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 Full year 2024 Results Management Call. The Group's Chairman and CEO, Francesco Milleri; the Deputy CEO, Paul du Saillant; and the CFO, Stefano Grassi, will walk you through the business and financial highlights of last year. [Operator Instructions] With that, I hand it over to Francesco.

Welcome, everybody. I'm happy to reconnect with you to present the sound financial performance of 2024 and give you an update on our strategic initiatives in smartglasses and hearing aids. EssilorLuxottica's revenue broadly maintain the sound pace of the past years with the fourth quarter at 9% and the full year at 6%. This came on the back of the sound organic growth of our business, supported by the solid trajectory of the eyecare eyewear activities and boosted by the new category of wearable. M&A gave a little extra contribution in the fourth quarter. I'd like to say a few words on Supreme, which continued to successfully execute its strategy after the consolidation in EssilorLuxottica perimeter, delivering, say, growth in line with the group pace. We are at work now on the next steps, expanding the brand footprint both through e-commerce and new stores as well as improving the eyewear category. We are also happy with the Heidelberg addition as it is opening new opportunities in medical applications that are becoming a strategic priority for us. Diagnostic and eye treatment as a part of broader strategic focus on eyecare is the natural evolution in med-tech space for our group. Talking about revenue, I also like to highlight the amazing performance of Stellest growing 60% in the full year in China and gained traction in Europe. This, once again, proves how urgent it is to address the myopia issue in China, Asia and worldwide, including the U.S. market that we look forward to start serving between this year and the beginning of the next. Looking at the group profitability in 2024, we substantially expanded our margins, with adjusted operating margin advancing by 50 basis points, offsetting the labor-driven inflationary pressure on our cost base. We also achieved double-digit net margin and sound free cash flow generation, resulting in the dividend distribution proposed in line with the last year at EUR 3.95 per share, also confirming the scrip dividend option. I'd rather like to focus now on the 2 disruptive technological innovation that EssilorLuxottica has been promoting in the market. To make it evolved towards a future where a pair of eyeglasses will be the main digital computing platform, addressing our daily needs related to medical service as well as information and social entertainment. Let's start with the Ray-Ban Meta glasses, a new category of products that we introduced in cooperation with Meta more than 3 years ago and is now proving to be a great success for its digital future, the ramp-up sales and utilization rates. Since its launch in September 2023, EssilorLuxottica has sold more than 2 million units of Ray-Ban Meta. The rate of activation and the time of utilization have been constantly increasing since the first launch, showing that this product is becoming part of our daily life. The category of wearable is at an early stage, but we have great confidence in its potential, and we are planning for the long term with Meta. We are thinking about new releases, [ renewed ] future and new brands, all supported by [ eye ] key application in smart glasses and wearable. We expect important progress soon as the most advanced multimodel AI, which is currently available in U.S., Canada and Australia, will expand across other markets worldwide. Consistently with our open model, we look at this product like a shared platform ready to embark on third-party brands and new function also in the form of subscription services. In the light of such evolution and in line with our ambitious plan, we are currently expanding our production capacity for Ray-Ban Meta, set to reach 10 million annual units by the end of next year. Passing to hearing aid glasses, we have launched Nuance Audio, both in the U.S. market and the main European countries. In the U.S., we have just got the full clearance from FDA and we are selling Nuance glasses in the OTC segment. In terms of the trade channel strategy, we confirm we'll go through wholesale, physical retail and e-commerce, including both our and third-party partners and hearing aid specialist. Selling and training tools are ready. The whole powerful platform of EssilorLuxottica is ready to push. We are also currently speaking with insurance group to include the hearing aid part of the product in the new managed hearing care schemes like we do in vision correction. In Europe, we have obtained the CE level as well as the ISO quality certification, and we are getting ready to start selling Nuance in Italy, in France, Germany and U.K. In line with the U.S. market, the trade channel mix will encompass both wholesale and retail, including hearing aid retailers and our own optical banners in each country. We strongly believe in our product and its ability to address a currently unserved need for more than 1 billion people worldwide affected by mild to moderate uncorrected hearing impairment. The disruptive comfort of pair of good-looking and well treating glasses, equipped with a groundbreaking open air hearing solution available at an affordable price will overcome the adoption barriers of stigma, discomfort in eye [indiscernible] that have so far prevented the category from rising in penetration. The journey is just the beginning. As we are already at work on the next product releases to offer to our customers higher quality and new functionality already later this year. Thanks to our audio team for their strong effort so far. Let's make it work now altogether. With that, I hand over to Paul.

Thank you, Francesco, and to all of you for being here today. As you have just heard, our company is in great shape. In the past years, we have never stood still. Instead, we have optimized each and every ingredient of our powerful organization, delivering a high pace of innovation, strengthening our supply chain, adding high-profile brands to our portfolio. Thanks to the engagement and commitment of our 200,000 colleagues who stand at the core of our strong execution, all this while accelerating the building of new categories. Let me give you an update on some key product and strategic initiatives. First, let's talk about children. Our myopia management initiative is evolving fast. Our first generation Stellest lense has experienced rapid growth, and we have equipped almost 3 million kids around the globe in 2024. Based on clinical evidence, we have recently amplified its medical scope targeting pre-myopic children with the aim to delay the onset or possibly even prevent myopia altogether. The Stellest [ Plano ] version started to be prescribed at the end of last year. Building on its success, we are now looking at the Stellest brand more broadly, creating a full suite of product and solutions. Twithout upcoming launches. The Stellest glasses, which feature a frame specifically designed to take into account the facial parameters of children for the best fit and maximize treatment. And the Stellest [indiscernible] contact lenses, which represent the debut of the brand in the U.S. In the meantime, in China, the Nikon and Kodak DOT lenses with the SightGlass Vision technology have also had a stellar year successfully supporting our myopia management portfolio strategy. A word on transitions, a success story. In recent years, the brand managed to effectively rejuvenate its image and is now chosen by millions of consumers of all age groups as a cool feature to colorfully express their individuality while also protecting their eyes. The growing trend was recently also fueled by the launch of Gen S, which is completing its worldwide rollout with Brazil and across Asia. Now take Ray-Ban Meta that Francesco talked earlier about. Already, 40% of the pairs sold in our direct-to-consumer channel are equipped with transition. It is the enabler to all day use of the product. And we are taking the brand a step further with new applications. In 2024, we launched the first-of-a-kind Ray-Ban change, featuring the transition technology directly on the frame. The result is a fully dynamic pair of glasses with changing colors on the lens and the frame. [ Our brand's ] a strategic asset. They are critical in conveying our innovation and product benefits to the consumer. Lately, we have enriched our portfolio with new licenses. The newest addition are Moncler, which presented its first stunning line collection at the spectacular event in Crans-Montana, mid-January. Diesel whose bold, daring style are destinated to create buzz among Gen Z trend setters. While the product license has just been renewed for the next 10 years. A lot more is to come this year also for our proprietary brands, Ray-Ban, and in particular, Oakley, which will be celebrating its 50th anniversary this summer. Stay tuned. As you have heard from Francesco, the med-tech dimension is a strategic priority for us. On that front, we have recently made decisive moves. Our aim is to serve our customers and patients from a more holistic standpoint, covering all aspects of eyecare, including eye disease diagnostics, surgical guidance and management of chronic conditions. In a world with a growing and aging population, the number of people affected by eye pathologies is increasing significantly. At the same time, health care systems across the globe are under pressure and the shortage of doctors is growing. To unburden the system, eyecare practices can play an enhanced role in screening and monitoring eye health under the shared care approach. Leveraging our relations with all actors of the industry, we are well positioned to contribute to this challenge. With the highly advanced OCT devices from Heidelberg Engineering and the retinal imaging solution of CellView, we have added powerful capabilities in the posterior and anterior eye segment for addressing diseases, such as macular degeneration, glaucoma, cataract and retinal detachment. While noninvasive devices of Espansione powered by light therapy will be a game changer in the effective treatment of chronic conditions, such as dry eye. Before concluding, I always like to share with you the remarkable progress we make with our inclusive OneSight EssilorLuxottica Foundation and its programs. Since 2013, we have provided access to Vision Care for almost 1 billion people and equipped close to 90 million individuals with eyeglasses they urgently needed. Regarding our sustainability journey, we are happy to share the validation of our targets for Scope 1, 2, 3 by the SBTi and the inclusion of EssilorLuxottica in the Dow Jones Best-in-Class Europe Index. And now let me hand it over to Stefano, who will run you through how our each offering has been effectively delivered to our customers through our global multichannel go-to-market organization.

Thank you, Paul, and good evening, everyone. Happy to be with all of you for our 2024 earnings release. We closed another year of outstanding growth in our top line across all the regions and all the segments that delivered positive growth at constant exchange rate. Latin America and Asia Pacific were just below 10%. The EMEA region was approximately 8% growth, and North America posted a 3% growth for the full year 2024. When we look at the fourth quarter, I would say that we closed at our best, posting the higher quarter of the year, with revenues up 9.2% at constant currency. And even excluding the impact of the newly acquired Supreme and Heidelberg that are part of the full consolidation in EssilorLuxottica since October 1, we will be looking at the best quarter for 2024 with revenue up 5.6%. So we're clearly very pleased with the way we perform, deliver and executed in 2024. A quick touch on currencies, we are financing our current exchange results broadly in line with a constant one, and we saw revenue up 9.2% at constant exchange rate, while our current exchange rate results posted revenue 8.5%. In the month of November and December, we're also seeing that current exchange results actually were better than the constant one, and that's obviously very promising as we enter into 2025. But now if we move across the 4 different regions as usual, we begin with North America that posted a Q4 up 7.8% in acceleration from the third quarter that was 1.6%. This was a remarkable quarter for North America, actually, the best one. And for sure, the impact of Supreme played a role. But even excluding the impact of the acquisition, we will be looking at the best quarter of the year for Professional Solutions, the best quarter of the year for the direct-to-consumer in North America. In our B2B division, the frame part of the business outperformed the lens in Q4. And we had a strong delivery of Ray-Ban in Ray-Ban Meta in Ray-Ban prescription. But we also had a good performance in our premium fashion portfolio with [ Swarovski ] and in luxury portfolio, in particular with Miu Miu and Chanel. Moving to the lens part of our business. We were positive on both single vision lenses and progressive lenses. We've got a great traction, I would say, from the Shamir progressive lenses. And from a price mix standpoint, we continue to see a strong price mix and that is true in both lenses and frames. And when we look at our distribution channel in North America, I would say that our growth was very much driven by our key accounts. While on the independent side, we continue to see an outstanding performance of the Vision Source Alliance. And now let me move to the other channel, the direct to consumer. As I mentioned to you before, we had the best quarter in 2024 in Q4. We had a strong rebound in Sunglass Hut in North America. And if you remember, during Q3 we were already observing a step change in Sunglass Hut during the month of September. Now that step change is confirmed. Now we are reporting a fourth quarter in Sunglass Hut with comp sales that are in the high single-digit territory. Both international and no international Sunglass Hut location posted a strong comp and the delivery was very much balanced between price/mix and volume. A quick touch on the optical banners. They deliver a low single-digit comps during the course of a fourth quarter. We had a good quarter in LensCrafters with positive traffic and a successful introduction during the second half of 2024 of the new LensCrafters adaptive progressive lens designed by Shamir. But now let's move to the other critical region, Europe, 9.6% at constant currency acceleration compared to the 5.6% that we reported in Q3. This is the 15th consecutive quarter of revenue growth in the EMEA region. And out of those 15 quarters of revenue growth, 13 were delivered at either high single-digit or double-digit pace. Let me say that this is a track record that it's probably closer to a fast-growing market, a fast-growing region than a mature one like EMEA supposed to be. Big credit for this outstanding result to the execution that we had across all the distribution channel across the product category and individual markets. When we look at our 2 distribution channels, both professional solution and direct-to-consumer delivered an outstanding quarter. We were double digit on direct to consumer and high single digit in our Professional Solutions channel. When we look at the countries across the EMEA region, we show widespread positive trend. In Italy, in Germany, in Scandinavia, in Turkey, in Eastern Europe, we delivered double-digit growth. In the Middle East and Spain, we were in the mid-single digit. And in France, we delivered low single-digit growth. When we look at our professional solution channel, our independents, our key accounts, our e-commerce partner were the 3 main drivers for the growth. But when we look at the product categories, I would say frames posted a high single-digit quarter with strong delivery on both Sun and prescription with Oakley and the luxury portfolio they were all in healthy shape during the quarter -- the last quarter of the year. When we look at our lens business, Eyezen was double digit, Stellest was double digit. Nikon delivered double digit while transition in Varilux delivered a mid-single-digit pace. So the message I want to convey is that we had a very strong, widespread growth in EMEA region on the B2B side. Moving to direct-to-consumer, high single-digit comps in both Optical and Sun. Let me start with Optical Retail. That continues the journey of elevation of the consumer experience. And you remember, we talked about that during the Capital Market Day. And every now and then, I'd love to share with you where are we with that journey. And I will share with you a few examples that give you a good flavor of the work that the team has done recently. The EssilorLuxottica lens penetration today in GrandVision is around 70% of the total assortment. When we look at the frames, the penetration is around 85% in the fourth quarter. Another important aspect is represent -- assets is represented by the subscription business model. 20% of the Optical Retail business in Q4 is underneath the subscription model. Teleoptometry, another important initiative. 10% of the store base in Optical Retail Europe is leveraging teleoptometry. In 2024, we performed approximately 140,000 eye examination leveraging teleoptometry. Where can we go from there? Well, we have an ambitious goal. By 2027, to equip approximately 3,000 stores and performing a single year 1 million of eye examination leveraging teleoptometry. The last important chapter of this journey is represented by the renovation efforts that we are undertaking. And we're marching at full speed with over 250 stores that were tasked to renewed in 2024. And also some key flagship locations that maybe some of you have seen walking by the European Street, like, for example, the GrandOptical in [indiscernible], the Vision Express in Oxford Street in London or [indiscernible] Frankfurt, they are now performing extremely well after the recent renovation. On the Sun retail banner, I would say, good delivery for the locations that are more exposed to touristic traffic, but also the other ones in EMEA were actually delivering good comp sales, in particular, Turkey and Spain that deliver a double-digit pace; France that was in the high single-digit comps and Italy that delivered mid-single-digit comp sales during the course of Q4. But now let's switch gear, let's move east and let's touch Asia Pacific. 14% top line growth at constant currency, the best quarter of the year in Asia Pacific. Clearly, in this quarter, there is an impact from the acquisition of Supreme. And excluding that impact of M&A, we will be looking at the fourth quarter in a mid-single-digit speed, substantially aligned with the trajectory that we reported during the course of Q3. Now let me share a couple of highlights for the region. All the key countries like China, like Southeast Asia, like Japan and Korea recorded a solid growth during the course of Q4. India was probably the only one just slightly negative, due to a soft sell-out that we experienced on the frame part of the business in Q4. In China, myopic controls product categories, continuous journey with a double-digit growth from both Stellest and the Nikon and Kodak lenses that leverage the DLT technology. Just to give you an idea, the overall category, of myopia solution grew in Q4 in excess of 50% and represents now 25% of the revenue base in the country, outstanding. Excluding the myopia solution category in China, we continue to experience a soft demand as we observed during the course of the third quarter, and we've seen that, in particular, in the Bolon brand. Let's touch on direct-to-consumer. Optical comps are a low single digit with positive in Australia, where our Sunglass Hut banner, Oakley and Ray-Ban stores in the region, they all deliver mid-single-digit comp, I would say, in particular, thanks to a strong double-digit comp in the Japan country. Now let's move to the last country, last region in our journey here, and that is Latin America, 8.7% at constant currency. In Latin America, this is clearly another strong quarter for the region represents the 16th consecutive quarter of positive growth at constant currency. When we look at our B2B side, the professional solution we, delivered low single digit on top of the strongest quarter last year, where I remind you, we grew 17% versus 2022. So a very, I would say, tough comparison base for professional solution. On the other side, our direct-to-consumer was up 15%, delivering the strongest quarter of the year. On the B2B side, we have the Brazil part of a business that was negative, but very much driven by that tough comparison base that I touched upon before. And it was particularly true on the [ lense ] side of the business, while the frame business were actually strong in Q4, in particular in the luxury segment. Now we are a few days into 2025. And I can already anticipate that as we enter in Q1, we do have an expectation of a step change in our Brazilian performance in Q1. For the rest of Latin America, we delivered double-digit quarter, helped by inflationary impact of Argentina, but also by a strong double-digit pace in Colombia, where we experienced a successful launch of transition Gen S. Now we're finishing with Professional Solutions, let's move to the direct-to-consumer side. In Q4, like in Q3, we had another double-digit quarter for our direct to consumer distribution channel. Our Optical Retail banner were on fire. GV banners in Mexico, the one in Andes, Optical Center in Guatemala, the [indiscernible] directly operated stores, all delivered double-digit quarter. Last touch on our Sun banners that on the largest Sunglass Hut footprint in the region, that is the Mexican one, delivered a double-digit comp. So very compelling picture on both Optical and Sun for the LatAm region. And let's now move to the profit and loss. I would say we are very pleased by the way we closed 2024, in particular, during the second half of the year, where the currency headwinds were materially reduced compared to the one that we faced in 2023 and in the first part of 2024. As usual, consistently with our narrative in the past, I will comment and focus more on constant currency results. I won't touch top line as we already covered that before, and I will start with our gross margin. Our gross margin in 2024 expanded 30 basis points at constant currency, with an expansion that is slightly lower in H2 compared to H1, and that was very much due to a strong performance of Ray-Ban Meta during the latter part of 2024. And as you know, Ray-Ban Meta is dilutive, and that dilution though, was largely offset by the favorable impact of price mix at group level. When we look at our operating expenses, they decreased approximately 20 basis points still at constant currency. And here, you can appreciate our effort to continue to balance on one side, a strong control on our cost base and on the other side, continue to fuel the pipeline of our strategic investment, for example, Ray-Ban Meta, the evolution and the expansion of the wearable family, the investment to launch Nuance and the major strategic initiative of artificial intelligence and diagnostic. All in all, our operating profit expanded 50 basis points on a full year basis, which represent the promised margin accretion compared to the one that we post for the full year 2023. When we look at our results at current exchange rate, you're looking at 20 basis points margin expansion at the operating profit level with an H2 margin expansion that was 40 basis points. Now if we go down for a second to the group net profit, our margin were 40 basis points accretive at constant currency with a tax rate that was broadly in line with 2023 and an increase in our financial cost that was mainly related to the application of the IFRS 16 lease accounting principle and a slightly higher instrument expense on our financial debt. All in all, our group net profit expanded 20 basis points at current exchange at 11.8%. And now the last chapter of this journey, free cash flow and net debt. Our free cash flow generation was once again extremely strong, EUR 2.4 billion for the full year 2024, slightly higher than the one that we recorded in 2023 with the capital expenditures that are substantially flat year-over-year. Our net debt-to-EBITDA ratio is below 2 at 1.7x and clearly include the impact of the recently acquired Heidelberg Engineering and Supreme. But now let me hand it over to the operator for the usual Q&A session.

[Operator Instructions] Our first question comes from Oriana Cardani, Intesa Sanpaolo.

The first one [indiscernible] based on the Trump administration released so far [indiscernible] profitability. And my second question with regards to growth profile expected in 2025 without considering the set of the launch of an Nuance Audio, what is the size of the price mix effect expected for this year.

Oriana. I'll take the first question. And then eventually, we can make a comment on the second one. So the first question with respect to the duties. As you know and appreciate, the picture, the framework is continuously evolving at this stage. We see pretty much every other day news on duties. But from what it looks today, there are probably -- 2 major headwinds that we see. One is China, the other one is Mexico at this stage. Let me say that if I step back and look at our supply chain, I look at manufacturing infrastructure. Today, we are in much better shape than we were probably were 4 to 5 years ago. We recently invested to diversify manufacturing plants for both frames and lenses. And that gives us a higher degree of flexibility and higher capacity to mitigate those headwinds. So that is 1 important aspect that needs to be taken into consideration. The other thing that I haven't mentioned is clearly the commercial action that eventually we could take, if needed, from a pricing standpoint to mitigate that. So if I consider those 2 things that I just mentioned to you, our expectation is those headwinds will be largely mitigated by the actions that I just described. With respect to growth in 2025 and the profile without considering the launch of Nuance, we still expect the revenue to grow to price mix. I think at this stage, mix would be probably more important than pricing. But the real step change that we expect to see in 2025 is going to be through volume effect, which I think it's something that we'll start seeing already as we enter into 2025.

The next question comes from Louise Singlehurst, Goldman Sachs.

Great progress in the end the year. Just terms of a questions. Firstly, on the wearable, great to see [indiscernible] volumes. [indiscernible] in your opening remarks. I wondered if you can talk about that, the different partners and help us understand more broadly the ecosystem you see evolving, whether that be product and distribution. Also on the third parties, I know in the past, during 2024, there were discussions about potential partners taking a stake in your business. I wondered if there's any update to that effect? And then my second question, just on -- again, on smart glasses on the lenses. Can you talk about the lens mix accompanying the frames and what you're seeing customers buying and if there's any interest in multiple pair purchases?

I'll try to give an answer to the first, the wearable and third-party brands. This is our usual approach. We started to set a platform of wearable that is evolving month after month with new function and capability and duration of our battery and so on. When the platform will be solid and complete, as usually, we are open first to bring this wearable platform on the other brands of our portfolio. But at the same time, we are open also to really accept the request for third parties brands that won't really compete on this arena. We never take this capability, unique capability that we built as a barrier to a normal competition. And I believe to provide the platform, the electronic part and in the future also to provide services will be a business that will be bigger than just sales they sell the product. Prada or the first brand that will arrive, we don't disclose. But I believe that in a few years, almost any brand in the market he will have at least 1 model with some digital services on it on capabilities. And in the long term, maybe any glasses will be on this position.

Maybe a word on the lens mix. I think the way to look at it is the following. When we started with Ray-Ban Stories, we started with a sunglass. And it was obviously not the right experience for the consumer. What we see in the Ray-Ban Meta, which is the first very notable change, is that now the choice is moving towards photochromic lens towards transition lens. And as I said earlier, 40% in our stores of the Ray-Ban Meta are equipped with transition, and it is growing. And this is what really makes the user experience much better because it is moving this category into a daily use continuous use. So then you move to Nuance Audio. And Nuance Audio is clearly whether we are on the smart glasses, Ray-Ban, whether we are on the Nuance audio. They are all Rx compatible. And the idea is to feed them progressively with the prescription lens. So the consumer as they are embracing this category are clearly going to move progressively to have their own prescription, the first step being the success of the photochromic, which is a very, very good sign. And of course, the full supply chain is being enabled to do prescription, full job for the consumer, whether it is in the professional solution channel or the direct-to-consumer or online.

The next question comes from Chiara Battistini,, JPMorgan.

My first one would be on Nuance. Great to see the approval last week. I was just wondering if you could share with us a bit of the timing of the first launches in the U.S. when we should be expecting the product on the market? And also how you're thinking at this stage about the ramp-up of the volumes available in the market and also an investment marketing selling costs that we should be thinking about as you launch in Q1 and ramp up in Q2? And the second question, you mentioned -- sorry, about Ray-Ban Meta, you mentioned, I think, that there is a plan to expand the capacity to up to 10 million units by end of next year. I was wondering whether that is all in China or in other regions as well and if that includes Nuance. And if I can may squeeze just a very, very small 1 follow-up on the impact -- the organic growth in Q4, I think, Stefano, you mentioned 5.6% organic, so 3.6% consolidation impact. Thank you.

Nuance, really, we have a great expectation. That is not just based on our dream or desire is really based on the -- how the customers are responding. We already tested in thousand of consumer and really, the feedback has been amazing, much better than we expected. Now the ramp-up is really in the top period. We are sending product and trade material, and we expect to have a great success with this product. first because it's something completely new. Maybe people have waited for that kind of solution for many years. So we believe to see a peak in the first part of the launch, then honestly, we want to really better understand the evolution of the product, how we can improve some feature that now are very basic. . We have 2 directions. One is really more sophisticated with AI, you know that we acquired Pulse that is really delivering an incredible system to manage sound to suppress noise and so on, this is for a part of consumer. Then we also are thinking that a product that will be simpler than the 1 that we launched now that will be totally independent from the mobile phone and from the app will be really just can be used with just the small device to increase volume, set the type of selection that we need. We are preparing investment in marketing and communication is much more involving more than direct -- directly the consumers is a word where working very well opinion leaders that are really represent reference for consumers that have this kind of problem to fix. And we really -- we are start to understand an incredible word behind this audiological market. Leave the others to Paul.

So on the capacity that Franciso commented that we would ramp up capacity to 2 million units for wearables that covers the Ray-Ban meta, it will cover also Nuance Audio by the end of 2026. It was said that capacity will be in China, but also in some of the footprint we have in Southeast Asia. . 10 Million capacity.

And I take the last question that you, Chiara have, just as an exception to the 2 usual questions, right? So that -- we got the third one, but it's just a confirmation. You are correct. 5.6% is our growth excluding the impact of the acquisition of Heidelberg Engineering and Supreme.

The next question comes from Susy Tibaldi, UBS.

The first one is on the smart glasses. I understand you cannot say too much on the agreements that you have with Meta. But is it the right way of thinking that Meta is the key driver behind the tech development side, while you are more driving the design and the commercialization. The reason I'm asking is that, of course, Mark Zuckerberg has made -- he's been very, very vocal when it comes to the scale of the investments they are making into AI and the related technologies. So I wanted to know if you are at all investing also in some of these technologies or thinking about investing or you're leaving this side to the tech world, which right now is Meta but could be also with others in the future? Or another way to ask the question, if we look ahead 5, 10, 15 years, do you see yourself as focusing more on the hardware distribution brands, lenses with a tech partner? Or do you also have eventually plans to do something a bit more on the tech side to have some sort of more independency. And my second question is on the margins you are confirming today, your guidance for 2026, this implies quite a big step up bigger than what you delivered this year. So can you talk about the key drivers. You had some headwinds with inflation, et cetera. So how are these evolving? Are they fading? And given all the innovations and investments, it just seems quite a big step up. So it will be nice to get a bit more clarity on the drivers, especially given that the dilutive effect of the Ray-Ban unless once you reach this 10 million, you think that it can be more aligned with the profitability of the group and therefore, not have such a dilutive effect.

On Smart Glasses, meta and the role that we play. So it's not one against another or competition. We are really in a full collaboration about technology. Nuance technology is completely in our hands. We start from scratch. We built the hardware infrastructure and platform, we develop the code. Now we are adding AI and so on. So I believe that in the future, the role of our company, it will be much more than just providing good brand or iconic brands or a beautiful design or really led the -- all our 20,000 stores support the sales. . We are not thinking in terms of independency. We are more thinking in the term of collaboration. And that is -- both companies are growing very well. Meta is start to better understand that the smart glasses are first of all, glasses and then they bring new functionality. This is, I believe, is a great contribution that comes from our understanding of the market. So that is our position. We are investing in the new technology. We are investing and hiring people on the audio and the video part. And so we will be capable to design our own platform. That is not because we have this capability that we are going to really build that kind of platform, we much more believe in contribute to the Meta platform to really reach the experience, the business model and the capability to better serve all our customers. Margin is yours.

Thank you, Francesco. The question on our long-term outlook. We are confirming our long-term guidance. When we look at 2024, we are happy with the growth that we achieved last year. We're happy with the promised margin expansion that we committed and deliver in the course of 2024. We now have a year 2024, where if you look at -- we still experience quite strong headwinds from inflationary trend. If you look at our slide, we commented about 170 basis points headwinds for inflation. We continue to invest on the strategic initiative. And with all of that, we were capable to expand quite materially our margin. When we look at our future, we have a revenue stream that are going to come from wearable device, there are revenue streams that are going to come from audiology, Nuance, first generation and the evolution of Nuance and itself. We have revenue stream that will come from diagnostic and surgery. We have a set of initiatives that in a matter of few years will materialize in a matter of billions. And clearly, they would be profitable one. So -- more than ever, we are confirming today the guidance from the long-term outlook ['21, '26 ] probably just 1 clarification because I suspect there was a misunderstanding before, the 10 million capacity set up that we had was very much related to Ray-Ban Meta, just as a matter of clarification.

The next question comes from Luca Solca, Bernstein.

Luca Solca from Bernstein. You were alluding before and you were explaining, in fact, Stefano that Ray-Ban Meta's dilutive effect, I wonder if you could help us understand a bit more the economics of Ray-Ban Meta. Is it more that it is dilutive because of the investments that you've carried out, and therefore, the depreciation that you have so that this could potentially be solved by increased volumes, but you will have to commit more capital, I suspect as you are increasing capacity so much. . Is it also that this product carries a significantly higher royalty attached to it. I presume then the typical license is that you would have with Chanel or with Dolce & Gabbana, for example, and that would typically work at 8 plus 8 in terms of cost for you, I wonder. If you could tell us a bit more about the economics, why it is dilutive and how we need to model this, especially as we're looking at a significant growth prospects, that would be super helpful. Then going back to what Francesco was explaining that this wearable product is indeed in its infancy, and it's going to evolve very fast and is possibly going to impact in the long term all kind of eyewear. I wonder what you think is the technology at the moment, how far is an augmented reality solution. We saw, for example, that Meta has the Orion and that seems to be an augmented reality pair of glasses. Will you be working on those? Do you expect that this is going to be the next step. How do you foresee this technological development? What could be the milestones of it, if I may ask.

Before Stefano will comment on the Ray-Ban margin, I want to just remind that we are really building a new category. When you build a new category in an old market, you have really to deal with 2 pieces of the puzzle. One is the margin that usually this reseller have and the type of product that you are invested. So in this case, the problem is that we are bringing and has -- because it's the right way to approach the wearable is going through the optical channel. We believe that is the right way to approach it, to become a normal pair of eyewear that you wear every day and sometimes, is the only one that you use. Everybody knows the margin on electronics are smaller than margin on optical. We try in this first phase to really try to balance the 2. We lose some margin. Also, we have to consider the part on lenses that we can gain through Ray-Ban Meta increase in numbers that are not in the margin of Ray-Ban Meta. But this is really that you have to understand that we are building something completely new merging 2 categories. Electronics device and all fashion optical business. In the future, I will be the -- margin will increase first because the new feature it will increase the price because -- and also because many function will be sold in a different way, and so it will add margin to the product. And the product will be not the only things that we sell. Now I -- maybe Stefano would comment on the specific numbers....

Yes, I can just expand even though Francesco, you pretty much said it all in a very comprehensive manner. But look, just 3 takeaway from -- when you look at Ray-Ban Meta and the economics without going into a large amount of details here. But number one, Ray-Ban Meta is dilutive and is mainly dilutive because of the electronic component. Secondly, when I look at my glass half full here, I can tell you that Ray-Ban Meta is materially less dilutive than Ray-Ban story used to be. And actually, when I look at the progression of Ray-Ban Meta due to the scale effect, it continues to be less dilutive month after month. Then what I believe can bring the wearable to the next level well, the expansion of the product category itself. Today, we are looking at handful of models and a single brand. In the future, you look in a variety of products in a variety of different brands and a variety of price points with a variety of functionalities, which, by the way, will probably encompass the hardware component on top of services that can be eventually activated and will represent on top of that an additional revenue stream. And last but not least, Obviously, let's not forget, as Francesco said, that we always have an addition of lenses on top of the base freight. And that's obviously a material lift in terms of revenues, but also profitability when we look at our Ray-Ban Meta platform.

This is, yes, they can sell the second, but we have still Orion. Now I believe that the evolution of wearable will be very, very fast because really the progression that we see on technology is amazing is if you compare the first Ray-Ban story with the second release of Ray-Ban Meta, you really understand that are 2 completely different products. And the second is so much better than the first, and it's just one year later the first. And now we are also working on the new feature. We are working on some app that can run on the wearable and will be sold by subscription. So there are very many streamings that will accelerate the expansion of wearable category and also because we are really receiving requests almost from all brands to have at least one SKU with some electronic capability inside. I believe also is not far maybe that also the luxury brand they will offer this kind of feature in their top SKU. How far is the augmented reality solution. I believe that the technology is not completely mature. Orion is a spectacular product, is working very well. We experience the product. There are some key killer applications like instant translation that will push on that kind of display solution. At the same time, it's quite a bit too complex, the interaction between the product and the human being. Now I believe the limit or the next limit will be the capability of our body to evolve and to be capable to, at the same time, to manage so much information in the same moment. Look at the image received -- maybe the advice through AI and maybe monitoring the health care, listen music, answer to the call that is the real challenge of the future, how to simplify that kind of interaction. When we will find out with something very easy to manage. I believe that the new technology will replace the old wearable now based mostly on the vocal way to activate the AI. But AI is behind this pattern to the simplification. Then we will see what happened when our wearable with all these features will take in a certain way, the control of our life. When your wearable, it will control your car, your [indiscernible] in the house, it will suggest not only what you asked, but it will suggest what he understood that may be you will need because all the sensors that they will control your health care, your health status, it will really suggest maybe to have drink, to drink more water or to relax or whatever. That is really the new challenge of the future. And this future is not so far as we believe.

Our last question comes from Grace Smalley, morgan Stanley.

Thank you for the information you've given on Ray-Ban Meta so far. I just had a few follow-ups. Could you just help us by specifying what percentage of sales Ray-Ban Meta, actually, represented of your reported sales in 2024? And if you do hit that 10 million units that you outlined in terms of production capacity in 2026, given you are changing, it sounds like somewhat the product mix and there's an opportunity to expand to different price points. What would you expect that to represent as a proportion of sales in 2026? And do you think about that 10 million of units is potentially like purely incremental? Or would you expect there to be some element of cannibalization now versus traditional glasses. And then my second question would just be on pricing of Ray-Ban Meta, please. How have you thought about the pricing of the product, like initial feedback you've got from the consumer and how it's priced. And therefore, as you roll out the technology to new brands to new products, how you're thinking about the opportunity to stretch the price point higher.

Grace, I'll take your question. I mean when we look at -- what we probably have to kind of look at holistic here is that we have the current business. And we see that current business nicely progressed at a fast speed. Then we have all a new set of initiatives that in a way are in the start-up phase. I mean Ray-Ban Meta is a great success. It's in everybody's mouth, it's a highly desirable product, but it's just 2 years, not even 2 years in the market. And we know that the ramp-up curve is going to come and it's going to be quite material from a volume ramp-up standpoint. That's why we're getting ready for that, setting up the new capacity. But it's not the only initiative. Clearly, we have a great expectation from Nuance. We see the desire of people to try Nuance, to have access to this product in Europe as well as in the United States. That's why we are largely celebrating the FDA approval for this product. It's very important. And let's not underestimate the importance of the surgery, the diagnostic component, they will become an important revenue stream in the near future. What I can tell you, Grace, is that if I add just those 3 initiatives, in few years from now, you are looking at something that is a material way impacting our results. And when I say in a material way, I'm looking at billions of revenue that will come up out of those initiatives. I don't know whether there is a cannibalization to be honest with you. There's definitely no cannibalization for Nuance because it's building up a brand-new product category. I can tell you that looking at the consumer behavior today with Ray-Ban Meta, and I believe in the future for our wearable device there is a genuine need, desire from the consumer that steps into our store to exactly purchase this product. We saw it in many different instances, consumers stepping in and say, "Hey, I want to buy a Ray-Ban Meta", which tell us that it's a family of product that is highly desirable. So I don't think there is, in a way, a material cannibalization deriving from that. I believe at the same time that the expansion of that product category will help us a lot. And obviously, the pricing assessment that we're going to make in the future is going to be also related to the functionalities that the new product and the brand will have in relationship with the wearable device. So it's all new journey, which we just started now. And believe me, in a few years from now is going to be a material part of our revenue stream.

So after this last question, we thank all of you to be with us anytime and with these really good questions, and we take some indication from your words. Thanks a lot. See you next time. Thank you. Good night.