Conference Call Third-Quarter 2013 Report October 24, 2013

Transcription

1 Conference Call October 24, 2013 Chairman and Chief Executive Officer Good morning everyone. I am here with Véronique, Ariel, Sébastien and Laurent to comment on activities in the third quarter. Our third-quarter revenues show a good level of combined growth at 7.1% and we can say that our usual growth drivers have performed strongly, particularly the innovation in high and mid end segments, and specifically there was positive feedback on the pre launch of Crizal Prevencia and a more significant contribution from acquisitions. Those factors reflect the underlying strong demand in the optic sector and a fundamental positive trend linked to demographic and lifestyle changes. Having said that, despite these positive factors we now expect combined revenue growth for the full year to be about 6%, reflecting three elements in particular. Firstly, there is the decline in revenues from a large account that we talked about in August and which is taking place more quickly than expected. Then, there was a generally weak level of consumption in the US in July and August, even if September recovered. The third thing is that there was a delay in the signing of a number partnership agreements, reflecting our cautious approach to due diligence when entering more in new countries and new segments. Overall, therefore what can we say? There is merely a time lapse for a few months in our growth and this will have no implications on the confidence that we have in our growth model, profitability or cash flow generation. Indeed, we continue to expect a higher margin than last year at somewhere between 17.9% and 18.3%. In a few moments, I will return to talk about some greater depth initiatives that will drive the fourth quarter and how we will move into However, I will now allow Laurent to dig deeper into the performance of the businesses in the last quarter. Over to you, Laurent.. Chief Operating Officer Thank you, Hubert, and good morning everyone. As you have seen, our revenue for the first nine months has grown by 1.4%, everything combined, and this comes after a significant base effect as the increase for the same period last year was 21%. I will focus specifically on third quarter activities and give some perspective on the fourth quarter. In the third quarter, we suffered from a record negative currency effect of -6.4%, linked to the strength of the euro. However, I would remind you that the Group s profitability ratio is not affected by currency, be it a positive or negative effect. When we look at the situation excluding the currency effect, the Group s growth in terms of combined organic growth and acquisitions was 7.1%, in line with the long term growth trend. In fact, over the past five years, it was 7.4%.

2 We have therefore seen an acceleration in growth in the third quarter, which is based on two main factors: firstly, the strong contribution of organic acquisitions leading to the carryover effect of deals signed in the first half; and an acceleration in agreements and deals in the third quarter, with three high quality operations that I would like to comment a little more on. We signed Classic Optical, a mid sized laboratory in Ohio in the US, which has sales of USD17 million per year. This is a very interesting lab because it is focused on delivering managed care products for Medicare and Medicaid consumers and, as you know, managed care and vision care are very important topics in the US at the moment under the presidency of President OBAMA. I will now turn to Asia, where we have also signed a very significant deal with Polycore, a manufacturer of prescription and sun lenses, distributed in multiple geographies, although mainly in Indonesia. This is therefore an additional network that we are building in Indonesia, which is a very big market, and they are also one of the leaders in manufacturing plano sun lenses for sun wear manufacturers. For our third operation, we go back to North America, north of Montreal in Canada, with Humanware. This is a different activity where Humanware is a leader in low vision products aimed at helping 140 million inhabitants on the planet to have greater autonomy. As you can see, therefore, these are different sized acquisitions in different geographies and different types of business within our own vision industry. In total, acquisitions have accounted for 4% of growth this quarter, reflecting the quality of the strategy that we are delivering year after year. For the fourth quarter, our teams are being very active everywhere in the world and despite the postponement of some acquisitions planned for the beginning of next year we are confident that we will be able to maintain, if not increase, the level of contributions from organic acquisitions in the fourth quarter. The second sector of acceleration in growth in the third quarter is the pure organic growth that went from 0% in the first quarter to 2.4% in the second quarter and up to 3.1% in the third quarter. When we look at the main factors of this acceleration we see that there are three: acceleration in developed markets in Asia, namely Japan and Australia, and I will come back to this; a very good performance by the Equipment Division; and a good performance in Latin America. In Japan and Australia, we are back to growth after the negative effect of Hoya coming back at the beginning of this year, based mainly on innovation and the innovation in mid range, with the UV protection with two important customers. In Asia we are still growing in the fast growing domestic markets of India and China, with double digit growth of close to 20%. We continue to perform well in those domestic markets, even if, as we saw in the first semester, performance has slowed a little because of the export business to the rest of the world. As announced, Equipment Division delivered a very good third quarter, driven in particular by the industry in North America, which is continuing to buy equipment and build capacity in the new technologies of digital surfacing and anti reflective technologies, and in Latin America digital surfacing, driven by SATISLOH and CM Equipamentos Opticos de Precisao, is growing rapidly. The order book and backlog are still very full for this activity and we are therefore confident that we will deliver a decently growing turnover in Q4 and in Q1 of next year. Page 2 / 11

3 Staying in Latin America, we have seen a consistent performance, with a slight increase, despite there continuing to be a difficult market situation, with a difficult economic and political situation in Argentina and some disruption in Brazil with respect to the social environment. Again, innovation is pushing things for us. Varilux S and Crizal UV have been very well accepted by eye care professionals in Brazil and as we speak the teams in Brazil are launching a wide product range for the mainstream under the Kodak brand and the whole industry is very excited by this. As Hubert mentioned, our performance in North America remains well below the growth potential of the market and there are a few reasons for that. Firstly, there was the loss that we talked about in August of two contracts with key players in the industry and the rolling out of the Varilux S series has taken longer than anticipated. To compensate for that, we have the Eyemed contract, which is now ramping up and as we speak the teams are signing contracts with eye care professionals to serve consumers under Eyemed managed care programs. We expect there to be a more visible impact of this Eyemed deal in Q4 and for there to be definitely more of an impact next year. Hubert also mentioned that the back to school period, which is very important in the US, has been a little disappointing, with consumers buying fewer eye care products compared with other products in July and August. What we can also see is that in the final weeks of September and at the beginning of October there has been some improvement in consumers coming back to our industry. Moving to Europe now, Europe delivered a very resilient quarter benefitting from a good performance in France where innovation and in particular Varilux S is still very successful. Europe benefited from a recovery in some markets, one of which was certainly Italy, as well as in some Eastern European countries. Additionally, the Instruments business, which sells edgers to opticians, is now back to growth after 18 months of slowdown. Those factors have more than offset the first effects at the end of the quarter of the loss of the Hal contract, which is decreasing quite rapidly now and this will have a negative effect in Q4. Finally, in terms of reading glasses and Readers activity, our performance is not meeting the objective that we had hoped for. In fact, when we look at what happened in the stores we see that growth is coming out of the stores and there is always a delay between FGX delivering products to customers and consumers then buying those products. We therefore anticipate a fourth quarter where there will be better quality growth in sun wear and reading glasses. If we were therefore to summarize where we are today, we have seen improved momentum in a number of countries in Asia, there are ongoing favorable trends in Latin America, the first signs of recovery in the US, a Europe that remains resilient, and the two divisions of Readers and Equipment are driving to improve in the fourth quarter. In addition, acquisitions will continue to provide growth in the fourth quarter and we are therefore expecting stronger growth in Q4 than in Q3 in both organic and bolt-on terms. I would just like to say a few words on the cash position and the financial position. During the quarter, as you have seen, we made a number of acquisitions and we have also increased the level of share buyback to avoid the dilution of the share purchase program. Despite those two investments, we have been able to reduce the level of debt slightly, which has left us with all the necessary room for maneuver Page 3 / 11

4 and enabled us to pursue our development plan, including of course the acquisition of Transitions during the first semester next year. That is therefore what I wanted to share with you this morning and I will now give the microphone back to Hubert. Thank you, Laurent, for that update on our activities. I would now like to come back to the drivers that will benefit the Group in the coming months and then into Firstly, we really anticipate an acceleration in the US market, where the impact of Varilux S is starting to be visible and will be even stronger in In the field, we have taken the measures to equip the labs and train the optometrists so that the knock on effect from weak growth in the US in 2013 is that the potential remains intact for The second key point that I want to share with you relates to the acceleration in our strategy in the midrange, which continues to bear fruit. As we explained in August, we are now systematically cascading our innovations to the mid-range, thanks to adapted pricing levels, consumer benefits and technology. This strategy is working and is seeing a good uptake. The third key point is the worldwide deployment of Crizal Prevencia which will begin in Q4 and will accelerate throughout As you know, this is an important launch because it increases our presence in the area of prevention and visual health. As the success of our backside UV prevention has shown, this is a true source of growth will of course be marked by the acquisition of Transitions, which should happen in the first semester, and since July this announcement has already had a highly mobilizing effect on our sales and marketing teams throughout Essilor. As soon as the operation is finalized, we will be in a position to accelerate the photochromic segment, which is one of the key components of Essilor s offer. As you know, this will include the launch of the new generation of the flagship Transitions lens, called Transitions Signature, as well as the launch of Transitions Vantage, the first lens that is able to go from clear to polarized. We can therefore expect 2014 to be one of the best years for Transitions and this will be visible throughout the world - in the US, of course, which the largest market for Transitions, as well as in Europe where the penetration of photochromic lenses remains low and where the market potential is therefore especially high. The next key lever for us in terms of growth relates to the sun segment. We are in the process of building a sun division within Essilor because we are all aware of the formidable potential of the prescription and non-prescription sun protection market, which remains under penetrated whatever the geography. In response, we have reinforced our production capacity in this segment through the acquisitions of Polycore and, shortly, Intercast from PPG. We have also enriched our portfolio of brands through the licensing agreement with Polaroid, where the rollout plan in 15 major markets will start in As you know, in sun, we have also completed the acquisition of Stylemark, moving it into FGX and we are now in a position to resume acquisitions in the sunglasses market. As we promised, this whole strategy will be one of the key highlights of the strategy that we will have developed by the end of February when we meet again. Page 4 / 11

5 Another key driver of our strategy is what we are doing in the fast growing and emerging markets of India, China and Brazil, where Essilor s success in domestic markets is set to continue. We are gaining share in these countries thanks to a clear and well executed strategy and we will also continue to make selective investments in acquisitions in these markets. I can say that despite the weaknesses of some currencies we remain absolutely confident in our revenue objective in those fast growing markets of EUR1.5 billion in Finally, our partnership strategy will continue as we have a rich pipeline for acquisitions and our cash flow generation remains quite strong. I would just like to summarize before moving on to the Q&A. With the model of value creation that we have built, we will continue to perform well and generate growth, profitability and cash flow. We are therefore confident about the months ahead and about At this stage, therefore, Laurent and I are ready to take your questions and we will deal further with the activity in the last quarter and in Mr. Alexander KLEBAN - Barclays Hi. Thanks for taking the questions. There are just three from me. First of all, on the launch of Crizal Prevencia, I was just wondering if you could compare it with the launch of Varilux S. I would assume that this is more straightforward as it is a coating, but I would just like to understand, as it is a global approach, whether you possibly have more risks that you are taking on board here and what those risks are and how you plan to manage that. The second question is just on the guidance and to have a breakdown of like for like versus bolt-ons. Lastly, could you give us a sense of growth for China and India in this quarter. Thanks. Laurent, I will answer on Crizal Prevencia and you could also say a few words on growth in China and India as well as the split of the guidance. Thank you, Alex, for your questions. As you know, Crizal Prevencia is this new coating that is really about the prevention of health. Crizal Prevencia coatings prevent from an increase of the AMD (agerelated macular degeneration) and avoid, thanks to the filters, the destruction of the cells inside our retinas by the negative effect of the bad blue rays from light. It is important to understand that when you look at the spectrum of light, specifically around the blue rays, which are about 430 nanometers, you have good blue rays and bad blue rays. It is a bit like cholesterol. You need good blue rays so you therefore need a lens that allows the good blue rays to enter your eyes and this will regulate your whole life. It is why you are awake or asleep and why you sleep well at night and then wake up in the morning. You absolutely need those blue rays. What you do not need is the bad blue rays, which are the ones at about 435 nanometers, plus or minus 10 nanometers, which enter your retina, generate what we call a Lipofuscin and clear out certain cells, the cumulative effect being that at the age of about 55, 60 or 65 you start having black spots in your vision and perhaps begin to go blind at a certain point. Page 5 / 11

6 In the nature, there are a lot of lenses today that say that they cut out blue rays, but only one of them cuts out the bad blue rays and allows the good blue rays to enter the retina. The development on the market for Crizal Prevencia is therefore education. In the same way that I have explained to you here what it is about, all our reps are conveying this message to the opticians, optometrists and the Heads of Purchasing in the chains, telling them that it is important that they understand what we are talking about and that they push this product, which is health. Again, therefore, we have decided to do this step by step and not to rush. Conveying the message on UV is possibly easier than conveying a message on Crizal Prevencia, but the power of the lens is fully accepted when it is explained well. We therefore foresee a worldwide rollout in Q4 and next year and an acceleration of penetration, but we are paying extremely close attention in the field to the education on the lens so that there is no confusion regarding its quality. I hope that this long answer has replied to your concerns about the launch of Crizal Prevencia. Perhaps Laurent could say a few words about India, China and the guidance. What we see in domestic markets in India and China is a steady growth. You will remember that we showed growth of 20% in India in August and growth of 18% in China and after nine months we are still in the same range of very dynamic growth in domestic markets in pure organic, like for like. There has therefore been a very consistent performance in those markets. As far as the guidance and growth of about 6% for the full year for combined organic and bolt-on acquisitions growths, what we can say is and I have said it that from where we are today we see an acceleration in organic growth and in the contribution of acquisitions in Q4 compared with the performance in Q3. If you do the math, you will see that to grow by 6% we need to be at between 9% and 10% combined growth in Q4, given that we know that growth last year was weaker and so there is a favorable comparable effect. Mr. Alexander KLEBAN - Barclays That is good. Thanks. Mr. Jonathan BEAKE - Citi Hi, there. One of my questions was on the split of like for like versus bolt-on acquisition growth and thanks for answering that. My other question is on the contribution from operations margin guidance that you have given in the region of 17.9% to 18.3%. Will this come at the expense of any increased restructuring expenses? Page 6 / 11

7 If I understand the question correctly, is your question whether we need to have more restructuring to reach that kind of target? Mr. Jonathan BEAKE - Citi Yes. If that is the question, the answer is no. We have a consistent ongoing way of adjusting the company and the structure of the company depending on the market. There will therefore be no additional restructuring or specific acceleration in restructuring. What will happen in the second half is, as we said in August, that we will use the resources that are available for accelerating the growth of segments of the market, which means more marketing, basically. Additionally, you have seen that we have been accelerating acquisitions in the second half and you will remember that we had no dilution effect in the first half from acquisitions, which is a kind of specific situation. In the second half, we anticipate having a slight dilution, as usual, from those additional acquisitions. That is a little of what we can say about how will move towards that high level margin. Mr. Jonathan BEAKE - Citi Thank you. Ms. Ingeborg OIE - Jefferies Good morning, gentlemen. Thanks for taking my questions. The first one is on sun wear and I was wondering if you tell us what market share you would have if you included the recent acquisition of Polycore and the future acquisition of Intercast. Then, secondly, on Hoya, could you give us a bit more color on the nature of the competition that you have seen in the third quarter and whether anything is changing relative to what you saw in the first half of the year. Thank you. Thank you, Ingeborg. I will say a few words and Laurent can complete what I say. Regarding sun wear, you know that our current activities are a bit like a puzzle. In the entry market, we have an interesting market share in the US thanks to FGX and Stylemark, specifically on plano sunglasses over the counter and at the entry price. Outside the US, we have basically no market share in that segment. When we talk about sunglasses in restricted polarized activity with our own brand with Xperio we have a natural market share globally speaking. Page 7 / 11

8 What we are trying to achieve is what we will explain in February, which is a broader approach to sunglasses, combining prescription, performing lenses and sunglasses worldwide and, today, we have an insignificant market share in this segment. You will really know more about all this strategy in February when we address you more comprehensively on what we will be doing in the sun market. Regarding Hoya and the competition, as Laurent said in giving his explanations, Hoya has decided to follow up with Hal and we refused to do so. They have accelerated their supplies to that chain this quarter and will continue to do so next quarter. We do not see anything different from what we have seen in the second quarter, which is that on certain targeted accounts there will be some aggressive pricing from these Japanese competitor, but that does not actually affect our overall activity in having additional opticians and optometrists, where you know that we are really developing our business. When we talk about having larger and more organized retail chains what makes the difference between Essilor and our competitors is the full service offering that we can provide that others cannot. However, there will be no significant change compared with those competitors over the last few months. I do not know if Laurent wants to add a few points. No. I think that you have answered it perfectly clearly. Ms. Ingeborg OIE - Jefferies Thank you very much. I look forward to more details in February on sun wear. Ms. Marie-Line FORT - Société Générale Good morning. I have just one question. Given what you said about the 2014 outlook, are you confident about moving back to a more normalized organic growth, which would mean growth of 5%, in 2014 compared with a low point in 2013? Marie-Line, it is much too early to commit on that number. We are in the middle of the budget and heavily involved in trying to figure out what the economy will be like in 2014 and what will be the split between the performance of our key products and our activities. We also know that with the timing of Transitions, even if it is an acquisition, the momentum that it will create will generate an acceleration in organic growth. We have the same uncertainty that you all have about the economy and what the effect will be of the big swing in currencies on consumption in emerging countries. It is therefore extremely difficult today to commit to any number. What we can do is just confirm what we have said. We know that our products work well and that our M&A activity will be at a very high level by the end of the year and in 2014 and we are absolutely confident about the power of Essilor in 2014 and delivering the cash generation and value creation that Page 8 / 11

9 you all know about. However, it is too difficult to commit to any number. On top of that, you know that when we execute our plans we focus much more on what we call combined growth. Ms. Marie-Line FORT - Société Générale Thank you. Mr. Hubert d AILLIÈRES - BPI Good morning. I just have two questions. The first one is related to the exports business. I do not think that you mentioned it and if you did, I apologize for the question. However, I just wanted to understand how the export business developed in Q3 because, if I remember correctly, it was clearly a drag on the Asia area in H1. Additionally as regards the export business, can we have an idea of the development of the comparison base? I guess that it is much easier for Q4 if you can confirm that. My second question concerns Transitions. I would just like to know whether since you announced this operation you have witnessed any sharp drop in Transitions business with third parties. Thanks. Thank you, Hubert. Laurent may have some numbers on his side on the exports, but I will just comment to say that the countries that we export from are mainly Korea, China and India, and in India we have seen the trend going up. In all those countries, the exports are to Europe and the US. Weaknesses in Europe plus the impact of the loss of Hal do not help all these exports. However, I will let Laurent give you some numbers if he can. If we look at Transitions and third parties, I can simply confirm what we told you before. While we will have closed those transactions, we will continue to sell Transitions to all the third parties, all our competitors and all the lens casters in the world and we will continue to serve them the best we can. At the moment, we do not know what the reaction will be in the short term or the long term, but so far we are seeing more of a positive attitude from most of them. However, we do not want to commit to anything and do not really know how they will react the day or the month after the closing of these transactions. They will all be most welcome to continue supplying photochromic lenses from Transitions and the brand will be available for all of them. However, as we said in the summer, all our forecasts and calculations were made on the assumption that in the next two years they would move to other options. Nevertheless, believe me, they will be most welcome to continue and purchase Transitions from us. I do not know if Laurent has anything to add on exports. No. I have no hard data that I can share with people today. The only thing that I can add is that, as you have said, we have seen a slight improvement in the situation, particularly in India, as well as a small improvement in China and Korea. We are perhaps able to say that the drop in the last month was also Page 9 / 11

10 because of Hoya s recovery. We therefore expect to have a progressively better situation in this area in the coming months and at the beginning of next year. Mr. Hubert d AILLIÈRES - BPI Okay. Thanks very much. Mr. Ed RIDLEY-DAY - Merrill Lynch Hi, good morning. I just have a couple of follow up questions. On the Hal contract, I think that the effect in the third quarter was slightly less than I had expected. Could you just confirm the exact timing of the switch on the loss of that contract? Conversely, in Japan and Australia, you seem to have seen a stabilization in those markets from the Hoya effect. Can we actually think now that Hoya has effectively had its go and been aggressive and that we are now seeing the market stabilizing and you would then not expect any particular further share loss in those markets? Those are my first two questions. Thank you, Ed. As regards Japan and Australia, you are right. Our activities are actually back in growth there and going up. The markets are stabilizing and our competitors are definitely becoming aggressive, but they also have their own ways and obligations of delivering profit and sales to their own shareholders. The markets have therefore stabilized. We are quite happy with the success of our top products Crizal and Nikon in Japan and Varilux S series and this should continue in Q4 and for next year. As regards the Hal contract, it is a little difficult to talk about timing, although I will ask Laurent to say more from his side. In Hal in Europe, it is a mix of various brands and chains. The end of the contract depends on all the different stores and the timing of the inventory and how they move things along, so it is not timing from day one. We know that we have been seeing a decrease step by step since July and that will certainly reach zero at the end of the year, but it is extremely difficult to tell you when or to time this. We are totally dependent on all the brand retailers moving out from their existing inventories and ceasing to order from us. I do not know if Laurent has any more to so say on this. As you will have noticed, we are not in the same room today. Laurent is in Paris and I am in fact in Asia today. Have you anything on your side, Laurent? No. I think that what you have said is correct and it is what we know at the moment. I would just confirm that we are seeing a more positive recovery and positive growth in Australia and Japan in Q3 and most probably in Q4, based on innovation and UV protection, which is very important in those countries. This is also based on the Varilux S series, which is beginning to grow, especially in Australia. As regards the Hal contract, we started to suffer in Q3, particularly at the end of Q3, and the teams are fighting to keep some products but we will probably see a bigger effect in Q4. Page 10 / 11

11 Mr. Ed RIDLEY-DAY - Merrill Lynch That is very helpful. Thank you. I just have a quick follow up question on the Equipment business in the US. There is clearly very positive growth overall for Equipment and improving demand in the US. Is there any more color that you can give us on that? Are there particular products that you are seeing that are in demand or new products about which you are particularly excited? That is a very good question, Ed. This has actually been driven by two factors. Firstly, there is the demand from the industry, where we are still seeing some labs moving from traditional surfacing to digital surfacing. We see demand for anti reflective coating products continuing to grow and the labs therefore need to be equipped with those vacuum coating machines. It is also driven by new products that Satisloh put on the market in the middle of this year, one of which is a more automated system called OBM, where big labs can enjoy remaining local and reduce their costs while delivering a good service. That is one direction that is sustaining this growth. The other thing is that Satisloh put smaller machines for mid size and small labs on the market and they are now able to carry out digital surfacing with that technology. It is therefore a combination of the demand from the market and new offers from Satisloh. Mr. Ed RIDLEY-DAY - Merrill Lynch Very good. Thanks very much. Thank you all and have a great year end. I will see you at the end of February and March. Page 11 / 11