EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Welcome, everybody. I'm Giorgio Iannella from the Investor Relations team. Thank you all for joining EssilorLuxottica's Q1 Trading Update Presentation. At the end of our CFO, Stefano Grassi's speech, we will have a 30-minute Q&A session. [Operator Instructions] With that, Stefano, the floor is yours.

Welcome to our Q1 trading update. We just closed a strong quarter for EssilorLuxottica with our top line in excess of EUR 6.1 billion, up 9.7% versus the first quarter 2022. If we look at our results at constant currency, we will be commenting an 8.6% top line growth in Q1. I want to remind you that this performance was achieved on top of the best quarter for 2022, where we grew our sales 11.5% at constant currency. Clearly, the picture is pretty compelling for each 1 of the 4 regions, where we see an acceleration compared to the growth that we see in Q4 of last year. But I would go probably a step further than that, saying that within each region, both our segment, Direct to Consumer and Professional Solutions, accelerated versus the fourth quarter trend. Clearly, a pretty remarkable quarter for us. From a North America perspective, our top line was up 7% on top of 8% that we delivered last year. Both our operating segments were in the high single-digit growth trajectory. If we look at our Professional Solutions, we are pleased to see growth driven by our independent ECP and our top account, while our sport channel decelerated in the Q1 due to a couple of accounts that were closed for noncompliance with our M.A.P policy. From a product category standpoint, our lens business was the primary driver of our growth during the course of the first quarter with Varilux and Shamir lenses very much on the spotlight. Before moving to Direct to Consumer, I want to make a last comment on our EL 360 program, the program that we launched and customized a couple of years ago for our independents. The program continues to be extremely successful, I would say, with a stronger performance of both lenses and frames for the ECP to join this program compared to the balance of our ECP network in the United States. On the Direct to Consumer side, we had a good start of the year with LensCrafters comps that were in the low single-digit territory, very much driven by our managed vision care clients and with our important assets, that is the teleptometry that is now rolled out in approximately 90 stores in LensCrafters delivering very promising results so far. On the Sunglass Hut side, we were in a negative territory due to a deceleration that we've seen in the month of March. And I would say a couple of things for that. On one side, the bad weather that impacted in particular, California, Texas, and the state of Arizona. And on the other side, in Q1, we experienced a higher number of remodels in Sunglass Hut. Now let's move to Europe. That delivered an outstanding quarter and 9% approximately top line growth at constant currency, and this comes on top of an 18% top line growth last year. In EMEA, we are clearly confirming the strong momentum that we see -- that we experienced in 2022. On the Professional Solutions side of the business, our top line was up double digit in Italy, in Spain, in Turkey and in Eastern Europe. And in the biggest country that is France, we delivered a high single-digit growth. Our sunglasses and branded lenses was very much the 2 categories that in EMEA Professional Solutions drove our growth during the quarter of the first quarter with very strong volume dynamics, I would say. Moving to the Direct to Consumer for a second. Our sales were up on a double-digit territory on top of the first quarter 2022, where we grew our sales in excess of 20%. If we look a bit closer on Direct to Consumer, optical EMEA comps were on the high single-digit territory with Vision Express double digit, with Salmoiraghi & Viganò in Italy double-digit and with Optica [ Dos Mil ] in Spain a double-digit territory. While if we move on the other side of our Direct to Consumer, the sun part, well, we posted the fifth consecutive quarter of double-digit growth with sun business that continues to benefit from the demand of touristic traffic and the local demand across the different European countries. But now let's switch to the eastern part of world in Asia Pacific with a top line that was approximately 12% up at constant currency with the month of March in further acceleration south of 20%. The performance in the region was material acceleration. You remember, we commented in Q4 last year where we had a top line that was approximately 3%. China is back. It started day 1 on the Direct to Consumer channel, while our B2B Professional Solutions, it picked up in February and March. Our Stellest lenses continue to grow exponentially with a top line up 80% for those lenses. If we look at other countries in the region, happy to report India, Southeast Asia, Japan and Korea, all of them on a double-digit territory. Let's touch on a retail in Australia that delivered mid-single-digit comps, very much driven by a strong delivery of Sunglass Hut business in the country. But now the last in the pipe, it's Latin America. And as usual, let's conclude with that. You might remember that when we commented Latin America last time, our Q4 was slightly positive. And we wanted to reassure you about the start of 2023 for Latin America, and here we are. We closed a quarter back to double digit once again with top line that was up 11.5% with our Professional Solutions in the high single digit and with our Direct to Consumer segment at a double-digit pace. Brazil, Mexico, Argentina, they all delivered double-digit growth during the course of the first quarter. On the Professional Solutions side, we are pleased with the work that we've done here to very much strengthen our presence and improve the quality of our service level. I will give you an example that is Mexico. In Mexico, we are tightening our partnership with some of our key accounts in the country, delivering strong results especially on the frames side of the business. While on the independent side, we're actually getting more and more traction every day, thanks to the further expansion of our sales force in the country. If we move for a second to the Direct to Consumer in Latin America, we're very pleased with the double-digit pace that was achieved in both our brick-and-mortar part of the business as well as in our e-commerce business. Our retail footprint in the region delivered double-digit growth on the optical side led by a former GV banner in the region. While on the sun part, we experienced a strong Q1 season, thanks to Brazil, Andes and Mexico that all deliver a double-digit growth. With that, we completed our journey across the 4 different regions. Let me hand it back to the operator for our Q&A session. Thank you.

[Operator Instructions] Our first question comes from Veronika Dubajova, Citi.

One, Stefano, I was hoping if you could comment on the sort of progression of growth through the quarter in the 3 months and maybe what you're seeing in April. In particular, I'm thinking North America, given some of the recent concerns around SVP, any slowdown that you've seen in the month of March or April. That's kind of my first question. And then a second question, I appreciate this is a sales call, but I'm going to ask nonetheless. If you look at sort of the inflationary pressures that you're seeing in the business, are they tracking in line with your expectations back a couple of months ago? Are they improving or worsening? If you could just briefly speak to that, that would be great.

Thank you, Veronika. Let me take your 2 questions. The first one on the progression during the course of the first quarter, I would say, fairly balanced progression throughout Q1. When we enter into April, we observed pretty much the same trend that we've seen during the course of the first quarter across the regions. With respect to inflationary trend, that's pretty much aligned with what we commented during the last call.

Our next question comes from Chiara Battistini, JPMorgan.

The first one, maybe if I can just come back on what you just mentioned on the inflationary pressures and maybe thinking about how to think about the margins for H1. I know it's just a trading update call. But maybe if you could spend some words on the other side of things, how you're planning to offset some of these inflationary pressures and whether those actions might be actually more than enough now to offset the inflationary pressures, please? And the second question on GrandVision and the integration and the progress so far. Could you please remind us where you stand now in terms of what you've done already in terms of taking the sourcing in-house and I guess, priorities for the next few quarters? And what could be the most imminent actions where that could lead to uplift in the margins, please?

Thank you, Chiara, and great to have you back in our calls. With respect to your first question, inflation and margin, this is a sales call. So as usual, it's our practice not to comment margins during a sales call. Your second question pertains to the GrandVision integration, and we're marching at a high speed, high speed here -- sorry. We announced, first of all, during the course of the first quarter the closure of the GrandVision headquarter that would be executed between the second and the third quarter of this year. We are developing a new store concept. We have a couple of them that are live, I would say, already in Spain as well as in Germany. And we are also applying a new sun commercial policy on the sun business that obviously, it's aiming to protect the equity of our brands and reduce the discount overall. Similar policy is progressively rolled out across the different optical banners as well. We have a lot of exciting news with respect to product and assortment. First of all, the rollout of transition lenses across the GrandVision banner during the second and the third quarter. That will be an exciting rollout in our optical retail banner in GrandVision and in Europe. And with respect to the lens in sourcing, things are progressing on track. I just want to give you a flavor. Countries like Italy, U.K., Turkey, Brazil and the U.S. have already a high penetration of EssilorLuxottica lenses in their assortment. And we're now progressively taking countries like France, Germany and Poland in that respect. So we're marching on the high speed in respect to the GrandVision integration.

The next question comes from Graham Renwick, Berenberg.

Just firstly, are you able to break out the Q1 sales growth by volume, by any price increases there may have been in the quarter, price mix and also M&A.? It would be helpful just to understand how these different elements developed particularly versus Q4. And then just secondly on the U.S., I mean, the U.S. acceleration is pretty impressive. You're certainly bucking the trend in North America, particularly with all the talk of slowing consumer spending. Some of your peers have seen a lot more weakness. I mean, what would you really point out as being the biggest drivers of your strength in the U.S. versus competitors in the market? Is it the premium positioning that's been more resilient? Is it the fact that you have a lot more insured customers that's given you a bit more resilience? Is it the assortment? Is it the refurb program that you've had across the retail estate? Anything you can sort of give there to give us a sense of how you've had that strong performance and how should we should expect that to develop going forward.

Thank you, Graham. Let me take your 2 questions, beginning with the Q1 growth profile. So I would start saying that in the overall number that you see, the M&A contribution is approximately 1%. That is very much aligned with the direction that we shared with you during the Capital Market Day last year. When we look at the growth profile, I would say probably on the frames side, we have volume being predominant over price/mix. And on the lens side, it's probably price/mix being predominant versus the volume. But again, we start seeing a more rebalanced between one and the other. Well, you remember in the previous years, we were talking much more about price/mix than volume. So the good thing about what we're seeing already is that volume is picking up. Now the second question is about what you define impressive acceleration in the U.S. Yes, it is an important acceleration in North America. I believe that the way I would look at that, it's really the work that the North American team has done with our independent ECP in recent months and years in a way. The engagement and the partnership that we developed, thanks to programs like the EL 360, it's now paying back. We clearly see, as I mentioned before, that faster pace for ECP that are enrolled into our program with higher demand of lenses, higher demands of frames, with a higher degree of managed vision care clients shopping into the ECP stores. And that's obviously helping us out to really create that tighter partnership and very much enjoy the benefit that a network company like EssilorLuxottica is giving. I believe this is a work that will continue to pay back. And I think the work that the team on the Professional Solutions side is doing, it's obviously extremely reassuring.

The next question comes from Domenico Ghilotti, Equita.

A couple of questions. The first is related to the online performance. We have seen the online back to slightly positive growth in Q1. Do you expect the trend to consolidate here during the year? And the second question is related to Sunglass Hut. It was the only, say, weak spot with the weak comps that you mentioned. Do you really attribute to some more, say, the fact that it's a more discretionary element or just, say, to some really one-off elements?

Domenico, thank you for your question. Online, yes, we like to see that slightly positive trend on our online business. I think one of the areas in which we are investing a lot of assets, I would say, is the development of 2 areas. One, the omnichannel connection between online and physical stores, and that's obviously working really well. We launched every quarter, every month new features that allow a dialogue, that allowed consumer to spend time online and then transition to physical, begin an initiated transaction on the physical environment and then switch to digital that I think it's creating a lot of appreciation from the consumer to shop into any of the omnichannel assets that we developed. On the other side, one of the areas that it's paying back progressively is the prescription part of the online proposition. That is obviously a part which we are developing more and more, thanks to the development of lenses, thanks to more editorial content on our online platforms. And I believe that more and more so that part of the business could represent an opportunity over the longer run. The second question you had is with regards to Sunglass Hut. I don't think we have a discretionary spending challenge in general at this stage. We're clearly looking and observing what's happening in every market. But conversely, I would say that if we look and observe what's happening, for example, in Europe, what's happening in Asia, what's happening in Australia, there is a strong demand of sun. So it's a business that is growing nicely. It's a business that is growing at a high pace. And I think it's really a matter of observing what's happening in the U.S. But I think again, we -- Q1 is traditionally a low seasonality quarter. I think we're looking at the second quarter with better hope, I would say.

The next question comes from Susy Tibaldi, UBS.

I have a question on North America,[indiscernible] which grew high single digits. When we look at the comparable store sales, we have LensCrafters, low single-digit; Target Optical, high single digits; and Sunglass Hut down mid-single digits, et cetera. So I was just trying to reconcile the division being high single digits in the U.S. -- in North America when some of the banners were turning below that. So does it imply that there was a more significant contribution from the space? Or what's the missing part here? When we look at the store counts, there is a very significant change in the number of stores. So I just wanted to understand where the data is coming from. And then maybe just to follow up briefly on the answer to the sun season question. What is your expectation? Because I mean, on this one, you probably have a decent visibility when it comes to orders on the wholesale channel for the second quarter. So if you could comment what you expect in terms of deliveries and in terms of growth, given your tough comps, but also on the other hand, I assume you -- the average selling price has been trending quite positively. Thank you.

Thank you, Susy. With regards to North America Direct to Consumer, I would say when we look at the overall performance in North America, you have to remember that there are other banners that we haven't talked about it, like Pearle Vision, Target Optical, those are marching at a higher pace than LensCrafters in Q1. The other important assets that it's being at a fast pace -- faster pace is our managed vision care in North America. With regards to the sun season, I look at the early stage of the spring season. And I think the orders intake that we see are pretty strong for sun. There is a lot of excitement, for example, in North America from department stores around some of the new product launch that we're going to have during the course of the second quarter. Second quarter is going to be very exciting for our leading brand, Ray-Ban. We are announcing, I would say, a revolution product that is called Reverse. It's a brand-new product, a reinvention of our iconic products and will hit the market during the course of the second quarter. We already share a preview of this product with department stores in North America, and I can tell you there is already strong excitement. For the rest of the B2B world, sun continues to be strong. We have a luxury portfolio that continue to be strong. We have some of our licensing partners that are extremely hot in the market right now. So we couldn't be in a better place.

The next question comes from Cedric Lecasble, Stifel.

I would have 2 questions actually. So first one is on GrandVision. Could you give us some color or some examples of what you have reached in terms of improvement of some metrics? Does it play more on traffic? Does it play more on conversion? Does it play more on average selling price? Maybe you can help us a little bit explain how you elevate the level of service and the commercial impact of GrandVision. You seem happy about the integration. And the second one is a more general question about competition and about market share in the U.S., In a quite tough disposable income macro environment, you seem to be running at a pretty fast pace. Where do you think the industry is? And what kind of competition would be more under pressure today?

Thank you, Cedric. Let me start with GrandVision. I think in GrandVision is a journey that we have undertaken, I would say, in the last 9 to 12 months with the change of leadership and a progressive -- holistically we look at every single aspect of our retail operation within GrandVision. So when we look at some of the KPIs, for sure, the change in assortment and the commercial policy with a reduction of discount is such that price/mix continues the predominant driver of the growth that we see in GrandVision Vision. On top of that, clearly, there is an important sun component that it's lifting up within GrandVision. It's -- Plano sun is also Rx Sun, and that's obviously extremely encouraging in that respect. So the overall experience that a consumer today has in the GrandVision banner is progressively better and better in every part of Europe. It's obviously a journey that is not over. But clearly, the direction is the good one. And as we enter into the second quarter, that trend that I'm just commenting and sharing with you is extremely positive. Let me add on that. The other thing that we're working a lot is the subscription model that has been very successful in the Nordics country. And we recently launched in the United Kingdom. So that is a model that we are closely looking at and eventually scalable in other context pending the results of our pilot. Your second question, Cedric, is with regard to the North America. We don't see now indication of disposable income contraction. We don't see indication of consumer trading down. Actually, if I look at the price/mix on lenses, it's healthy. It's going up. If we look at the price/mix on sun, it's healthy and it's going up. Our luxury products are growing. And that's obviously extremely reassuring with respect to the ability of the U.S. consumer to spend money.

The next question comes from Maria-Laura Adurno, Bank of America.

I just have 2 questions. At the time of your Capital Markets Day, you had mentioned that you had positive operating leverage when you generated group revenue of 3%. And so I was just wondering, given the level of growth you've achieved in the quarter and if this actually -- if this guidance still holds up even in an environment where you've had higher costs? And then the second question is coming back to what you were discussing about China. Can you perhaps provide some qualitative comments with respect to what you're seeing in April?

Thank you, Maria-Laura. With respect to your first question, I would have to repeat again what I said, so nothing new and -- or anything different to comment. China. April, it's going well. I mean, China trend is consistently stronger. And now it's consistently strong on both channels, Direct to Consumer as well as Professional Solutions. So we are pleased to see that. China is an important part of our growth profile this year. And we are happy to see that Chinese consumer have the appreciation for our products, have the appreciation for our service. Stellest lens continue to be a very successful story even in the month of April. So we're very happy with what we see in China.

The next question comes from Louise Singlehurst, Goldman Sachs.

You must be delighted with the performance in Q1. My first question just relates back to the U.S. again, another question, I'm afraid. But just on -- we're getting obviously quite mixed feedback across the peers and just the retail environment overall. And just to triple check in terms of the underlying performance, are the teams working a bit harder? Are there any more like deals going through to the consumer? I know you've talked very clearly about that there's no discretionary spending challenge that you're seeing, but just to make sure we're not missing anything in terms of any other incentives that you might be offering on the retail front. And then my second question, I wondered if you could just very broadly give us any color on the feedback from the third-party retailers and wholesalers that you deal with, their levels of confidence, how you would compare that versus 3 months ago from when we last spoke.

Thank you for your question, Louise. North America, I know it's concentrating a lot of the questions today really being a big part of our business. I mean, when I look at the North American market, I can see higher competition on probably a certain part of the market. The one is more value for money, where I can clearly see that there is a battle for price, a battle for discounting. As we talk several times the space where we operate with our Professional Solutions proposition but also with our optical and sun retail banner, it's a bit of a different one. For us, it's important product quality, service level, and those are the ones where we try to improve ourselves every single day. And when we hear consumer feedback with the Net Promoter Score, we continue to see progressive improvement in that respect. On the Professional Solutions side, as you know, there's a lot of work that has been done behind the scene. On one side, to continue to innovate our products. The luxury portfolio, it's always on the spotlight. On the magazine, it's always on the spotlight on campaigns, and it's very visible in many of our licensing brands. And I think that very much witnessed the importance and the relevance that our products have. On the lens side, we should not forget that we have an important launch during the course of the second quarter and onward. That is the new Varilux XR lens, which is an important pillar, an important asset in particular in the U.S. but also in other countries like EMEA. And we have a lot of work that is done by the team to really get ready for this important launch. That will come between the second quarter and the third quarter, second quarter in EMEA, end of second quarter, early Q3 in North America.

The next question comes from Piral Dadhania, RBC Capital Markets.

So maybe I could just ask another question on the U.S. So we've seen some market data that pointed to some softness in -- towards the end of March for the independent ECP optical channel. I was just wondering if you could give us some indication about whether there are material differences between the performance of your optical business in North America across the ECPs and across your own retail banners and how that's progressed into April. And then secondly, just on your frames license business. As we've all heard, LVMH during their Q1 earnings call are talking about internalizing their remaining outsourced sun brands. How do you think about the portfolio from your perspective if you're going to lose a couple of more brands? We know you've signed up a few new ones in recent months as well. But what's the strategy there in terms of kind of filling some of the holes over the next couple of years, please?

Thank you, Piral. First question on ECPs. Well, I mean, the performance and the trend that we've seen here is it's pretty solid. And I would say it's pretty solid when we look at our lens business, and it's solid when we look at our frames business as well. So it's a business that we have been cultivating through several quarters through several initiatives. There's an increased focus from EssilorLuxottica to make sure that we are successful with ECPs for product, for service level in delivering lenses in North America. And there is a lot of work that has been done. The 4,200-plus ECP customers that are enrolled into the EL 360 program gives us a good indication of what is the results, the demand and the success that we have with the ECPs that they have with consumer when they embrace the network company of EssilorLuxottica. Frames, lenses, insurance, digital assets, that's obviously contents that are continuously updated, upgraded for our ECP. Second question is regarding with the frame licenses. I mean, this is a, I would say, a recurring question. I know that. But we have to consider what has been the recent announcement that we made from a license acquisition point of view. Just in the last few months, we announced Brunello Cucinelli. We announced Swarovski. We announced Ferrari. And just a few years back -- a few months back, we announced the multiyear agreement renewal with Armani. So we -- I think the license portfolio that we have, it's pretty strong. And we are happy with the new acquisition and the newcomer on board.

The next question comes from James Grzinic, Jefferies.

I have 2 questions. I guess the first one is, obviously, you've now accelerated beyond the sort of rate of growth you expected the business was capable in the coming years, given what you said at the CMD back in September. How sustainable is that? And how should we look at this as an inflection in the business model? And I guess, as part of that, it feels like there's been some pricing taken early this year that is impacted in Q1. Can you help us perhaps triangulate that a little bit and perhaps reference that in terms of how you're thinking about the gross margin line, given that exercise in terms of price recovery?

Thank you, James. So I won't comment beyond our guidance that is already out there beyond the fact that April, it started with the same trend that we have seen during the course of the first quarter. That's really where we are. With respect to pricing, our position has not changed. You know that we drive price/mix through innovation, whether it's lenses, new product introduction with Varilux XR or frames, Ray-Ban stories, it would be Ray-Ban Reverse that will be launched during the second quarter. And the other price adjustment that we are taking are really to selective product of SKUs, eventually in certain countries to fill gaps that we might have or eventually for the new product portfolio. I remind you that when we look at our luxury portfolio, for example, that in today's world is extremely, extremely successful for us. The luxury portfolio get on average 60%, 65% of new collections or the collections that are renewed throughout the year between first and second launch. So every year, you have a consistent part of a license portfolio that is brand new. And usually, those products have an enrichment of quality, have an enrichment features, have an enrichment of material that justify higher price points. In certain collection, that percentage gets even higher. There are certain collection where we got 80%, 90% of renewal. And that's the way we are driving price/mix.

Our last question comes from Luca Solca, Bernstein. We have no further question.

Thank you very much, everybody, for being on the call today, and look forward to talking to you in our next call. Thank you.