EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Good morning and good afternoon, everybody. This is Giorgio Iannella from the IR team. Thank you for joining EssilorLuxottica Q3 Revenue Management Call. The group's CFO, Stefano Grassi, will walk you through our revenue performance. [Operator Instructions]

Hello, everyone, and good evening. Welcome to our third quarter sales update. EssilorLuxottica revenue grew 5.2% during the course of the third quarter at constant currency. For the first 9 months of the year, you're looking at a top line up 7.2% still at constant currency. Both our 2 division professional solution and direct-to-consumer posted solid growth in the quarter with the top line in the mid-single digit territory. When we look at our revenue, our current exchange results, we are reporting a decline of 1.6% for the third quarter. The gap between constant and current FX is very much driven by 2 currencies, the U.S. dollar and the Turkish lira. And those 2 currencies devaluated respectively, 7.5% and 38% during Q3 against Euro. Our third quarter has been a quarter full of exciting news. I hardly remember another one with such a variety of exciting news to share. The launch of Ray-Ban Meta now feature a live streaming and it's powered by artificial intelligence, the drop in store of the new Swarovski collection. The rollout of Varilux XR in key countries like North America, like France, like Latin America and India. The launch of a breakthrough hearing solution that has been developed by the super [indiscernible] team, and they will be commercialized during the second half of 2024. And last but not least, the announcement of a new division called HELIX, that will develop digital solution for the ECP market. So as you may appreciate, there is a lot of focus from the organization in delivering this new project, and we very much look forward to updating you in the following quarter on the progress made on each one of those. But now as usual, let me start our journey across the different geography, and as usual, beginning with North America. In North America, our top line was up 2.1% at constant currency, a very consistent pace, as you remember, between the second quarter and the third quarter. Our Professional Solutions division delivered top line at approximately 3% with the independent channel that represented a key driver, especially the one that embrace the EssilorLuxottica 360 program, which is really a program that delivers a higher productivity compared to the remainder part of the ECP network. When we look at our product category, our lens business was solid positive with a strong delivery in the independent channel and with Varilux XR that is already fueling our pipeline of branded progressive lens portfolio. The other categories frames, when we look at the frames, our growth is still driven by our luxury portfolio with Prada, with Burberry, with Ralph Lauren, very much leading the pace on the frame business. If we now switch gear and look at our direct-to-consumer division. We observed here, I would say, 2 different trends. On one side, our optical retail banner that delivered positive comp sales in July, positive comp sales in the month of August and positive comp sales in September. LensCrafter accounts were in the low single-digit territory while Pearle and Target Optical deliver a pretty compelling story and mid-single digit comps. The other side of our retail network in North America is represented by our Sun banner. In Sunglass Hut, we have a pretty consistent pace in the negative territory for comp sales in Sunglass Hut. So we still see that softness in the Sun demand in North America. And that is true for both the international location of Sunglass Hut as well as the non-international location of Sunglass Hut. Moving now to EMEA. EMEA was up 7% during the course of the third quarter, which leads to the first 9 months of the year to a top line up 9%. And I remind you that last year in EMEA, our top line grew 11% at constant currency. So we are growing at a high pace over a double-digit delivery that we had last year. When we look at our professional solution, our frame category posted double-digit growth, driven by Ray-Ban that was strong in both prescription and Sun. On top of that, we also had a strong delivery by our luxury portfolio. This is something that we have seen already for quite a few quarters. When we look at our lens side of the business, our top line was in the low single digit territory. Price mix was the primary driver of the growth. We do see Varilux XR that was recently launched in our main country in France, delivering great interest and appreciation from our clients. And this interest and appreciation is very much confirmed the SILMO exhibition in Paris, where Varilux XR was actually awarded with a Silmo d'Or in the Vision category. If we now move to Direct to Consumer, another outstanding quarter of optical retail in Europe, with our comp sales that were close to double digit with a strong growth in all key countries like United Kingdom, like France, Germany, Italy, Nordics and our Spanish operation. Clearly, the effect of the integration of GrandVision banner into the EssilorLuxottica platform has continued to deliver positive results. We are seeing the lens are already over the 50% target that you remember, I shared with you at the beginning of the year. So more than 50% of our lens supply in GrandVision comes from EssilorLuxottica. Transition and other important assets that we are leveraging into GrandVision is already available in 15 countries with higher and improved penetration week after week, month after month. And last but not least, we continue to push for a higher discipline in discount management on both Sun and prescription. Now let's look at the other side of our retail banners in Europe, and that is Sun. In Sun, we experienced a deceleration during the course of the third quarter. Our comp sales were in low single digit territory. And I have a couple of readings for that performance. On one side, a very high base in 2022. I think comp sales in 2022 for Sun were in excess of 50% during Q3. The other aspect, and I would like to call it very often, but in this case, I think I should, is the weather condition, especially in U.K., we had a fairly rainy month of July and month of August, and that dragged and decelerated the performance overall of Sunglass Hut in the region. In the month of September, weather got better, and we've seen good traction in the overall performance. We were actually a double-digit pace in the month of September. And I must say that as we enter into the month of October, we already see that performance at double-digit pace continuing throughout the fourth quarter 2023. Now let's move East and let's touch on Asia Pacific. Top line up approximately 12%, 11.7% at constant currency. This is the third consecutive quarter at double-digit pace in the region. We were double-digit pace again in China. Despite a much tougher comparison base, we remember the third quarter of last year in China was a very good quarter. And despite the high base, we were still able to grow at a double-digit pace in China, but we're also double-digit pace in India, in Japan, and we were double digits in Korea. In China now, just let me explain a few seconds. We had a strong back-to-school season, which obviously pleased us very well. We had a new initiative of eye screening in school that we are undertaking in the Shanghai metropolitan area, and we will extend in other parts of China. We're also pleased to share with you that we have already exceeded 1 million pair of Stellest lenses dispensed in China throughout 2023. This was a target that we have signed on a full year basis. And after 9 months, we have already exceeded that target. Last but not least, we are developing a non-new chapter related to presbyopia, a new category that we will further develop in China. So stay tuned, I would say, for more news on this topic. Last touch in Asia Pacific, it's related to brick-and-mortar business that posted double-digit growth in the Sun part and posted a mid-single digit comp on the optical part of the business. OPSM, despite a very tough pace of last year where comps were in excess of 30%, still was able to deliver a solid growth during the course of the third quarter. And now the last but not least is Latin America. In Latin America, we had a performance of mid-single digit, with top line up 6.2%. We had a good quarter in the region, with Mexican and the other Hispanic LatAm countries that deliver a solid growth in the third quarter. I would say that probably the only country where we experienced a softer trend in Brazil. And in Brazil, in particular, the land part of the business was the softer one due to some timing effect of stock lenses reordering between the different quarters. On the other side, the Frame business continues to be solid. We delivered a double-digit pace. In Oticas Carol, we were actually marching at a double-digit pace. And I would say this is thanks to the reorganization, the launch of a new franchising program, which is now engaging more than 2/3 of the franchisee in Oticas Carol, and it's proven to be very effective with very good results in Oticas Carol. Moving now to Direct to Consumer. In our optical retail band, we posted another strong quarter with comp sales in the high single-digit territory, very much driven by the former GrandVision banner in Mexico and in Hispanic Latam. I would say that here, similar to what we've seen in Europe, we continue to see the benefit of the integration of GrandVision into EssilorLuxottica. We see tangible results in lens and assortment, the integration effort was extremely focused on supply chain and also in improving and enhancing the customer experience. So overall, a very exciting journey in the region that I'm sure we'll continue to carry forward in the following quarters. But now it's time to pass it back to the operator for the Q&A session, please.

[Operator Instructions] Our first question comes from Oriana Cardani, Intesa Sanpaolo. The next question comes from Chiara Battistini, JPMorgan.

The first question, I was wondering if, by any chance, you could elaborate a little bit further on current trading and the comments you made on Sun going in Europe going into October. Maybe if you could extend those comments also for other regions, including also optical, please? And specifically on that in the U.S., Can you remind us on Sun, how the comps are evolving into Q4? And also whether Q4 has a lower weight in -- Sun has a lower weight in Q4 versus Q2 and Q3? And the second question on Europe. In Europe, you continue to show a very strong improvement and very strong progress. And I was wondering if you could maybe split how to think about the contribution that is coming from GrandVision versus generally a consumer that seems to still be very resilient for optical, both in prescription -- for eyewear, both in prescription and in Sun. And to what extent maybe also growth has been supported by pricing actions versus peak, please?

So let's start from the current trading. I think you particularly skewed your question regarding EMEA. When we look at some EMEA, in particular, we had really 2 months that were more challenging due to the weather conditions. I think the overall performance and trend that we've seen in EMEA, Sun is overall good for this year. The month of October, it's continuing on a strong pace, for example, on the Sun banner in Europe. We still see on the B2B part of our business, strong demand on Sun, luxury. And overall, I would say we are very pleased with what we're seeing. So it's a bit of a different situation compared to what we've seen in the U.S. where we have a softness in Sun in Q2. We've seen that softness coming through in the third quarter as well. So that, I think it's something that we're going to have to live with. And so far, I think we've been capable to be much more resilient on the optical part of the business. But again, it's more skewed towards the U.S. While in Europe, I think it's been contingent to 2 months only. The other part of your question is the -- well, the other part of your question is related to the weight that Sun has compared to, let's say, Optical or Vision Care during the course of the fourth quarter. And you're right, there is a lower weight of the some business during the course of the fourth quarter. The other part of your question was regarding GrandVision. I would say, in GrandVision, we have really the results of a strong execution that has been done by the GrandVision team in making sure that every single aspect of the retail experience was elevated, whether it's the assortment, it's the consumer journey, whether it's the service level whether it's the overall look and feel of our retail network in GrandVision, everything step-by-step, week by week has got an improvement. And I believe that will be a mantra also throughout the remainder part of this year, and I believe in the following quarter. The work that has been done there, it's pretty impactful. And I would say it didn't really create any disruption on the day-to-day basis. In terms of pricing, I think the work that we've done on the GrandVision has been more around discount management, higher discipline in discount management. We started with Sun, which in a way was more obvious. And now we are progressively taking that exercise also on the optical apart. And again, the good thing of that is that we didn't see any disruption any deceleration with respect to volume for GrandVision.

The next question comes from Veronika Dubajova, Citi.

I have two, please. I would like to go back to current trading actually and ask a little bit about the health of the consumer when you look at the prescription business. And in particular, if you could comment on the U.S. and Europe, we are seeing data points in some of the other health care industries that are pointing to some more of a slowdown. And I'm just curious, Stefano, if you can comment on October and the prescription business and how you're feeling about the consumer on that front? And then just looking forward, and I appreciate, I'm not asking you for 2024 guidance, but obviously, inflation has been a very big headwind for your business this year. And I'm just curious, as you sit here and think about your budget for 2024, are you -- can you comment on the trends that you're seeing on wages, on freight and logistics and on sort of raw materials and to what extent you'd expect those to moderate as we head into next year, that would be super helpful with them, obviously, visibility that you have at this point in time.

Current trading, in particular in North America. North American market continues to be a highly competitive market. Promotions are out there in shopping malls, in many streets locations, street mall, and we see that competitive environment, and we leave it every day. The work we are doing there, it's pretty good, I would say, especially because we work a lot with the independent. In particular, we put independent at the center of our execution. We've seen the result of that, looking at some of the lands performance in North America. Varilux and Shamir lenses, progressive lenses have been extremely strong. On the Frame business, we experienced some, I would say, softness -- temporary softness in Canada, but the overall business in North America, in U.S. was strong. Luxury continues to be very strong for us, and that's not new. We've seen it already in the previous quarters. The 4,500 independents that are part of the EssilorLuxottica 360 program continuously get a better performer than the remainder part of our independent ECP. So we have a higher productivity, which means every time that we invest, we do something for a certain category, we do see the results of our action even in a very challenging market environment. Now we are ready to develop new important assets that we make available for our ECP, and that is HELIX. HELIX will believe evolve the overall practice management for the ECP, putting technology, putting the ECP at the center of what we're going to do going forward. The first important delivery VisionX, I believe, will be very important for the market. We'll hold all new features with respect to patient scheduling, ordering and billing patient recall. The overall practice management is going to be materially easy to really manage through each ECP. And I think this is something that is going to create an even tighter partnership between EssilorLuxottica and the ECP. So yes, we do see a marketing that is challenging. But at the same time, I believe the work and investment that we've done in recent months and that we will continue to do throughout 2024 is going to pay back. Last but not least, we do see price/mix on the positive territory. And that is very much an indication that we don't see consumer trading down in North America. The second part of your question, Veronika, pertains to 2024. I think it's a bit premature to talk about 2024. First of all, because our budgeting process is still in progress. Secondly, because this is really a sales trading update.

The next question comes from Graham Renwick, Berenberg.

Just firstly, sorry to come back on the current trading point again. But just on the group perspective. Can we essentially attribute all the quarter-on-quarter slowdown to sunglasses and therefore, optical was -- growth was broadly in line with H1. And then you've talked about European sun reaccelerating from low single digits to double digits. U.S. Sun is still a drag, but it's a smaller drag given seasonality into Q4. So can we assume that group sales growth has reaccelerated again into Q4. So we've seen a better exit rate. Then secondly, just on myopia management, you've mentioned Stellest doubled sales again in Q3. What is the sales now on an absolute basis or as a percentage of China? And it sounds like you're running well ahead of the targets at the start of the year. So what do you think is achievable now for the full year.

So Graham, let me be very clear with respect to the trend. What we see in Q3 versus, for example, second quarter. It's really 3 things: number one, [indiscernible], as you rightly pointed out, but it's been contingent very much to July and August; secondly, the comparison base in China. Last year, third quarter was actually a very strong quarter in China. I think we are top line, if not mistaken, grew double-digit at constant currency; thirdly, there is a lower contribution from M&A during the course of the third quarter. Those are the 3 reasons why you see a different pace at constant currency between the second quarter and third quarter. On myopia, what I can say is that we are now working on what 2024 could look like. And it's -- we have a variety of myopia solutions that are in progress to be developed and launched. Just recently, during the Beijing fair, we launched a new product that is coming to the market in China, and that's the new Myopia lenses that leverage the DOT technology underneath the brand of Kodak that has been presented in the month of September. So our focus right now, it's not necessarily updating the target for 2023, but very much getting ready for next year. But I believe, obviously, we have a challenge to continue to grow our myopia solution throughout the China market and even abroad outside China.

The next question comes from Susy Tibaldi, UBS.

First one, can you comment on the -- what has been the evolution of price mix versus the pure price increase, I believe you took at the start of Q3 and also volumes? And how do you expect this to trend going forward? If we look at the U.S. market, considering the positive mix contribution, it's probably fair to assume that volumes have been at best flattish for the past 2 quarters. So I was wondering if this is a concern and if you have any expectations of when this could inflect? And then secondly, when we think about the second half, can you comment on the magnitude of inflationary pressures that you're continuing to see in the business? In H1, you commented it was around 250 bps, of which 70% is due to labor costs. So given the labor is not going away, is it fair to assume that H2 would still have 150 bps or so or maybe it's less? And how confident are you that you can offset this through pricing or operational efficiencies or synergies.

Price mix. On frames, I would say, more balance between volume and price mix. On lenses, primary driver is price mix. And within price mix, it's definitely more important also in light of the part of your question related to price adjustment. So this is a call on revenue. So I won't go into the inflationary trend. I think we talk about them in the month of July, and we're going to again, discussed together in February when we're going to release the full year results.

Our next question comes from Luca Solca, Bernstein.