EssilorLuxottica Société anonyme (EL) Earnings Call Transcript & Summary

Hello, everybody. This is Giorgio Iannella from the IR team. Thank you for joining so EssilorLuxottica H1 2026 Results Management Call. The Group 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 the period. [Operator Instructions] With that, I hand it over to Francesco.

Welcome back, everyone, and thank you for joining us today. I am pleased to reconnect with you to share the results of the first half of the year and give an update on the execution of our strategic vision as the group evolves at a speed that is completely new in our history. . First of all, I would like to say just a quick word on the financial performance of the first semester. Revenue growth at constant currency remains extremely solid at 9.7%, fully aligned with our targets. This result was supported by the resilient performance of our core business of frame and lenses and by the exponential growth of our clinical platform and wearable category. Adjusted operating profit progressed even faster at 15%, alongside our investments in R&D, AI and medical capabilities together with a strong development of our industrial and commercial footprint. Cash generation confirmed its strong trend, exceeding EUR 1 billion in the period. Move to our strategy. We are taking a precise and ambitious direction. EssilorLuxottica is leveraging its unique platform, vertically integrated fully omnichannel, leading insights and global footprint to move towards the new frontier of economics based on high related biomarkers to offer medical services everywhere and at all levels, entering as a main player in the whole health care market bringing this new technology from laboratories to clinics and stores. To understand what this means in practice. Let me start from LensCrafter opening of its first vision and high health surgery center in Philadelphia. A fully integrated platform that bring comprehensive high valuations and surgical procedures under one roof, together with our unmatched portfolio of frames and lenses. This is the first step of a plan to build a system of surgical apps based on our optical store network. Health care center like this will go far beyond high disease, a recent commentary that circulated widely in the U.S. predicts that in 5 years, the largest cardiovascular cleaning site in America will not be a hospital nor a primary clinic. It will be the LensCrafter banner and broader optical practice network. This is not a speculative bet since the concept of [indiscernible] was established. More than 400 peer-reviewed studies have validated the high as a primary and reliable window into systemic health, making it today a recognized and increasingly adopted the [indiscernible] approach across the scientific and medical community. A single 50-minute exam at one location, either of the group or of its partners, powered by Heidelberg [indiscernible] of Citi, complemented by rating's capability will be able to detect a wide span of disease like diabetes, cardiovascular issue and cognitive decline. This is where our vision is going, complementing and supporting primary care delivering prevention, early detection and predictive medicine where people already go. Our short-term ambition is to create a new layer in the health care system that will more efficiently connect patient and hospitals. Complementary to that, in order to strength, trust, governance and accountability of our developing business model, we are building the foundation to manage data as a strategic asset. Reliable, protected, compliant and usable across the group and geographies. To expand these new medical services from the physical practice directly on the face of billion of people through wearable, we need a specific [indiscernible] of technology. In order to achieve that, we started a strategic partnership with Applied Materials to jointly develop and manufacture the new generation of intelligent optical system for AI and AR wearables. This partnership is aimed at shaping the future of optics ranging from way guides to adaptive and electro active lenses from prescription integration to advanced encapsulation, dining and light modulation technologies. The lens category itself will be redefined and our capability to master this new stack industrially at cost at scale with ability to personalize will let us lead the future not only of smart glasses, but of the entire premium eyewear category. No other player in the world can combine comprehensive ophthalmic know-how and excellence with semiconductor-grade manufacturing capabilities. Our objective is to place EssilorLuxottica at the forefront of innovation in the next generation of lenses and the first products and pilot line are already being realized. Regarding our hearing aid glasses once audio is progressing along its discovery path, building awareness and adoption. The second generation will hit the market in mid-September with improvements in battery life, audio amplification, new feature and better design. A final word on wearable and our partnership with Meta, which continues to deliver exponential growth. In H1, we further reached the portfolio with Ray-Ban Meta Optics, our first optical style adjustable and perfectly fitting to be easily warmed for the full day. Together with Meta, we also launched a new collection specifically designed to open the eyeglasses category to a broader, younger and price-sensitive audience. Together with Ray-Ban and Oakley as well as the display model, we now offer the most complete lineup of AI glasses in the market and more is to come. The category is scaling across geographies, brand, price points and consumer segment with higher profitability already visible in our numbers. In conclusion, H1 2026 confirms that we are where we want to be with sales and profits growing. We remain confident in our ability to deliver in our financial ambition and our strategic vision. In less than 10 years, we deeply transform our group from the best-in-class in frame lenses to the pioneer of the wearable category and now into the MedTech [indiscernible] health care leader. With that, I hand over to Paul

Thank you, Francesco. It is a pleasure to be with you today. The first 6 months of 2026 have been, in many ways, a period of consistent acceleration for our group in terms of strategy execution and financial performance. Behind the numbers, Stefano will walk you through shortly. What stands out to me is our team's unique ability to continuously execute across the board. Advancing the science, expanding the industrial footprint and staying close to our patients and consumers. None of this happens with chance. Interest on assets and capabilities we have been building over decades, made up of an integrated production and lab network, a supply chain designed for both agility and resilience and a distribution model that spans wholesale, physical retail and e-commerce channels. These are the foundations that allow us to bring innovation to market at speed and scale wherever our patients and consumers are worldwide. At the heart of this delivery is our core business of eye care and eyewear which is a key driver of the group of resilient growth, both in revenue and profits. In often lenses, our pipeline is rich. Over the recent quarters, we unveiled [ Crizal Natural Look, Varilux ] Immersion and various shift steps forward in the key fields of antireflective and progressive lenses to be rolled out across our trade channels. We also are having great product dynamic under Shamir and icon brand. On the Eyewear side, the last 6 months confirmed the enduring strength of the Ray-Ban brand in traditional glasses, supported by the successful rollout of the Ray-Ban Innovation Lab, new polarized ultra lens technology. The launch of the transition call of Touch capsule and continued momentum on the Wayfarer models and Aviator shapes. Our new luxury eyewear collections were well received by our customers at the recent EssilorLuxottica days with Miu Miu and Chanel at the forefront. Beyond this solid base, I would like to focus on what I believe is the fill roles of our story. Turning science into human impact at scale through 3 deeply connected engines. Our portfolio of [indiscernible] management lens solution our R&D capabilities and industrial platform and the go-to-market global reach, science, scale and access, one single continuum. Let me start from myopia management, a field where we have further strengthened our leadership, keeping sales growth above 20% quarter after quarter. Thanks to strong clinical evidence and a widening range of solutions across technologies, brand and press point. In the first half, we had shipped the next frontier of the field at flagship scientific events. At CCOI and APA 2026 in Hong Kong, we broadened the conversation from slowing progression to prevention. And at ARVO 2026. In Denver, we presented the most comprehensive evidence-based ever built around myopia spectacle labs, including a 7-year Chinese follow-up confirming stales sustained efficacy. In the U.S., [ Stellest ] has already reached 11,000 across channels, progressively bringing the eye doctor community on board to prescribe it. And in June, we launched [indiscernible] in Japan, another high prevalence market. While we continue to invest in R&D assets and capabilities in France and Italy, we complemented our global footprint with a new R&D hub in La Krabang, Thailand, a state-of-the-art 5,000 square meter center located next to our major manufacturing facilities. This hub is bringing under one roof advanced material research, polymer chemistry, characterization and industrialization for next-generation lenses, wearables and MedTech. Another major decision we announced is the rollout of wearable production in Italy, adding a new premium product category to the range assigned to our dating class Italian plant. This reinforces our leadership AI glasses and paves the way for the launch of new made in Italy Smart eyewear. Stefano will give you details on the excellent performance of our nearly 20,000 location retail network worldwide. I would just like to remind you that together with our leading wholesale presence, our brick-and-mortar global distribution platform is a key success factor in our omnichannel business model and a major driver of its evolution. As a part of that, in April, we took a major step acquiring a meaningful stake in top [indiscernible] the largest optical retail chain with almost 2,000 stores across the country, an integrated eye care service model and a portfolio of well-known house and license banners. Founded in 1947, [ Top Sharon ] brings us closer to consumers in one of Asia most important market. Elevates Vision Care standards across the region and creates a natural runway to accelerate the wearable category in Southeast Asia. Together with our time manufacturing footprint and the new R&D hub, Thailand is emerging as a fully integrated ecosystem. Last word on sustainability, which is a fundamental pillar of EssilorLuxottica journey. Our facilities are designed to the highest environmental standards while our single-use plastic reduction efforts continue to progress well toward our 2030 targets. As mirrored by our improved ranking, like last year, CDP Climate A rating, and DGSR recognition. To conclude, EssilorLuxottica progress in H1 is centered on a unique combination of clinical science, integrated industrial scale and consumer reach. This is quite remarkable. As Francesco said, we are delivering on our long-term ambitions, while redefining the boundaries of our industry. With that, I hand it over to Stefano. Thank you.

Thank you, Paul, and hello, everyone. Welcome to our 2026 H1 results. We're wrapping up a strong first semester for EssilorLuxottica with revenue that are up 9.7% at constant currency and 5.7% at current exchange rate. The second quarter landed at 8.7% at constant and 7.2% at current exchange rate. Clearly, both second quarter and first half very much aligned with our medium-term guidance of solid revenue growth at constant currency. Now if we take a bit of a closer look to our second quarter, we see that North America, EMEA, Latin America, they all deliver high single digit, while Asia Pacific posted a double-digit Q2 at constant currency. Our core business that just as a reminder, represent the entire EssilorLuxottica perimeter, excluding wearables, it's up mid-single digit during the course of Q2. Now last comment before we move into the geographies. As you might have seen the gap between constant and current change results is reduced to 1.5 percentage points during the course of Q2 as the U.S. dollar devaluated against euro, approximately 2.5% during the second quarter. So I'm knocking on the wood here, but at those currency level, you might finally expect some currency tailwinds during the second half of this year. But now as usual, let's move across the 4 regions, and let's begin with the largest one, North America. North America recorded during the course of the second quarter, a top line that was up 7.2% at constant currency. In Professional Solutions, we delivered a low single-digit revenue growth. And in the direct-to-consumer side, we delivered double-digit Q2. When we look at our B2B, the independent ECP delivered a good quarter in acceleration versus Q1 and with the Vision Source partnerships that was up mid-single digits, where our key accounts experienced a slow down in Q2. But as usually, I remind everyone to really look at our B2B over a longer period of time, typically 6 months. And when you look at that, we have our key accounts that deliver high single digit for the first semester. Moving to price mix and volume. Price mix was very much the main driver of our growth in the lens business and also in our frame business. Wearables recorded another outstanding quarter with the 2 new models of Ray-Ban Meta prescription, they were up for an excellent start during the course of the second quarter. Our luxury portfolio, Luxury delivered a high single-digit quarter, I would say, on the spotlight here, Miu Minu, Chanel and Jimmy Choo. And now I'll just touch on Stellest. Stellest is now ramping up with a distribution that is now available in about 11,000 doors in the United States. And I would say we have a very encouraging results during this first year of a very promising journey. But now let's switch to the other side of our distribution in North America. Let's move to direct-to-consumer. We're clearly happy about the second quarter. LensCrafter delivered high single-digit comp sales, recording the 14th consecutive quarter of positive comp sales with traffic, conversion, volume and price/mix to all continue to trend in the proper and the right direction. I would also add this quarter the subscription plan. We're rolling that out in about 830 stores in LensCrafter in North America. And I believe this could be another important assets during the remainder part of this year and the future years. On the Sun part, Sunglass Hut delivered comp sales above 7%, and with Ray-Ban Meta that represents a strong driver, and we coupled that with a higher second pair penetration, and I would say a more diligent store execution, especially on discounts. Both our Sunglass Hut location, the international, more exposed to international touristic traffic in the non-international Sunglass Hut location deliver high single-digit comp sales. But now let's move to the second region on the pipe, Europe, 8% at constant currency. And I remind you, last year, we delivered a 9% growth at constant currency in the EMEA region. So we're very pleased with the results and the delivery in the EMEA region with a high base. I would say, direct to consumer, double-digit pace, Professional Solutions, low single-digit quarter. Italy, Turkey, Eastern Europe, they were all up double digit. U.K. and Scandinavia delivered a high single-digit Q2, while France was flat in this quarter. When we look at our B2B, I mentioned during the first quarter, but I think it's important to be mentioned again, the switch event that was held in April in Monaco. It was the second event that we had this year for our B2B clients. It was an excellent opportunity to showcase to our wholesale partners, the innovation applied to Vision Care, artificial intelligence, [ MadTech ] and wearable technology, a great success. In Professional Solutions, we had a strong price mix. I would say that price/mix was strong on both lenses and frames. On the frame side of our business, we posted a strong quarter in Ray-Ban Sun and prescription and the growth in this part of the business was very much driven by volume due to a strong demand across our distribution channels. The other key brands, Oakley, was up double digit. When I look at the licensing portfolio, luxury and premium fashion experienced a negative quarter in Q2. On the land side now, low single-digit quarter, here, we had a good traction, in particular, on [ Eisen, in Valoc and in Shamir. ] Now let's move to the other side, direct to consumer. Our comp sales in dollar to consumer were slightly below 10%. And with a material acceleration compared to the mid-single-digit comp sales that you might remember, deliver in Q1. When we look at our optical retail side of our business, Vision Express was up double digit. [indiscernible] was up high single digit, while when we moved to Germany, Apollo delivered a mid-single-digit quarter. I would say that in optical retail price/mix was stronger than volume, and that was true for both lenses and frames. It's worth to mention that now the subscription model that -- as I mentioned before, we are ramping up in LensCrafter and it's well established in the EMEA region is now close to 30% in terms of penetration on revenue, and that is approximately 6 percentage points higher than the same period of last year. Let me close the journey in the region with the outstanding performance now of Sun retail that very much delivered double-digit comp sales on top of a double-digit sales in Q2 last year. On the spotlight, Turkey and Italy that delivered double digit, our [indiscernible] business was high single digit, while U.K. and France delivered a mid-single-digit quarter outstanding. The eyeglasses -- and I would say the strong retail execution were very much the 2 main factors of those outstanding results. Now the third country is the best performer for the second quarter. And that is Asia Pacific, 17% at constant currency. The second quarter in Asia Pacific was an outstanding quarter for the region. The posted this double digit, also including the impact of [indiscernible] in Thailand that was consolidated at the beginning of the second quarter, about 2,000 stores added in our store footprint in the region. But even excluding that, you will be looking in Asia Pacific delivering a double-digit quarter. We were double digit in India. We were double digit in Japan, we were double digit in China, in Southeast Asia and Korea. Australia posted a mid-single-digit quarter. So definitely many reasons to be happy about the performance in our Q2 in the Asia Pacific region. If we now deep dive a bit more in some of the key countries, the largest one in China. In China, Professional Solutions, one of the main growth drivers was the lens business. That was up double digit. Driven again by a strong quarter of myopia lenses, in particular, we continue to observe a strong demand, in particular on the DOT technology while on the frame side, I would probably mention our luxury portfolio that overall was up double digit in Q2. Now I lost touch on the direct-to-consumer segment. Optical comps were up mid-single digit with a good delivery of [indiscernible] in Australia. When you look at our Sun business, AI glasses continue to see a great appreciation from consumer, in particular in the markets that were recently opened like Singapore and Japan. While Sunglass [indiscernible] was really the only country that recorded negative comp sales in a quarter that, as you know, it's in a low seasonality period. Now the last region in the pipeline is Latin America. Latin America delivered 6.7%, a very consistent pace between Q1 and Q2 and Q1, we recorded 6.7% in constant currency. In the region, we had a double-digit growth on direct-to-consumer and a low single-digit quarter in our professional solution. When we look at our different countries in the region, Brazil, Mexico and Argentina, they were up mid-single digits, while Colombia and the rest of the Hispanic LatAm countries were up on the double-digit pace. When you look at our B2B side, frame delivered a high single-digit quarter very much driven by optical and wearable, and we continue to see a strong demand, in particular, on the 2 new countries that were recently opened, Brazil and Mexico, while consumer seems to really appreciate our meta Oakley and Ray-Ban Meta glasses. Closing on the direct-to-consumer, our Sun business delivered a double-digit quarter in acceleration versus Q1, very much driven by our Brazilian sun business that was up double digit. Thanks to the Oakley and Ray-Ban wearable, while the 1,600 optical retail stores that we have in the region posted a high single-digit comp sales. And as usual, the JV banners, in particular, the one that we have in Mexico and in [ Anders, ] delivered an outstanding second quarter. But now this is the end of our journey through the 4 key geographies for us at Luxottica now start a new chapter, and that is the profit and loss. I would say on the profit and loss that we delivered an outstanding first semester. The gross margin accretion was very important, and we deliver it. We had a double-digit growth on the operating and net profit at constant currency. So let me share here a few highlights for this first semester profit and loss. As I mentioned, gross profit up 10 basis points both at constant and current exchange and that is a material improvement compared to the 400-plus basis point dilution that we reported, if you remember, in the second half of last year. We had a strong price mix for sure, that was an important help. And we also have the net positive impact year-over-year from tariffs in the U.S., and those were really the 2 main drivers of the gross profit accretion. Our operating expenses as a percentage of revenues improved 80 basis points despite the investment that we continue to sustain to develop our MedTech platform and promote our innovation across the different brands. Bottom line, our operating profit was up 80 basis points at constant FX and 50 basis points at current exchange rate. When you look at our net profit, we recorded a 50 basis points improvement in constant and 20 basis points improvement at current exchange rate. Despite the higher cost of debt, and a higher tax rate by 70 basis points, still delivering a double-digit growth at constant currency. And let's now move to the last chapter of our journey here, and that is the free cash flow generation. Our free cash flow can be summarized in 1 number. EUR 1.067 billion free cash flow generation for the first half of 2026 the strongest 1 in the last 5 years for us Luxottica over EUR 100 million better than the free cash flow generation that we had last year. Now before we hand it over to the operator, let me just close saying that we enter in the second half of the year with a strong motivation and commitment to continue to deliver profitable growth. While we are fully aware that the comparison base in the second half is quite demanding. We're also confident that our innovation pipeline and the continued productivity improvements will support our momentum during the last 6 months of this year. But now let me hand it over to the operator for the usual Q&A session.

Ladies and gentlemen, we will now start the Q&A session. Our first question comes from Oriana Cardani, Intesa Sanpaolo. Please go ahead.

My 2 questions. The first one regards to the profitability of the smart glasses in the first half of this year. You stated that wearable products improved the gross margin in the first half. Could you comment on the factors driving this increase and the extent of that expansion of gross margin for this category? And my second question is on cost trends. How do you expect operating expenses to evolve in the second half of the year? Are you seeing any inflationary pressure?

Good afternoon, Oriana, and welcome to our call here. So let me take both your questions. First one on smart glasses. Well, when I look at our smart glasses, I should say that all the KPIs with respect to smart glasses, whether you're looking at top line revenues and costs are actually improving year-over-year. We are seeing an improvement in the average price. We're seeing an improvement in the higher penetration of our lenses, so the prescription part of our business. We're seeing an improvement in the penetration of transition. We're seeing an improvement in penetration of polarization lenses. And also, from a cost point of view, we do see a better productivity in our smart glass -- AI glasses in general. So very pleased with the results that we've seen. And clearly, all of that is result in what you see on the gross margin. The second question regarding the inflation. No, I should say there's nothing that concerned me at this stage. I think everything is pretty much under control, and I think it will be like this also during the second half of this year.

Our next question comes from Julien Dormois Jefferies.

The first one is whether you guys could elaborate on the partnership with Meta. We have obviously seen the meta launching metal glasses and starting with a different price point than what you have been advocating so far in your category. So just curious as to how we think about potentially diverging pathways between meta and yourself in terms of the positioning of the glasses and whether that could possibly open up the floor to more partners going forward and you're starting to work with other players in the tech industry. And the second question relates to smart glasses. You indicated that the sales of [indiscernible] nearly doubled in the second quarter. And I think that probably means around 4 percentage points contribution to Q2 growth. So if we do the math here and because that was a 5 percentage point contribution in Q1, that would probably indicate that in absolute sales, Q2 sales of smart glasses were lower than Q1 sales. So just curious how we should think about the phasing here, especially also in the context of a very tough comp on that side in the back half.

Julien, I'll try to answer to the first question. As usual, we look to manage a large portfolio go from luxury to mid low price of our eyewear. It would be also the case of the AI glasses. We started with our iconic brands, Oakley and Ray-Ban. We will launch in the future, other brands also in the high hand of our pyramid. But at the same time, really, we look to expand our market targeting a new consumer that have less more sensitivity to the price and maybe are younger more interesting in having something technology. So it was a great idea to support the meta glasses. So a tech brand that can easily targeting a segment of population that is so far not completely included on our offer. Also on lower price, I'm not so -- I don't agree completely because if you look at the best selling that is the OVA1 supported by famous ladies that is quite a mid-high price and is going very well. So I believe that the meta partnership is growing is working very well is also now go behind the tech partnership and is helping us really to create a more differentiated portfolio with some brands, more tech for electronic consumer targeting that can help the growth and establish a more strong presence into the market. About more partners. So far, really is the -- our capability or totally on the meta partnership. We are launching every few months, new product, new feature. So we are so far very, very fine and happy about this partnership.

And I'll take the second part of the second question, Julien, with respect to the top line growth profile. I think in a way, it's very simple. So you're looking really the core traditional business trending on the upper part of the mid-single-digit range, and that includes the bolt-on M&A and the complement of that to the 8.7% top line growth that we recorded in Q2 is very much represented by smart eyewear growth during Q2.

Our next question comes from Hugo Solvet, BNP Paribas.

First, wondering if you guys are actively costing partnership or lens supply agreement with other smart as manufacturer. That would be my first question. And second, just a clarification. Did you receive any tariff refund in H1. Can you quantify that, please?

Thanks for the questions. I take the first, and I consider a question about our partnership with Applied Materials. The partnership with Applied Materials is really a strategic one and is in the more wide concept that we have in the way we look at the market. As you know, we are manufactured producer. We are also suppliers of all others players in the optical market. And also, we are the big customers of almost all brands that operating in our market. This is a complex position, but is what is really make our company completely unique in the market. So now we -- when we understood that the future of the smart eyewear would be projection, we believe, especially for our focus on the medical part projection, it will be really a key feature that will allow us to really play a main role on the future of health care. So we started this partnership with apply material to come out with a new class of lenses that are combining the capability to project monocular and binocular capability to really intercept through sensor or many information from the light outside and many other markers that we will have. So that is another piece of our strategy, not just sales complete pair or frame of wearable but also become a strategic supplier of a key component that any others manufacture, producer or brands in the eyewear have to buy from us

And I will complement Francesco's answer with the answer of your second question Hugo. So Tariff let me just frame the context here on what you have for the first half of this year compared to last year. . So you have 2 effects coming into play. The first effect is the tariff payments and charged to the P&L that we have in the first quarter 2026. And those tariffs we didn't have in the first quarter of last year. So there is clearly a headwind in that respect. On the other side, the second effect is represented by the tariff refunds that got into the first half of 2026. The net impact of those 2 things is a net positive impact, which accounts 60 basis points in our profit and loss. And clearly, all of that effect is loaded on the gross margin side.

Our next question comes from Grace Smalley. Morgan Stanley.

The first one would just be a quick clarification there Stefano on your comment on tariffs. Understood on the net 60 basis points positive impact in H1, taking into account those 2 factors. Could you just help us clarify then what we should be expecting in terms of the impact some tariffs in the second half and whether you've got the full refund in H1 and there's no [indiscernible] to come or just how we should think about that as we try to model the tariff impact, if any, in the second half of the year? And then my second question, please, could you see on the top line? I understood your comments at the end of Q&A that yes, you have a tougher comparison base, but then that you're also very confident in your product pipeline. So just as we're thinking about the second half revenue growth, how should we be thinking about maybe professional solutions versus DTC as I think Professional Solutions slows a little bit in Q2. So if you could help us with any outlook on Professional Solutions in the second half whereas DTC remains very strong in Q2 and whether or not we should see that continuing and whether that's what you've seen in July already.