Essilor Luxottica

Hello and welcome to the Essilor Luxottica full year 2020 results call. My name is Patrick and I will be your coordinator for today's event. For the duration of the call, you will be on listen only. However, towards the end of the call, you will have the opportunity to ask questions. This can be done by pressing star 1 to register your question at any time. If at any point you require assistance, please press star zero on your telephone keypad and you will be connected to an operator. I am now handing over to your host, Paul de Ceylon, Deputy CEO of SLL Exotica, to begin today's conference. Thank you.

Thank you, Patrick. Sorry for this little delay. We had a little technical issue. Good morning. I'm delighted to welcome you to our 2020 Earnings Conf Call, together with our co-CFO, Stefano Grassi, and David Hillemans, as well as our IR team. I'd like to start by paying a tribute to Bernard McNaz, a former chairman and CEO of Essilor, an inventor of the Varilux progressive lens, who recently passed away at the age of 94. He was an inventor, a true pioneer, and always curious. His achievements are a great symbol of the youth and potential of our industry, and this is what I would like you to keep as a symbol of Bernard. So, let's talk about Our topic of today, 2.20. 2.20, a pivotal year for Essilor Ducetica, during which we showed our resilience, our fighting spirit, the relevance of our combination, and our ability to build a strong group. Of course, we had to manage COVID-19. Francesco Milleri and I are extremely grateful to our employees and customers for their outstanding adaptability during this period. In H1, they displayed their resilience and agility. And in H2, they quickly moved back to reinvestment mode with a significant growth in revenue and results. Ultimately, COVID-19 has proven to be a clear catalyst for Estee Lauder Luxottica in terms of customer intimacy, supply chain flexibility, new consumer habits, and strict financial discipline. Our solid results and cash generation, especially in the second semester, demonstrate the strength of our company and business model. 2020 was a pivotal year in which we accelerated the building of Essilor Lipsetica. I would like for you to remember five key achievements. We outperformed our industry in lenses, optometry, optical frames, retail, and e-commerce. We have a great performance in strategic countries like the U.S., China, Australia, France. And despite the environment, products well aligned with consumer needs managed to grow. This is the case, for instance, of Aizen for connected life and glucose protection, which both grew double digits in 2020. Second, we have a solid pipeline of innovation and series of launches in major categories. Complete pairs with Ray-Ban Authentic, MyUK management with Stelest, precision optometry with the VR800 measuring instrument, and the AVA lens, smart glasses with our Facebook collaboration. Third, we accelerated our digitalization in all aspects of our business, the most visible one being our 40% increase in e-commerce, which represents now 1.2 billion euros and 8% of total group revenues in 2022. we deepened our integration and delivered the plant synergies. So we can confirm cumulative synergies of 300 to 350 million euros by the end of 2021, and 420 to 600 million euros by end of 2023. And finally, we did all this in full respect of our mission of sustainability and of our strong human values. For example, I can mention the success of our recent employee shareholding campaign. 44% of our employees worldwide are now shareholders. With all these achievements, Ethelon Luxottica is coming out of the crisis stronger and well-positioned to help perform and transform the eye care and eyewear industry. I will come back to this later, but first, I would like to hand over the call to Stefano and David for more details on our results.

Thank you, Paul, and good morning, everybody. Welcome to our earnings call. Let's start with a recap of our 2020 financial results that you see listed on this page, beginning with our top line. Our revenue for the full year of 2020 declined 17% on a current FX basis. On a constant FX, you're looking at revenue down approximately 15%. But we had a very different speed, as you will know, between the first and the second half of the year. The company in the first half of the year showed revenue declining on a constant FX basis at 29%, while on the second part of the year, our revenue were substantially flat to 2019 level. From a profitability standpoint, our adjusted operating profit is 9.5% from a margin rate standpoint, but again, very different speeds between the first and the second half of the year, where despite revenue declining 5% on a current effects basis, we were able to be margin accretive. We're leveraging the strong balance sheet, our net debt to EBITDA ratio is just above one, and our free cash flow generation has been at 1.8 billion for the full year 2020, just above 2019 level despite currency headwinds. So overall, we're pleased with the recovery pace that we've seen in the second half of the year, as well as our sound profitability and our strong free cash flow generation. But now let's start our journey beginning with our top line. And I will jump into page four of the presentation, focusing on the fourth quarter revenues, broken down by segments. And I will draw your attention on the bottom of the page, where you can see our top line growing 1.7% on a constant effect basis for the fourth quarter. If you look at our results on a current effect basis, you'll look at a negative 4.4% for the fourth quarter. From a currency standpoint, Clearly, you remember that during the first half of the year, currency fluctuations were substantially neutral in our top line, while we experienced a quite heavy currency headwind, I would say probably stronger in the fourth quarter, where the US dollar devaluated against Europe approximately 7%. If currency faces those levels, we do expect those headwinds to continue throughout the vast majority of 2021. But now let's look at our different segments, beginning with the biggest one, length and optical instruments, where revenue were up on the single-digit territory, 5.3%. All the regions posted positive sales growth during the course of the fourth quarter. North America and Latin America posted high single-digit growth rate in Q4 for the length and optical instruments. The sunglasses and reader division were negative 9%. The sunglasses part decelerated in FGX as well as the balloon business. The reader business in FGX further improved the performance compared to the third quarter one, although still on the negative territory, while the balloon business on the optical side posted the best quarter of the year in the fourth quarter with a double-digit pace. Moving to wholesale. Our revenue were down on a constant effect basis for Q4 4%. We were positive in North America, and you remember, we were very pleased with the third quarter result, and now we are still positive in the fourth quarter for North America. While in Europe, we felt the results and the confinement of the second wave of pandemic outbreak. From a price mix perspective, we were positive, and from the product mix standpoint, our prescription business was positive, while our sum business was on a negative territory. Retail number was up on a 3% during the course of the fourth quarter. All the regions we'd accept of Europe were positive. On the retail division, we experienced a strong growth driven by our e-commerce division. They grew in excess of 55% on account and effect basis during the course of the fourth quarter, while the retail brick and mortar was just slightly negative, with two different underlying trends, positive solid sales on the optical retail business, thanks to optical retail in North America, in Australia, as well as in Latin America. While on the other side, our sunglass business was more on the negative territory, very much due to the lack of tourist traffic in several locations. But now, I will start our journey across the different geographies, and I will begin with the biggest one, jumping up directly on page 8 of the presentation. So, I'm on page 8 of the presentation. Okay. Okay. North America revenue were up 4% during the fourth quarter. We are very pleased with this result. It's an accelerated result compared to the third quarter trend of 2.5%. Our Lens and Optical Instrument Division posted high single-digit growth rate in Q4. The ECP channel was very much the driver of the growth in the fourth quarter for North America, also thanks to the Axelor Expert Program. the program that saw, at the end of 2020, a rollout of approximately 7,800 doors, which represents over a 30% increase compared to the number of doors we had at the end of 2019. From a branded lens standpoint, all the key branded lenses were positive in North America, Transition, Crisel, and Varibus. We are on track with our Synergy Deliver, and one important pillar for that Synergy Deliver is represented by the first commercial offer that we undertook in North America, the program called EL360. EL360 represents very much the combination of the strengths from Epsilon and Luxottica coming together for our ETP. And just to give you an idea, that program, that commercial program, saw a rollout of already $1,200 at the end of 2020. From an e-commerce perspective, on the land side, we were very pleased with the double-digit delivery of our iBuyDirect.com business in North America, also thanks to an enhanced assortment of products like Ray-Ban and Oakley. Our wholesale division was solid positive during the course of the fourth quarter, The key drivers for that growth were the independent channel, the sports channel, as well as our third-party e-commerce partners. The optical part of the business was up on the double-digit place, while we experienced very favorable price mix on the course of the fourth quarter. And from a branding standpoint, I want to draw your attention on the picture that you see on the right-hand side of this page. That page very much, that picture very much celebrates the outstanding results that the Oakley brand delivered during the course of the fourth quarter with double digit pay and positive double digit on both optical as well as sunk. Our retail business now. Retail was up on the mid-single digit territory. Optical sales were positive on the high single digit territory in Q4. With all our optical retail chain, Lance Crafter, per vision, target optical, all strong positive during the fourth quarter. In particular, in Lenscraft, we are pleased to see calm sales on the positive territory, despite the lack, or let's say, the heavily reduced traffic in shopping mall location, despite the confinement and the restriction that we experience in Canada, as well as in California. But thanks to a stronger price mix, thanks to a strong conversion, and thanks to the performance of last-tracked allocation in known shopping malls, we were able to deliver positive comp sales for fourth quarter. The Sunglass App division was still on the challenging territory, very much due to challenge situation on international Sunglass App locations, while the Bass Pro location experienced a nice double-digit growth rate during the course of the fourth quarter. Last dash on e-commerce, e-commerce was up in excess of 50% during the fourth quarter, with all our branded eyewear propositions, Ray-Ban, Oakley, and Sunglass Up all double-digit during the course of Q4. But now let's switch continents. Let's get into, I would say, a more challenging territory, Europe. Clearly, the restriction that many of us experienced in the month of November and December had an impact in the region, in particular on our retail business. From a country mix standpoint, France, that is the biggest country in Europe, was likely positive, and this is obviously very pleasing for us, while Spain, Turkey, and Russia were on the negative double-digit territory. From a branded land standpoint, we were happy to see some of our branded lands like Aizen up double-digit, the transition business up on the single-digit territory, both sustaining a very good product mix for the land business.