Essilor International Earnings Call NUGGETS: Double Digit Growth, Year-Over-Year

On Friday, Essilor International SA (EI) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Double Digit Growth

Hubert Sagnieres – Chairman and CEO: I know it’s a bit hard to talk about this, but talk us about the contribution for (AMERA) and Europe, because as far as Hoya is concerned, there should be something to mention as far as Asia Pacific is concerned as well, win the EUR37 million profit, but that gives us a growth figure of 5% for organic growth.

Unidentified Analyst: Could you sort that out for us? I just wanted to make sure that you are going to be tying in with double digit growth as you said you will. You’ve have also mentioned three major innovations and we’ve have just seen that you have delivered and as far as our future is concern I know you’re only just sated to rollout, but will there be more innovation in the next 12 months or are you going to be slowing down the pace a little bit as far as innovation is concern? Why don’t you come and work for us? You are putting more pressure on people in R&D than we are. You want more innovations on stuff that once we you already reported to you and very demanding presence but Jean-Luc you can see there is a lot of pressure and research development there. Actually it’s not an easy thing to balance as far as innovations concern, but that won’t be having much of an impact on the South American market. That was a big effect, however in Japan, specifically in Japan and growth in (indiscernible) even without this will be more than 20% and as far as major customers and how we know they are concerned, they are going to be banking on us in order serve their customers, so that’s just about what we can say. As far as innovation is concern, let me say this, we’ve always said that we’re on the learning curve as we were. As far as innovation is concern, we are only at the beginnings of it. There are problems you still need to resolve so R&D people are marketing people are working hand in hand on things like the UV protection on Optifog. Eric has just explained an unresolved problem that is field of vision and swim effect and how important it is to design these lenses better, but as far as upcoming innovations comes — in the years to come there will be other things we would be able to report to you later on. The second part of the answer is, you can’t simply say that innovation for Essilor is Crizal UV, Varilux and Optifog. All of our entities innovate, Shamir does, all of our partners do, and the price point are all the same. In the U.S. we have just launched a new Definity, a highly innovative design. Nikon and Essilor have just launched a new blue line protection capability and so there is a fair bit of innovation in the services sector, in the product sector, and across all of the entities that belong to this group. Believe me there are things in the pipe as well that we will be able to announce a little bit later on and I am sure Eric won’t say the opposite. As the quarters fly by in absolute (indiscernible), we are spending much, much more on research. It’s a driving force for us and for product innovation as well and also services too. So, anybody else. Sophie, there is a person in the front.

Year-Over-Year

Sophie Dargnies – HSBC: I have a couple of questions on year-over-year. During your last presentation or the last time we saw you, you said it was 2% growth potential, but it seems that actually even some more than that in Q2. Could you tell us a little bit more whether this was the effect of growth in Europe alone and during Q2, it seems that there has been something of a downstairs effect so what really happened in this part of the world, was it because we were expecting a further slowdown and particularly during the rest of the year H2 and then I know that in Q1, Q2 and Q3 figures are looking high, but probably not so much in Q4, because you said, little bit of that Q2 and Q3 on what you think we could expect to be seeing in the months to come as far as the figures are concerned?

Laurent Vacherot – COO: Okay, I thought we were going to be talking about Essilor, but let’s talk about Hoya much as well. You have me this again, it’s a very complex job, that is to detect what innovation has been doing for us and what – and the difficulties that Hoya run into and whether it was because of Crizal or Optifog or whether it was the crisis. There was a big contract in England with Boots, where this is a main supplier, it used to be Hoya, but to try and unbundle all of this is not easy, but we said 20% possibly of a 20% growth and we said this to the analysts as well, but as far as the difference between 1% and 1.5% is concerned, it’s not that business has been worse in Europe in Q1 and Q2, but as I was saying earlier on, I think things have changed in Europe, because there has been a 1.6% favorable effect and conversely during Q2 there was a slowdown effect of 2% and if you add all this up, there is something of a change for both quarters put together, there is no real speeding up effect as it was to report for Q1 and Q2 because our industrial capacity has actually improved, so what I’m looking at for Europe for the present time, we said despite the problems with Southern Europe and despite what’s happening in the instrument business is that things are looking rather good. You have the question on instruments as well, the difference between Q1 and Q2 being speeding up of the pace two years back during Q2 2010. The 50% growth that we’re comparing with over the past two years has only actually been organized as of Q2 2010, and what are you talking about in Essilor lab or whether you talking about of off group lab as it were, there is a lot of business going and there is a lot of demand, and outlook tells us that it’s not going to change between now and the end of the year in Q2, Q3, Q4. We think that the growth might be single-digit for Satisloh and instrument, but rather good performance of the same. As far as consumables are concerned, there is no stock effect or inventory effect and the figure is 5% or 6%.

Sophie Dargnies – HSBC: How about business in Europe overall?

Hubert Sagnieres – Chairman and CEO: Yes bearing in mind what Laurent just said about Q1 and Q2 and business during those two quarters. As far as the overall European effect is concerned, what we can say is that even though the economy has not been easy, even though the instrument business is not an easy business to work in, France has nonetheless done rather well during H1. Germany and the Central Europe have also provided good growth figures. In the U.K. the same can be said, but in the Benelux countries, it’s not as easy and Eastern Europe is running pretty flat. So, there’s something of a differing effect from one part of Europe to another going from west to east.

Marc Willaume – Raymond James: Marc Willaume, I work for Raymond James. I wanted to talk about the dilutive effect of your strategic acquisitions over the past 18 months. We’ve reported a dilution of 30 basis points, but for next year we should be able to report the full effect of – or rather with 20 basis points. What about the new contracts? Will they have an effect on the business in the U.S. and the U.K.? In Q4, you said there going to be new contracts for a LensCrafter in (indiscernible). Is there anything else? How about Boots as well?

Laurent Vacherot – COO: So, what about the dilution effect, well the Stylemark and Shamir, the profiles of these companies are being different. Shamir will be in improving profitability, but slightly less than ours, but benefiting from all of the synergies that we can deliver and whether they are going to be delivering more in 2013 or 2014, we’re not sure yet. But what’s more important is Stylemark because in the first our company didn’t really make much money, but since we were able to create this leader and look over the horizon into the future and do that for the Northern American market, synergies have been improving over the past 18 months. During H2, we think that Stylemark and FGX put together will improve the situation for us in 2013 and 2014. Operational effect will probably take two years to report. This is a comment from the floor that interpreters cannot hear. Answer, no. In order to qualify this a little bit more, in Stylemark, there were 300 people working in Florida basically and distributing out of Florida and 18 months later, there are people working in Rhode Island with FGX, slightly more headcount or a slightly bigger headcount and so, they used to be 300 of them in Florida, but now only 80 of them Rhode Island, but they need time to develop their market and particularly this time same market, there is not 80 people, it’s a 100 people working in Rhode Island. As far as the margin is concerned, the Essilor machine is running high line growth and 4.5 billion people need us if they want to see better, and our strategy over the past four years has been to deploy globally in order to serve that objective. And as we’ve said, half year after half year, we’re running at about 18% better with an ROI that is of interest to a number of investors and quite frankly they are not upset at all. And our growth today, our strategy isn’t going to be let’s push margins as high as we can, let’s rather deploy our strategy globally and provide the right kind of return on investment of to all of our investors, in addition to improving vision for 4.5 billion people who need us and there are more and more of them and they will need product serviced and innovation, so that they can see better. And if year in, year out, Essilor can do this and deliver grow thanks to organic acquisitions or bolt-on acquisition and manage the 18% growth rate, we’ll have succeeded. As far as these contracts are concerned, there aren’t a lot of major players as you know. However, we have been working hard with a number of major, some of these contracts are still being brushed out, and as things turn today, we know that as far as the America market is concerned, that market there can cater to much more innovation, so as far as a premium lenses are concerned and customization and varnishing both side of the lens, and as far as strategy is concerned, we’ll be able to provide people with high end solutions for their requirements. Maybe, there is something you wanted to ask? Yes. We’re going to Eric Leonard and his people are working on integrated offerings, and particularly as far as Boots concept is concerned, it’s a good concept. We had a full range of service and Boots at the end of last year provided us with something having the effect and is going and the ramp-up started in Q4 last year. Okay thank you any more questions please?

Unidentified Analyst: I have a question on your product mix, could you tell us more about the impact of Varilux and tell us today how much Varilux is worth as far as your revenue is concerned and how the substitution effect has actually occurred and how ramp-up has developed, the 15% effect on prices?

Hubert Sagnieres – Chairman and CEO: I can’t give you the answer you want on the first part of your question because it’s highly strategic, but since your questions are highly strategic all I can say is that, Eric will be able to, I don’t what I going to tell you, that is, as far as my concern we have always tried to develop the same way. Ever since 1959 up until 2005, we have always been providing more benefits to consumers. There was Varilux of course as you know, and we started widening the high end and the midrange of providing more benefits to consumers for all of the price positionings and that strategy itself has been rolled out again. A major innovation has been progressive lenses and in 2012, 2013 and 2014 we are going to be rolling out them all for the high end and thus as the years go by we are going to be doing the same for low end and midrange. Maybe you could say a little bit more about the price positioning strategy.

Eric Bernard – President, Essilor China: I can’t give you figures but we are talking about the Varilux range because we have two tiers to the Varilux range. There is Varilux Comfort that was launched 15 years ago and Visio launched six to seven years ago. They were re-launched in 2010 as you know and during the financial crisis 2008, 2009 we tried to consolidate our core business with Varilux Visio, also low end with Varilux Freedom and the aim of all of this being to present the optimum solution to the consumer with Varilux S Series. So there are going to four tiers. There will be Ipseo, but Ipseo represented a very small percentage as far as revenue was concerned, but of course we are going to seek significant innovation and with the Visio and Varilux (indiscernible). Our initial innovations are not going to be phased out at all. We are going to keep or stick to this four tier deployment. We have a question from the Internet. Jonathan from Citibank had a question regarding Hoya and instruments. Okay. People are more interested in our competitors than they are in us. Anyway, let’s try and find the figures for the impact on H1 for Hoya. I had said it was EUR30 million altogether and if you want to give another figure for Europe, it will be about EUR20 million. The thing to remember being that people working in Europe over the past nine months have been serving customers or part of their customers, but have had problems with their main supplier. People at Essilor have installed instruments and trained people with innovative products than they had to commercially and from the distribution point of view. The people are now working for Eric would like to keep these new customers and continue to develop them. So I think that — saying that you’re going to provide less of this kind of service would not be the right thing to do and even less to say as far as America and Europe are concerned, we were providing the same level of service and as far as instruments are concerned people are thinking that nobody wants to invest anymore, the answer is no, not at all. The basic effect is that there has been lot of growth over the past few years, 50% over the past few years, have number of machines and the machine revenue is so moving forward very briskly. In high growth countries people are investing in capacity and in technology in order to serve the market because the market is growing.