EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Hello, 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 the revenue performance of the latest quarter [Operator Instructions]. With that, I hand it over to Stefano.

Hello, everyone, and welcome to our third quarter sales results. EssilorLuxottica in Q3 posted revenue up 4% at constant currency, which leads to the first 9 months of 2024 with top line up 4.9% at constant currency. When we look at our revenue at current exchange results, we look at revenue up 2.3% with a gap between current and constant exchange results that is broadly unchanged compared to what we've seen in the first 6 months of 2024. The main reason for that is the U.S. dollar, the U.S. dollar that, during the month of July and August, in particular, devaluate quite strongly against euro. The macroeconomic environment continues to be quite challenging, in particular, in a couple of countries, the U.S. and China. But despite that, we had a strong delivery in both B2B Professional Solution and Direct to Consumer, both brick-and-mortar and e-commerce. On the Direct to Consumer side, we delivered a mid-single-digit pace with a double digit in Asia Pacific, with a double digit in Latin America and a strong contribution from EMEA. While we move to the B2B Professional Solution, we experienced a deceleration in Q3 compared to the trend that we've seen in the first 6 months of 2024. And the main reason for that was a bit softer results in Greater China during the course of third quarter. But now as usual, let's start the journey across the 4 different geographies. And as usual, let's begin with the biggest one in North America. In North America, we experienced a slight acceleration compared to the Q2 delivery. The overall top line was up 1.6% at constant currency. And on the B2B side, the comments are going to be quite similar to the one that I shared with you during the second quarter. We had the delivery that was positive on both frames and lenses, on the frames side, I would say we continue to see strong demand from Ray-Ban Meta. We continue to see strong demand on prescription frame, while the sun part of this business faced a bit of a soft demand, and this is not new, we've already seen in the previous quarter, in particular on the department stores. When we look at our lens business, the premium part of our lens brand portfolio was positive, with Varilux, with Eyezen that were very much instrumental to drive the growth during the course of the third quarter. And the nice thing is that we see that growth with a pretty good balance between price/mix and volume. Quick touch on the channels. Our key account channel delivered a solid mid-single-digit growth in Q3, while on the independent side, we still observe a polarized picture. On one side, the eye care practitioners that are part of our Vision Source program deliver a good mid-single-digit growth, with strong demand and product supply on frames, on lenses, on instruments. While on the other side, our remainder part of independent customer base was actually trending more in a negative territory in a market that I want to remind you, continues to be still challenging and highly sensitive to price point. Moving now to Direct to Consumer. The third quarter comp sales were actually the best comp sales in North America for the year so far. Target Optical delivered a mid-single-digit comp. LensCrafters and Pearle Vision both delivered low single-digit comps. A quick touch on sun. Comp sales overall was still negative in Q3. But if I look at my glass half full for a second, I'm pretty pleased about the performance of Sunglass Hut in September, where we turn comp sales into the positive territory, very much driven by the international Sunglass Hut location. And what I can tell you that as we enter now in the fourth quarter, the month of October was actually positive as well. So we see good traction happening now for almost 2 months, which is a nice leading as we're approaching the holiday season. But now, as usual, let's move to Europe and the EMEA region that delivered 5.6% at constant currency. That is another strong quarter for the region. We are looking at the 14th consecutive second quarter of positive growth in EMEA, high single-digit delivering Direct to Consumer, mid-single digit on the B2B Professional Solution. Most of the key countries recorded positive growth in Q3. Eastern Europe, Turkey were double digits. Italy, Middle East were high single digit. While France, on the other side was really the only country that had a bit of a deceleration due to the challenging month of August, and many of you know the reason why, and that is related to the Olympics that clearly created a lot of constraints to the ordinary course of business. Now if we look at a bit closely, our Professional Solutions side, our independents were very much the channel that drove the growth in EMEA, and that was true for both frames and lenses. In particular, the lens part of our business had a strong quarter with volume as the main driver, but also with price mix that nicely support our volume growth. On the frames side, I would say, good prescription business, good sun, with luxury and the premium portion part of our portfolio that were very much the key driver of our growth. Before we move to the Direct to Consumer, there are another couple of things that I want to share with you. First of all, in 2024, in the SILMO exhibition, our 2 key innovation, Transition Gen S and Ray-Ban Meta won the prestigious Silmo d'Or, respectively, in the category of vision and technological innovation in eyewear. And that proves, once again, the EssilorLuxottica surgical leadership in product innovation. The last remark that I want to make today is related to the Olympics. We all have seen the great visibility that the Olympic Games have worldwide. And within the Olympics, the Oakley brand had an exceptional, exceptional visibility in front of million, hundreds of millions of people. Outfitting 2,000 athletes and becoming one of the 10 most visible and impactful brand at this Olympic games. Direct to Consumer now. The optical retail business delivered high single-digit comps on top of a strong quarter last year with double digit in Salmoiraghi & Viganò, with double digit in Turkey, with double digit in the optical banner in Ukraine and a high single-digit delivery in Netherlands, in Belgium, in Finland and a mid-single-digit delivery in Vision Express in United Canada. Now when we look at our synergy realization, we're pretty happy with the progression that we've seen in GrandVision. As of today, approximately 70% of the lenses supply in GrandVision come from EssilorLuxottica. And on the frame side, we had that percentage to be around 80%, including our proprietary exclusive brands. Last but not least, our sun retail. I would say we had a strong summer season here. Several countries, whether I look at Spain or DACH, whether I look at the Netherlands or Turkey, the Middle East or U.K., I feel good about this quarter and in general, about the sun season. Probably one exception, that is France. And that is very much due to, I would say, slightly negative trend that we've seen in department stores in France. Now let's move, switch gear. Asia Pacific, 5% delivery at constant currency. I remind you that we had a pretty tough comparison base. Last year, in Asia Pacific, our delivery was 12% growth rate. In the region, Japan delivered double-digit growth. India was in the high single-digit territory, while Australia and Korea were in the mid-single-digit growth. In China, we landed in a slightly positive situation in Q3 in terms of revenue growth. But clearly, this is a deceleration compared to the trend that we've seen together in the previous quarter. I would say a couple of things on China. On the positive side, I think the resilience of Stellest lenses and in general, of myopia solution, has been pretty impressive. Stellest in Q3 delivered a growth in excess of 40% with approximately 2 million pairs of Stellest lenses that were delivered so far in China. On the other side, I think when we look at Hong Kong, for example, we reported average sales, and I believe that we have, in Hong Kong right now, a structural lack of touristic traffic, consumer spending, and that obviously doesn't help to grow our revenue base there. On the other side, also the Bolon brand. The Bolon brand during the course of the third quarter experienced a quite material deceleration, very much driven by a weak sellout data. Brief touch on Direct to Consumer, I would say, pleasing to see OPSM deliver in the quarter, with comps that were in the mid-single-digit territory. And we enter now with a very similar trend in Q4, and that's obviously very promising as we approach the high seasonality. On the other side, our retail footprint in China struggled a bit with negative comp sales, and I would say that, that was mainly driven by weak traffic across the China country. Latin America, the best-performing region, up 10.1% during the course of the third quarter. In the LatAm region, we clearly benefit and continue to benefit from the tailwinds of Argentina. But in any case, all the key countries in the region, like Brazil, Colombia, Mexico, Peru and Chile, they all delivered solid growth with -- in Q3, with a pretty good balance between the 2 distribution channel, Professional Solution and Direct to Consumer. On the B2B side, I would say, happy with both frames and lenses in Brazil, while on Hispanic LatAm, we were double digit on both optical and sun frames. While the lens part of Hispanic LatAm was a bit softer in Q3 due to a slow pace that we saw in Mexico in particular, on a couple of key accounts. Moving to the Direct to Consumer. I would say double-digit comps in the optical retail banner with price mix that were very much driving the growth as we reshape the overall assortment of lenses and frames, similar to what we've done in Europe with GrandVision and that clearly is driving price mix up. While on the Sunglass Hut part, we have a double digit in Anderson in Brazil and a low single digit in Mexico. But now before I hand it over to the operator for the Q&A session, let me just close out today's session with a couple of remarks. We are entering the fourth quarter conscious of the assets we are deploying across the different markets. We are ready to face a holiday season, an insurance week, a Black Friday with a team that is very much committed and prepared for a strong execution. On top of that, we are consolidating from day one in the fourth quarter, both Supreme and Heidelberg which will give us an additional lift in our revenue profile. So I can tell you and share already today that we have an expectation of revenue acceleration compared to the trend that you've seen for the first 9 months of 2024. With that, let me hand it back to the operator to start the Q&A session. Thank you.

Ladies and gentlemen, we will now start the Q&A session. Our first question comes from Luca Solca, Bernstein.

I would like to ask about the status of your collaboration on smart glasses. We saw that you extended the partnership with Meta that you've been launching a new version of the Ray-Ban Meta glasses. And I think this year, you had also been talking about potential stronger tie-up with Meta, with shares being bought by Meta and also about the potential ability to work with other players like Google. I wonder if you could expand a bit on that. And this would be my first question. When it comes to the situation in retail. I wonder if you could maybe give us a few signposts and give us quantitative elements as far as like-for-like growth is concerned in the most important change, if you could.

So let me take both of your questions. So the first one with respect to Meta. We are pleased to enlarge the duration of the partnership that we have with Meta. And it's a partnership that will be a journey that we'll do together around wearable. It's a partnership that will last quite a few years, I would say, that will take us to the next decade. And it's a partnership that will also encompass presumably, I would say, will encompass other brands. It is a partnership that has certain aspects of exclusivity that, for obvious reasons, we can't disclose. But I would say, if I have to judge by the results we've seen so far with Ray-Ban Meta, the success that Ray-Ban Meta has had in many geographies, in every geographies, I would say where it's commercialized and sold, I should say that we're very hopeful and confident that this is going to be a very successful journey together. The other part of your question is about the shares that was mentioned during the last time that we got together in H1, we have nothing to report at this stage. The second part of your question relates to the retail performance so far. I mean, generally speaking, the trends are pretty clear. Let me say, optical retail banner, very strong in Europe. We continued the journey with the GrandVision, the integration is marching at high speed. We see that journey of elevating the consumer journey in our optical retail banner going in the right direction. In North America, I would say consistent pace, consistent pace, which is a good thing. LensCrafters are low single-digit comp. It is exactly where we wanted to be. Nice lift in Target Optical performance, mid-single digits. It's now becoming a good consistent trend over there. Probably, the sun part, it's kind of 2 velocity story, right? We have that soft demand in North America, but good September, good month of October so far. So we're very hopeful, as I mentioned before, that we're going to get into the holiday season with a very nice leading considering where are we in the month of October. For sun has been a good month, a good quarter. Europe. In Europe, we've seen pretty much throughout the different geographies, a good trend, good demand. I think the job that the team has done to improve the performance, it's remarkable. So Australia, we commented the good performance of OPSM, very happy with that. And really the only area where I would probably see a bit of a deceleration trend is the retail footprint in China. But again, I mentioned before and I said it again now, consumer demand and a macro environment that is probably more challenging than what we've seen in the second quarter in China, it's very much driving that direction.

Our next question comes from Chiara Battistini, JPMorgan.

First question I have on Europe. Could we come back, please, on the performance of DTC versus Professional Solutions. And notably, you've mentioned that Professional Solutions slowed in Q3. Could you expand on what drove that deceleration? Was it anything related to timing and in more cautious ordering? Anything more on that would be very helpful. And again on Europe and the rollout of Stellest, can you please remind us now in how many countries you're present, how that's going and sort of the pace of acceleration of that business in Europe.

So Direct to Consumer versus Professional Solution. I think Direct to Consumer, we commented in Europe, a good trend. On Professional Solutions, I would probably mention 2 things in Europe. One, situation in France. I think we've all seen the restriction that probably some of you have lived in their day-to-day life due to the Olympics in the month of August and really in the last probably 10, 15 days of July. So that had obviously a natural constraint in the evolution of business in France, but we're not concerned about it because I think the job that the team has done in Europe and in France, in particular, in the last few years, it's remarkable. And again, it's important that we highlight that. Probably there's another thing that I want to mention in Europe because sometimes we tend to observe the single quarter. In EMEA, we had the last 12 consecutive quarter of growth above or equal to 5%. So I mean, we are looking at a region that has been consistently delivering 5% or more in the last 12 consecutive quarters. So I would define this a pretty impressive track record. When we look at the Professional Solutions side, there is probably, on top of France and other things that I would mention is Turkey. In Turkey, we've seen a little bit more of a stabilization on the trend, but Turkey is still growing at double digits. So no reason to be concerned over there. Stellest in EMEA. Well, Stellest in EMEA, it's obviously a nice story from a growth standpoint. We are growing in excess of 70%. So we're pleased with that. And just to give you an order of magnitude, Chiara, you're looking at Stellest being around 10% of the size that we have in China, and that's something that can start giving you a bit of a flavor and an idea how to put in perspective the expansion and also the growth of Stellest in EMEA.

Our next question comes from Grace Smalley, Morgan Stanley.

My first one would just be on Nuance, please. If you could just update us on the progress there and your anticipated launch timing and also how you're thinking about the Nuance opportunity following Apple's announcement last month. And then my second question would just be a clarification on the Q4 comments that you made at the end of the prepared remarks. I believe you said that you expect an acceleration in revenue growth in Q4, including also the consolidation impact from the recent acquisitions. Could you just comment if you also expect an acceleration in revenue growth on an organic basis, just given your comments on the Olympic headwinds that have now faded and also your positive comments on the exit rate in U.S. sun in September and October.

First question on Nuance. We're confirming what we already shared. We do expect to launch Nuance between the end of this year, early next year. And we are in the process of getting the clearance from the FDA. Fourth quarter comments, we do expect an acceleration, and we do expect that acceleration in the trend versus the trend that you've seen in Q3 with the impact of Heidelberg and Supreme, but also organically without considering the impact of Supreme and Heidelberg.

Our next question comes from Louise Singlehurst, Goldman Sachs.

Just on Europe, I know there's been a commentary on this already, but the deceleration and the key factors. I wonder if you can just specifically talk about optical within that, obviously, the double digit in Q2 to mid-single-digit-ish for Q3, I'm guessing. And I know you've highlighted France, but I just wondered, ex France, to your point just now, can we also expect an acceleration in Q4, all else equal? And then my second question was just with regards to North America. And you're obviously confident enough to highlight in the statement and the commentary about Sunglass Hut turning positive in September and also continued into October. Do you think it's time now we can actually -- do you think we are genuinely turning a corner now for a sustained positive momentum in sun? I know it's a big question to ask, but it'd be great to get your comments.

Louise, let me answer both of your questions. I think the first one that you were talking about is in EMEA. And I would take the optical question on the angle of the Direct to Consumer. If I'm wrong, please have a follow-up. The way we see the third quarter, it's still a very good story from a GrandVision standpoint. I think, generally speaking, we've seen positive growth in all the key markets. Probably, we've seen a bit more softness in the U.K. with Vision Express. We had a tough comparison base in all honesty. So that's probably the only explanation that I have for you today. And in France, it's very much related to the Olympics. So we're already seeing good traction in the month of October. And in general, we stay confident that we're going to see a good performance also during the course of the fourth quarter. We look at the, for example, subscription business. And that's obviously very promising for us because subscription business today represents about 15%, 1-5, of the GrandVision revenue of the optical retail revenue. That number was 10%. So it grew almost 50% year-over-year. So that part obviously creates a natural link with consumer and we believe is going to ramp up further more just as of today, we're running slightly less than 20 countries with the subscription model. And I believe between the end of '25, early '26, we're going to have the entire optical retail banners, leveraging the subscription model, which so far has been very successful. Sunglass Hut North America, whether we are turning the quarter or not, let's wait for a quarter to see and comment that. But for sure, we've seen a different trend beginning in September and through the month of October. We've seen that improvement, in particular on the Sunglass Hut locations that are more exposed to tourism. So the 10% of the network, which represents 20% of our revenue base for Sunglass Huts, those are the ones that are usually more successful in the month of September and October. But again, I think the team is very committed and I think you're going to have a pretty exciting holiday season.