The world's leading supplier of ophthalmic lenses has reported an 11.6 percent boost in its net income to €366.7 million for last year, translating into an increase in its net margin to 12.6 percent from 12.2 percent the year before. The gross margin declined to 57.6 percent from 58.2 percent, but the operating margin (EBIT) grew to a new annual record of 18.1 percent, up from 17.9 percent in 2006, and management is predicting that it will remain stable in 2008.

As previously reported (EWI No. 9-1 of Jan. 25), Essilor raised its consolidated revenues by 8.1 percent in 2007, reaching €2,908.1 million, with a rather exceptional organic sales increase of 8 percent. Acquisitions were responsible for 4.0 percentage points of extra growth, but this was largely offset by a negative effect of 3.8 percentage points from changes in foreign exchange rates. The management stands by its previous forecast that the turnover will grow this year by 6 percent organically and by 10-10.5 percent including the effect of acquisitions.

Essilor continues to grow faster than the market, whose average annual growth rate seems to have risen to around 3 percent since 1997, compared with an annual rate of 1-2 percent before. At the company's usual annual conference with the analysts, Xavier Fontanet, chairman and chief executive of Essilor, told them not to expect any further lasting acceleration of the company's organic sales growth, but stressed that it's following a clear business model that will ensure long-term sustainable growth, without any need to diversify into contact lenses, hearing aids or other sectors.

Analysts are in fact recommending Essilor's stock as a relatively safe investment under the present turbulent economic conditions. The company's management again pointed out that Essilor has not been affected by the economic conditions in the USA since the start of the year

Last year's slight decline in the gross margin was attributed mainly to lower profitability of some of the newly acquired companies, such as OOGP in the USA. Excluding acquisitions, the gross margin improved by 0.1 percentage points. Overall margins would have been better without exceptional costs related to the imminent launch of a new generation of Transitions photochromic lenses in North America and Asia. Because of the depreciation of obsolete inventories, Transitions, in which Essilor owns a 49 percent share, contributed a profit of only €19.9 million in 2007, down from €22.2 million in the previous year, in spite of a sales increase of 12 percent.

Another partial holding of Essilor, the 44-percent-owned VisionWeb, broke even again, but should contribute a profit this year. Essilor's 15 percent minority stake in Sperian, the former Bacou-Dalloz, brought in a higher profit of €8.8 million, up from €6.3 million.

Furthermore, charges related to stock options increased in connection with changes in their allocation. Their beneficiaries can be vested after two years instead of six, and they are now linked to Essilor's performance on the stock exchange.

Relatively high investments of €224 million were made in 2007, and around 75 percent of these went into distribution operations and prescription laboratories. They included spending on the establishment of a large new headquarters for Essilor of America in Dallas, the construction of a new Asian distribution center in Singapore and the acquisition of the real estate assets of some European laboratories.

Net financial investments of €216.8 million included €151.3 million for 16 different acquisitions that will generate annual extra revenues of about €160 million. The management noted that Essilor has been making acquisitions all over the globe since 2005, after concentrating on U.S. laboratories in the 1995-2000 period and after adding investments in Asia in the subsequent five years. Aside from major new opportunities, future acquisitions should be of the same magnitude as a percentage of total sales.

Essilor already owns about one-third of the independent labs for ophthalmic lenses in the USA. The group plans to acquire or establish more labs in Asia, and to do the same in Russia, but total capital expenditures should decline in the near future. There will no doubt be more opportunities for acquisitions in China once the local wholesalers become bigger and more professional, and their accounts become more transparent. Investments are also planned on the value chain in Europe, which previously contributed most of the cash flow for its copious investments in the USA, but the emphasis is shifting to emerging markets all over the world, including China and India (see article in the next pages).

The high investments of last year didn't prevent the group from reaching a net cash flow of €262 million, half of which will be given to shareholders in the form of dividends. In early March, Essilor announced two more acquisitions. One is O'Max, a Dutch distributor of optometry and lens edging instruments with annual sales of €3.2 million. The other one is an Indian prescription laboratory based in Hyderabad, 20/20 Rx Lens, which has been a partner of the French company for a long time.