In presenting the relatively good results of his company for the first half of 2014, Hubert Sagnières, chairman and chief executive of Essilor International, said he had “absolutely no comment” to make on the rumors about a possible merger with Luxottica. We think that such a “marriage of the giants” would make sense because of the complementarity between their operations and possible synergies. It could raise further their market dominance, but could also alienate some important strategic partners and many independent retailers.

Essilor Int'l. Consolidated Income Statement
(Million Euros , Six Months ended June 30)

 

2014

2013

%
Change

REVENUES

2,780

2,576

7.9

Cost of Sales

1,182

1,127

4.9

Research & Development

90

81

11.1

Selling & Distribution

649

584

11.1

Other Operating Expenses

346

312

10.9

Other Expenses (Income), Net

(321)

31

-

Finance Costs

16

3

-

Other Financial Expenses

4

3

33.3

Profit of Associates

4

11

-63.6

Pre-Tax

818

446

83.4

Tax Credit

88

109

-19.3

Minority Interest

699

310

125.5

NET

730

337

116.6

Euro/Share (Diluted)

3.26

1.45

124.8

Raising its financial objectives for the year, Essilor said that it stands to book an improved, adjusted “operating margin contribution” of around 18.6 percent, with revenues growing by more than 13 percent in local currencies, thanks largely to big recent acquisitions, the introduction of new products and stepped-up advertising. The company is targeting pure organic growth closer to 4 percent than 3 percent for the year.

For the first six months of this year, the group reported a 7.9 percent increase in total revenues to €2,780 million, in spîte of a negative currency effect of 4.7 percentage points from the appreciation of the euro. On a comparable, currency-neutral basis, sales increased by 3.0 percent, with an acceleration of the growth to 3.5 percent in the second quarter from 2.4 percent in the first one.

In fact, changes in the scope of consolidation added 9.6 percentage points to the reported growth for the first half. The recent strategic acquisition of Transitions Optical and Coastal.com added 3.2 percentage points. Other “bolt-on” acquisitions including Costa in the U.S., Xiamen Yarui Optical in China and many laboratories in many countries added 6.4 percentage points.

The gross margin of the group improved to 58.0 percent from 56.3 percent in the first half of 2012, but excluding acquisitions, the gross margin was stable. Operating earnings increased by 11.0 percent to €494 million and net earnings rose by 3.5 percent to €325 million. Excluding restructuring costs and other extraordinary items, the so-called contribution margin rose by 0.6 percentage points from the year-ago period, reaching a record of 18.9 percent of sales.

Free cash flow jumped by 43.3 percent to €245 million, and the group will use part of that to reduce its net debt, which jumped to by €1.79 billion to €2.17 billion because of the recent takeovers, led by the $1.71 billion investment made to acquire the remaining 51 percent interest in Transitions.

Lenses & optical instruments, the biggest segment in Essilor's turnover, registered a 3.6 percent increase on a comparable basis, with increases of 4.1 percent in North America, 7.9 percent in Latin America and 8.5 percent in Asia-Pacific, the Middle East and Africa partly offset by a 0.5 percent drop in Europe.

The drop in Europe was partly due to the cancellation of a big contract with Hal, which switched to Hoya as its lens supplier as of September 2013. Company officials told analysts that sales in Europe would have risen by two percent if the contract had continued, with an acceleration in the second quarter.

The officials pointed out that Essilor has struck new partnerships since then with General Optica in Spain and other major retailers around the world such as GMO in Latin America and Formosa in Taiwan. It also has now partnerships with chains of hospitals in Mexico and Cameroon.

Reviewing the different parts of Europe, Essilor mentioned “difficult” conditions in France and “fragile” growth in the German-speaking countries and Benelux. The markets in Spain, Italy and Eastern Europe rebounded, with sales of Varilux progressives rising by 15 percent in Spain, and the company performed well also in the U.K. and Russia. Sales of instruments staged a strong recovery in Europe, particularly in the lens edging segment

The strong growth in North America was partly attributed to the effects of strong advertising campaigns, which are now being generalized in parts of Europe and China. Growth accelerated in North America during the second quarter and the momentum is expected to continue for the balance of the year.

In Latin America, the star performer was Colombia. Sales continued to grow in Brazil, but many Brazilians preferred to watch the World Cup of football during the second quarter instead of buying glasses.

Essilor Revenues

(Million Euros, Six Months ended June 30)

 

2014

2013

% Change
(reported)

Like-for-like
Growth (%)

Acquisitions
(%)

Optical Lenses and Instruments

2,419.0

2,296.3

5.3

3.6

6.5

North America

984.7

914.8

7.6

4.1

8.6

Europe

825.5

802.0

2.9

-0.5

3.6

Asia-Pacific & Africa

432.8

407.9

6.1

8.5

6.5

Latin America

176.0

171.6

2.6

7.9

9.5

Equipment

85.3

92.3

-7.6

-3.0

-1.3

Readers

275.8

187.1

47.4

-1.4

52.9

TOTAL

2,780.1

2,575.7

7.9

3.0

9.6

Across the globe, fast-growing markets raised their sales by 24 percent to about €600 million. Revenues went up by 17 percent in India. They rose by 11 percent in China, driven by anti-UV products, the introduction of the Kodak brand in the country and higher exports, but company officials indicated that the growth in volume was higher. Essilor reported sustained growth in Southeast Asia, led by Thailand, and continued progress among independent opticians in Australia.

Essilor's equipment division, which is led by Satisloh, reported a 3.0 percent decline on a comparable basis in the first half. An increasing proportion of intra-group sales was associated with low orders from external clients after big deliveries in late 2013. Essilor mentioned weak orders for new digital surfacing machinery, but said they should increase in the second half because of Satisloh's new green alternative to alloy-based lens blocking processes.

A drop of 1.4 percent in the sunglasses and readers division was attributed mainly to a decision by Walmart and other mass retail customers in the U.S. to reduce their inventories, but sales of readers increased by 7 percent in the country. Costa performed well in the U.S. and the segment's overall business went up sharply in Europe, Latin America and China.