EssilorLuxottica SA

PAR:EL

Earnings Call Analysis

Robust Revenue Growth Amid Inflation

In the second quarter of 2023, the company achieved robust revenue growth, achieving an 8% increase at constant currency. This impressive figure is built on the back of a 7% growth from the previous year's quarter. Despite facing significant inflationary pressures, the firm managed to deliver pleasing profitability results in the first half of the year. Operating profit experienced a margin expansion of 10 basis points at constant currency, though there was a 10 basis point dilution at current exchange rates. Notably, the company generated €954 million in free cash flow, exceeding the previous year's by €50 million and marking this as the second largest generation in its history for the first half of the year.

Steady Topline Growth Amidst Currency Headwinds

The company reported an 8% increase in second-quarter revenue at constant currency, which signifies a robust performance given it's on top of a 7% growth from the previous year's same quarter. However, the current exchange rate showed a lower increase of 4.9% due to currency headwinds, particularly from the US dollar, Turkish lira, and Chinese renminbi. While the company has enjoyed seven quarters of currency tailwinds, it is now faced with a three percentage point headwind, which if persistent, is expected to impact the remaining part of 2023. Nevertheless, the first six months witnessed an 8.2% growth at constant currency, highlighting the company's resilience in maintaining a topline above its mid-single-digit guidance.

Regional Performance: Growth Across the Board

North America saw a more modest 2.3% increase at constant currency in Q2, with a first-half growth of 4.5%. The Professional Solution and Direct to Consumer segments had even growth, with a positive outlook due to the upcoming release of the Varilux XR in the U.S. EMEA region's growth accelerated from 8.9% to 10.6% at constant currency, with double-digit rises in Italy, Spain, and Turkey. Asia-Pacific demonstrated significant growth, jumping from 12% to approximately 24% at constant currency, thanks to strong performances in China, India, and Korea. Latin America also reported a healthy growth of 9.3% at constant currency, driven by Mexico's robust performance and strong sales in the lens category.

Product Segments: Lenses Lead, Frames and Retail Adapt

The company's lens business showed solid growth, particularly through the e-commerce channel. However, frame sales experienced a deceleration in orders after a strong Q1. Despite this, Ray-Ban and luxury brands maintained impressive growth. In the Direct to Consumer segment, optical retail banners like LensCrafters and Target Optical performed well, but Sunglass Hut faced negative comps, primarily in locations away from tourist traffic. Strong lens portfolio and new product introductions, such as Varilux XR, are expected to bolster the Professional Solution segment going forward.

Financial Health: Maintaining Profitability Amid Inflation

The company managed to keep a stable profitability with a slight gross margin dilution of 20 basis points, mainly due to higher claim costs. Despite inflationary pressures adding a considerable 250 basis points impact, the company's operational diligence led to a reduction in operating expenses relative to revenue by about 30 basis points. As a result, the operating profit showed a 10 basis point margin expansion at constant currency, although at current exchange rates, there was a marginal dilution. The bottom line of the profit & loss statement indicates a 10 basis point margin accretion to a 13% net profit as a percentage of revenue, keeping in line with the previous year's performance.

Earnings Call Transcript 2023-Q2

[Giorgio Iannella, Head, IR]

Welcome everybody. Thanks for being with us today. I'm Giorgio Iannella from the IR team. I'm pleased to introduce our speakers Francesco Milleri, Chairman and CEO; Paul du Saillant, Deputy CEO; and Stefano Grassi, CFO of the Group. At the end of their presentations, we'll have a 30-minute Q&A session. [Operator Instructions]

With that, I hand over to Francesco Milleri.

[Francesco Milleri, Chairman and CEO]

Good morning and good afternoon to everybody. Thanks for joining us. Today, I'm pleased to present to you EssilorLuxottica's sound financial result of the First Semester as well as its new strategic initiative in the hearing aid market.

Let me start from the H1 results that we are proud of with respect to both. Revenue growth and margin trend. Revenue at constant exchange rates grew by 8% in the second quarter and 8.2% in the first six months, close to €13 billion. All regions and segment were positive and contributed to growth.

We just saw some softness in the US market, but less material than expected as it was limited only to the sun category. So, far this year, the group topline has performed well above the mid-single-digit long-term target, thanks to its open business model, positive integration journey, and higher diversification in terms of products, services, geographies, channels, and segments.

The adjusted operating profits deliver a robust performance in the first six months of the year, growing faster than sales at constant exchange rates to 18.5% margin, 10 basis points higher than last year, which is a remarkable achievement considering the impact of the cost inflation in the period.

While working on the efficiency and synergies, we continue to invest in our new business model with the focus on advanced solutions in lenses like Varilux XR, disruptive technology and design like Ray-ban Reverse, Teleoptometry system, and digital learning platform, Leonardo. At the same time, in order to protect our profitability, we are now taking selective measures of price increase across products and countries.

Today, we are proud to announce a groundbreaking strategic initiative that we gave some clues about at our last Capital Market Day when we spoke about Super Audio. EssilorLuxottica is expanding into the hearing aid market with the launch of a completely new type of product based on proprietary hardware and software, will combine innovative hearing aid solution and prescription glasses into one single brand new disruptive product. This will serve more than 1 billion mild to moderate hearing impaired people worldwide in a completely different way, allowing them to see and hear better the world around them; see more, hear more, be more.

Following the recent acquisition of Nuance, the Israeli companies specialized in advanced audio software technology, EssilorLuxottica Luxottica has established the new division Nuance Audio. At this stage, we have already built and tested prototypes with strongly supportive results. The product will be available on the market in the second half of the next here.

From stigma to style, that's our journey in hearing solution. With the launch of this new category at the intersection of sight and sound, we want to grow and elevate the entire hearing aid industry like we are doing with the eye care and eyewear sector. Both business have great potential in term of growing demand, driven by population aging as well as growing penetration of the category currently much lower in hearing aids than prescription eyeglasses.

To make the most of this opportunity, we'll work in close synergy with doctors, audiologists, and all industry players to make sure we offer solutions based on the patient's needs. We also leverage the capability in advanced miniaturization, electronic components, weight reduction, and wearing comfort that we have built along our journey in smart glasses.

In term of the distribution strategy, we'll serve both hearing aid and optical wholesale markets as well as our own retail network.

Few words to conclude on our carbon roadmap to confirm that we are on track with the target of neutrality in Europe on Scope 1 and 2 by the end of this year. This give you the sense of the priority we assign to our sustainability program as reflected also by our recent commitment to the Science Based Target Initiative.

With that, I hand over to Paul who will keep talking about product and innovation in different fields.

[Paul du Saillant, Deputy CEO]

Thank you, Francesco, and to all of you for being here with us today. As you can imagine, we are quite proud of our first half achievements. Today, I would like to spend a few minutes to share with you some key factors to keep in mind when looking at our performance in the first six months of 2023 and beyond.

Our company is at the core of an industry that is rich of untapped opportunities and centered around a basic right, the need for good vision. Leveraging our well-balanced setup in terms of geographical, distribution channels, product categories, and brand portfolio, we can size and bring the opportunities to life where and when appropriate. We have the unique ability to deliver a resilient growth.

Embedded at the heart of our organization are our people. In the past months, we strongly invested in our teams in order to retain and continue to develop our pool of talents.

At an average age of 37, employees are a young and dynamic force bringing together a vast range of competencies, blending deep expertise, with fresh ideas. Their enthusiasm for our mission is a common feature.

While the ever growing number of employee shareholders representing today 72,000 colleagues is a testament to the strong sentiment of belonging inside the organization. The setup of our supply chain is catered to fulfill the diverse needs of our customers at best. Substantial investment have been made this year to bring our manufacturing and logistics footprint to the next level.

In the coming months, two new global integrated facilities in Mexico and Thailand will start their operation, adding extra capacity to sustain our future growth. The optimization of our lab network is underway combining the cost advantage of the industrial labs with a premium service of the proximity labs.

Since the beginning of the year, the biggest industrial labs have continued their journey to operational excellence to match and exceed customer expectation, while the network of proximity labs is being strengthened.

Now, let's talk about innovation, which is always on top of our mind. For us, innovation is based on the holistic approach, as you know. First, embracing our active portfolio of products and brands. The powerful engine is at work to continue to refine our current product range and keep enhancing the value we bring to our customers and consumers.

We regularly dropped novelties into our frame collection and deploy new lens generations such as Crizal Sapphire HR and the Transition XTRActive. Our latest newness was presented at the EssilorLuxottica des in Milan this month and received excellent traction.

In connection with this, our R&D teams are also unlocking new disruptive technologies and design to be incorporated in our products, pushing the boundaries of the industry standards.

Let's take a couple of great illustration with the recent launch of two new groundbreaking technologies. First, the new Varilux XR series. It is the first high responsive progressive lens powered by artificial intelligence. The best overall progressive lens on the market.

Thanks to the creation of the digital twin, we are able to predict the visual behavioral profile of each consumer and provide a lens that respect the natural movements of the eye.

The product has already been introduced in a number of key markets and to support the launch, we have conducted more than 30 events and roadshows in EMEA, US, and Brazil, reaching 18,000 customers and receiving exceptional feedback from both consumer and opticians.

Second, Ray-Ban Reverse, which defines convention with an inverted lens design. The switch from a convex to a concave lens shape is a revolution and an audacious move not only from an optical, but from a fashion perspective.

Successfully overcoming the optical challenges which come along with the new design, the lens delivers the sharpest and most accurate vision experience. It can be fitted with four iconic Ray-Ban styles; Aviator, Wayfarer, Caravan, and Boyfriend and is made for the ones that love to be at the forefront of the new trend and express their uniqueness in every detail. The product has been launched starting from May.

On top of that, we are selectively adding new names to our frame brand portfolio, keeping it contemporary and attractive in the customers' eyes. On this, we are proud to share that we have just presented our first Swarovski collection, which can be found on the shelves starting from the fall. During the first half of the year, we also announced the collaboration between Roger Federer and our Oliver Peoples brand and signed the new Jimmy Choo license.

Our ambition is to create also brand new categories to address yet unmet consumer needs. Two new categories, which the group has embarked on are myopia management and wearables.

Myopia management, we have now unveiled our fourth year clinical trial results for states showing sustained myopia control efficiency. Children saved more than 1.25 [Indiscernible] of myopia on average over the period, a huge contribution to their well-being.

On wearables, the experience of our first-generation Ray-Ban Stories has took us important element about the consumer relationship vis-à-vis the new functionalities. Based on these valuable insights, our R&D team are preparing the feature of the next-generation to come.

As you can see, the breadth of our products, brand, and categories is underpinned by deep innovation and a robust end-to-end organization, which is at the heart of the growth of our company and the development of our industry.

With this, I am handing it over to Stefano. Thank you.

[Stefano Grassi, CFO]

Thank you, Paul and good morning, good afternoon and welcome to our first half 2023 earnings release. As usual, let's start our journey looking a bit closer to our topline first and then take a closer look to our profit and loss and financial position.

Our second quarter revenue were up 8% at constant currency, while on a current exchange rate, you're looking at topline up 4.9%. I remind you that the 8% growth comes on top of a 7% sales growth that we recorded in the second quarter of last year. So, we continue to grow our topline above the mid-single-digit guidance even against a tougher comparison base.

From a currency standpoint, after seven consecutive quarters of currency tailwinds, we're now experiencing some headwinds in our results. And those headwinds are quantifying about three percentage points as the difference between constant and current change results for the second quarter.

The main driver for that is the US dollar, but I would also add the Turkish lira and the Chinese renminbi. If currency stays at those level, we do expect those headwinds to carry on during the remainder part of 2023. For the first six months of the year, as you can see in the slide, we're looking at 8.2% growth at constant currency and 7.1% our growth at current exchange rate.

But now let's start our journey across the different geographies. And as usual, let's begin from the biggest one, North America. North America posted a topline up 2.3% at constant currency during the course of the second quarter. With the first half results overall at 4.5% still at constant currency.

Both Professional Solution and Direct to Consumer progressed at an even pace throughout the second quarter. If we look at our Professional Solution, our price/mix was very strong on both frames as well as lenses. If we look at our Lens business, we posted solid growth in Q2, very much driven by our EC channel. And this is obviously very promising as we are now approaching the launch of Varilux XR in the US during the course of the third quarter.

On the Frame side, after a good first quarter, we've seen clients a bit more cautious on the reordering side and that caused a bit of a deceleration during the quarter. But we had the Ray-Ban brand that was still strong in Q2 and the luxury that delivered double-digit growth during the course of the quarter.

If we now switch gear and move to the Direct to Consumer. On the Direct to Consumer, we posted solid growth in Q2 with our optical retail banner with LensCrafters, perVision, Target Optical, they all posted solid comp sales during the course of the second quarter.

Conversely, our Sunglass Hut banner in North America had negative comps during the course of the quarter, with a deceleration that was a bit stronger on the Sunglass Hut location that were not exposed to the touristic traffic.

Let's move now to EMEA, that is a story of sequential acceleration. During the first quarter, EMEA recorded a topline up 8.9% at constant currency, while in the second quarter, we're now delivering 10.6% at constant currency.

Professional Solutions posted a high single-digit growth, while our Direct to Consumer segment was actually up on the double-digit pace. When we look at our Professional Solution, we posted double-digit growth in Italy, in Spain, as well as in Turkey and a high single-digit growth in France and in Middle East.

From a channel mix standpoint, the large account, the buying groups, the ECP, they all posted solid growth during the course of the second quarter. Our branded lens portfolio is solid with a high single-digit growth, and I believe it will be even stronger with the progressive rollout of Varilux XR throughout the region.

So far, we have very promising results. We engaged more than 18,000 ECPs across the region that participated to several roadshows in Europe. 19 countries have been activated and we already see a strong penetration of Varilux XR within the Varilux product offering.

We now move for a second to Direct to Consumer, just a couple of data here. 10% comp sales in Optical Retail EMEA and 15% comps in our Sun Retail business. In the optical part of the business, we delivered double-digit growth in Vision Express in UK, in Samara, Vigano in Italy and proudly so in our optical banner in Ukraine.

On the Sun Retail banner, we are very pleased with the 15% comp because they come on top of 80%-plus that we recorded in the second quarter of 2022. All the Sun markets were very positive in the region, and the main driver of the growth was the large retail stores that we have across Europe, the one that are located in the prime location, in particular in department stores and premium shopping malls and that do represent about a fourth of the overall revenue base in Sunglass Hut in Europe.

And now let's move east to Asia-Pacific, another story of sequential improvement in the performance. You remember first quarter in Asia-Pacific, we delivered 12% at constant currency. In the second quarter now, we are approximately 24% at constant currency.

On our Professional Solutions side, we were double-digit in China, in India, as well as in Korea. In China, we experienced a further boost on the B2B channel with both lenses and frames that delivered double-digit growth.

With our Stellest lens, our Myopia Solution, the group on the triple-digit territory for the second quarter, marching, I would say, at a higher pace -- higher than expected to hit the 1 million pairs to be sold by the end of 2023 globally.

Switching to Direct to Consumer, both optical and sun banners delivered double-digit comps, primarily driven by the strong rebound that we experienced in China.

Last region in the pipe, it's Latin America. Latin America that delivered 9.3% topline growth at constant currency. We had a mid-single-digit growth in our Professional Solution with Mexico that delivered double-digit pace as the main growth driver in the region.

The lens category was very much the primary category in terms of growth and that was very much thanks to a strong price/mix with Eisen, Varilux, Kodak that all delivered double-digit pace.

While when we look at our frames side of our business, we were double-digit in Brazil, and we were double-digit actually in both optical as well as Sun with all our main brands, Ray-Ban, Oakley, and our luxury portfolio that all deliver double-digit pace.

If we move now to our Direct to Consumer. Our 1,600 optical stores in the region, they grew on a double-digit comp sales, very much led by GMO and the former GrandVision banner. While if we look at our sun part of the business, our retail chain delivered a mid-single-digit comp sales during the course of the second quarter.

But now we have concluded our journey across the four different regions and now let's take a closer look into our profit and loss results. When we look a bit closely our profit and loss, I would say that we're pretty happy with the profitability results that we deliver for the first half of 2023 despite a quite severe inflationary headwinds that impacted our profit and loss. I would quantify those headwinds in about 250 basis points impacting our H1 2023.

And if we now look at a bit closer to our P&L, our gross margin show approximately 20 basis points dilution. I would say that we have two things. On one side, the main driver of that margin dilution is the higher claim costs that we experienced during the first half of the year on our managed vision care assets and that dilution was largely offset by strong price/mix as well as manufacturing efficiencies.

When we look at our operating expenses, their incidents on revenue decreased approximately 30 basis points, very much stands to a strong and diligent management of our cost base.

So, overall, when you look at our profit and loss, you have an operating profit that on an adjusted basis showed 10 basis points of margin expansion at constant currency. While if you look at our results at current exchange rate, you're looking at 10 basis point dilution at 18.3% as a percentage of revenue.

Now, the bottom of the P&L is our group net profit. And here, you have 10 basis points margin accretion to a 13% net profit as a percentage of revenue. While when you look at our result, at current exchange rate, our margin is flat versus the first quarter of last year.

Now, the last chapter is our financial position. You can see on the picture on the headlines over there, €954 million free cash flow generation. That represents approximately €50 million more than the free cash flow that was generated last year and is the second larger free cash flow generation in EssilorLuxottica history for the first semester.

Let's touch on net debt to EBITDA. We continue our journey of deleveraging. We're well below two, more precisely a net debt-to-EBITDA ratio of 1.6.

With that, we completed our journey today. Let me hand it back to the operator for the Q&A session. Thank you.

[Operator]

Ladies and gentlemen, we will now start the Q&A session. [Operator Instructions]

Our first question comes from Oriana Cardani, Intesa Sanpaolo.

[Oriana Cardani, Intesa Sanpaolo]

Hello. Yes, good afternoon. Thank you for taking my two questions. The first one with regards to the price increase [indiscernible] to take in the second half of this year. Can you give us more details on products when markets involved and the size of the price increases?

The second question is about the margin trend. What is your expectation for the full year? Do you see room for margin expansion in the second part of the year? Thank you.

[Stefano Grassi, CFO]

Good afternoon, Oriana. Let me take both of your questions. First of all, with respect to the price increase, as Francesco mentioned before, those are price adjustments that we are taking on selected eyewear brands are done on specific SKU-specific models. And remember, an important driver of high price/mix is also represented by the continued innovation and release of new collection on the luxury portfolio, which obviously driving our price/mix upward.

The second question you have is with respect to margin trends and expectations for full year. As you know, we have a long-term outlook out there. which is guiding topline and margin up to 2026. Our objective is to achieve on an adjusted basis, the 19% to 20% margin rate by 2026 and we are marching on that direction according to our plan.

What I can tell you is that during the second half of the year, you're going to have a couple of things that will help us. One of them is the price adjustment that we mentioned before. Another one is the benefit coming through from the GrandVision integration, in particular, the announcement of the restructuring of the headquarter in [Indiscernible] that will create some tailwinds, especially on the latter part of 2023, and clearly for the full year 2024.

And last but not least, our comparison base. Our comparison base in the second half of the year, it's probably a bit easier. You might remember that we have a stronger margin expansion in 2022 during the first half of the year compared to what we experienced during the second half of the year.

[Operator]

The next question comes from Susy Tibaldi from UBS.

[Susy Tibaldi, UBS]

Good evening. Thanks for taking my questions. The first one on the US market, please, if you could give us a bit more detail, very helpful to understand the various drivers that you mentioned. But just in general, how are you seeing the demand? Because you mentioned the softening demand in a retail. But it sounds like on optical, it's still pretty solid.

I think in the release, you mentioned that Sunglass Hut is further deteriorating. So, could you perhaps talk a little bit about how you see the outlook for the rest of the year in the US if anything specific to flag, I'm asking because some of the other players in the US have mentioned that May was the weak point with June seeing a bit of an improvement. So, I was wondering if this was also what you're seeing?

And the second question, do you -- impact we may expect in the second half of the year. You mentioned around 250 bps in H1. So, if you have any idea for H2, given that we're sort of annualizing it?

And at the CMD, you were mentioning that a topline growth of around 3% is needed to keep margins flat. And in light of this higher inflation than we've had for a while now, could you share some updated thoughts on this number? Is it more like 4%, 5% now? That would be very helpful. Thank you.

[Paul du Saillant, Deputy CEO]

Okay. Susy, this is Paul. I will take the first question on the US market and a little bit how we see it. I think what you have to take away from what we told you so far in the call is that the lens part, the prescription part, the vision-related part of our growth in the US has been there in the first half, and it will continue in the second half.

We see good traction for our prescription lens, for our branded lens, for our optical frame, all of our programs with the ES360 [ph] is continuing to be developed. So, what is very important to see is that we are first vision care driven, and that demand, as you know, is a resilient one. We have always said it. And we are attacking the second half of the year with a major launch in one of our biggest brand, which is Varilux XR, which we have been launching just in July in the US.

So, this is combined with all of the novelties in the frame brand, we think, are a good driver for our second half. So, I think this is the way you should look at it. And like it was said by Stefano, the Sun part of our portfolio was one of the things that made the Q2 be softer. So, that's the way I think you should look at it.

[Stefano Grassi, CFO]

Let me take the second question, Susy, regarding inflation. The -- it's hard to put a precise stake in what inflation going to look like in the second half of the year. But what I can tell you is that when we look at that 250 basis points, the vast majority of that, the biggest driver is definitely labor. Labor probably accounts for about 70% of that headwinds that we experienced during the first half of the year. And presumably, we're going to feel the same kind of headwinds during the second part of the year as well.

You also mentioned the 3% topline growth on a steady state beyond which we would accrete the margin. That is correct, and that's what we shared with you and the rest of the team during the Capital Market Day. But remember, that is part of a five-year outlook. So, over a five-year period, that is the base case. Clearly, there are years in which inflationary headwinds are stronger. And in those years, clearly, the steady state, the 3% is a different level.

[Operator]

The next question comes from Graham Renwick, Berenberg.

[Graham Renwick, Berenberg]

Hello, good evening. Thank you very much for taking my questions. Just firstly on revenue, you mentioned in the statement price/mix at the cover more pronounced impact in Q2 than you've seen previously. And you also mentioned price increases are now coming through. So, can you give us a sense of how the 8% growth in Q2 breaks out between price, volume, mix and M&A. So, how much did those elements contribute?

And then just secondly, on myopia management, is there any indication on how close we are to FDA approval for any of the management solutions you have in the US, I believe Cyclos was very close to approval at the start of the year. Could that come soon? And also where are we on the path of FDA approval for Stellest as well in the US? Thank you.

[Stefano Grassi, CFO]

Good afternoon, Graham. Price/mix, second quarter, it's usually more helpful to look at it from a B2B side, Professional Solutions. So, when I look at that on the two categories, the two main categories, lenses and frames, I would say that we have definitely price/mix being the main and primary driver on the lens side. Definitely, the premium lenses portfolio is driving across the different geographies, price/mix in the upward direction.

While on the frame side, the other category, we do see a more balanced between volume and price/mix. And that's pretty consistent with what we've seen and I think, commented during the course of the first quarter.

When we look at our M&A contribution, that is broadly in line with the comment that we made during the Capital Markets Day, which means an M&A contribution up to 1% of our overall topline.

[Paul du Saillant, Deputy CEO]

On the SightGlass Vision and Stellest, the FDA process that we are in, I think you should look at something towards the end of 2024, 2025, that is when we think with the fourth year of data that we are working on, on SightGlass Vision, we should have the results and the FDA discussions. And then on Stellest, we are in a fast process, but it started a little bit after STG.

Now, I think altogether, you should take out from this discussion from this call that the myopia management initiative is delivering significant growth starting, of course, from China, where we have great success with the Stellest, lens and portfolio.

And now deploying in Europe also successfully, France is off to a great start, and we have key markets in France where we are establishing the category, the product. And we have also started to deploy SightGlass Vision product in China. So, the overall program is really moving and delivering very nice growth.

[Operator]

Our next question comes from Veronika Dubajova, Citi.

[Veronika Dubajova, Citi]

Good afternoon and thank you for taking my questions. I will keep it to two, please. If I could return back to the North America performance I appreciate this is difficult, but if you can give us any indication whatsoever of how the prescription business performed in the quarter against the sort of two and change growth that you delivered for North America as a whole?

And then to the extent that you can provide some forward commentary on the third quarter, especially given the change in weather on the Sun front, whether any improvement as far as Sun is concerned, that would be very helpful? So, that's my first question.

My second question is on the hearing aid efforts and congratulations. Great to see you guys expand into a new category. Are you also planning to sell traditional hearing aids? Or is the effort here entirely focused on this new form factor? And will these be sold as traditional hearing aids or will they be sold more in the over-the-counter category? Thank you.

[Paul du Saillant, Deputy CEO]

Okay Veronica, I will go back on the US -- on your US question. I'm not going to detail you which are the whole breakdown in between Sun, prescription, insurance, but I think you should look at our position in the US as one that is very holistic where the prescription activity is centered. Clearly, whether you look at it from the lens from the optical frames from the retail.

As we have always explained to you, it is a resilient need. People can delayer little bit sometime there the replacement of their prescription, but they really come and need new eyewear and new lenses, we have in front of that, I think, a very good portfolio of product at work with great new innovation going to market. So, this is some of the engine that we have.

And in parallel to that, the Sun was not so strong in the Q2, and then we will see how it is in the H2. Now, the beauty of the company is that, as it was explained, it's a very balanced portfolio of position, geographical, channel, product categories, brand, and this is what, at the end, delivers the total growth of the company. US, fortunately, we have a strong optical and prescription position.

[Stefano Grassi, CFO]

I'll take the second question, Veronica, on weather. I mean, yes, weather got a little bit better. We are 20-plus days into the third quarter. Clearly, we need to look at trends on a longer-term basis. But again, the primary driver of the softness that we've seen is the demand on Sunglass Hut. So, I think it's we still see that weakness in July as we started the third quarter.

[Francesco Milleri, Chairman and CEO]

Try to comment the hearing aids. We started two years ago to establish our audio division or Super Audio division, we call it to really leverage the technology that we have in industry that are close to the optical.

So, we decided, first, to deliver in one year an OTC category focused on US because they give the opportunity to better taste our product, better understand the market. But in the future, I believe, because our approach, the combined optical and sound hearings the differentiation between traditional and OTC, it will change a little bit and will remain two different legislation and rules to sell and manage that kind of product.

But at the end, performance, we believe it will really match because it's not starting from the hardware, but anything starting from the software, the [Indiscernible] that can manage sale.

So, we believe that this is a promising move for our company, and this is a good news also for the industry, audio industry that will see a player -- a new player open to help the industry to improve and to help all the players really to help customers to hear better.

[Operator]

Our next question comes from Adrian Duverger, Goldman Sachs.

[Adrian Duverger, Goldman Sachs]

Hey good afternoon. Thank you very much for taking my question. So, the first one would be on Europe. How would you describe the overall demand environment during the second quarter for the industry? And how have you performed relatively to other players?

And the second question would be with regards to the Professional Solutions. Are you sensing any change in ordering behavior across your third-party partners in terms of products by price point or any change in the level of confidence on the sell-out? Are you happy with the levels of inventory? And how does it compare to what you were seeing about three months ago? Thank you very much.

[Stefano Grassi, CFO]

Good afternoon, Adrian. Let's start with EMEA, I'll take the first part. The work and the execution in Europe has been extremely strong. I would say, on both channel, Professional Solution as well as Direct to Consumer.

The level of engagement with our clients on the B2B side has been pretty high. Just the fact that during the rollout in Europe, of Varilux XR, we engaged 18,000 ECPs in 19 countries, being very much part of an important product launch that we believe will be an important asset for the optician to the market going forward. That tells you a lot about the excitement and the expectation that they have around EssilorLuxottica ability to deliver products, to deliver innovation around the market. And that is clearly an important part of that and we see it across different markets, and we are very pleasing to see those results going through the second quarter. And I believe going forward, having an additional assets like Varilux XR could only help to improve that situation.

The other part is strong retail execution. In EMEA, it's a work that we've done on the Sunglass Hut part on the Sun part of the business, very strong performance which comes on top of a very strong performance last year. But even more important is the work that we're doing with the integration of GrandVision into the network -- into the retail network of EssilorLuxottica.

That work, it's working, it's doing really well. It's the work that we're doing on the back office. It's a work that we're doing on the renewal of our assortment on the renewal of our lens offering, and we are clearly seeing that we are executing with no disruption across channel.

When we look at the question on the order side. I mean, I think there is a bit more cautiousness and I mentioned that before, especially on the frame side on the reordering in North America. We've seen a bit of softness during the course of the second quarter, but again, I always say that on Professional Solutions, the frame category needs to be seen over usually a six month's period. And when I look at the picture over the six month's period for France, for example, we're flattish. So, we got a good first quarter, and we got a deceleration during the course of the second quarter. But all-in-all, the picture is still solid.

The first half of the year in North America is still a growth story overall. And I think, we're conscious that the first quarter started faster than Q2, but overall, the picture is still pretty compelling.

Just a last reminder, when we shared the long-term outlook, we guided for North America to be anywhere between low to mid-single digit. And if you look at the performance that we're getting in North America today, it's very much aligned with what we guide you for.

[Operator]

The next question comes from Cedric Lecasble Stephen.

[Cedric Lecasble, Stephen]

Thank you for taking my questions. I have a follow-up on Sunglass Hut. And a specific question, how should we look at your North American network for Sunglass Hut. It's been extremely powerful across the years and for some time, where you lack tourism activity, it seems to be a bit softer, maybe a little structurally.

Do you think there's a structural issue there that this network seems to be working a little better in Europe with more tourists flows and in the US? And do you see any need to maybe rationalize a little bit of number of stores, which is still very elevated thing?

And the second question is linked, is a bit into this one, but Optical is outperforming Sun more resilient. How should we look at the impact of Sun on the overall profitability? How should we think of the comparison of the Sun business profitability versus Optical? or the indirect impact of lower operating leverage from Sun in some countries like the US, if Sun slows? Thank you very much.

[Francesco Milleri, Chairman and CEO]

I try to clarify something on Sunglass Hut, especially in North America. I believe that it's more than just a network to sell sunglasses for us. You know that we are the only one with full dedicated stores to sunglasses in US. We built through Sunglass Hut in UN category and we are really supporting that kind of demand. So, I believe that is the role of our retail is much more than just sell some pair of sunglasses more day-by-day, but it really is to communicate the category and really support the category against many competitors that are not coming from our industry.

As you know, sneakers is the most powerful competitor of sunglasses. And our store really is really a marketing tool. That's how we see. We are refurbishing, repositioning many of our store in US following evolution of mall or cities. And this is good, its showing that the results are solid, and we want to continue on this journey.

EMEA is younger than any North America. So, that is why anytime we enter in the market, open new stores, we see immediately good return with good margin, but it was the story that we saw in UN 10 years ago. So, we are very confident that it's the right way to approach the category, to support the category, and evolve in the next year, our retail.

[Operator]

The next question come from go Hugo Solvet, BNP.

[Hugo Solvet, BNP]

Hi hello. Thanks for taking my questions. I have two. First, on Travel Retail. You had a soft performance in Q1, maybe outside of the US in Q2. Can you comment on the quality of Travel Retail and if you're seeing a pickup here?

Second, on [indiscernible] and maybe a two-parter here. So far, the OTC market in the US failed to gain traction. What have you identified -- or what do you believe you can bring to the market to really help this market take off? And why partnering with traditional hearing aid players, what do you think they can add to the equation here?

And second part, you mentioned that you set up the hearing aid business of the Audio business two years ago, should we understand that any revenues coming from that business over the next three years is part of the 2023 target or come on top of that? Thank you.

[Stefano Grassi, CFO]

Okay, so Hugo, good afternoon. I'll take the first question related to Travel Retail. We've seen a good dynamic in Travel Retail. I would say, still pretty localized in Asia. Travelers in Europe are probably big portion driven by local travelers, European traveling around, we've seen it and also a good touristic traffic inflow from North America. We haven't seen yet a massive inflow of touristic traffic from China yet.

And I believe probably the second half of the year, things might get better. But right now, we've seen an improvement of Chinese traffic in Europe but not that materially. So, the numbers that we see on the second quarter are better and we definitely see a pickup in that respect.

Now, the second question was regarding the hearing aids, maybe Francesco?

[Francesco Milleri, Chairman and CEO]

Yes. First, we don't disclose number today. We just established fact that we are entering in the hearing aid market. So, the fact that is not in the guidance is to me today is not so relevant.

What has to be clear that we are not trying to bring the hearing aids in the Optical market. We are really trying to compete on the audio market with a new solution. And this new solution since it will be in the intersection of audio and optical, it will be managed at the best also in optical retail. But we will -- we want to supply also the traditional hearing stores and support the entire industry.

[Operator]

The next question comes from James Grzinic, Jefferies.

[James Grzinic, Jefferies]

Good evening everybody. Congratulations on a good and resilient quarter. I guess I have a couple of questions. The first one is just on the numbers side of things, Stefano. Of course, FX becomes a much bigger discrepancy in the second half. Is there anything on the basis of what is done in half one on the margin side of things that it's worth flagging at this point in time?

And secondly, if I think about GrandVision, can you help us with a couple of KPIs in terms of the integration. I was wondering, firstly, what has happened to the level of penetration of Essilor lenses into the GrandVision operations in half one versus half one last year and second half last year and how that is expected to progress? And I guess it might be a third or it might be a second B. I was wondering how the pilot -- the SAP pilot is going in Italy?

[Stefano Grassi, CFO]

Good afternoon James. I'll take your questions here. The first one relates to the FX. Yes, we've seen, actually, for the first time, some headwinds in our results due to currency after seven, I believe, seven consecutive quarters of currency tailwinds.

I mean you have a good proxy of what is the impact, taking the proper proportions between constant and current change that we have on the margins. And that could be a good proxy to be considered during the second half.

As you said, in the second half of the year, we do expect those headwinds to remain and be there all in Q3 and Q4. But again, we have a fairly balanced cost base between revenue and cost. So, we have a kind of, in a way, a natural hedge in quite a few key geographies in that respect.

The other question you have is with GrandVision -- with respect to GrandVision. So, one of the KPI, let's say, the target that we have is to get approximately 50% of the lens supplied through in GrandVision to be supplied through EssilorLuxottica. And I can tell you that we are approaching that target as we planned. We are a bit south of already through the first half of the year. So, we're confident that we're going to reach out that target by the end of 2023.

SAP implementation, it's going well, and as planned. SAP, I think it's an important enabler to allow us to manage more and more our infrastructure on a common basis to manage our inventory more effectively to manage our supply chain, allocating resources, assets depending on what is the demand and which part of the world and therefore, we continue to support that. And I'd say it's working pretty well so far.

[Operator]

Our last question comes from Domenico Ghilotti, Equita.

[Domenico Ghilotti, Equita]

Hi, good afternoon. Two questions. First is a follow-up on GrandVision. So, I am curious about the performance of the GrandVision banners, also because I would expect that revenue synergies should take more time to materialize compared to cost synergies. So, you are still in the middle of your process to extract higher revenues and so there is potentially room for acceleration.

And the second question is for -- is on the online business. I understood that it's still a little bit. Do you expect any recovery soon or probably postpone to 2024, if you can elaborate a little bit?

[Stefano Grassi, CFO]

Domenico, good afternoon. So, let me take the two questions. We are here, obviously, commenting GrandVision, but clearly, we are conscious of the fact that we have, I would say, two successful story in Europe. One is our Professional Solutions side. Very successful, I would say, the work that the team has done in Europe. And on the other side, another very successful story on the retail side of the business, both Optical as well as Sun.

The impact of revenue synergies in our topline performance, it's marginal and it's nothing new in that way. We always kept saying that the vast majority of the work that we're doing on GrandVision will generate synergies that will probably be more related to cost synergies and a bit of work with respect to the assortment.

I think we brought this plan, we brought strong execution around the different banners. And the results that we are seeing is very promising. A lot of initiatives that have been undertaken in the course of 2023, deliver very strong results. For example, the subscription model in United Kingdom. We launched that at the beginning of the year and we can say that already today, approximately a third of the growth that we are delivering in UK is due to the subscription model. So, we're going to leverage and take that learning also in other parts of Europe whenever we think it makes sense.

On the other side, the rollout of transition lenses throughout the GrandVision banner has proven to be very good in terms of penetration. We see consumer demand in that and clearly, this is helping also our price/mix. So, it's a pretty compelling story, and we're pleased with the trend that we've seen in the second quarter, I would say, overall in the first of the year. And we're clearly pleased to see that trend continuing also in the month of July, overall, I would say, for the trend that we've seen in EMEA.

The online business, I would have a hard time to say that we're struggling in a way. Let's just take a broader perspective of what online was in 2019, pre-pandemic for EssilorLuxottica. We were looking at the business that was 5% of our overall turnover. And now, we have a business that is 7% in overall contribution to our revenue.

So, it is a business that is structurally bigger than what it used to be three years ago. It is a business that more and more is convergent with our off-line proposition in an omnichannel structure. And I feel that today, the investment that we're making in a way are making our online proposition more and more convergent with our stores.

So, again, I know if we look at the single quarter, the growth is probably not what we've seen in 2022 or before. But again, we are talking a business that is structurally two percentage points bigger than what it used to be in terms of contribution to the overall revenue of EssilorLuxottica.