In spite of the ongoing economic uncertainties, the world's leading supplier of ophthalmic lenses had a very good first half of the year, according to its management, thanks in part to recent acquisitions and the launch of many new products for different segments of the market.
Essilor International's total revenues grew by 15.8 percent to €1,926.8 million in the first half of the year, but excluding currency effects and acquisitions, comparable growth in first-half revenue came to 2.7 percent. The company's recent strategic acquisition of FGX International and Signet Armorlite, consolidated from March 12 and April 1, respectively, contributed 5.9 percentage points to the reported growth. An additional 3.2 percent came from numerous other, bolt-on acquisitions carried out in 2009 and the first half of 2010. A positive currency effect of 4 percent reflected the euro's decline against other currencies - particularly the Brazilian real, the Canadian dollar and the U.S. dollar.
The organic growth rate increased from 2.5 percent in the first quarter to 2.9 percent in the second one. Interestingly, organic growth has been rising steadily for the group since the second quarter of 2009 and is now highest in the area of equipment. After many negative quarters, this division, where Satisloh remains the biggest single factor, experienced increases of 20.5 percent in the second quarter of 2010 and 20.8 percent for the full first half of the year, thanks only in part to the acquisition of DAC in April.
On a comparable basis, equipment sales grew by 8.8 percent in the first six months of this year, excluding intra-group sales, in contrast with growth of only 2.5 percent for optical lenses. Satisloh's sales were particularly robust in the area of consumables and digital surfacing machines. Business is developing rapidly in Asia, particularly in China where Satisloh now has a dedicated product offering.
The group's gross profit margin slipped by 0.5 percentage points to 55.5 percent in the first half, as compared to the same period one year ago, mainly because of the dilutive effect of the latest acquisitions and the ramp-up of mid-priced product offerings..
The operating margin (Ebit) of the group before extraordinary charges ticked down by 0.1 percentage point to 18.0 percent, but excluding the results of its two major recent strategic acquisitions - FGX and Signet Armorlite - it stayed flat at 18.1 percent. Margins were aided by a boost in digital surfacing and other manufacturing processes in low-cost countries such as China, India, Thailand and Mexico. Extraordinary charges depressed the operating margin to 14.6 percent.
Net income sank by 1.3 percent to €197.5 million in the first half, but excluding a new provision of €41.3 million set aside to pay a fine to the German anti-trust authority, whose verdict Essilor is appealing, earnings rose by 19.3 percent to €238.8 million. Essilor had already posted provisions of €9.2 million for this case in its 2008 and 2009 accounts. The first-half results also include restructuring costs of €12.5 million, up from €6.5 million in the same period of 2009, partly due to the shutdown of its laboratory in Dallas.
On the positive side, earnings of more than €8 million flowed in from the first-time consolidation of FGX and Signet Armorlite. Earnings from Essilor's stake in Transitions increased to €14.2 million from €9.8 million, while Essilor's stake in Sperian Protection yielded €2.5 million, compared with just €900,000 last year.
The group experienced good growth in terms of volume in all regions during the first half due to the introduction of more than 200 new products, including for example special progressive lenses for the Indian and Korean markets. The acquisition of Satisloh has shortened to only 15 days the time required to develop a new progressive design.
Sales got a boost from the launch of new products such as the Varilux Physio 2.0 lens for night vision in Europe and the U.S., the Xperio polarized lens in Europe, and lenses made using Eyecode technology worldwide. Xperio had been previously introduced in the U.S., and Eyecode in Germany.
Most of the new products are positioned in the medium segment, an area on which Essilor is focusing in order to capture higher market shares, particularly in emerging markets. For this purpose, it has raised marketing expenditures by 13 percent and it is planning to accelerate its investments in laboratories in promising markets such as Brazil, partly on a joint venture basis. A subsidiary is being set up in Singapore and a single-vision Kodak branded lens by Signet-Armorlite is going to be launched soon in China.
In Europe, where performances still vary considerably from one country to another, total sales progressed overall by 1.4 percent on a comparable basis during the first half. France maintained strong momentum thanks to its multi-network strategy and business picked up in the Netherlands, but remained disappointing in Germany and Austria. Benefiting from Russia's rapid development, Eastern Europe returned to growth.
Growth leveled off in North America, where it was up by 1.0 percent overall on a comparable basis. In the U.S., where Essilor's Xperio polarized lenses sold well, all distribution channels contributed to a growth in volumes, but not all the chains participated in the sales increase. Operating problems related to a new IT system affected performance in Canada, in an already challenging environment.
In Asia, comparable growth of 8.0 percent was led by emerging markets. Essilor continued its rapid expansion in India, where its sales increased by 21.8 percent, as well as in the ASEAN countries, particularly Thailand and Indonesia. Business in China was stimulated by improvements in the product mix, while sales contracted in Australia and New Zealand in a difficult market environment.
Countries in Latin America recorded significant growth in the first half, with revenue for the region up by 16.6 percent on a comparable basis. In Brazil, the mid-range segment benefited from increased volumes and higher demand for anti-reflective lenses, and Mexico and Argentina both reported very strong growth. Essilor is now looking at other Latin American countries where it does not yet have a direct presence.
Turnover from readers reached €79.7 million at FGX, which also reported particularly strong sales of sunglasses during the second quarter in the U.S.
The group's organic growth of 2.9 percent in the second quarter included gains of 2.1 percent in Europe, 7.5 percent in Asia-Pacific and Africa, and 17.6 percent in Latin America. North America had a 0.2 percent drop in the three-month period. In reported terms, including the effect of currencies and acquisitions, Essilor's total quarterly revenues increased by 24 percent to €1,020.9 million. Acquisitions contributed 13.2 percentage points to the increase, and currency effects added 7.9 percent.
Free cash flow jumped by 72 percent to €165 million for the Essilor group in the first half, in spite of its numerous investments and acquisitions, including the redemption of all the 2003 bonds that had not yet been converted. The debt/equity ratio is now at a comfortable level of 21 percent. Total investments of more than €120 million budgeted for 2010 will include money spent on a large new R&D platform at Créteil near Paris that will centralize by 2013 all the group's R&D resources now dispersed across Europe. The goal is to develop new products even faster in the future.
In addition to other previously reported acquisitions, during the first half of this year Essilor acquired stakes in two more U.S. prescription labs ? Epic Labs in Minnesota and Custom Optical in Georgia ? and in Ceditop, a prescription lab and distributor in the Brazilian state of Rio Grande do Sul with annual revenues of around €3.5 million. It also bought Visitech, a distributor in Singapore.
Since the second half started, Essilor has acquired a majority stake in Gulf States, a prescription lab in Louisiana that generates $3 million. Nike Optical US, a Nikon-Essilor subsidiary, bought a majority interest in Pasch of Colorado, which has sales of about $3.9 million.
Essilor confirms its forecast of a stable operating margin and a 5-7 percent increase in sales for the full year excluding currency effects and new businesses. In the second half, Essilor will get a capital gain of about €27 million from the sale of its stake in Sperian Protection to Honeywell last Aug. 9 for €138 million.