EssilorLuxottica SA

PAR:EL

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the Q3 Results Call of EssilorLuxottica. I will now hand you over to your host, Paul du Saillant, CEO of Essilor International, to begin today's conference. Thank you.

[Paul du Saillant, CEO & Non]

Good morning. I'm delighted to welcome you to our Q3 conference call together with our Co-CFOs, Stefano Grassi and David Wielemans, as well as our IR team. Today, we published solid numbers, which were made possible by the commitment of our teams. So first, I would really like to start with a word of gratitude to them on behalf of Francesco Milleri, our management teams and I. During COVID and again today with its reacceleration in Europe, our priority is to keep a high team spirit and everybody safe. All our employees have responded with great resilience, commitment and adaptability. Thanks to that, we have got many good news to share today while fully realizing the complexity of the world around us. A clear mission and purpose to address the need for good vision particularly well suited to the current well-being needs for billions of people: see more, be more. Structural resilience of vision needs, enhanced consumer awareness for eye care since people spend more and more time on screens. New product services well suited to the new environment. More than 95% of our stores, Stefano will go back on this, are open. An amazing entrepreneurial spirit of our 400,000 ECP customers, who have been managing this crisis and the reopening of the store with great agility. A very strong acceleration of digitalization.So COVID has been a clear catalyst, and it has been a clear catalyst for our market but also for us at EssilorLuxottica to deepen our integration, simplify our organization and accelerate decision process, all this while controlling strictly cost and preserving cash. So as a first introductory comment, I really wanted to lay in front of you those key ideas. Now a few highlights before Stefano goes in more detail on the business review. Our Q3 revenue was down very slightly at constant currency, only 1.1% negative. Most important is to notice that most activities, back to growth. This with a positive mix in terms of product, channels and countries. If you look by division, the lens and instrument was up year-on-year driven by increased consumer awareness for eyewear, appetite for branded product and some pent-up demand. Wholesale bounced back very nicely thanks to the independent channel and the timing of new models. And retail significantly narrowed its decline thanks to optical models and lenses, which were all up during the quarter. So you see an interesting dynamic when you look by division. By channel, e-commerce, up 40% year-to-date to a record close to EUR 900 million of sales driven by the proprietary brand platforms like ray-ban.com, oakley.com, sunglasshut.com but also by multi-brand sites like eyebuydirect.com, which performed very strongly. Another channel driving the growth has been the independent ECP, leading the recovery through their entrepreneurship, accessibility and product assortment. So very important and interesting dynamic in our channel. If now you look by countries, developed markets have been back to growth, with North America and Europe showing very positive performance, while emerging markets are improving and have been improving month-by-month through the quarter, with some of them, like China, clearly being back to solid growth in the quarter. And last but not least, if you look by product, we saw strong demand for our value-added solutions. Ray-Ban; Oakley; Varilux; Crizal; Transition GEN 8; Eyezen; the new instrument -- the new precision instrument, VR800; and our new consumer experience, AVA lens, so the product mix has been a very interesting and positive one. And as this product mix was at work, we also had strong activity in new launches like the Ray-Ban Authentic that was launched in Italy or the new myopia management lens, Stellest, which was launched in July in China. All of this supported by increased partnership programs for independent ECP. Some of you might have noticed that we launched this EssilorLuxottica 360 program in the U.S. back in July. So a very important dynamic in between the division, the channels, the product and the geography, which show the full breadth of presence and deployment of EssilorLuxottica worldwide. As we were managing this rebound, I want to insist on the importance of the way the integration work has been at work, and I will come back to that after Stefano. So we have been able to manage this V-shape rebound and the integration work while controlling cost and preserving cash. You see that through our strong free cash flow in the quarter that led to a cash position of EUR 8.8 billion at the end of September. These were a few highlights I wanted to share with you, and I will now hand over to Stefano, who is going to give you more color on these good trends.

[Stefano Grassi, Co]

And good morning, everybody. Before we start our journey across our division, across our region, there are 2 highlights that I want to share with you today. First of all, our revenue trend, as Paul mentioned, clearly outline a V shape in our recovery curve from the first wave of the pandemic outbreak. You all might remember that our sales started to decline in the month of March, when we posted a negative 33% at constant FX basis, deepened down in the month of April at negative 70%. And after that, we had a progressive and fast pace of rebound. May was negative 52%. The month of June was negative 19%. And the first quarter was just a touch below 2019 level at negative 1% on a constant FX basis. So clearly, we proved that the resiliency of our business model was very much instrumental to this fast pace of recovery that we observed in the recent months. The second highlight that I have for you is regarding currencies. Our performance was negative 1.1% on a constant FX basis, while in the current FX, our revenues declined 5.2%. So we had about 4 percentage points of currency swing. Those currency headwinds very much derived from the devaluation of the U.S. dollar -- it was about 5% during the course of the third quarter -- as well as the devaluation of the Brazilian real that, during the course of the third quarter, devaluated approximately 30% against U.S. At current FX level, we do expect those headwinds to continue during the course of the fourth quarter as well as during the first half of 2021. We now start looking at our different divisions. I begin with the biggest and best performer one that is the lens and optical instrument. The lens and optical instruments posted revenue up 2.7% during the course of the third quarter on a constant FX basis, while in the first half of the year, you might remember, the lens and optical instruments sales declined 23%. We are very happy with the solid growth that we saw in Europe as well as in North America from this division. We experienced solid product mix thanks to the anti-fatigue, the blue-cut lenses as more and more people in the population worldwide get exposed to electronic device during the pandemic outbreak. And we also got pretty good support for the more recent launch of product. One perfect example is the Transition GEN 8. As you might remember, it was rolled out last year, and whenever it was launched, it was a very successful story worldwide. Sunglasses and reader, negative 4% on a constant tax basis for the third quarter. We moved from the first half of the year where sales declined 29% on a constant FX on the sunglasses and reader. We are very pleased with the Bolon back to double-digit growth on both optical as well as sun. The FGX business showed some remarkable improvement during the course of the third quarter, but we're still trending here on a negative territory. But really good to highlight, first of all, that the e-commerce was up on the double-digit territory during Q3, and we observed very positive sell-out data on readers in North America. And this is obviously a very promising indication as we get into the fourth quarter. Overall, I would say that both Bolon and FGX show again their complementarity in the EssilorLuxottica brand portfolio. But now let's move to wholesale. Wholesale was negative 1% on a constant FX basis. I think it's important here to remind you where do we come from. The first half of the year for the Wholesale division was negative 43%. In particular, during the second quarter, Wholesale was negative 64%. So we are observing a very material rebound in our Wholesale performance, so negative 64% to negative 1% on a constant FX during the course of the third quarter. Happy to report double-digit growth in North America very much led by independent channels. Happy to see Europe a solid positive. And Asia and Latin America, still on a negative sales trend. The last division is our Retail division. Retail was negative 5% on a constant FX basis, while on a current FX -- while in the first half of the year, we reported negative 28% for our Retail division. As Paul mentioned, over 95% of our store base was open as of the end of the third quarter. Comp sales just for the stores that were opened during the period were down 6%. But within that number, we really observed 2 different velocity. On one side, our optical stores, they were flat, while the remainder part of our store network was down on the negative territory, on negative sales. The last touch is on our direct branded eyewear e-commerce that grew during the course of the third quarter over 60%, proving once again a very strong track record of growth throughout 2020. But now let's have a quick snapshot of our performance across the different regions. And what you're seeing here -- I won't spend too much time on this page, but I just want to share a couple of things. First of all, the first 2 regions that you see on this page, namely, North American and Europe, that during the third quarter represent 80% of our total revenue are the 2 regions that posted positive sales growth on a constant FX basis. While Asia and more so Latin America are the regions that are still lagging behind some positive trends clearly as a consequence of the COVID outbreak. For now, I will skip the first 9 month trend, and I will go directly into the region journey, and I will start with the biggest and, actually, the best performer region that is North America. You see on the headline 2.5% at constant FX rate for our North America performance. Our B2B channel lens and frame was very much supported by a strong demand of independent channels. If we look at our sales division, sales to independents on the lens side was up mid-single digit also thanks to our partnership program that Paul described before, partnership programs like Vision Source, like EL 360, like Essilor Experts that every day engage more than 8,000 ECPs across the United States. From a product standpoint, happy to report solid growth on Transition, Varilux and Crizal lenses but also pleased to share with you that innovation never really stopped on the lens business. As a matter of fact, during the course of the third quarter, we introduced Varilux Comfort Max in the United States. And in the month of September, we launched Crizal Rock in Canada. So 2 important launches, of which I'm sure we will be a very successful story in the months to come. On the Wholesale side, we are very excited about the double-digit growth that we've seen in Wholesale. That double-digit growth was very much led by strong revenue in independent channels but also in the key accounts and through our third-party e-commerce website, while the department stores remains still on a negative sales trend. Retail now. Retail sales were slightly negative in Q3. With optical retail comps, they were flat in the quarter. And that was also supported by solid price/mix in particular thanks to the lens. And that obviously is worth to be highlighted because it very much witnessed the tighter partnership that is happening between Essilor and Luxottica, ensuring a high degree of penetration within our optical retail store network. Sunglass Hut was negative in Q3, very much challenged by the lack of touristic traffic. The best performer channel in North America for Sunglass Hut was Bass Pro [ 160 ] stores, and that was very much due to the booming that we observed in North America of the outdoor activities. Last but not least, our branded eyewear e-commerce. Sales in North America were up 70%, approximately, with rayban.com up 85%, sunglasshut.com up 100%. We've doubled the business on the Sunglass Hut division. And that was very much leading the way for our branded eyewear dot-com in North America. And now let's switch gear, and let's look at another region that has been delivering a positive growth rate on constant exchange rate. That region is Europe. Europe was up 1%. You remember, Europe comes from the first half of the year where sales were negative 32% still on a constant FX. France, Italy, Germany and Turkey were all in the positive territory, while U.K. and Spain were still lagging behind on negative sales trends. The lens business posted positive high single-digit growth rate in Europe thanks to a solid growth of branded lenses and very much thanks to a solid support by online business, very much driven by the prescription glasses that had very strong delivery in Europe during the course of the third quarter. Wholesale was solid positive with sales up around 4% on a constant FX basis, and we had very solid support from both prescription frames as well as sun, and this is a very good indication. Retail in the third quarter posted negative sales, very much driven by the Sunglass Hut business that suffered in Europe the lack of touristic traffic flows, especially in several capital across the European region. Salmoiraghi, the Italian retail chain, was still on the negative territory from a sales perspective. But I want to highlight here that the prescription part of Salmoiraghi was up mid-single digit during the course of the third quarter, proving again the resiliency of the business model on the prescription side of our business. And now let's move to the East part of the world. Let's look at Asia, Oceania and Africa. Our overall picture here is negative. Sales declined 8% on a constant FX basis during the course of the third quarter. But I want to share with you a couple of good things that we observed during the third quarter. First of all, China, overall, was flat during the course of Q3. And Mainland China in particular was up mid-single digit on a constant FX during Q3. The other good news that we want to share is Australia. Australia delivered a positive 7% performance during the course of the third quarter. Conversely, Korea, India, Southeast Asia and Hong Kong reported negative sales results during the course of Q3. I want to draw your attention in China for a second, because in China, the lens business posted double-digit sales growth. And this is obviously very important for our presence and our development in this key part of the world. We have a shooting in this page. You see that on the right-hand side of this page: a shooting that very much celebrate the launch of the new Stellest lens. The myopia management lens that was piloted in July in one region in China, we started there, but we're seeing very good success. And now we are progressively rolling it out to the remainder part of this country. You'll hear us more and more, Paul and the rest of the team, talking about Stellest. And we observe positive orders intake on a sequential improvement week after week in China. So very promising for the remainder part of the year and 2021. On the retail side, very pleased to report that optical Australia retail sales were up on the double-digit territory despite the shutdown of Victoria state, which we are very pleased in recent day has been lifted. All the fundamentals in optical Australia retail were very positive, conversion, multiples and price/mix. And this was also thanks to the launch of the new Eyezen and Varilux lenses in the optical Australia retail network at the end of the first quarter. Now let me close our journey in -- across the different regions with the region that was really the most challenging one: Latin America, negative 22%. The overall picture here shows a very challenging environment due to the COVID outbreak. Brazil and Mexico were negative double digits. But happy to report that, in September, Brazil reported an encouraging positive growth on the lens business. The other positive signal that I want to highlight here is the positive order intake and sales that we posted and we observed on the wholesale B2B side of EssilorLuxottica. So a pretty good indication. Despite a challenging Q3 in Brazil, pretty good indication as we get into the fourth quarter for Brazil. Argentina was up double digit. Our GMO, our optical retail chain in Latin America reported negative comp sales just for the stores that were open. But again, a positive signal here that started in the month of September, our trend showed positive comp sales for the stores that were open. The last note, before I hand it over to Paul, is a quick snapshot of our retail footprint in Latin America. We entered into the third quarter with about 60% of our stores that were open in the region. At the end of September, we have over 93% of our store base that is open in Latin America. With that, we concluded our journey across the different region, and I'm obviously passing back to Paul that will give us more color around the integration process, and then we'll share with you some closing remarks. Paul, please.

[Paul du Saillant, CEO & Non]

Thank you, Stefano. And thank you, Stefano, because I think you gave us a great illustration of this amazing growth dynamic that is at work in between the different divisions, the different geographies, the different activity, product, categories, brand. And I think it's a great illustration of the breadth and the reach of EssilorLuxottica and the combination of product, brand, go to market, local presence that we have and that our teams are deploying, with great agility in so many countries, geographies. So a great illustration. So I wanted to share a few words on the integration, which is, of course, a key topic at work in the construction of EssilorLuxottica. First, we are fully on track to deliver our synergies of EUR 420 million to EUR 600 million by 2023. And we wanted -- I wanted to start by laying that in front of us. Francesco Milleri and I are taking more and more decision together, sharing many points of views and working efficiently with each other, with our integration team that Pierluigi Longo and Eric Leonard are animating, our key executives and full commitment of hundreds of our team around the world. The COVID-19 pandemic has proved to be a catalyst to accelerate our decision, simplify our organization and deepen our unification. We now have 28 integration work stream against the 20 we had at the beginning of our journey. So we have increased the number of topics, whether they are top line or cost or project -- specific project. The new environment supported cost synergies with key achievement in the field of procurement, back office, lab unification and IT. Actually, on IT, we just went live with the key financial module that was rolled out in Italy in October, a key milestone. So many activities in the area of cost. But also, on the revenue synergy, while temporary, we delayed -- they were delayed during the lockdowns. But we saw them recovering nicely in the last 5 months, including in October, with great contribution. We reached important milestone on complete pair with Ray-Ban Authentic launch in June in Italy; the new joint ECP program, first of a kind, EssilorLuxottica 360, that, as I said before, was put in place by our leaders and teams in the U.S. in August; and many, many cross-selling activity; development of Varilux at Salmoiraghi & Viganò, OPSM, David Clulow, LensCrafters; deployment of transition in all of our banners; increased penetration of Ray-Ban, Oakley and many Luxottica frame brand at Essilor expert and Vision Source members. So many activity both in the cost dimension in the building of EssilorLuxottica and in the top line synergies, which is a bit -- is a big credit to the team because, despite the complex situation that we face operationally, actually, the level of activity has not slowed down. On the contrary, it has increased. So this is a few key thoughts I wanted to leave with you. A few thoughts before we go to the Q&A. I would like you to keep in mind a few key points. First, and we have said it, but it's very important, is the resilience of our industry which address a fundamental need. And vis-à-vis this fundamental need, we have a company which has a full set of global assets that benefits from a very granular local presence, key in the current period. This gives us agility to mitigate the volatility of the near-term business environment. Of course, we are prudent about the second wave of COVID in Europe. And at the same time, we remain confident about the structural need for optical product and solution. And the fast recovery post outbreak, I think you got from Stefano explanation the profile that we have witnessed with the first wave of COVID and the V shape that we have witnessed in so many countries. This is really confirmed about what we saw in the last 6 months. And remember that optical activities represent 70% of EssilorLuxottica revenue. And this COVID has confirmed the need for good vision and has increased the consumer awareness about the need of having good vision solution. Second, we have powerful assets to lead the transformation of the eye care and eyewear industry and outperform this industry: a vertical open business model, a unique portfolio of brands, strong innovation and a global local supply chain and distribution. I want also you to keep in mind that M&A remains a key pillar of our growth. So Francesco Milleri and I are taking decision to build a strong combined group during this crisis by deepening this integration, accelerating our digitalization, continue to innovate and leverage our global supply chain, all of this while controlling our costs and preserving the cash. To conclude, I would like to remind you how important our strong human values are for us and for all of us at EssilorLuxottica. This has kept a great team spirit in the company in this difficult and uncertain environment, and I really want to recognize this attitude of our teams. We will continue all our initiatives around our mission, including new business models, very promising, and deploying employee shareholding. They form a strong foundation on which to build EssilorLuxottica and to embark teams, customers and consumer. So with this, I would like that we go in the Q&A session with Stefano and David. Thank you very much.

[Operator]

[Operator Instructions] Our question is coming from the line of Graham Renwick from Berenberg.

[Graham Ian Renwick, Analyst]

I just have 3, please, if that's okay. Just firstly, on trading, assuming that there was a sort of sequential improvement through Q3, was your constant currency growth positive at the end of Q3 in September? Are you able to give us a little bit of color on how that has developed through October or Q4 to date?Secondly, on cash flow, you've seen very strong free cash flow generation there in Q3. Can you talk us through the moving parts of that? Is it actually fair to assume that you've grown profit in the quarter? Or is there any sort of big working capital efficiencies or CapEx savings in there that helped that? And finally, just on GrandVision, are you possible -- is it possible for you to sort of provide an update there? Can you remind us of where we are in the EC approval process? I think you previously said that you are hoping for a division in Q4. So is that still the case?

[Paul du Saillant, CEO & Non]

Thank you very much, Graham. I propose Stefano that you take question 1 and 2, and I will take the third one.

[Stefano Grassi, Co]

Absolutely, Paul. Absolutely. So Graham, the trend during the course of the third quarter was pretty homogeneous if we look at the overall performance and regarding the marginal difference across the months. But I think the overall trend was fairly consistent throughout the quarter. With respect to what we observed in the month of October, we observed an acceleration -- further acceleration in our trend. And we are now solid positive for the month of October in terms of business results. Clearly, going beyond that is obviously a bit more of a question mark because we need to observe and understand the evolution of the pandemic outbreak in particular in Europe. But this is something that we obviously will better understand and deep dive into the following days. But again, no major difference across the months. October, moving to solid positive. And again, close look into what's happening in the month of November and December. With respect to cash flow, I would say the primary driver of the free cash flow generation was very much a very solid and strong management of working capital. Paul, with respect to the third question of the GV.

[Paul du Saillant, CEO & Non]

Yes. Thank you, Stefano. Well, on GV, like we have told you and always confirmed, the strategic rationale for the GrandVision acquisition is confirm and makes sense for EssilorLuxottica, and we have always confirmed that -- the interest of this and the complementarity of these assets. On the antitrust process, it's progressing. We are actively working on the 3 remaining authority with the -- sorry, with the 3 remaining jurisdiction: Europe, Chile and Turkey, making good progress. The legal aspects are proceeding. And you will understand that I don't make any comment on those, but we are confident at EssilorLuxottica that there will be favorable outcome on those legal and arbitration proceedings. So we are confident. It makes strategic sense, and the antitrust process is progressing like expected.

[Operator]

The next question is coming from the line of Julien Dormois from Exane BNP Paribas.

[Julien Dormois, Research Analyst]

I have 3. The first one would relate to the sales trend into Q4. So Stefano, thanks for giving us the October trend that you saw. I just have one question here about what's happening now in Europe in terms of the lockdown. I just want to make sure that opticians across the countries which are under renewed lockdowns can remain open. And I think that makes a difference compared to the spring event. So first of all, can you confirm that the optician shops can remain open there? Second question is actually focused on Stellest, this myopia lens that you launched in China, I think, in July. I'm just interested to get your thoughts on whether that could become a major sales driver any time soon. And typically, what are the key hurdles you would need to overcome there to convince patients? Is that the pushback from the parents? Is that the training of opticians? So we're really keen to get your thoughts here. And also, what is a reasonable time frame for launches ex China? And the last question relates to the dividend. I can see in the press release, you are delaying the decision on dividend distribution to early December. I'm just curious whether this can still be paid by the end of the year, by the end of the calendar year, because my understanding is you need shareholder approval and possibly an AGM, and that probably takes a bit of time to be organized. So I'm just wondering whether there is still a chance of the dividend being paid before the end of calendar year.

[Paul du Saillant, CEO & Non]

Thank you very much, Julien. So I propose to take the 2 first one. And Stefano, if you're fine, you take the third. So on -- for Europe, like Stefano told you, first, we are pleased with the trend in October, which is solid growth in Europe and the U.S. all the way to the end of the month. Now you are right, Julien, that the way the lockdown is being implemented, and we are day-by-day following that very closely country by country, of course, including France. It's a lockdown but in which the opticians are considered, rightly, as an essential needs. So it means that they have the right to stay open. And as I pointed earlier in our comment, the optician is a very proactive, dynamic group of individual. And in the restart back in May, June, July, they were very dynamic in finding many different ways to serve the consumer. But now they can clearly stay open. So it's a question more how will the traffic will -- get to them. And I think we have to observe how will the rendezvous be taken. I think they will try to plan to welcome the consumer. They may be more proactive and see how they can make more a remote service. But I'm quite confident that, of course, we are going to see a lower trade than what we have seen in the recent weeks and months, which was very strong. Now how much of a slowdown and for how long will we see, we will observe. But clearly, it should be maybe less drastic than what we saw in April and May, June. Now I think you have [ June -- yes ], anyhow, to look at it in a different angle, which is it's a structural need. And anyhow, we have learned from the first lockdown the V shape and the very strong restart wherein which actually the store were extremely active to serve the customers. So of course, we have to see how much the traffic has slowed down with the stores staying open or partially open. But what is important is that we have demonstrated in the recent months, in the last 5 months, the robustness of the need. Stellest. So Stellest is an innovation. Norbert Gorny, when he talks about it -- our Head of Innovation and Research at Essilor, when Norbert talks about it, he says it's a rupture, a totally rupture innovation. Because the concept of the lens, and we don't have enough time to go through it, that is to create this de-focal effect in front of the retina, peripherical de-focal effect in front of the retina with a very complex design on the surface of the lens with microlens that are sitting in front, very small aspherical lens. And it's as disruptive as was maybe the progressive lens invention 60 years ago by Bernard Maitenaz. So we are creating a full new platform of design and solution, like a new category that is addressing a problem that is not solved, which is this myopia management, myopia development in between the age of 4 to 12. So to make -- to establish that category, you have to create the awareness. You have to work with eye doctors and [ court ] children to see the effect. You have to organize the training industry or the dispensing to work with the parents, like you said. So it's a full, holistic approach that we have, of course, started to do a few years back in China, where the myopia management issue is the biggest. We launched it in July. It's extremely promising. We are now working with other key geographies, for example, key countries in Europe. Two in 2021 started the develop -- the deployment of this solution, worked with the key opinion leaders, with the ophthalmologists, the eye doctors, the opticians. So it's a journey starting with extremely promising results that we have witnessed after 12 months of wearing those new lens. And we will have the confirmation after 2 years in a very short period of time. So this is what we could say in a few minutes on Stellest, but disruptive innovation to create a totally new technology platform and category for children. Stefano, on dividend.

[Stefano Grassi, Co]

On dividend, all I would say is the decision again will be taken in the course of the month of December and is technically doable.

[Operator]

The next question is coming from the line of Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I also have 3, please. I appreciate we're kind of fairly early on in the -- my first one is around the lockdowns and how you're thinking about sort of the drop-off in demand. And I know we're very early on, but I'm just curious, maybe from your own retail experience, what you have seen in the last couple of days. Are you seeing customers who are canceling appointments? Is there a drop-off in forward bookings? If you can give us an indication. Obviously, it's very hard for us to know given that the opticians are staying open, and this is a very different lockdown to what we had seen earlier in the year. It just would be great to get your thoughts on how you're thinking about the potential downside in places like France and Germany. That's my first question. My second question is just an update on the CEO search and wondering what you can share with us. And my third question is a bit of a financial one looking at the second half of the year. Obviously, very nice rebound in revenues, but also, you have mentioned throughout the press release and your prepared remarks today positive mix in terms of the types of products that you're selling and also geographically. Just curious kind of how you're thinking about the implications of that on the gross margin and overall levels of profitability in the second half of the year.

[Paul du Saillant, CEO & Non]

Stefano, would you like to take a few remarks on the -- our own retail, very early signs or observation? I can make a few more comments on France. I will take the second one, and maybe you take the third one, Stefano.

[Stefano Grassi, Co]

Sure, Paul. Absolutely. Just a quick touch on retail. As you know, Veronika, on the retail side, the vast majority of our presence in Europe is very much on the sun side. So there isn't much of the dynamic with respect to optician, at least on the direct-operated stores. We do see challenges in optical retail in Italy, where we do have a certain kind of restriction. For example, in the capital region, in the northern part of Italy, where we have restriction for accessing in shopping malls during weekends. But then we see probably consumer shopping during weekdays. So we need a little bit more time to see how that kind of restriction are impacting the stores. But again, I think it is important to highlight that no matter what and where we are in the vast majority of the country, our optical retail stores are considering dispenser of essential eye care needs, and therefore, the store can be open. I got to be honest with you: we are used to leave in 2020 with traffic decline on a double-digit territory. I think the consumer profile that we see shop in our optical retail store is probably different from the one that we used to see in the past, meaning that we have a consumer that is much more convinced that by getting into the store, he wants really purchase something that represents an eye care need. So the reason why you do see pretty much consistently across the different region conversion improvement, it very much witnessed what I was just saying: consumer much more convinced to come into our stores. Therefore, again, we don't see -- in recent weeks or recent days, we don't see any kind of deviation in the trajectory. But I also think that what we're observing in Europe needs to be thoroughly understood in the next few days or weeks. Paul, I don't know if you have a reading on your side, probably more on the optician side.

[Paul du Saillant, CEO & Non]

No, I think, Veronika, it's really early, early days. I think the -- nevertheless, the optician and our teams have learned a lot in the period of March to June. So I think the way they will manage the lockdown, as I said, the optician, the store can remain open. And the way they interact, leveraging new technologies, remote booking, just to name that one, and the way they have organized their store is going to, I think, make the impact lesser than what we saw in the second quarter in France. But it's honestly, Veronika, just a bit too early. I just feel a lot of entrepreneurship and eagerness of the small stores and the stores in France, you were pointing to France, to stay open and to continue to do business. There is -- a lot of determination is in maintaining the economical activity going. So I think that's the mindset and solution exists. But we have to see day by day. And our teams are extremely close to their customer as we talk. You might want to take the question on the gross margin, Stefano, and so we talk about the business, and then I'll say just a word on the CEO question.

[Stefano Grassi, Co]

Yes, absolutely, Paul. With respect to gross margin, Veronika, yes, you're right. I mean we talk about positive price/mix on wholesale. We've seen positive product mix support, especially in the more mature markets on the lens side. So we do have those constituents. They are definitely playing in our favor. We still have on the negative side a bit of headwind deriving by the underabsorption of fixed cost due to the volume. But what I can tell you without necessarily disclosing -- this on Q3 P&L because this is really a sales call. But we do see a marginal improvement in our gross margin position compared to what you've seen in the first half of the year. Paul, I'm not sure. Do you want to comment on the CEO search?

[Paul du Saillant, CEO & Non]

Well, this is a sales call, so it's really not very much the topic. But Veronika, I think what we can say is that there is a clear governance in place until the general assembly of May 2021. And in that governance, Francesco Milleri and I are working closely together, are leading together the company and managing each of us, Luxottica and Essilor. And I think it's a very strong and solid setup to navigate through the pandemia and through this complex year. And we have around us a top-quality group of executives and teams to -- that we're working with. So we have a clear operational governance in place. It's robust, and it is serving the purpose very well. Second, there will be, as you know, a new board elected in May 2021 at the end of the combination agreement, at the end of the equal power setup. And that new board will decide about the top-of-the-house organization with its [ seniors ] and Board members. So that's what we can say today. And I'm certainly not in a capacity to comment on those. It's a Board topic with very clear date and rendezvous.

[Veronika Dubajova, Equity Analyst]

Stefano, can I just clarify quickly a comment you made earlier? You said October was positive CR growth for the group as a whole or for Europe and the U.S.? I was a little confused, and I just want to make sure I got it right. And then I'll jump back into the queue.

[Stefano Grassi, Co]

Absolutely. It was a solid positive for the group.

[Paul du Saillant, CEO & Non]

To support Stefano, and this is a very powerful information that we are positive, solid growth territory in October.

[Operator]

The next question is coming from the line of Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge at HSBC. Three questions. Actually, I'd like to come back on the question of the CEO search because I think, officially, that was a search which was supposed to end before the end of 2020. But listening to you and mentioning the May 2021 AGM and how on the process that you described, I mean, isn't it fair to say that now the news about the new CEO might be more aligned with that AGM date? Second question relates to the incoming U.S. election and regarding the different outcomes. What could be the impact on the health policy in the U.S.? And do you think that there could be different outcomes in terms of how the eyewear industry could be impacted? And thirdly, coming back to Stellest, and thanks for the update. What is the competitive landscape for Stellest, first of all, in terms of other lenses launched by your competitors but also in terms of competition from other products than just lenses?

[Paul du Saillant, CEO & Non]

On the first question, Antoine, I am not going to go any further. That is very clear: it's a Board topic. And I'm not here to comment on the CEO search. It's a sales call, and you will understand that I'm not here in -- to comment on this matter. I told you the fact they're very clear, and I think they are a very important data point for you on -- they are an important data point for you on this matter. On the U.S. election, that is certainly not a matter we can comment. But what we can say -- and Stefano, you will complement. What we can say is the need -- the optical market in the U.S., the need for good vision is something that, for decades, has been a very important matter in the U.S., and it's a market that has developed itself well. It's the largest market worldwide. It's a growing market. And the need for good vision is well known. There is many vision care provider. There is a full set of stores of all kinds. There is an Internet offering. There is a lab network to serve the industry. There is all the brands that you want to have, frame brands, sunglass brands. So it's a well-developed market underaddressed. That is key. The key categories are not so well penetrated. So I think that's the way we look at this market. And actually, throughout the year 2020 we have seen, like it was very well explained by Stefano, a very solid rebound from the month of May and a nice third quarter and month of October. So I think the fundamentals of the market are good. And in whichever scenario, this need for good vision, this need for brand is there. And the go to market, all the channels are largely deployed. But maybe, Stefano, you can give some color also on this matter. Stefano?

[Stefano Grassi, Co]

Yes, sorry, Paul. I know that we have some variables that determine a pretty good level of uncertainty. If I have to judge what we're seeing in the U.S. compared to the behavior that we've seen so far in Europe, obviously, in the U.S., we probably see a level of restriction that is probably to a lower magnitude than the one that we are experiencing in Europe right now. We do see, on the prescription side, a pretty consistent trend, as Paul mentioned, of positive growth. I think that, that demand is going to be there no matter what, no matter who is going to win the election. We have planned for the fourth quarter a pretty good amount of activities around our optical retail stores, in particular, in LensCrafters. We're going to go on TV campaign in -- for 2 times between October and November, [ 4 weeks to wait ]. And this is something that we haven't done last year. We have a pretty solid CRM campaign that will very much encourage people to anticipate some of the insurance benefit not at the very end of the quarter but to -- probably widespread that throughout the quarter in order to avoid a massive queue of people at the year-end. So we're doing a lot of work to also address consumer behavior, address what the customer is looking for in light of the epidemic outbreak. I don't think those trends on the optical side will change, whether it's going to be one or the other contender that is going to win the election. As we mentioned before, the trend for October was positive in optical retail in North America, in particular, in LensCrafters. So those are pretty good indication. We continue to observe what's happening. We will obviously continue to monitor the results of our TV campaign and our CRM efforts. But again, we're confident of the exercise and the investment that we're putting in place.

[Paul du Saillant, CEO & Non]

Thank you, Stefano. So a few -- Antoine, a few complementary information on Stellest. So first, I think you will have to see -- go back to the magnitude of the myopia topic. Today, 2.6 billion people on Earth are myopes. We estimate, and we shared that with you at the Capital Market Day, that by 2050, 4.7 billion people on Earth will be myope. And in those 2.6 billion today, 400 million people are high myopes. And if I just go to China, 40% of the population is myope. So the question is that there is a few solution at work. There is atropine, which is drops -- eyedrops. You have contact lens solution, and then you have eyeglasses. We think that this new concept of a lens is bringing a new kind of a solution to slow down the development of myopia in between the age of 4 to the age of 12, 13. Yes, the industry is very active at trying to crack this different approach, different technologies. But I think the matter is really how do we deploy those solutions fast enough and with the proper awareness, the proper explanation to the eye doctor, to the optician, with the proper ramp-up market by market. So it's an industry challenge. And the more solution there are, the better it is. Because the topic is massive. It is an industry issue that we -- for us that we provide fast enough good solutions. That's the way I look at it, Antoine.

[Operator]

Thank the next question is coming from the line of Luca Solca from Bernstein.

[Luca Giuseppe Solca, Research Analyst]

I have a question on LensCrafters. It seems to me that, on the one hand, COVID-19 is pushing digital as you say, also reporting about your business. And on the other, your continuing innovation is shifting your mix towards more complex and more sophisticated lenses that cannot be produced or cut or serviced at the point of sale. I wonder about your progress in rightsizing the average store footprint at LensCrafters and how far advanced you are at this stage in shaping LensCrafters and making it ready for the future, if you are in the initial steps of this process or if you see that you have accomplished much, as you said, about post-merger integration. The second question is about STARS. You report continuing growth of this business and, importantly, significantly better organic growth in comparison to the average of the Wholesale and Retail businesses. Yet, the penetration of STARS is still below 20%. How do you anticipate this will proceed going forward? Do you expect an acceleration in this development? And how is your desire to move further into retail, especially in Europe, going to change the background for the development of STARS? And last but not least, you said that you're progressing well on GrandVision and on the antitrust investigation in the European Union and in other parts of the world. I wonder how you're looking at this acquisition today after COVID-19, after seeing digital grow so much. Is this still a strategic move for you? And is it still worse, the same? Or is, by contrast, the recent template between LVMH and Tiffany a good template to try and anticipate what is going to happen between you and GrandVision?

[Paul du Saillant, CEO & Non]

Stefano, are you -- can you take the 2 first ones?

[Stefano Grassi, Co]

Yes, absolutely, Paul. Let me start with LensCrafters. There's no doubt that there is a digital journey, a digital transformation that we need to do in LensCrafters -- I would say, in optical retail, generally speaking. And we need to leverage our own retail store to very much represent the benchmark for optical retail stores evolution into a more digital era. We started this journey outside the United States, Luca. We started this journey in 2 countries, where I think now we're pretty much completed. One is Australia. The other one is Italy. And the 2 retail chains that we decided to begin with, OPSM as well as Salmoiraghi & Viganò, are the one which we experimented, we worked a lot very hard to launch new digital innovation, whether it's appointment booking, digital eye examination, and really take that to the next level. For LensCrafters, we've done some work in the last couple of years, no doubt. But the journey hasn't been completed. Now if you ask me where are you on that trajectory, whether you are -- it's hard to make [ a percentage ] in a way, but we still have ways to go in the next probably couple of years. We'll still need to invest. But we know the direction. We know exactly what we need to do. We know some of the fundamental pillars that -- which we believe are still going to be there. In LensCrafters, we completed, for example, from a product assortment standpoint the evolution of our lens assortment. Now we have pretty much completed our LensCrafters lens assortment of branded and unbranded lenses that's very much supplied by Essilor. And this is an important accomplishment. You might remember that we started this journey a few years back in -- when we were about 50%. Now we're pretty much completed with that. We need to renovate still a good amount of stores because we believe that some of those stores will require an upgrade to make it more up to speed with the recent technologies. The frame advisory is one perfect example. The leverage of the artificial intelligence on one side, the leverage of the virtual mirror technology on the other side will allow some of our consumers that shop into LensCrafters to preselect some of the frames even the one that they don't necessarily have in the stores. The telemedicine is the other evolution that we're having right now. And we are piloting this in those months. And in 2021, you will see us be more discrete about a rollout and the investment for telemedicine, which is in the early stage of rollout in LensCrafters in North America. Some of the stores are too big. Some of them, no doubt. I think some of them have opportunity to be properly rightsized, meaning to become a little bit smaller than what they are. But remember, all the new stores do not have in-store labs any longer. And this obviously creates a difference in terms of store size. Clearly, the investment is an important one, but the return that we see from the LensCrafters stores, those investments are pretty promising. With respect to STARS, I think, STARS, it's really a good story but a story that is still to me very much Europe centric in the vast majority. And then what we need to do now is take the remainder part of the world, in particular, South America, Central America, United States, to the next level in terms of STARS evolution. I think some of the partnership program that we launched have been very successful. STARS can take further tailwinds from the launch of those programs, in particular in the -- outside Europe, in the region outside Europe. And I would say, North America and South America should be our priority. That's very much for LensCrafters and STARS. Paul, do you want to comment on the third question on GV process?

[Paul du Saillant, CEO & Non]

Yes, I will -- Luca, I will just confirm to you to your question is that, as I said and as it has been said by the group, the strategic rationale of the GrandVision acquisition is unchanged. We confirm that it makes sense to make this acquisition for EssilorLuxottica. One thing -- I bounced on this question because you pointed -- you sort of pointed a bit the digital growth or the online growth and the off-line growth. I think one of the aspects, and I'm sort of looking out of GrandVision question, that we could illustrate by our third quarter is that we have been able to grow online and off-line nicely in the third quarter and in the whole post COVID or restart. Of course, we had very strong online performance, e-commerce performance in the second quarter. The market was down in the store. But then in third quarter, the market restarted, like we've been talking for the last hour a lot about. And at the same time, we continue to have strong online performance. And I think that's something that is a key takeaway for today, is that the group is able, with its open model, with its go-to-market strategy, to stimulate, to support the growth dynamic of the industry, both with the independent, with the key retailers, with our own retail and with our online platform in an omnichannel approach more and more. So -- and what is good is that all the channels have the proper dynamic, leveraging our brand, our product, our assortment, our categories. So I think it's a very important learning also of this year to keep in mind.

[Operator]

The next question is coming from the line of Susy Tibaldi from UBS.

[Susy Tibaldi, Associate Analyst]

So the first one, I wanted to ask a little bit more about the sun category. Clearly, it's a smaller part of your business, but 30% is still quite significant. And I think the reasons for the weaker performance are very well understood. But I was wondering if you can give a little bit more detail on how much of a drag it really is and what you expect there in terms of shape of recovery and whether, in recent months, you have seen any change in trends for the category.One question on synergies. Are you able to quantify the level of synergies that you have delivered year-to-date? And you have mentioned that you have clearly changed some of the priorities internally when it comes to maybe prioritizing some of the cost synergies versus the revenue synergies. And are you seeing a direct cost benefit from these initiatives? Or do you think it's still too early? I am trying to understand if the cost of implementation currently is offsetting the benefit or you are already seeing some net benefits. And just if you could, just a few words on this Ray-Ban initiative, this complete pair. Since you have launched in Italy in June, how has the take-up been from customers? And also, what are the plans for the other markets?

[Paul du Saillant, CEO & Non]

Stefano, are you okay to take the 2 first ones?

[Stefano Grassi, Co]

Sure. Yes, the question on sun, absolutely. I mean the -- we would -- dealing with traffic drop that is quite material on the Sunglass Hut location, which is really the major constituents on the sunglass -- on the sun for retail. We have been challenged quite particularly in touristic location in theme parks, which is creating a challenging situation, more so in Europe than in the United States. In Europe, we have about 50% to 60% of our Sunglass Hut location that is more exposed to that touristic traffic across the main capital of Europe -- in Europe. In the U.S., we have more of a core part of business that is still more resilient than the one exposed to touristic traffic that has proven to be, again, probably stronger than the touristic traffic part of Sunglass Hut. We now have an important period that is the holiday season, in particular, in the United States. From a timing perspective, we probably have a slightly longer holiday season than we had last year, a couple of days more. And we need to observe how things are developing. But again, I think our investment should be very much around the cores in order for them to serve more and more local needs rather than international traffic flows because we don't think that is going to come in the near future. Again, we continue to observe that booming activity in the outdoor world due to the Bass Pro. Then for what pertains to the B2B channel on the Wholesale side, I got to tell you, we had a good summer season. I mean, in particular, in the month of August and, in particular, in Europe, it was a pretty good fun season. So in that respect, we believe that as soon as there is a restored confidence in the consumer to take some activities outside their home or apartments, I think they will naturally come as a counteract. We have the assets ready. The stores are ready to host new clients. We have the right product launches in the stores. So we feel good about it. In terms of synergies, I think the progression is coming pretty well. We have been challenged during the course of the second quarter due to the outbreak. The challenge was probably the sales side than on the cost side. But during the third quarter, we accelerated some of the initiatives on the cost side as well as on the commercial side, like EL 360. Paul confirmed the synergies that -- the synergy target that we have. And I think you will see already some benefits into a profit or loss very much deriving by the course of those initiatives. So targets are unchanged at this stage. We closely -- very closely -- we follow very closely the evolution of the following months. But again, there's no reason for us to change target at this stage.

[Paul du Saillant, CEO & Non]

Thank you, Stefano. So a few words on Ray-Ban Authentic that we launched in June in Italy. First, the concept, you see the concept. The concept is a great one, is to have the same experience with a prescription Ray-Ban than you have with the sunglass Ray-Ban in sun and in clear with the lens being optimized optically and cosmetically with the frame. So it's a great consumer offering. We see very good interest in Italy, where we are in our own store at Salmoiraghi and in the wholesale activity with optician launching the product. And we are in the early days, months. That is the current market where we have put it, we have launched it. We will launch it in the U.S. next year. So that is very important rendezvous. And we are studying with the European teams which will be the next countries in Europe after Italy. So this is where we are, and I wanted just to refresh on the concept which is behind it, which is a powerful concept.

[Operator]

The next question is coming from the line of Domenico Ghilotti from Equita.

[Domenico Ghilotti, Co]

I have 4 very quick questions. The first is on the synergies. You said you are on track for the, say, 2023 synergies. What about the confidence on the 2021 target you gave initially, so that EUR 300 million, EUR 350 million?Second, on the free cash flow generation, Stefano, you were mentioning that working capital was a strong contributor but is also -- that's predictable for us, so I understand. Could you provide a sense of what is the trend that you expect or the level you expect at year-end in terms of free cash flow or net debt, as you like? And the third question is on the -- a follow-up on the second wave risk. So if I understand properly your comments on the U.S. market, you are less concerned on the reaction on the trend -- current trend in the U.S. because you have clearly lower restriction despite having a second wave that is relevant as well. So if you can comment.And the last question is on the dividend. So I'm trying to understand, first of all, if you -- what are the KPIs that you will consider to propose the dividend payment and if the payment will be just, say, the payment of the dividend that has been suspended initially, so the full year '19, or if you can expect totally new proposals or a new amount.

[Paul du Saillant, CEO & Non]

Stefano, are you okay to take 1, 2, possibly 4, and I can take the third one, if that's okay with you?

[Stefano Grassi, Co]

Yes, yes. So with respect to synergies, Domenico, no reason to change our target at this stage. This is really where we are. Really, the mix between cost and revenues change. The mix contribution between different work streams change. But as we said, no reason to change our goals at this stage and neither the medium-term or the longer-term one at this stage. With respect to working capital and the free cash flow in general for trend into Q4, I mean, what -- there are 2 things, right, that I can tell you. Cash flow generation is for many obvious reasons concentrated during the month of December as we're going to have the ramp-up of our retail for holiday season for insurance period. And the second thing that I can share with you is that the month of October, from a cash flow standpoint, has been positive, and we're good to go on that respect. So these are the 2 things that I can share at this stage. Then obviously, we need to observe how the evolution is going to go, especially in the month of December. With respect to dividends, I mean, the first thing that we look at very much so is the solidity of our balance sheet. And you look at our net financial position. You look at it, and I'm sure many of you have made the comparison with what we've seen in the first half of the year, and you could do the math directionally on where are we. So we had strong cash flow generation during Q3. And this is an important KPI, the solidity of our balance sheet that is there. Clearly, we look at also our P&L performance. And then obviously, we'll have discussion within the Board of Directors to really take the proper decision. Paul, do you want to take question #3 on second wave concerning U.S.?

[Paul du Saillant, CEO & Non]

Well, I think currently, the U.S. stays quite dynamic. But we have to observe if there is partial lockdown, what is the form of this lockdown. Through the month of October, we saw up to days like yesterday a very good dynamic in all of the lens-related activity. I think wholesale frame also sunglasses was good. But Stefano, maybe you have better -- good -- more recent data than me. But the dynamic of the business at this point is robust, Domenico. So we will see if this change, but the situation is drastically different from what we see in Europe in terms of the way the governments are acting in Europe. And those decisions in the U.S., I remind you, are very local by the federal structure of the country. So to be followed closely. To be followed closely, but so far, so good.

[Operator]

The next question will be the last one, and that's coming from the line of Delphine Le Louet from Societe Generale.

[Delphine Le Louet, Equity Analyst]

If we stick in the U.S., probably, Stefano, can we get the breakdown in terms of revenue regarding department stores and ECPs? Second question will deal with the Essilor 360 program. I'm trying to understand, is it going to be the new backbone of the commercial marketing activity dedicated to ECPs? Or shall we see that as an umbrella where we're going to have the Essilor Expert, the STARS program? How would that fit? Is it a part of the new synergy and 1 of the 26 ongoing strategic program? And finally, can you ensure us when we look in the next 6 months -- and it's going to be very different for the next semester with the end of the combination agreement. Can you assure us that we're going to have a smooth transition from where we are now regarding the management, and I'm talking about the -- all the managers of EssilorLuxottica, to the new company? And if I hear you well, Paul, I'm just saying myself that you already have the selection of your CEO, and it's definitely internal one. So I want to be sure that we will not have to wait for 6, 12 months with the new CEO to get a new plan for a new company.

[Paul du Saillant, CEO & Non]

So Stefano, do you want to take the first one? I can make some comment on EL 360.

[Stefano Grassi, Co]

Absolutely. Just on the breakdown of revenues involving ECP -- I mean, give or take, you're looking at anywhere between 40% to 50% on the B2B side of EssiLux on a combined. So it's definitely the biggest channel that we have. While if you look at the department stores that is primarily on the wholesale side, we're looking at a single-digit presence from a department store standpoint on the B2B side. Then obviously, we have presence as part of our retail network, but that's different. So I think you were more referring on the B2B side. Paul, do you want to give more color on the EL 360?

[Paul du Saillant, CEO & Non]

Yes, I'm happy to do so. Delphine, the EL 360 is -- you have to go back to -- we have key program with our ECPs. And we have often talked to you about the Essilor Experts program, for example, on the Essilor side. There is STARS program and other programs on the Luxottica side. If I just cover the Essilor Experts in the U.S., it's 7,000 Essilor Experts that we have. Some of them are in our doctor alliance, company. Some other are just purely independent ECP. So the EssilorLuxottica 360 program comes -- is an extension of this Essilor Experts. And actually, many of the first Essilor 360 partners are coming from Essilor Experts, and it's bringing offers -- programs coming both from Luxottica and from Essilor as a common program. And it is managed as a common program at EssilorLuxottica level. So I don't think you should look at it as an umbrella program on top of the Essilor Experts. It's an extension wherein which there is more features; more commitment on both parts, business commitment, product commitment; and access to the product, service capabilities of our group. It's the -- start of the program is very, very encouraging. When we talk with Fabrizio Uguzzoni on -- regarding the U.S., this is impressive, what they have been able to achieve in just over 2 months. On your last question, as you have sensed in the last months with Francesco, we really are managing together with the real objective of steering the company and the team in this very complex time successfully in a smooth way but also in a decisive way, taking decisions and not waiting for any magic date in 2021. Just managing the company, taking decision, accelerating integration, connecting our teams, delivering on project, common project more and more of them. Then, I will -- as I said earlier, I will not make any comment. It's not appropriate for me to do so. There is an AGM in 2021 and the Board whose responsibility is to take care of those matters. But for sure, together with Francesco, we are very pleased to work together and, more than work together, to take decision and build EssilorLuxottica, which is for the years to come and decades to come. Thank you, Delphine. So I think that was the last question. So I think we will wrap it up here, Stefano, except if you have one more comment. Otherwise, I think we're just going to conclude. Thank you very much for attending our call. We really appreciate all of your questions and interest. And we will see you on March 12. I think that's our full year results analyst call. So we look forward to it, and we thank you very much for being with us this morning.