Conference Call Third quarter 2011 report October 21, 2011

Transcription

1 Conference Call Third quarter 2011 report October 21, 2011 Mr., Chief Executive Officer Thank you, good morning everyone. So we are here in Paris this morning with Véronique Gillet, Sébastien Leroy, Laurent Vacherot and myself to comment the sales for the 3 rd quarter and the first 9 months. With the growth of sales excluding currencies at the level of 9.3% in 9 months, Essilor is in very good shape and just confirm the solidity of its business model and its strategy. But this is in a world which has been affected the past 9 months by a lot of events, we mention the fluctuation of raw materials, the crisis of the Euro, the debt crisis and of course the exceptional weather conditions and all others events. But actually you all know this like me, and it is this within this whole context that Essilor has continued to strengthen and take market share in a market, in an optical market which continues to grow worldwide. So in a nutshell, what to keep in mind after 9 months? I would like to comment 6 points this morning. The first one is an acceleration of the growth, of our core business, what has been the heart of Essilor for years, Lenses and Equipment, with a growth during the third quarter at 4% when it was 3.6% when it was at the end of the first semester. The second point is an acceleration which is due to our activities in the US and all the actions, all the products, the sales activity and dynamism that we put in place. They are now showing great results. As far as the optical market is concerned in the US, the optical market is strongly positively oriented. And the demand for high end products is quite strong. If you remember at the Investor Day a year ago, we did explain to you that the potential of growth of large, mature countries is actually as strong as one in emerging countries and, step by step, what s going on in the US is actually showing or demonstrating what we explained to you a year ago. The big categories of products, anti-reflective, progressive lenses, just continue to grow in a significant manner in the US. The third key point of this morning is also to notice that the optical market continues to invest as a whole, in equipment and this is what you do see when you are looking at the growth of Satisloh and our equipment division, and specifically two lines of products, the anti-reflective machine in one hour, the sputtering machine, and the surfacing machine in digital surfacing, the new technology we put on the market a few quarters ago. Essilor - Third-Quarter 2011 Report 1

2 The fourth point which is also explaining the dynamism of Essilor is our acquisition strategy which you have seen, bringing actually 4.8% of growth after the acquisition of Shamir which we concluded during the third quarter. The fifth point I have to comment also is actually a major event for us which is the continuation of our fast growing market strategy, and more specifically the partnership we have signed in Russia where we are partners with the number one in Russia Optik Mekk known locally under the name Luis Optika. And this is following our partnership done in China early this year with the number one in China called Wanxin. And finally, of course, which is actually underlying all our efforts and underlying our overall strategy, meaning the innovation strategy specifically on products which has been extremely rich quarter by quarter with a new anti-reflective line of products with Crizal, a reinforced line of polarized lenses with Xperio and a very rich line of Varilux lenses using digital surfacing technology to make much more personalized lenses, and you know the full market of progressive lenses is actually accelerating in this category. So finally if I may before asking Laurent to comment the third quarter, I would like to underline the power and the motivation of all the Essilor teams worldwide, our partners and their capability to actually put in place and execute our strategy which really explains the performance, that actually we continue to show, quarter after quarter. Laurent, maybe you could comment now more specifically the third quarter. Mr. Laurent VACHEROT, Chief Operating Officer Thank you, Hubert. Good morning everyone. So this is the quarter where we have seen an acceleration of growth. This is true for the overall growth without the currency effect, we are close to 10% growth, 9.7% without currency effect. This is true with the acquisitions : overall, 5.3% of growth brought by acquisition, it s more than 51 million and it is true as well as Hubert mentioned for the core business, lens and instruments, growing organically at 4%, it was 3.6% during the first half. As usual to understand how this performance has been built, we need to go region per region, business by business and I will start with Europe. So in Europe, the organic growth has been only 0.6% for this quarter, and as it has been for a few years now, the performance varies from country to country. We have countries where the performance is still very good, France, exceptional job, Eastern countries which are confirming the growth we have seen at the beginning of the year, Italy recovering as an example. We also have countries doing better, like Spain, that has gradually quarter after quarter improved its performance but we have also countries where we see traffic in the store slightly decreasing like Germany, the Netherlands and the UK. In order to really understand the performance in Europe for this quarter, there is a few facts I need to mention. The first one is that in most of those countries, we had one day less compared to last year and as you know we are really in a daily business, so one day accounts for this relatively small growth Essilor - Third-Quarter 2011 Report 2

3 this quarter. Also we have to understand that new products that we launched especially in Europe, have just been launched end of September or beginning of October. It s true for Optifog, this lens that avoids fog on the lens and this is true as well for the instruments where the customers were waiting for the new edger Mr Orange that has been launched at Silmo, beginning of October. So there are technical factors that explain this relatively slow growth in Europe. Going to North America, Hubert mentioned that the dynamic of the market has been very good for this quarter. In this good dynamic, Essilor took advantage with those high end products, Varilux, Xperio and Crizal to gain growth and I should mention that for the total category of anti reflective coating lenses, both in independent optometrists channels and retail chains, we start to see the first results of, on one side, the media Crizal consumer campaign that the US team initiated during the second quarter and also the first positive results of the one hour Anti Reflective technology that we provided to one big retailer in North America. Going to South, to Latin America, 8.5% of organic growth and 18.7 of growth thanks to bolt-on acquisitions. I think there are two things we need to mention. The first one is a slight decrease in growth thanks to the decrease of economy in Brazil, but Mexico and Argentina accelerated their growth with a growth above 20% for this quarter. In Brazil, the market is still there and we continue our strategy to develop technology and to increase number of partnership with existing players, meaning labs and wholesalers. Asia, 9% organic growth, 6.6% growth thanks to bolt-on acquisitions. I think that we need to mention that in fast growing countries, we are still growing very fast, as Hubert explained. I think what is really remarkable is the growth in Japan which is high single digit for this quarter and also Australia s recovery, and we had a slight negative effect with the export business from Asia to the rest of the world where we suffered from currency changes which is slightly negative. Readers and FGX International. So 1.9 organic growth, +4 in organic acquisitions, I think we need to explain a few things to explain the performance. Number one, the selling-through from stores to consumers are still growing in this market, so there is no market issue concerning the Reader s market. What happened is that big customers of FGX International want to reduce their inventory and they postponed promotion on new products introduction, so they achieve this inventory reduction which explains why FGX International suffered during this 3 rd quarter. Less promotion, decrease of inventory for customers could continue for the 4 th quarter. What s important to have in mind is that the market itself to the consumer is still growing and then there will be no effect on profitability because less promotions means less marketing costs so the profitability of FGXI will continue to be high. Lastly, last division, the equipment division. So as you have seen, a very good performance again this quarter. The industry, all the players in the industry are still investing in technology and capacity. The backlog, this is one of the businesses we have, the backlog is still very high, so we expect a very good year for this division. Also, what we see on the consumable part of the business, which is around 40% of the total business, we continue to see growth which means the industry is running and introducing Essilor - Third-Quarter 2011 Report 3

4 machines. Overall, I think this third quarter performance confirmed the dynamism of Essilor in a very dynamic market. My last two comments will go to acquisition and financial debt. Acquisitions that have been a great quarter, 5.3% growth this quarter. Obviously we have been able to sign early in July the partnership with Shamir which is a very important partnership for Essilor. Also, Hubert mentioned the partnership in Russia and also we continue to sign partnership in Brazil, a smaller lab Comopticos at the end of this quarter following the partnership with the leader in Brazil at the beginning of August, the Cientifica lab in Sao Paulo which is the leader that joined the group during this quarter. Overall, we have acquired without Shamir, 90 million on a full year basis with these 17 partnerships we signed up to September. You have seen the debt increasing slightly, we still have a very strong cash flow generation which helps us to finance the high level of acquisition this quarter including Shamir, and we also had to suffer a slight negative currency effects because of the dollar rising up at the latest part in September. Hubert this was I wanted to share with our guests today about the activity of the 3 rd quarter. Mr. Thank you, Laurent. So maybe now a few words about the end of year and What can we say? Well, actually all the teams worldwide are working basically on three main projects. First of all the roll-out of Optifog everywhere in the world, this anti-fog lens we have introduced in some markets at the beginning of the Q4 in France, in Germany, in the US actually early next week, in Canada in November, Indonesia, India, in China also next week. A lot of excitement by the consumers everywhere where we introduced directly Optifog through social media, a lot of excitement on YouTube, we enjoy being one of the top 3 on YouTube for many weeks with our digital and virtual marketing, this definitely will have impact on 2012 and will start in some countries during the last quarter of A second key project also is the roll-out in the instrument division with the launch of the edger Mr Orange. It has been introduced at the Silmo, it got one of the two Silmo d Or big awards that we got this year and definitely its introduction in the countries where we have such activities is very positive and draws a lot of energy. And finally and not the least, putting together the execution of the three big contracts we have announced during the year, the anti-reflective in one hour at Lenscrafters, the deployment of Essilor s lenses in Boots in UK and the deployment of readers and over the counter sun glasses in the US. Those three contracts, we don t see them yet really, except for a portion of it in the US but we don t see them yet in the figures. But the roll-out and the introduction is actually starting step by step in all those countries and we ll have a full effect in And of course, the fourth main exciting part of what we are doing and also which takes a lot of energy is preparation for 2012 of the introduction of two new key products and I should say that I have been selling lenses for now maybe 23 years, 2012 will be the first year in our life where we will have for the first time two key products in two key categories, Varilux Lenses and Crizal with significant innovations in those two categories. Essilor - Third-Quarter 2011 Report 4

5 All those activities continue to happen in the market which continues to grow, basically everywhere in the world but also which is affected by what s going on outside our world, outside Essilor, outside the optical industry. We have seen in some countries some impacts of what s going on in the world, we re having debt, consumption and so on. Definitely we are stronger this year than we were in 2009, it has affected by a few percentage points in some countries, and we have no idea and you have no idea what could be the impact during 2012 but overall what we know is that the strategy we put in place on the high end with innovation, the roll-out of our strategy in the mid-range being very profitable for us, all of that actually makes us very confident and we remain absolutely positive for this year and for So it s with a big smile that actually we do confirm the guidance that all of you know for Thank you very much all of you and I suggest we go now straight to Q&A. Mr. Andrew OLANOW, Morgan Stanley Good morning and thank you for taking my questions. I want to talk a little bit about the market. First of all, we have some industry data that essentially indicate that the market slowed from either Q1 to Q2 or even first half to the summer in some key European market such as Germany, France and Spain. Have you in recent months seen any indication that those markets are beginning to improve, i.e. in October or does it seem that they re still continuing with the downward trend? Secondly and similarly, can you tell us what kind of market development you ve seen in the US in terms of what kind of trends of growth are occurring there and what kind of consumer confidence and retail footfall impacts we might expect in Q4 or perhaps in Thank you. Mr. Thank you Andrew for your questions. I will comment on the US and then Laurent will go more in Europe. Well, we are in an industry where we have to be extremely careful with published data information. As you know the optical industry is a small industry, the data are not always reliable and the industry is actually complex, and it s sometimes very hard to read on a long-term period actually the data published by some organisms. What we could see is actually what we do, what Essilor is doing, what we could see is what our customers are telling you and actually following step by step the success or non success of our products and our strategy. The only country where really there is some data is the US. Outside the US, the published data, we at Essilor, don t believe them being really reliable. In the US, we have seen quarter by quarter the growth of the market.we have data for the first two quarters, no data yet published for the third quarter. We have seen in volume an increase and more specifically an acceleration on progressive lenses and an acceleration on anti-reflective demand which is fuelling the growth you have seen in the US, we are taking market share and actually we are better than the market growth, just because on those two categories, as we speak we have the best products in the world. Essilor - Third-Quarter 2011 Report 5

6 Mr. Laurent VACHEROT And to go to Europe, I think we cannot say we have seen the trend going one way or the other, the markets are still described with a high volatility in every country from one week to another. I cannot explain why we have this kind of market. October is starting well for the first week, so this is one week. We hear customers telling us that they have less traffic than before in some countries, we see new products, answers to new products very positive, especially the Optifog end of September, beginning of October so overall very difficult, and as Hubert mentioned no real industry data, no reliable industry data so we know what we know, and for the rest of it, what I can say, we can conclude that there is a trend going up or down in a very efficient manner. Mr. Andrew OLANOW Just one follow-up question on the US market. Assuming...Well as you say volumes are accelerating in progressives there, should I assume that we re seeing more acceleration out of retail chains rather than out of independents? Is that correct? Mr. For progressive lenses and anti-reflective, both markets are accelerating. What are the drivers? I think this is maybe more important than purely the facts. The driver of progressive lenses is really the US market starting to embrace the product issues from digital surfacing, it was not the case two years ago, it has started two to three years ago in Germany, now the US market is really embracing the personalization, the customization of progressive lenses. And this is happening definitely on the highend within the independent optometrists in the US and the high-end and mid-range being retail chains able to do those products actually using laboratories networks. On anti-reflective market, it s a different story. The acceleration is definitely linked to the advertizing we have done on Crizal in 11 states as well as, and we see it a little bit in the Q3 as well as the success of the capabilities of Lenscrafters to do anti-reflective in one hour thanks to this sputtering technology issued from Satisloh that we are installing step by step within few Lenscrafters stores and again we have done a few tens of them while Lenscrafters have as you know basically one thousand stores in the US. The acceleration of the US market is due to really a dynamism and a need for new products in the US as well as the success of the coalition that actually we put together two years ago called Think about your eyes, the big programs where the industry, Lenscrafters, us, the number one of Managed Care, Transitions and even now the Association of Optometrists of the US have decided to invest in an advertising campaign in order to insist on the fact and demonstrate to the US consumer that they have to see their eye care doctor to have their eyes checked and then to correct their vision. This has an impact that we do see absolutely clearly in the growth of the industry and the key players. Mr. Andrew OLANOW Okay, thank you very much. Essilor - Third-Quarter 2011 Report 6

7 Jean-Jacques LEFUR, ODDO Securities Good morning. Jean-Jacques Lefur. I have a few questions because you mentioned a new Varilux and a new Crizal range to be launched in I don t know if you could elaborate a bit more on these two products, what are the difference between the previous Varilux and Crizal? What are the upside compared to these products, and so on? Mr. Jean-Jacques, I am sorry, I just can t What I can tell you is that effectively we will launch in the US, at our big sales meeting that we do every year in January, a new category of Crizal lenses extremely innovative, extremely competitive with benefits perceived and needed by the consumers and this will be followed a few months after by the top of the range of a new Varilux lens. Varilux lenses on the high end and all this is the results of a few years of constant and growing spendings in R&D and in our innovation and what I could say this could be really as far as I know one of the first times when we will have two key products combined the same year, it s a lot of load on our marketing, it s a lot of load on our sales force, this will be done depending on each country, first with Crizal or first with Varilux but we will definitely see the effect during Jean-Jacques LEFUR If I may ask a follow-on question. Could we assume that this new Varilux lens may cannibalize partly I would say the Varilux Physio 2.0 or the latest version of the Varilux. Or it will add something more Again if you remember every time we are launching a new product, there are two effects. The first one is to fuel the growth of the category and then the execution depends on how each country is using the product. Some countries, they re positioning at really the top of the range and it s pushing up without any cannibalization, or they decide to actually replace the top of the range by this new product and it s pushing margin and volume but it s way to early to actually share with you or even have an idea of the global effect it will have except it should contribute to actually fuel the margin and fuel the growth. Jean-Jacques LEFUR Ok thank you very much Hubert. Thanks Jean-Jacques. Essilor - Third-Quarter 2011 Report 7

8 Ed Ridley-Day, Bank of America Merrill Lynch Good morning. Thank you. Just firstly quickly a follow up on the Readers business. Laurent you indicated that we re gonna see the further impact from the draw downs in the fourth quarter. Is that way you expect it to stop or do you not have visibility yet on the first- second quarter next year? And also on Shamir, is there any guidance you can give us on the contributions from Shamir within your business and the run rate in terms of the growth rate of Shamir compared to where it was last year? Good morning. On the FGXI as we said, the impact of the actually stock effect will continue on Q4, so don t be surprised you will see slow growth or the same type of decrease on FGXI on Q4, its a stock effect but also large account postponing promotions and introductions of new product to Q1. So it has basically no impact on margin because the cost related to those products will be actually postponed also to 2012 but we assume we may see the same type of sales fluctuation in Q4. Now what we have to underline is two things. First the sales throughout all those stores are still strong and two to three times above the growth of lenses between 6, 7, 8 per cent depending on the stores. We are enjoying this growth actually every week and this doesn t change. And this market of Readers and sunglasses at market, at retail level to consumers continue to grow, demand worldwide is very important also and we are continuing big time the strategy we have explained which is to open new countries through partnerships or acquisitions, and this strategy is absolutely reinforcing the strength of Essilor. But this is true that it actually brings some fluctuations and volatility of our overall sales. Laurent VACHEROT Good morning. For the first few months, it s still very early that Shamir is part of the family, I would say they are in a high single digit growth so dynamic growth and dynamic activity. The impact on Essilor what we said and you know the purchase price allocation exercise is always complex and takes sometimes so it s not yet finished. What we said is that the impact of Shamir on net results will be relutive in 2011 before PPA amortization and will be relutive in 2012 with net result all combined. I cannot say more today about the impact on Shamir. So good impact on growth and then relative net result without PPA in Ed Ridley-Day Ok thank you. On Shamir, that s fine. A quick follow up on Readers. Is there a way of giving us some color on what levels of inventory you re reading or FGXI clients hold. How many months inventory they held? Essilor - Third-Quarter 2011 Report 8

9 Laurent VACHEROT Oh I think what we are speaking about is inventories at customer site,that are managed by the FGXI customer so, and this one I don t know the information. Ed Ridley-Day Ok then fair enough. Jacob THRANE, S&P Capital IQ Good morning gentlemen. Thank you very much for taking my question. Just a lot of it has been discussed already, just on the situation in Germany and the Netherlands and the UK. I understand that there was some varying trends but it seems like these countries seem to be sort of returning weak countries of the recent quarters. Is there anything that you can add sort of in respect of color, what exactly is it going on in these countries I supposed we see some now are recovering, Italy, Spain is coming back, France is still performing. What have you discovered any country-specific issues you could share with us? Thank you. Good morning Jacob. I m going to say a few words, maybe Laurent you can elaborate on this. I think what we are seeing in Germany is kind of an impact of what we read in the newspaper regarding the Euro and the debt and what s going on between France and Germany. The French market is stronger those days. Germany s consumption may be a little slower, this is what we are getting from opticians. Nothing measured at all as far as products. The German market is very strong in demanding innovation, I should say this is maybe the country where today we have the highest success with Optifog which has been introduced at the same time between France and Germany, but so far nothing major relative to our industry. Laurent VACHEROT I have maybe one thing to add, specifically in those two countries, the multi-network strategies are not yet totally built and achieved as it is in France for example so that may be also an answer to the question. I would like to come back on the comment on FGXI by actually adding maybe a few facts. Some big accounts of FGXI, huge retail chains in the US, really they have reduced their inventory that were usually around 12 weeks down to 5 weeks which is a significant impact. Now this is not new for FGXI, you all know that FGXI is a public company, if you look at the past five years of FGXI standing alone in the publicly traded US stock market and if you listen to Alec Taylor, their CEO, you will see that in 2008 or 2009 they have the same impact and actually, that has not impacted at all the value of the company a few years after. Essilor - Third-Quarter 2011 Report 9

10 Andrew OLANOW, Morgan Stanley Thanks for taking my question. Just a follow up. You mentioned some of the one off impacts that had made Europe seem lower perhaps than it should have been. I wonder if there is any one off impact that makes North America perhaps look a bit higher than it should have been? Or should I view this 4.7% growth as something that s sustainable? Laurent VACHEROT I think generally speaking this is positive trend in North America, in the US today. We explained the market dynamics, we explained what we are doing in the market, we explained that at the moment both segments of the market independent eye care professionals and retail chains are getting stronger, so no major one off explaining this positive trend in the market. Andrew OLANOW But I mean even within the quarters, there s something that makes it abnormally higher as this continued, should be expect 5 now to be the run rate for the US? Don t get too excited, Andrew. We had a great quarter, the impact is due to anti-reflective in one hour, anti-reflective as a whole, growth of the market. We want to see the success or the level of the success of Optifog during the fourth quarter, we want to see the success of the new Crizal, Q1 next year and then in March we ll be able maybe to be more precise on what we could expect for So far, just a fact, the US market for us is strong and steady. Andrew OLANOW Ok that s very helpful. Thank you, Andrew. OK, so I think there is no more questions. Thank you very much all of you and I think we ll have the pleasure to meet all of you March 1 st, when we will comment the full year 2011 and share with you the strategic perspective for Thank you very much all of you. Essilor - Third-Quarter 2011 Report 10