While reporting on a strong end to the 2017 financial year, with an organic 5.1 percent increase in the fourth quarter, the management of Essilor International predicted that the group's sales will go up by around 4 percent in 2018, compared with last year's growth of 3.5 percent. The contribution from operations, which declined in 2017 by 0.3 percentage points to 18.3 percent of revenues, should be equal or higher.

On a reported basis, Essilor's consolidated sales increased by only 1.1 percent to €1,829 million in the fourth quarter of 2017, as the organic increase of 5.1 percent and an unusually small boost of 2.0 percentage points from new acquisitions were offset by a negative foreign currency impact of 6.0 percentage points, due primarily to the depreciation of the U.S. dollar.

Organically, sales of lenses and instruments rose by 5.2 percent in the quarter, with a rebound of 8.8 percent in North America. The acceleration in that region was driven by the introduction toward the end of the year of the Varilux X series and a new anti-reflection coating, Crizal Sapphire 360°.

Increases of 2.4 percent in Europe and 4.8 percent in the Asia-Pacific, Middle East and Africa region were recorded in the segment, but Latin America was off by 2.0 percent. The fast-growing markets of the world performed well with the exception of Brazil and India.

The group's sunglasses & readers division recovered in the fourth quarter, posting an organic sales increase of 3.1 percent, which was attributed to good results for FGX and Costa in the U.S. and the Photosynthesis Group (MJS) in China, which was acquired by Essilor in 2016.

The equipment division marked a promising rebound in the quarter with an increase of 9.0 percent.

For the full 2017 financial year, Essilor's revenues went up by 6.7 percent in terms of local currencies, with acquisitions contributing 3.6 percentage points to the growth. Translated into euros, they went up by 5.3 percent to €7,490 million.

Despite the difficulties in Brazil and India, Essilor's total sales in fast-growing markets grew by 12 percent last year to nearly €1.8 billion, representing almost 24 percent of the group's turnover, compared with a share of 15 percent in 2011. In China, acquisitions helped to raise total revenues by 30 percent, and they are expected to pass the €500 million mark in 2018.

The group's gross margin declined by 0.8 percentage points to 58.0 percent last year, mainly because of the rapid growth of the less profitable online business and a 9 percent drop in sales of high-margin Transitions lenses to other manufacturers.

The drop occurred in spite of the roll-out of the Varilux X series and other new products in various countries that came with a price premium, helping to boost revenues. The new progressive lens, which already represents 70 percent of all new sales of Varilux lenses, was launched in the U.S. at the end of 2017 and will be introduced in Asia and Latin America this year. First launched in the U.S., Crizal Sapphire will come to Europe next month.

On an adjusted basis, excluding one-off expenses of €109 million linked to the proposed merger with Luxottica and a positive €73 million impact from tax changes in the U.S. and France, the operating profit inched up by 1.5 percent to €1,248 million. Operating margins were depressed by significant investments in Brazil and China, restructuring provisions of €33 million and €82 million in compensation for share-based payments to a growing number of employees.

Free cash flow reached a record adjusted level of more than €1 billion, allowing the group to reduce its net debt by €400 million. The net income attributable to shareholders rose by 2.5 percent to €833 million. The overall tax rate declined to 22.1 percent, and it should stay at that level for several years.

Organically, the group's sales went up by 3.1 percent last year, and the momentum picked up in the second half with a rise of 3.8 percent year-on-year against an increase of only 2.5 percent in the first half. Looking at the different segments, Essilor's organic annual sales rose by 3.4 percent in lenses & optical instruments, by 0.1 percent in sunglasses & readers and 5.8 percent in equipment.

Within the lenses and instruments division, the group's e-commerce business grew by about 13 percent overall, reaching a higher-than-planned turnover of €440 million under the leadership of Bernard Nuesser, and it is becoming profitable for the first time in the more mature countries. In the U.S., Clearly rebounded during the second half of the year, offering a new consumer experience platform on its website. In Europe, Vision Direct and Glasses Direct recorded robust sales growth. In Scandinavia, the operations of LensOn and LensWay were combined. Essilor has begun to invest in the deployment of e-commerce in China, India and Brazil.

Contributing to the division's overall growth, sales of optical instruments grew organically by 8.5 percent last year, with a strong momentum across all product lines and geographic areas. In particular, Essilor's edgers reached record sales levels, especially in the fast-developing countries. The company's refraction and diagnostic instruments enjoyed brisk sales, thanks to new contracts with key accounts.

In lenses & instruments, European sales grew organically by 2.4 percent last year, driven by the introduction of the Varilux X series in the region during the spring, strong volume growth for Transitions photochromic lenses, good results in instruments and the development of e-commerce activities.

Alongside Eastern Europe, Russia and Scandinavia, Italy was among the countries that saw the strongest growth in the division, thanks to a better product mix with independent opticians. Sales were flat in France because of the new legislation on reimbursements. They were also flat in Germany and the Benelux countries. They were down in the U.K. and Spain.

The North American market improved in 2017, registering organic growth of 4.1 percent for lenses and instruments, with progress in various channels including doctors' alliances, key accounts, independent opticians, fast-growing retail groups like Costco and the distribution of contact lenses online.

Essilor International Consolidated Revenues

(Million Euros, Year ended Dec. 31)

2017

2016

% Change reported

% Change (like for like)

% Change in the scope of consolidation

% Currency effect

Lenses & Optical Instruments

6,498

6,218

4.5

3.4

2.4

-1.3

North America

2,805

2,707

3.6

4.1

1.4

-1.9

Europe

2,015

1,905

5.7

2.4

4.0

-0.6

Asia/Pacific/Middle East/Africa

1,192

1,138

4.7

5.1

2.0

-2.3

Latin America

486

468

4.0

-0.9

2.8

2.0

Sunglasses & Readers

766

685

12.0

0.1

14.8

-3.0

Equipment

226

212

6.4

5.8

2.0

-1.4

TOTAL

7,490

7,115

5.3

3.1

3.6

-1.4

Two initiatives directed at independent opticians were particularly successful toward the end of the year: a premium solution for consumers called the “Ultimate Lens Package” involving the company's latest innovations, and a business solution for optometrists called “Essilor Experts.”

The picture was mixed in the Asia-Pacific, Middle East and Africa region, where organic sales rose by 5.1 percent overall. Sales declined in Australia and slowed down India. They grew by 10 percent in China, and they went up also in Korea. They improved quarter by quarter in Japan. The growth was very strong in Southeast Asia and Turkey, while trends were more mixed in the Middle East and Africa.

In Latin America, where sales of lenses and instruments declined organically by 0.9 percent, a sharp decline in Brazil, especially in the premium segment of the market, cancelled progress in the Spanish-speaking countries, which are now contributing more than half of the regional turnover. Argentina delivered the best performance. Colombia grew by close to 10 percent. Chile and Costa Rica kept a healthy dynamic. Mexico made steady progress throughout the first half, but then, starting in September, it suffered from natural disasters and problems with the supply chain.

Overall, the group's sales of sunglasses and readers went up by 12.0 percent to €766 million last year due to the acquisition of the Chinese Photosynthesis Group (MJS), which delivered good results in the first year of operation under Essilor's ownership. It opened 250 new stores, taking the total door count up to 1,200 points of sale.

Essilor Int'l. Consolidated Income Statement(Million Euros, Year ended Dec. 31)

2017

2016

% Change

Revenues

7,490

7,115

5.3

Cost of Sales

3,144

2,934

7.2

Research & Development

217

214

1.4

Selling & Distribution

1,845

1,750

5.4

Other Operating Expenses

923

896

3.0

Other income

12

18

-

Other Expenses

299

109

174.3

Finance Costs, Net

52

54

-3.7

Other Financial Charges

14

12

16.7

Share of Profit of Associates

-

1

-

Pre-Tax

1,010

1,165

-13.3

Tax

132

285

-53.7

Minority Interest

89

67

32.8

NET

878

880

-0.2

Euros/Share (Diluted)

3.57

3.71

-3.8

Changes in the scope of consolidation added 14.8 percentage points to the annual growth of the segment, slightly reduced by the currency effect. The segment's sales were nearly flat on an organic basis, with an increase of only 0.1 percent. Costa recorded the best performance. FGX rose slightly, enjoying gains in shelf space at several major clients and outside the U.S, Bolon saw its overall sales decline, in spite of its international expansion (see the related article in this issue). The management is predicting a 5 percent increase for this segment in 2018.

The equipment division recorded a sales increase of 5.8 percent for the year. They were driven by sales in Europe of VFT-Orbit 2 digital generators and Multi-Flex polishers, and they were aided in Asia by the addition of new production capacity in the form of new laboratories. Sales were flat in the U.S., but the group received new orders in the last quarter of the year, auguring well for the development of the sector.

The pace of new acquisitions was considerably reduced last year in view of the planned merger with Luxottica, and this should have a positive effect on operating margin this year because of their lower dilutive effect. Nine transactions were concluded in 2017, and they will result in extra annual sales of about €78 million going forward. They included the acquisition of a 50.2 percent stake in the logistic platform of Optitrade, a buying group for about 650 optical stores in the Netherlands. Essilor also made its first entry into Ethiopia and Guatemala by taking over control of two laboratories in those countries, Sun Optical Technologies and Opticas Exclusivas.