EssilorLuxottica Société anonyme (EL) Earnings Call Transcript

Hello, everybody. This is Giorgio Iannella from the IR team. Thank you for joining EssilorLuxottica Q3 '26 Revenue Management Call. The Group CFO, Stefano Grassi, will walk you through the business and financial highlights of the period. After his presentation, there will be a 30-minute Q&A session. [Operator Instructions]. With that, I'll hand it over to Stefano.

Hello, everyone, and welcome to our Q3 trading results. This quarter was another strong one for EssilorLuxottica, with revenue growth that was 7.2% up at constant currency and 9% at current exchange rate. When we look at our results, those are even more remarkable when you consider that we had a tough comparison base last year. In the third quarter of we actually grew our top line 11.7% at constant currency. When we look at our 4 different geographies, Asia Pacific posted a second consecutive quarter at double-digit pace, both Latin America and EMEA deliver high single-digit quarter, while North America, we were up mid-single digit. That was very much due to a strong base in 2025, in particular, on Professional Solutions. If we dissect our growth profile, our traditional business, that includes M&A, grew 6.5% at constant currency, and that is an acceleration versus the first half trend while our wearable business was up double digit, 20%, not including yet a material support from the new products that were recently presented at the MetaConnect2026. Now the last chapter is very much related to exchange rate. As we anticipated during our last conversation, we are finally experiencing some currency tailwinds in our numbers. Those currency tailwinds accounts for about 1.8 percentage points in our growth profile with all our main currencies, the U.S. dollar, the British pound, the Chinese renminbi and the Australian dollar, they all experienced a revaluation against the euro during the course of the third quarter. But now as usual, let's start our journey across the 4 different geographies. And as usual, let's start with the biggest one, North America. Now in North America, we are up 4.7% at constant currency. And as I mentioned before, there is a base effect in our results here. And last year, our third quarter was up 12.1% at constant currency. And you remember last year, we observed the buildup of the AI glasses category. So we are clearly delivering another strong quarter over an outstanding third quarter last year. When we look at a big closure, our 2 distribution channel, let's start with the B2B, the Professional Solutions one. In Professional Solutions, we had a low single-digit quarter with the optical channel that was in acceleration versus the second quarter and both independent and key accounts that were positive. All our national accounts in the United States were strong, and we coupled that with a strong sellout that we saw and observed from our national accounts. The Vision Source Alliance continues to outperform the rest of our ACP and that is true for both lenses and frames. So a pretty compelling picture when we look at our distribution channel. A lost touch on department stores. Our department stores were up double digit. We have a continuous focus on the sun category. While on the other side, sport channel and e-commerce were both negative. I would say that for the sport channel, the main reason is the tough comparison base that we had in 2025. Well, for e-commerce, that is very much due to the continuous commitment that we have in cleaning up the marketplace. Now when we look at our brands, Ray-Ban delivered a strong double digit in Q3 with both AI glasses and analogic frames that are contributing to our growth profile. Our luxury portfolio is actually up mid-single digit. I would say thanks to Prada, Chanel, [ Mimi. ] While on the land side, I would put on the spotlight will tell us the 1 and only myopia management lens that is FDA approved available in the U.S. right now, got a good traction during the back-to-school period. So we continue to build up this category, and I think we have a pretty good traction so far. Now let me move to direct-to-consumer. LensCrafter delivered a mid-single-digit comp sales in Q3, while Sunglass Hut delivered high single-digit comp sales. For LensCrafter, we are looking at 15 consecutive quarter of positive comp sales. And we're also up against the best quarter for LensCrafter in 2025. So I would say that the main growth driver for LensCrafter was an improved conversion versus last year, positive volume, positive price mix, in particular on lenses, and in addition, I would also mention that we see an early contribution that is coming from the new subscription program that is called LensCrafters that is now available in over 900 locations across the country. When we look at our Sunglass Hut in North America, 8% comp sales on top of an 8% comp sales that we delivered last year. So very pleased with the delivery in Sunglass Hut in North America. The traffic in stores continue to be positive. We had conversion flattish year-over-year. and the growth was very much supported by both AI glasses and analog frame with international and non-international Sunglass Hut location to deliver high single-digit comp sales during Q3. Let's now move to Europe. Europe delivered a 7.5% growth at constant currency during the course of the third quarter. The 7.5% comes on top of a 12.7% that we deliver in the third quarter of last year. With our direct-to-consumer segment that delivered the eighth consecutive quarter of double-digit growth in the EMEA region, while Professional Solutions was slightly positive in Q3. Let me share a few highlights for this region. From a country standpoint, Turkey, Netherlands, Eastern Europe were all up double digit. Italy, Spain and Switzerland were up high single digit while France delivered a low single-digit quarter and U.K. was slightly negative in Q3. When we look at our professional solution, B2B, price mix was the primary driver on both frames and lenses. The negative performance that is coming from the turmoil that we've seen in the Middle East is very much diluting our professional solutions growth in the region by less than 1 percentage point. Our [ analoframe ] offering category was extremely resilient during the course of the third quarter. Oakley was up double digit, Ray-Ban was up double digit, and the luxury segment deliver a mid-single-digit pace. Our AI glasses turned negative in Q3. And the reason for that was very much a strong demand in the third quarter of last year, I would say, in particular, on the consumer electronic channel. Now let's switch to direct-to-consumer. On the direct-to-consumer side, we had high single-digit comp sales in Optical Retail and another double-digit quarter on sun. When we look at our optical side, I would say that the 2 largest chains that we have in Europe, Apollo and Vision Express on the optical side, deliver double-digit comp sales. while Salmoiraghi & Viganò in Italy was up high single digits in terms of comp sales. Last touch on Sun. The growth in Sun was very much driven by both price/mix and volume, and that's obviously extremely reassuring with conversion that improved and our discount rate profile that was reduced year-over-year. both Analogic and eyeglasses were positive. When we look at our different countries, I would say Turkey and U.K. that were on the spotlight. They posted double-digit comp sales were Italy, France and Spain, posted a high single-digit comp sales in Q3. But now we concluded this journey with the EMEA region. Let's move east to Asia Pacific, 15.7% growth at constant currency. This is really the shiny star in Q3, I would say. That growth comes on top of a 10.5% growth that we delivered in the third quarter of last year. So we're clearly delivering double-digit growth on top of a double-digit quarter last year. In those figures, there is an impact from bolt-on M&A. That is Top Charoen, as you know. But even excluding that, you will be still looking at a double-digit pace for the third quarter in the Asia region. Both our professional solution and direct-to-consumer delivered a double-digit quarter in Q3. From a country standpoint, India, Japan, Korea, they were all up double digit. China had a touch below double digit, while Australia delivered high single-digit third quarter. On the Professional Solutions side, I would say that China in China, our full set of myopia solution delivered a third quarter at double-digit pace -- while on the frame side, Ray-Ban was up double digit. The luxury portfolio delivered mid-single digit in Q3, while Bolon was really the main brand to land on the negative territory for this quarter. Moving quickly to direct-to-consumer. I mentioned before the integration of Top Charoen into the EssilorLuxottica operating platform started well. And I'm sure we are up for a successful journey here, like we've seen in the past from many other retail banners that EssilorLuxottica acquired. On the other side, OPSM delivered low single-digit comp sales, while on the Sun side, our Southeast Asia stores delivered good double-digit comp sales while in Sunglass Hut Australia, we were negative, but remember, it's a low season period here. The last region in the pipe is Latin America. 7.1% constant currency. That is the best quarter for Latin America with professional solutions that deliver a mid-single-digit speed and the direct-to-consumer side that deliver a double-digit growth. I have really 3 highlights for you in this region. First of all, from a country standpoint, Mexico delivered high single digit; Colombia delivered a remarkable high single-digit growth. And why do I say remarkable? Because you all remember the third able hearth way they hit the country during the month of August. In Brazil, we had a mid-single-digit third quarter, while in Argentina, we were a bit softer there, I would say, low single digit, and that was especially true on the B2B side. But remember, we come after several quarters of fast speed in delivery, our growth. The second highlight relates to Brazil. In Brazil, our Professional Solutions delivered a strong third quarter, in particular, on the frame business, they were up double digit, and that growth was very much driven by AI glasses and also analogic frames. Ray-Ban grew in excess of 30%. It's very much supported by the successful campaign for the local testimonial. And I think it's the first time that we have a local testimony for Ray-Ban Bruna market in xenia while on the land side, we have a pretty good traction in Varilux. The third highlight pertains to Oscaro. Utkal had a good quarter in Q3 that was very much driven by our directly operated stores, while in optical retail, we posted a high single-digit comp sales in the region that was driven by the GrandVision banner in Mexico in Andes. Last touch on Sun banners. Those banners posted an outstanding double-digit growth in third quarter, I would say, thanks to the successful rollout of the AI glasses in Ray-Ban stores and in the Sunglass South stores for the region. But now we have completed our journey across the 4 different regions. Let's hand it over to the operator for the usual Q&A session.

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

Yes. 2 questions. The first one is on the performance of Smart Glasses KPIs in the third quarter. Could you provide an update on the trend in the average selling price as well as an update on the penetration of prescription lenses and transition lenses. And my second question is on the revenue growth of the traditional business. Could you provide the breakdown of the 6.5% growth recorded in the quarter, distinguishing between volume and price/mix? And could you tell us if during the quarter or more recently, you have observed deterioration in the volume trend.

So let me take both of your questions. First question is regarding wearables. We do see positive price mix on our wearable trend during the course of the third quarter. I think that is the result of the continuous innovation that we launched through the wearables. I also want to add that with respect to the lens KPIs, we've seen a pretty strong improvement. Just to give you an example, the penetration of transitions is around 60% for what we can see on our own network, retail network. That number last year was, I think, 40% to 50%. So it's quite a material lift that we're seeing in the transition penetration. With respect to the [ arrex ] that KPI has also improved. But roughly speaking, we are about 1/3 of penetration of the wearable through [ arrex ] lenses. Now the second question you had is on the traditional business, the growth of the traditional business. The growth of traditional business, it's primarily driven by price mix. But we have volume that are positive on a logic frames. We have volume that is positive also on lenses, and that's obviously very encouraging.

Our next question comes from Hugo Solvet, BNP Paribas.

I have a quick follow-up on the base business and given the 6% growth in the quarter. Curious, Stefano, if you see this continuing at the same pace into Q4 or possibly even accelerating. That would be good to have some color on that. And second, obviously, there's been a lot of talks and debates on governance in the past few weeks and months. So it would be great to hear from you what is your perception of governance given the recent headlines.

Go. Let me answer the 2 questions on the traditional business entering in Q4. We are 3 weeks into the month of October, which is traditionally the lowest one in terms of materiality of the 3 quarters of the 3 months in the fourth quarter. But what we can see right now in those 3 weeks is that we have a pretty consistent pace on our traditional business as we enter in the fourth quarter. Governance, I would say -- I think 2 things that give you a clear reading of where we are. First of all, there is a statement from the Board of Directors of EssilorLuxottica, which I think very much witnessed the support and the fact that we are a unified organization, and we have a full support of our Board of Directors, at the same time, I would say we have a team, internal team that is very much focused on the execution. We have ahead of us obviously a quite demanding base in the fourth quarter. And I think the team is very much focused on delivering fourth quarter and full year results. So that's really let's say, the perception and the morale that you see inside EssilorLuxottica.

The next question comes from Veronika Dubajova, Citi.

I'm going to keep it to 2 as well. The first 1 is a follow-up on the traditional business and Stefan, I'm just curious if you could discuss a little bit what you're seeing in the consumer landscape. Obviously, we've had lots of mixed data points. I think there is a growing concern that consumers are delaying purchases, including in health care. We've seen some data dental. So if you could maybe comment on North America, U.S. specifically and then the European regions, including Germany and France and Italy, given inflation and some of the recent social unrest that would be super helpful. Just give us a little bit of flavor for what you're seeing there. And then my second question, I appreciate this is a revenue update, but just curious, given the strength in the base business that you're seeing, especially when it comes to price and mix, do you have any updated thoughts on the margin progression in the business this year.

So first question on consumer trends. I don't have concern honestly with respect to what I see around the world, whether I'm in North America, in EMEA or in Asia or in Latin America. I think you can clearly have a good understanding of the traction and the performance that our direct-to-consumer business is delivering across the full region. I think that price mix going up across pretty much all the geographies is a clear indication that we don't have consumer trading down neither on our more discretionary part of the business, which is sunglasses or on the lens prescription side. So I think it's, for us, obviously, a matter of continue to deliver on those results. I think it's a matter of continuing to leverage the innovation that is made available for the market also in our retail network. You know that, for example, for wearables, we have a pretty strong pipeline of products that are now available in the market and will help the holiday season as we approach the fourth quarter. And that's obviously -- it's helping us out in our progression. With respect to the margin progression, I think we said during the last call that we have a long-term outlook that has a yearly deployment and that yearly outlook, obviously, describe a revenue growth at solid revenue growth at constant currency and a profitability that is broadly aligned at constant currency with our top line, and we confirm that.

The next question comes from Julien Dormois, Jefferies.

My 2 questions. The first 1 is a follow-up from some of the previous questions and more particularly related what happened in France over the weekend, and we also saw some unrest in Italy. So I just want to make sure that, first of all, that most of your employees are safe and also that it will not have a meaningful impact on your fourth quarter? That would be the first question. And the second question relates to Stellest, obviously, another very strong quarter. So if you would be kind enough to just remind us where that strength is coming from between the U.S., China, Europe, where do you see this as really being in in great shape. And also remind us maybe an update on what are -- what is the contribution of Stellest the sales in China as a percentage of total sales would be super helpful.

Okay. Julien questions on impact of the protest in Italy and France. We are obviously very close to what's happening in Milan and in Paris, as you can imagine. We don't see any material impact. Clearly, we had some stores that were closed due to the situations. We have some damages, but everything is absolutely managing within our footprint. And I should say, big thank to the professional in that our associates in the store have kept during time, they were honestly quite tough, quite tough because of the the turmoil and the situation they had to face. But overall, I don't see any change in the trajectory that we've seen either in Italy or in France in that respect. Clearly, we acknowledge that the macro in those countries, especially now in Europe, it's quite turbulent. But with that said, we think we still have consumer that are loyal to our brands. consumers that are loyal to our product proposition, and we can see in good traction in our dick-to-consumer. The second question is regarding Stellest. On Stellest, I think overall, the results are good. And I would probably draw your attention for a second in North America and the U.S. because now if you think about it, we are, I would say, a year that we have stalled in the United States. And I think we can have and share a few thoughts on how the last 12 months have been for sellers in the U.S. First of all, we opened up 12,000 doors on the B2B side as a distribution. And I would say that is not a given. That is not a given because the lens in itself has a high degree of complexity, it's more probably of a treatment than a lens dispensing. So there is a need to define the protocol and we've done it. There is a need to engage doctors and train properly doctors, and we've done it. There is a need to continue to invest on consumer awareness and I think the team over there has done a great job in creating a lot of awareness in North America during the back-to-stool period. So overall, I would say we're pretty happy. If I step back U.S. today is second only to China in terms of ramp-up of the curve, penetration over the myopic population over there. So there's a lot of good indication. Clearly, we have an ambition. We know that we have 50 million kids, myopic kids that today are wearing single vision lenses. Clearly, we cannot go after all of them, but our ambition is obviously to equip them with a better asset, with an asset that will improve their day-to-day life and ultimately, we love them to live a better life for the future. That asset is represented by Stellus. And that is the ambition that we have to equip those kits with our lenses and obviously create that awareness with their parents because we truly see and believe that the benefit of those lenses are obviously invaluable.

The next question comes from Luca Solca, Burstein.

I have 2. One is on whether you could potentially update us with -- on your partnership with Applied Materials and how you see the evolution of lenses when it comes to the ability to produce augmented reality functionalities. What you see as potential patents, how you see the competition shaping up and whether your technology advances could potentially represent a moat in this area. The other question is more simply on the Nuance product and how it is going.