EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Welcome to the EssilorLuxottica Q1 revenue 2022. [Operator Instructions] I now hand the call over to Stefano Grassi, CFO.

Good morning and welcome to our first quarter trading update. We are very pleased with the way we started 2022, despite some headwinds, like the COVID outbreak that hit several parts of the world and also the dramatic events related to the war in Ukraine. But Q1 has been a quarter of strong growth for the group, a quarter where our top line was up 38% on a reported basis, while on a pro forma basis, we're looking at the second consecutive quarter of double-digit growth, with sales up 11.5% at constant currency and 15.7% at current exchange rate. The key assets of the EssilorLuxottica group are in healthy shape. All the region posted solid growth in Q1, with EMEA and Latin America at double-digit pace, while North America was up 8% on top of a 6% in 2021 versus 2019 on a pro forma basis. Our key eyewear brands, Oakley and Ray-Ban, they both posted double-digit growth in Q1. Our vision care assets that represent more than 75% of our revenue base grew in excess of 9% at constant currency, thanks to a demand that continues to be strong pretty much in all the regions around the world. Last but not least, our sun business is back again with double-digit growth very much led by our luxury portfolio. But before we start the journey around the different geographies, let me give you just a quick flavor on how we did perform in our 2 operating segments. The Professional Solutions division posted top line slightly south of double-digit pace at 9.6% at constant currency, an acceleration versus the fourth quarter trend at 6.8%, with North America on a high single-digit territory and both EMEA and Latin America at double-digit pace. Our Direct to Consumer segment continued its outstanding performance, posting the fourth consecutive quarter on a pro forma basis, a double-digit pace at 13.5% versus Q1 2021. Our brick-and-mortar comps were up double digit. Our e-commerce business was up 9% versus 2021 and up over 80% versus 2019 level, proving once again that our multichannel-oriented strategy is definitely going into the right direction. But now let's start our journey around the different geography. And on Page 12, as usual, let's start with North America. North America posted a growth in top line at about 8% at constant currency. The demand in the market is still there, probably a bit softer in the month of January due to the spread of COVID cases around North America. In the Professional Solutions side, the overall growth in the quarter was on the high single-digit territory for the frame business with double-digit pace in key accounts, double digit in e-commerce partner, double digit in the sport channel, with a strong support from the sun business that was up, again, double digit, thanks to a luxury brand portfolio support. On the lens side of the business, our branded portfolio reported solid growth in Q1, also supported by the new Transition XTRActive and by Varilux that during Q1 posted a top line up on the mid-single-digit territory. Moving on to retail, the overall comps were at the low single digit, with Sunglass Hut that performed in mid-single-digit territory led by our international store location as the U.S. border reopened to international tourists during the latter part of the fourth quarter, while LensCrafters were actually on the low single-digit territory with a soft start in January due to the Omicron cases and a tougher comparison base during the last 2 to 3 weeks of March as we anniversaried the stimulus pack in the U.S. and a strong acceleration of the vaccination campaign in Q1 2021. And let's touch on e-commerce: Our e-commerce business was south of double digit with our 3 key branded eyewear websites -- Oakley.com, SunglassHut.com and Ray-Ban.com -- that all posted double-digit growth during the course of Q1, but now let's move to EMEA. EMEA posted a remarkable acceleration in the top line. On a pro forma basis, EMEA posted a first half of 2021 negative 1%. In the second half of the year last year, we were up 8.5% versus 2019. And now in the first quarter 2021 (sic) [ 2022 ], our top line grew 18%, with both Professional Solutions and Direct to Consumer at a double-digit pace. On the Professional Solutions side, Spain, Germany, U.K., Eastern Europe and Turkey, they all delivered double-digit growth also helped by a favorable comparable base, while Italy and France were, respectively, flat and a low single digit during the course of Q1. Our branded lens portfolio grew at mid-single digits driven by price/mix, with Eyezen, Varilux and Transition very much leading the way in Q1. On the frames side, we posted double-digit growth led by a strong sun business even in Europe and by a strong delivery of both our Ray-Ban and our Oakley brand. If we now move to retail for a second. Comps were in excess of 25% compared to the first quarter 2021. Clearly the COVID restrictions that you remember applied last year in Europe created some easy base of comparison that more than offset, I would say, the headwinds deriving from the uncertainty of the war in Ukraine. In Europe, all our main banners -- Générale d'Optique, GrandOptical, Apollo, Salmoiraghi & Viganò and Sunglass Hut -- they all posted double-digit growth mainly driven by volume, with the price/mix as a nice add-on. Moving to Asia Pac now, top line up 3% at constant currency. In Asia, we posted the best performance during the last 5 quarters on a pro forma basis. Southeast Asia and Japan, they were all double digits, while our performance in Greater China was flat, with professional solution in mid-single digits with strong delivery of the Stellest lenses that, during the course of the first quarter, sold more than half of the Stellest lenses that we sold in the entire 2021 in China. And this remarkable delivery happened despite the severe consequences of COVID-related restrictions that impacted Hong Kong as well as Mainland China. And just to give you an idea: In Hong Kong, over 95% of our store base in the month of March were impacted by either closure or severe traffic decline due to local restriction for COVID. That number, it's 75% in Mainland China, so materially impact in our -- disruption, I would say, due to the COVID restriction in China. In Australian retail, we had a strong rebound in Sunglass Hut, thanks to a reopen up to tourism with Australians that now can move around the different states. While our OPSM business, our optical retail business in Australia, decelerated in a negative territory due to a soft January due to the COVID cases buildup in the month of March that was impacted by severe floods, but we have confidence that during the course of the present quarter things will progressively improve. The last region for today is Latin America. And it's actually the best performer of all the region, 21% in top line growth at constant currency. Both Professional Solutions and Direct to Consumer posted double-digit growth, with Brazil, Mexico and Argentina, all of them at double-digit pace. In Brazil that, as you well know, is our largest country, we grew close to 20% in our B2B channel with lenses that were up on a high single digit with our branded lens portfolio that posted a double-digit growth and our frame business that was up in excess of 30% compared to the first quarter of 2021. Now let's touch on retail, where our comp sales were double digits on both optical and sun retail chain with double digit in GMO and the growth that for all the main GrandVision chain in the region were double digits. But now we finish our journey around the different geography, and let's move to our Q&A session.

[Operator Instructions] We take our first question from Susy Tibaldi from UBS.

I'll stick to 2 questions. So the first one would be on the U.S. market, which is the area where you are facing the toughest comps. And so it's reasonable to assume that there we are seeing a, let's say, deceleration which in reality is a normalization. But can you help us understand to what levels this normalization is taking us? Let's -- is it fair to assume that in the DTC you are maybe seeing around low single-digit growth, whereas the professional solution is outperforming? So maybe overall the U.S. is growing around low to mid-single digits, something along those lines? It would be very helpful to know because, I mean, it's a very important market for you. You are doing a lot of -- in terms of work within the business with synergies, et cetera, so if you can give us an indication of what kind of growth you started to see from the second part of March and in April, it would really, really help us. The second question is on inflation/supply chain. So inflation, clearly pretty high everywhere in the world, but for -- in your case specifically, the verticalization really helps. But are you seeing -- what kind of inflation are you seeing? Are you still comfortable that you can offset it internally? Or are you considering also potentially raising prices on some parts of your portfolio at some point during this year?

Susy, let me take your 2 questions. First one, on the U.S., as you pointed out, yes, we have a tougher comparison base in the U.S. very much due to the 2 things that we mentioned before, the acceleration of the vaccination campaign and -- in 2021 and the stimulus pack that was announced during the latter part of March 2021. I think what we see in U.S., from a shipment perspective on the Professional Solutions side, it's still a performance that I will define solid. There is a bit of a timing difference between April and May due to the different timing of shipment, days of shipments. From a retail perspective, I would say we are happy with the trend. It's aligned with our expectation, considering the fact that we have a tougher base of comparability. With respect to inflation, we feel the impact of inflation like anybody else in the market. We mentioned last time that inflation, it's on labor, it's on shipping costs, and in a way, it's on materials. And that is something that's obviously -- and in utilities. But if I have to look at our first quarter, that inflationary impact has been broadly and largely managed within our profit and loss. I do expect probably that, between the second and the third quarter, there's going to be a bigger hit or inflationary trend. And then probably on the latter part of 2021, we're going to see a normalization of that.

We take our next question from Elena Mariani from Morgan Stanley.

Stefano, I will stick to 2 questions as requested. So the first one is on the other regions into the second quarter. So could you just indicate briefly which sort of trends you've seen at the beginning of the second quarter? So anything to flag in terms of changing consumer sentiment, people trading down to like lower price points? You've mentioned that Asia was a bit weaker than expected in the first quarter, but you expect things to improve into Q2. Are you already seeing that in April? And what about EMEA? I mean, as you know, there is a big debate around consumer sentiment holding up, so we're keen to hear whether you're seeing any change in trends into the second quarter. And then my second question is going back on the margin outlook, putting together inflation, synergies coming through and a situation that is definitely unstable from a macro perspective. Could you confirm that you are still comfortable in saying that you're going to see an EBIT margin improvement in 2022? And do you expect some GrandVision synergies to come through already in 2022? I've seen that there has been a change in management happening, so perhaps you are going to start to implement quite a few initiatives already this year.

Elena, we'll go through your 2-plus-1 question, I guess. Let me start from the trend at the beginning of Q2. When I look at our trend overall, I think we have pretty solid shipment trends, for example, in Europe; and this is true for frames and lenses. And for the rest of the world, really nothing major to report, with the obvious exception of Russia and China. I don't see consumer trading down. As a matter of fact, price/mix is still there. In retail, I mean, let me say that we have a solid optical performance worldwide. And we have a strong sun business, so all in all, we have an expectation of growth for the month of April. And the second question pertained to the margin outlook, yes. If you remember that during the last call, we talk about the fact that we're obviously not guiding for the year, for 2022, but what you can expect for this year is a story of top line growth and margin expansion. And we'll -- we're still confirming that. Clearly, with GrandVision, we are at the beginning of a journey: a journey on which we know the job that needs to be done; a journey that has started already with respect to synergetic work stream; and a journey that now see in place a new leadership which, I believe, is going to overall accelerate the execution of our synergy realization.

Our next question is from Luca Solca from Bernstein.

There's a lot of debate about the impact of COVID-19 restrictions in China. And as you are on the ground and you have quite a broad distribution there, could you tell us, are you seeing the impact on traffic from the COVID-19 restrictions? And do you see a rebound in traffic once these restrictions are lifted? I'm getting mixed reviews on this point, with consumers potentially continuing to be concerned that they could be on the wrong side of the contagion and affected by further restrictions and so that traffic rebounds and not as sharp as we saw last year, for example. On the value-added products which you are developing on many different fronts, starting with myopia management but then looking at prescription sunglasses and many others, what metrics do you monitor? And how you see this shift to more value-added products developing across the various markets, if you could go through the main geographies?

Thank you, Luca. Let me answer your questions here; first of all, the COVID impact in China. We didn't see a rebound of traffic, so we are still going through a severe traffic decline over there. I think that is probably widespread around China, with really a handful of exception. But if I look at the glass half full at the same time, I have a good source of optimism, for example, looking at the Stellest performance during the course of the first quarter. Stellest's performance, it's very reassuring. Clearly we saw a deceleration in the month of March due to the restriction, but again it tells me that the demand on the market for vision care products from myopia solutions, it's still there. And that leads me nicely to the second question you asked, around value-added products, in particular, I guess, lenses. And we look at the overall lens portfolio on a geography-by-geography basis, but in particular, we look at our branded lens portfolio. And I'm glad you asked this question because, for example, during the course of the first quarter, we're generally seeing our branded lens portfolio outpacing the unbranded lens portfolio. And so we're obviously looking at that around the different lens that we have in our portfolio. We're looking at how much our clients are trading up from unbranded to branded lenses, and this is something that we clearly monitor and we observe and see in many parts of the world.

Our next question is from Veronika Dubajova from Goldman Sachs.

I have 2, please. One is, I guess, maybe just excluding China. And I know the business is pretty messy and volatile at the moment, but if you strip out China, just curious if you can comment to the exit growth rate at the end of March or April growth, to the extent that you can give us some reassurance that the momentum that you've seen through the quarter has continued. And maybe, was it higher or softer at the end of the quarter versus the quarter on average and where you see April shaking out? Just anything you can say on that even if you don't want to comment on April, but maybe just the March exit growth rate ex China would be very helpful. And then my second question is just a follow-up on the guidance comment you had made. I think, back in March, your comment on the margin improvement is it would be sort of on aggregate consistent with the average you'd have to achieve to get to that mid-term guidance. I'm just curious if you're still confident in that shape of the margin progression or if the current environment should mean that we should be rethinking that phasing of that margin improvement up to the 19% to 20%.

So let me address your 2 questions here. First question, with respect to the growth trend that we see. I mean the overall trend in March was positive, and we were happy with that. So I mean we were clearly seeing the headwinds in the U.S., but the overall number for March is a good one. With respect to the -- even excluding China or including China. With respect to the confidence in the margin progression, the confidence is there, absolutely. I think we confirm the guidance. And again as we mentioned before, we do have 2022 as a year of margin expansion and top line growth. That's how we see it.

Our next question comes from Cedric Lecasble from Stifel.

I have 2. So first one, on the independents in the U.S., you mentioned a slight slowdown and tougher comps for technical reasons. I would be interested in the behavior between traffic; average basket; what you observe, yes, for these clients. And how long do you think the softer performance due to comps could last in '22? In other terms, how long was the boost last year? And what should we expect for this category? And the second question is on GrandVision in Europe. Could you be maybe a little more explicit between the banners kind of midrange and the banners kind of value range? Did you see any disparity between the banners? You said all were positive, but could you be maybe a little more explicit?

Cedric, let me take your questions here. First question, on ECPs. Yes, we see a slowdown, a deceleration in the first quarter from the -- on the ECP channel, but just as a reminder, I mean, the ECP channel has been the driver of our growth, of our structural growth, in U.S. for at least the last 4 quarters. So it's a natural deceleration, I would say, on a channel that has been continually performing and, I would say, in many extents exceeding our expectations in the U.S. I think the job that we're doing is going into the right direction, more engagement with our ECP on the key program that we have in place, the EL 360. Just last year, we added more than 2,000 ECP into the EssilorLuxottica 360 program. And that, when we have ECP engaged in this program, we do see that there is a continuous improvement of the penetration, shares; and growth of the ECP, first of all, and clearly on our side. We need to work on that direction. Some of the programs that we have in place are going into the direction of engaging ECP. And when we have the engagement of ECP, the direction is definitely going into the trend that we expect to see. With respect to GrandVision in EMEA, the trend is positive. It's double digit. And I don't see much of a difference between midrange and value range in terms of performance for GrandVision banner in EMEA.

Our next question is from Julien Dormois from BNP Paribas.

I would be interested, first, to get a quick update on the traction that you see from your latest product introductions, more specifically on Ray-Ban Stories but also maybe Stellest ex China. So if you could provide us with some data points here, that will be very helpful. And my second question revolves around the M&A landscape. And what do you see at the moment in terms of availability of targets, the price that are being asked for by the sellers? And also how should we see the M&A trends in the coming months and quarters? Should we see a pickup in bolt-on deals now that you have closed GrandVision and a couple of other large deals? Is it on the agenda for 2022, or should we expect more in 2023?

Julien, first question, around latest products introduction and their performance. We had a pretty solid pipeline, I would say, between the end of last year and early this year. The new products that were introduced in the market are products that are actually taking new geographies, going into new market, hitting new consumer. Transition XTRActive is a pretty good story now in U.S., where we have the launch and it's giving very promising results so far; Stellest in China. I mean, in a single quarter in China, despite all the uncertainties that we were discussing before with Luca, we are experiencing a first quarter where we sold more Stellest lenses than what we did in first half last year, just in a single quarter in China. So excellent results, I would say, and no reason to believe that things could go anything different because Chinese consumers do understand the benefits of myopia solutions. And with respect to Ray-Ban Stories, we are building up a category, so it's a journey. That journey, for us, it's on one side geographical expansion of Ray-Ban story. As a matter of fact, in the last few months, we have enlarged the number of countries in which we made the products available. And obviously there is the newness, and that is important. And it's a buildup of a category that -- it's giving pretty reassuring results. With respect to M&A, bolt-ons will be part of our growth trajectory, as we say many times. We do deals that make sense for us from a strategic standpoint at the right price. And this is obviously the strategy that we're going to undertake in 2022 and the following years.

Our next question comes from Piral Dadhania from Royal Bank of Canada.

Stefano, Giorgio, just 2 brief ones. Most have been answered now, but I'm just wondering, firstly, on Stellest again. You guys give some anecdotal data points, which is very helpful and qualitative feedback, but we get many questions on what the actual quantitative contribution is to growth in China and Europe. Is that something you feel comfortable sharing with us at this point maybe in terms of the size of the category or just in terms of the growth contribution in the 2 main markets in which it's launched? That will be very helpful to try and assess the future potential for that product. And secondly, just to come back to guidance: I think last year you provided financial guidance at the half year results, which was July, if I'm not mistaken. I appreciate that the current operating environment is very challenging, but is -- should we expect something a bit more kind of nuanced and specific at the half year? Or is this the sort of guidance framework that we should continue to work with for the rest of the year?

With respect to the Stellest lenses and, I would say, myopia solution in a broader sense because now we, again, need to assume a broader product range that will address myopia needs in the Chinese market. I would say the category is growing very fast, is the fastest-growing category within our lens portfolio, is the major contributor to the growth in China; and obviously no reason to believe that this is going to change. With respect to the guidance, I think, as we said, we have a mid-term guide, a 5-year outlook. That is the one that give the proper perspective of what the company needs to do in the next 5 years in order to get to the 19% to 20% operating profit on an adjusted basis. So that journey is what matters the most. We are in the middle of an important integration. We have several initiatives around the different geographies. And the direction that we're taking, it's very much summarized, if you will, in the 5 years outlook that we share.

Our next question is from James Grzinic from Jefferies.

I have 2 quick ones. The first one, Stefano: I presume, just to clarify, your view on your margins for the coming year is an ex-FX view, so we will need to obviously overlay what is happening, hopefully in terms of the U.S. dollar in particular. And the second point: Is it worth touching on China in terms of your ability or -- to continue to feed the machine from [ the one ], and then the extent to which you're still very comfortable that what's happening in terms of the pandemic there won't affect your ability to maintain service levels into your operations globally?

So James, with respect to the guidance, the guidance is very much currency-neutral, so you don't have any tailwinds or headwinds expectation over the 5-year outlook with respect to currencies. With respect to the sensitivity to the U.S. dollar, in a swing of a plus/minus 10%, you can expect a 6%, 7% EPS impact on the group. With respect to China impact on operations, let me say that the current situation has seen for a few weeks the closure of a couple of plants, more precisely a mass production plant and a laboratory in the Shanghai area, but the fact that we are very diversified, we have a very diversified manufacturing footprint, allowed us to redirect production and services in other locations. So I would say there hasn't been any material impact, broadly speaking, in our overall service level or supply chain.

Our final question comes from Domenico Ghilotti from Equita.

The first question is on optical in North America. So I saw the low single-digit same-store sales that you were mentioning for LensCrafter and Target Optical and so I'm wondering: How can you sustain momentum going into, say, tougher comps for the rest of the year? And the second question is on the GrandVision integration. So if you can share with us what has already been executed in terms of projects and work streams.

So with respect to optical North America, clearly we know that there is a tougher base. I think we need to work on the things we know to -- how to do well. We need to continue to work on our pipeline of store innovation, which is quite ambitious in 2022. And I think that direction is very important for us because we know, every time we're in new store, we see a lift in our performance. It's going really well, for both traffic in as well as doctor appointment, to be able to get into a new environment, into a new space, into new doctor rooms that have tele-optometry. And I think that it's creating a different level of dialogue, a different level of consumer experience within LensCrafters. We're also getting people trained more properly. And as a matter of fact, we do see an improvement in conversion, and that is obviously very important for us. So I believe that, given also the lenses portfolio that we have available in LensCrafters, given the price/mix that we see and continue to support our performance over there, given the good and reassuring performance and multiples, I think there is a lot of things that are under our control. And they are -- and we are executing properly. In terms of GrandVision integration, there is a first thing on which we started working on, I would say day 1, Domenico; and that is the assortment. We already have our team hands-on into the lens and frames assortment in GrandVision, looking at the different banners; understanding where we can make adjustments, where it makes sense to create a different phasing of products, of our products, within the GrandVision retail banner. And I would say that the results that we're seeing are pretty reassuring. The other important area for us of focus is going to be obviously store renovation. We're going through a development of the store model for GrandVision and for the different banners. And obviously we will go through a progressive renovation process of the stores and the banners that actually do make sense. All right, I guess we're done for today's call. I want to thank you for your participation. And obviously we'll catch up during the upcoming AGM on May 25. Have a good rest of the day.

Thank you all for joining. This now concludes the call. Please disconnect your lines.