EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Hello, and welcome to the EssilorLuxottica Q3 Revenue Update. [Operator Instructions] I will now hand the call over to Stefano Grassi, CFO, to begin.

Welcome to our third quarter trading update. EssilorLuxottica posted another quarter of strong growth with top line in acceleration, despite a tougher [ comparison ] base during this period, where revenue were up 17% at current exchange rate. While if you look at our results at constant FX rate, you're looking at 8.2% growth. The main driver of the difference between constant and current FX results is very much the U.S. dollar, that during the course of a third quarter, we evaluated approximately 17% against euro. In Q3, pretty much all the region posted solid growth. Asia Pacific and Latin America were at double-digit pace. Europe was at a high single-digit pace, and North America performed on a low single-digit territory, but with a very tough comparison base. As you remember, in the third quarter of last year, our North America grew 14% versus 2019. But before we start our journey across the different geographies, let me just give you a last touch on e-commerce. Our e-commerce division is contributing to 7% of our revenue base, with a top line growth in the mid-single-digit territory. And now, let's start our journey on Page 12 of the presentation with North America. North America posted a third quarter top line growth at 3.4% at constant currency. I'll remind you that our second quarter revenue were up 2.4% versus 2021. Both Professional Solutions and our Direct To Consumer division posted solid growth. If we look at -- a little bit closer our Professional Solutions division, both category, lenses and frames were in the positive territory. From a channel mix standpoint, our key accounts, our department stores, our e-commerce partner, were all positive, while the ECP or independent ECP decelerated in the negative territory during the course of the third quarter. When we look at our brands, the licensed luxury portfolio that we have, was very much the key growth driver of our frame business. While on the lens side, our branded lens portfolio outpaces consistently our branded -- the unbranded part of our portfolio. On the Direct to Consumer side, we are very pleased to report that our Sunglass Hut business, Oakley retail, Pearle Vision and Target Optical, they all posted positive growth during the course of the third quarter. While LensCrafters was slightly negative, but against a very tough comparison base. As you remember, in the third quarter 2021, LensCrafters reported a 9% comp sales versus 2019. Now let's touch on e-commerce that posted a top line growth at a mid-single-digit territory in the course of the third quarter, driven by Sunglass Hut, Oakley and EyeBuyDirect.com. This last [ month ], they grew on a double-digit territory. But now let's move to Europe, and let's look at a very stunning growth for the third quarter. Our EMEA region grew 9%, on top of a 9% in 2021 versus 2019. Our Professional Solutions was in the high single-digit territory, and our Direct to Consumer division was in a double-digit pace. Professional Solutions, most of the countries delivered a strong growth, with Spain, Turkey, Middle East at a double-digit pace, while France, U.K., Italy, they all perform on a mid-single-digit territory. The only major country that experienced a deceleration during the course of the third quarter was very much Germany, in light of a deceleration on the optical side of the business. If we now look in our 2 categories, lenses and frames, the lens side of the business delivered mid-single-digit growth, with price mix that continued to be very strong. While on the frame side, the growth is more balanced between volume and price mix, with a double-digit delivery very much led by a strong sound season during the course of the third quarter. I'll last touch on the Direct 2 Consumer now. I would say and define and stand and deliver the results that we've seen in the third quarter. We delivered a double-digit top line growth on the top of a double-digit top line growth in 2021 compared to 2019. We have very much strong results pretty much across all the banners in the region. Sunglass Hut top line was approximately 60% in Q3. Salmoiraghi & Vigano delivered double-digit growth, and GrandVision that delivered mid-single-digit growth in top line during the course of the third quarter. Now let's move east and let's touch Asia Pac. In Asia Pac, we experienced a strong acceleration of our results, where our top line that was up 23% at constant currency. And I remind you, in the first half of 2022, our top line was up 2% in Asia Pac. Let me walk you through what's driving that acceleration in the region. From a country standpoint, China was in the double-digit territory, driven by our Professional Solutions division with our Stellest labs, and that is not a news, that continue to record exponential growth, with the third quarter volume to double the one that we recorded in the second quarter. On the other countries we reported top line and acceleration, with a double-digit pace in India, in Southeast Asia, in Australia, while Korea was the last in line still with a high single-digit growth. On the lens category, we grew the top line at double-digit pace, with a strong ramp-up of our branded lens portfolio, with Varilux and Eyezen growing respectively at double-digit and high single-digit pace. Moving to brick-and-mortar now. Our top line grew in excess of 35% during the course of the third quarter. That top line growth was very much driven by a strong delivery of our optical and some banners in Australia. This result was also helped by an easier base of comparability in Q3. As you might remember that last year, Australia experienced a quite severe lockdown that clearly created a softer base for us. But now let's touch on the last region of the 4, and that is Latin America. As you remember, Latin America was the best performer region during the last 3 consecutive quarter. During this quarter, they thought that would pass the lead to another region, namely Asia Pacific, but they still deliver an outstanding 12.6% growth at constant currency. Brazil was on the high single-digit territory. We were double digit in Mexico, in Argentina, and in pretty much all the other Hispanic countries. In Latin America, our growth was driven by our Professional Solutions division, that posted a double-digit pace with both categories, lenses and frame in a double-digit territory. On the lens side, we continue to see a strong double-digit growth with our Varilux brand. While on the frame side, our growth was double digit when you look at our sum and also our optical frame portfolio. But also, when you look at Ray-Ban, Oakley and our luxury brand portfolio, you all see double-digit growth. Once we move on the retail side, our brick-and-mortar revenues were in the high single-digit territory for the course of the third quarter. That performance was very much driven by our sun retail business across all the region. While on the optical side, we observed a deceleration very much driven by GMO, that was up against a very tough comparison base in 2021 versus 2019. Now let me hand it over back to the operator for the Q&A session.

[Operator Instructions] Our first question comes from Susy Tibaldi from UBS.

So my first question is focusing more on the top line. So you delivered 130 bps quarter-on-quarter acceleration. And I think if you asked a few months ago to anyone in the market, they would have said it was almost impossible. So that's an excellent result. It seems that you had a very strong sun season, which obviously comes from -- relative to comp last year when we still had some COVID impact. So can you comment a little bit how much of the growth was driven by sun? And now that the sun season is pretty much over, what sort of normalized growth rate should we expect? And what trends did you see in September and October? And secondly, in H1, your EBIT margin grew 100 bps year-on-year. And at the same time, we were absorbing 100 to 150 bps inflation without any major price increase. And when we think about the H2 margin, the fact that the sun category performs strongly, must have some pretty positive implication for your margin. So can we expect an expansion in H2, at least in line with what we saw in H1.

Let me take your question, first of all, with the third quarter performance. Clearly, there was a help and support from our top line perspective from sun. But we've seen it pretty much across the geographies, across the different channels. It is true. But I remind you that from a revenue base standpoint, sun accounts were about 1/4 of our total revenue base. So the remainder part of the business marked also at a pretty high pace. So that is very important to remember because, I think it's an important driver of our growth, for sure, but it's not the only one. When we look at the impact on the margins, clearly, our ability to manage inflationary headwinds is -- really resides in 2 things. On one side, our growth, and therefore, our leverage on the P&L, and on the other side, the impact for -- the impact or the efficiency. The efficiency that we are undertaking across the business units, the efficiency that derived from the integration of the GrandVision with EssilorLuxottica. As I mentioned already a few times, this year is going to be historical growth and margin expansion, and that is going to be still valid for 2022 for the group.

Our next question comes from Louise Singlehurst from Goldman Sachs.

2 for me, too. Just firstly, I think on -- first read the statement. If I think back to July, we had quite a cautious set of comments with regards to the U.S. slowing. And obviously, today's statement, obviously, it reads a lot more in terms of stability, I would say. There's no real mention in terms of any changes during the period. Is that fair to assume that there is a lower growth, but it's stable during the period? I wonder if you can just provide some color there, Stefano. And then secondly, just in terms of the cohort mix and structure, is there anything that you can tell us that struck you in terms of change at the entry level, the higher-end spending, as we think about that more aspirational consumer and a few concerns, obviously, about the slowdown at the lower price points?

Let me take your 2 questions. First one on North America. The North American story, it's a North American story of growth. It's a story of acceleration, as you heard on the third quarter compared to what you've seen on the course of the second quarter, despite a tougher comparison base in several parts of North America. Just to give you an idea, we'll still continue to see growth on the frame business, while last year, our frame business was up in excess of 30% compared to 2019. So we are posting growth on top of exponential growth last year, and that's obviously very reassuring for us. With respect to price trend, let me say, we don't see any consumer downtrade at all. We actually continue to see solid price mix on frames, optical and sun frames. We continue to see a strong luxury portfolio. We continue to see our branded lens outperforming the unbranded once we clearly drive a price mix, which witnessed the fact that consumer do understand the value that we propose with our premium lenses in pretty much all the geographies.

Our next question comes from Mr. Cedric Lecasble from Stifel.

I have 2. So first one is on your general comments about growth led by volume or by operating leverage -- volume operating leverage and by price mix. Just wanted to know if -- what's going on this year with the strong cost inflation, has led to any change in perception of the mix between price mix and volume, knowing that, you said that over the medium term, we'd be more on the operating leverage side and on price mix, and with a slight inflection versus some past years? That's the first question. And the second question is on Stellest. You still have a huge momentum there. Can you maybe tell us about your pricing strategy for these lenses? Maybe tell us at what price on average they sell and what's your general pricing strategy as penetration seems to [ sky market ]?

Let me take your 2 questions here. First of all, with respect to the balance between volume and price mix. I can confirm that the direction that over the medium, longer run, we want to take, is exactly the one that you described. So volume being predominant over price mix. In a certain extent, if I look at where we are today, on the frame side, for example, we already have that happening. So we have volume being stronger than our price mix. On the lens side, it's probably still price mix being heavier than our volume mix. But again, the direction over the longer run isn't changed, despite the inflationary trend that we clearly see today. With respect to Stellest, I mean, our -- Stellest is -- in a way is a revolutionary technology that we believe is going to create a major change in the eyewear market. It's a revolution that we've seen being very successful in China, and we are now progressively rolling that out in other different countries. As we mentioned, Stellest is not only -- the only product that we have. That's why we like to talk more and more on the longer run of myopia solutions, because we have the products that comes from the joint venture with CooperVision. We have a variety of different solutions that are lenses, contact lenses. And our goal, our intent is to make those products accessible to our own retail network, to independent ECP, to really make sure that our effort to eradicate poor vision around the world, it's obviously completed successfully. So the price that we see right now for the Stellest lenses in China, it's around EUR 400, for the pairs of Stellest lenses. We obviously consider pricing depending on the markets where we are. But again, the reception from the market that we've seen in China -- and I would say not only in China, so far has been extremely positive.