Thank you, Michele. To sum up we had a challenging quarter but we know why we have sound plans to address it. We posses numerous competitive advantage and expect to strengthen our leading position and gain profitable market share. I want to thank all Signet team members for their hard work and dedication. And with that we'll now take your questions.

[Operator Instructions] Your first question comes from the line of Simeon Siegel with Nomura. Your line is open.

Thanks, good morning guys.

Good morning, Simeon.

Hey, can you quantify anything this quarter you view more as a one-time hit maybe tied to PR issues, I mean you mentioned the reputation defence element and you adjusted [indiscernible]. How much was that, how much, if any do you think continues for how long? And then Michele can you also just in light of the comment you made, can you just talk to your ability to hit that Zales mid to long-term EBIT margin rate target in light of the synergy comments despite the weaker sales? Thanks.

Sure so in terms of the one-time cost that impacted second quarter in my prepared comments, I had indicated that was about $5 million. So close to about $0.05 per share impact. There will still be some additional cost related to that in Q3 as we look in terms of training some of the investments that we’re making with in-store technology around this area that maybe Mark wants to speak a little bit more too. So I would anticipate there is about $3 million or so factored into our Q3 guidance associated with that. And so before I answer your second question Simeon is there anything else you want to mention in terms of the investments in the store?

Well, we've been selling -- I've been selling jewellery my whole life, for about 30 years. And the most important part of selling jewellery is trust. And that the system that we have in place is a multi-step process right now, which we have full confidence in that. We're doing the right thing in that when we have a customer comes in we test the diamond in front of the customer. We map inclusions, we get sign up, we ship the product to our shop, then we check it in and repeat the sign ups and we check again to make sure the diamond is real and we map it again. So overwhelmingly we feel that we have a great process in place to ensure that our customers are getting what they expect to get. That being said we're taking the opportunity to test in the fourth quarter some new technology that relates to specific gem scopes that we're putting in place to some of our Kay stores that will not only have a view of the product that's being -- have a view of the product under magnification will also have a digital screen on top of the gem scope that will highlight the unique marks of everybody's diamond. Every customer's diamond is like a thumbprint, they have all unique marks to it, and we will mark those on a digital screen and then we will have the ability to digitally send over that picture to our customers via e-mail and keep it on our own file. So we believe by putting this type of new technology in place in our stores that we are enhancing and creating even more transparency to our customers and that will be a huge competitive advantage for us into the future.

And then Simeon following up on your second question in terms of the long-term EBIT margin adjusted that we have related to Zale and is there any impact that we see in a lower sales environment. Again Mark had mentioned in his prepared remarks, when you look at the synergies that we have in place and again synergies are flowing throughout the organization. But the majority of those synergies are not contingent on the top-line. They're really related to gross margin initiatives SG&A control. So at this point I feel confident in terms of our long range goals as it relates to our Zale margins.

Great, thanks a lot guys. Best of luck for the rest of the year.

Thank you.

Your next question comes from the line of Oliver Chen with Cowen & Company. Your line is open.

Hi, good morning. We had a question regarding Jared and Mark in your prepared comments you mentioned the fundamental issues at Jared. What are your thoughts on how this is manifesting with traffic and conversion and what should we look for in the back half as we think about Jared and the initiatives you're taking versus some of the issues you're pointing out around your work around customer and what you can do there? Also Mark on Leonard Green, just could you brief us on why this was the right time for this? And which aspect of their retail expertise do you expect to benefit from most over time? Thank you.

Thank you. The Jared fundamental issues, as I stated in my prepared comments, after reviewing and doing the intense research on our Jared customer and understanding how that customer is segmented differently than our Kay or Zale stores we focused on making sure that we understand that customer better and putting in the products, having the right advertising communication vehicles, talking to those customers specifically and making sure that we do what they believe is the best for the Jared customer experience. So we think starting with the chosen diamond, which we know is perfectly targeted to the Jared sentimentalist customer that tracks it all entirely through its journey we think is going to be a tremendous enhancement to the Jared business in the fourth quarter. It’s been testing very well Oliver and we continue to see enhancements at every store that continues to test the chosen diamond. So we believe once we have that in all of our Jared stores for the fourth quarter supported by a wonderful advertising television creative to really explain the journey of a diamond is going to be a huge enhancement to the Jared stores for the fourth quarter and it talks specifically to the customer’s segmentation of that Jared customer. We also have some initiative that we have in place on enhancing our selling tactics, and making sure that our customer is taken care of from the minute they come in the door and not passed around to different departments, while they’re in the selling area. We’re also testing certain -- I mentioned this pricing tactics and I won’t go into a lot of detail for competitive reasons; we have pricing tactics that we’re testing right now that we think can be an enhancement to Jared for the fourth quarter. And we’re also…

Thanks, Mark. And Michele on inventories could you brief us on how they may trend in the back half versus sales? And Mark I think sector wise I was -- you gave us a good briefing about the reality of the jewelry trends in terms of the market research out there what do you think happening with the market overall just given that the state of the middle income consumer seems okay, I'm curious about your hypothesis in terms of the industry at large because it’s been a resilient industry historically so this feels pretty new. Thanks.

So I’ll start with your inventory question Oliver, in terms of the back half of the year and how we look at our inventory first and foremost, we’re very much focused on inventory optimization that has been one of the key initiatives as it’s related to when we acquired Zale we did see an opportunity to really optimize the inventory level through the merchandise assortment. But with that said, we’re also acutely focused on the initiative that we have in the back half of the year, all the great initiative that Mark talked on the call in terms of with Jared, whether it’s our chosen Pandora, Vera Wang our Ever Us and product extension. So we’re not going to starve ourselves. We had a great pipeline initiatives so we’ll balance our inventory and our working capital management of those inventory levels with the growth in those initiatives for Q4.

And Oliver as you stated the jewelry industry over the years, years and years has been resilient and has grown over the last 10, 15, 20 years 3% to 4%. There are quarters that will dip and it happens in the jewelry, we’re not immune to economic issues out there. So the industry has consistently performed and Signet has consistently outperformed for years, the jewelry industry in retail as whole. What we think is happening out there is as we all know there is a lot of questions out there that whether it’d be what's happening with the Brexit that we believe affected the mindset of people in middle America across American and across the country. There is things obviously there is a presidential election, which is unique this year, and I think has some very unique characteristics that going to be affecting the mindset of Middle America consumers until we get through this. And quite frankly, it's just something that's happened before, and we think we're going to come out of it just fine. We just have to be focused on making sure we are doing what we know will do best is taking care of customers and continue to innovate and bringing exciting new products to the consumers out there in our markets. So we believe there is something just going on maybe in the geopolitical perspective, but once we get through the elections hopefully, we’ll see some stability and we will recover like we have year-after-year over the past years.

Your next question comes from the line of Brian Tunick with RBC Capital Markets. Your line is open.

Thanks. Good morning. I guess two questions. One, regarding the quarterly flow of the business in Q2, just curious between the reputational attacks, which I guess were around June, and then the weakness in the energy market. Just curious, if you can maybe talk through what you saw between those two issues and how the business had trended throughout the quarter? And then Michele, on the $1.1 billion buyback program, how much is embedded in your updated earnings guidance? Should we expect that to be completed in a pretty short time? Or is that going to be more into next year as well? Thanks very much.

As far as the reputational issues that arose in late May, there was some negative, negative social media perception of Kay in May and into June, but this completely normalizes, and we track this weekly that the social media perceptions have completely normalized into August and in July and into August. We measure on a regular basis, we look at our customer complaints, we look at social media, and we have some list in the end of May and into June. But like I said in July and into August it's all been normalized. We’ve done certain -- several different surveys to make sure that we understand what's being with the bad news and how the perceptions our Kay brand were and our Zales and Jared for that matter. And it’s impossible to really know for sure if it’s affected our sales or not. But what we do know is that the service we have taken and there are some independent surveys done by some sell-side analysts all confirm that the Kay brand is still very well perceived by consumers as is the Zales and Jared brand. But overall the Kay brand is still in very good-- the Kay brand equity is very strong as it ever has been. We -- and one thing you can look at by the way is our Kay brand actually did better compared to most of our other banners. So we don't believe that the publicity overhang is really affecting our business, but it's hard to understand specifically if it is or is not. So the surveys are key indicator for us and obviously sales are key indicator for us.

Yeah, and in terms of your question on the share buyback with the $1.1 billion, so in Q2, what we have done is we accelerated our planned Q3 and Q4 share repurchases into Q2, given the opportunity that was presented on the share price value. So year-to-date, we have $375 million repurchased as I mentioned in the comments, Brian. That is what factored into our EPS guidance and roughly that’s about $0.30 of the EPS if you equate that. When you think about the transaction as Mark had mentioned, the whole objective of the transaction from a financial standpoint is to be neutral. So we will repurchase $625 million, at least $625 million of shares related to that and that would commence this year.

And can I ask one final question. On the dollar earnings cut to the year, just curious, I mean, Q4, are you embedding, it seems like, negative comps in Q4 for the earnings revision?

Yes, so obviously, we didn't come out and give Q4 guidance, but it is implicit you can easily reverse engineer and get an idea of what the Q4 implied guidance would be. So there is a negative comp in Q4, however we do anticipate that that would look a little bit more favorable in terms of Q3. If you go back and you look at our past five years historical trends moving from Q3 to Q4, on average it's about 120 basis points acceleration between Q3 and Q4, which completely make sense given it's a key holiday gift giving period. We're on TV at that time at least eight weeks out of the year. So we would anticipate with all the initiatives to have some level of acceleration moving from Q3 to Q4.

We know to Michele’s point Brian, to Michele’s we know we studied this for years that when we're on TV we gain market share. And we’ve seen this consistently over the last five years and specifically when we're on TV in Christmas we're way towards at the highest level that we really get involved in that we gain market share when we're on TV.

Great, thanks and good luck.

Thank you.

Your next question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.

Thank you. Good morning. You called out bridal as soft for the first time in the while. And I just wanted to ask if you thought that this was a direct result of the unsubstantiated claims that you referenced. And also curious if you’ve seen any change in trend line in your repair revenue or warranty attachment. Thank you.

Thank you, Lorraine. Look it's hard to understand specifically like I said earlier that what's attached to the public relations issues [ph] and its effect on our business as a whole. We don't believe that is the reason for our bridal was not being as strong this quarter. If you look at some of our competitors that I've talked about their bridal business they also had soft sales in the bridal area for this quarter. We believe it's something that is a consumer mindset issue that relates to bridal and that they just want to get some stability and understand what's going on as a whole in the world and what's going on in the presidential election. But we don't believe, but it's hard to determine that the bridal business not being as strong as it has been in the quarter is due to the public relationships. But there is no direct correlation there is no way we can completely measure it. But again like I said we've heard throughout the industry and we’ve seen other publicly traded jewelry companies also have issues with bridal in this last quarter.

Yeah in terms of Lorraine to your questions on repairs and warranty attachments, repairs which Mark had mentioned in terms of synergies is a key synergy particularly on the Zale side. So we actually have seen an increase related to our repair sales and related margin associated with that not necessarily an increase in terms of repair claims. As it relates to the warranty attachment rate, we do continue to see an uptake in terms of those customers we see the value and purchasing our extended service plan that's primarily tied to again whether it's bridal or higher price collections such as our higher diamond jewelry collections, which we indicated was a relatively strong performance for us in Q2.

Thank you. And I thought the new system sounded interesting where you mapped each person's diamond. Do you planned to market this to your customers?

We first -- we need to get it in the stores, we actually created this ourselves internally, and so we're working with several vendors and working with our IT department and our purchasing department operation department. And we're first got to get it in the field and test it out. So we'll have it out in many stores this fourth quarter. And if it's going to be a success we think it is, but we may see an opportunity to market it. We see it like I said Lorraine that this could be a huge competitive advantage that Signet stores can have this technology that opens up transparency to our customers that engages them to even be more trusting of our people and our brands. So first of all we need to test it this fourth quarter, but we will have it in hundreds of stores. And with the hope that it will be successful and be able to take it to all of our stores next year. And we will market it if it's appropriate and we will wait and see.

Your next question comes from the line of Paul Lejuez with Citi. Your line is open.

Thanks, guys. Just curious when did you first start to see the energy markets weaken relative to the rest of the chain. And I'm curious if you have any specific different plan of attack there to address the weakness in those markets? Thanks.

So Paul it's Michele. Let me talk to just in terms of overall when we starting to see these trends. Actually if you go back to even Q3, we did start to see some trends in the energy reliant regions. Now that was predominantly up in like the Western Canada, the Alberto region, in Q4 we started to see a little bit more of a pronounced impact, started to see a little bit happening more in the Texas region. Q1 again that trend continued and we started to see it probably spread into a few more states on how we define that energy reliant region. But I would say most notably as we move shifted from Q1 into Q2 you really did see an acceleration in terms of those states or those oil reliant regions having an impact on our comp sales. So it's been an acceleration from Q3 last year into Q2 of this year.

And as far as targeting those markets with certain promotions or program, there is a fine balance here Paul that we have to take because when you have a market that's just not doing well with relative to macroeconomic issues, you don't want to just lower your margins and increase your promoting and just give away margins obviously or give away gross margin dollars. So we are testing and looking to see where we can find that fine balance in these specific markets and we’ll look to see there are some programs that we think will be beneficial. But we got to balance out to make sure that we understand that sometime you just can't push water up hill and you don't want to just give away gross margin dollar. So we are looking at it, we are testing some options, but we are going to be balanced on that front.

Got it. And just one follow-up, there was a change in your average transaction value a couple of the brands is that a function strictly of slowing bridal engagement jewelry or was there something else that impacted that was there just an overall higher level of promotions across the board? Thanks.

So in terms of the ATV and what you are referencing is the decline that was, I would say it was driven by a couple of things. It was the relative strength that the fashion jewelry gained over bridal is one element of it. Not so much I would say on the promotional side we saw that in Q1 we talked about Q1 in terms of the promotional event of the Mother's Day, but it's primarily merchandise mixed driven.

Thanks. Good luck.

Thank you.

And the last call there at this time for comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Hi, everyone. Good morning. Thanks for taking my question.

Good morning, Ike.

I guess Michele just you talked about Q4 basically kind of implying in that a little bit of negative comp or earnings growth, I guess I'm not looking for guidance or anything I'm just kind of curious because of the Zale synergies and the buyback and the cost opportunities, if we looked in the next year and let’s just to be conservative what we assumed the comps kind of remained in slightly negative territory. Could you still grow the bottom-line in that kind of environment in your excess full year? I'm just curious how you would talk about that.

So Ike and as you well said we are not going to obviously guide into next year I mean we are absolutely focused on Q4 this year and meeting the guidance that we've issued. With that said we have strong synergy flow through and there are additional synergies that we would achieve next year that would favorably impact our operating income. Combined with just our continued focus on cost control and savings, but outside of that I'm not going to entertain trying to give guidance for next year.

Okay. And then just a quick follow-up, I think Mark you commented about revamping and expanding the credit reporting, is that something that we should look for the next time you report or in the 10-Q when that gets filed I'm just kind of curious if you can elaborate on that?

So I'm going to jump in here on that one if you don't mind. So the comments that we have referenced is that when we look at our credit strategic review there really are two positions or two sides that we could be at it's either optimizing our current portfolio and in the case of optimization we will enhance our disclosures in the Q which include a number of elements. So it is when we make that decision as we move through and get to the completion of that review that's when you would anticipate to see enhanced disclosures related to the credit portfolio.

Got it, thank you.

You're welcome.

Thank you and thank you all for taking part in this call. Our next earning call is scheduled for November 22. Thanks again to everyone and good bye.

Thank you. Ladies and gentlemen, that concludes today's call. You may now disconnect.