Essilor International SA (OTCPK:ESLOF) Q3 2016 Earnings Conference Call October 21, 2016 4:00 AM ET
Hubert Sagnières - Chairman and Chief Executive Officer
Laurent Vacherot - Chief Operating Officer
Cedric Lecasble - Raymond James
Ashley Wallace - Bank of America Merrill Lynch
Julien Dormois - Exane BNP Paribas
Veronika Dubajova - Goldman Sachs
David Cerdan - Kepler Cheuvreux
Michael Jungling - Morgan Stanley
David Adlington - JPMorgan Chase & Co.
Rosanna Burcheri - Artemis Investment Management LLP
Catherine Tillson - Credit Suisse
Hello, good morning, everyone, and welcome to our Q3 Conference Call, which I am hosting with Laurent Vacherot and of course the Investor Relations team.
So you have seen the figures for the last quarter. Some of them are lower than expected and those slowdowns being not structural at all. And some of them better than expected. What we would like, Laurent and I, actually to do with you is, first, to share with you the explanations and to elaborate on the ongoing action plans for the next quarter.
Now, all in all, the delay that the group has accumulated in Q2 and Q3 makes achieving some of our full-year objectives more challenging. However, all the teams around the world are working on getting as close as possible to those objectives. But let me start by reminding you that our growth strategy is based on five pillars.
First, the core lens business fueled with innovation and marketing and with market share gain and consolidation; second, in sun and readers division fueled by the wider deployment of existing brands and leveraging Essilor capabilities; third, an online division capturing the growth of the growing demand on this channel and specifically on the 2.5 billion myopic people; fourth, ongoing acquisitions worldwide to strengthen our presence in more geographies and region; and fifth, the deployment of our Essilor mission [ph] activities to fight against poor vision in the world and then create the consumers of tomorrow, while improving vision and life of hundreds of millions of people.
This is the base of our strategy. What I would like to do now is to detail each of them in the perspective of 2016 and the last quarter. On the first pillar, our products are well accepted and our marketing strategy works with our clients, ECP and consumers. This is proven by our successes in Europe and in many other countries. And yes, we are taking market share.
But, yes, this performance is affected by U.S. market demand and some other countries with very bad economies. And this was not anticipated. But all we know from past. In that, when it happens it’s a recovery in six months, nine months later, because people need to see well and can’t stay with bad vision. Their life will be in danger.
On the second pillar, sun, Bolon is back to growth, which is good. But it is not yet at the level to offset the lower performance of the beginning of the year. And on top of that, the size of this division is not yet at the level we want and that we need to fuel overall Essilor growth.
On the online division, all sites are performing well and above expectations, except Coastal in the U.S. And this division needs also to grow through acquisitions to reach the critical mass.
Our fourth pillar, on acquisitions, it is heavy contributor of growth and future organic growth. We are taking market share, consolidating positions, building for the future and we are building a very powerful company in a very fragmented industry.
And on our fifth pillar, significant acceleration in all action-plans on the Essilor mission activities, more specifically in our actions of increasing business and awareness. The bottom line, our strategy is powerful, creating long-term value, but few activities, yes, are slower than expected and impact our very short-term expectations.
Now, I let Laurent detailing all this and I will come back on more perspective after Laurent.
Thank you, Hubert. Good morning, everyone. So, as Hubert has said, I will spend a few minutes to focus on our Q3 and what are the factors impacting the Q3 positively or negatively. So you have seen the revenue came out at €1.722 billion, up 6.4% and 7.2% without currency effect. Actually the currency impact has been improved in the last quarter compared to the first-half, with the appreciation of Brazilian real, Australian dollar and Japanese yen, which have almost offset the sharp depreciation of the British pound.
As a result, the impact of the currency effect in Q3 has been minus 0.9. And we expect, if exchange rates remain at the same level at end of September, full-year currency impact around minus 2%.
I’m now going to comment the organic growth, which stands for Q3 at 3.2%. And this is a result of three factors: number one, as planned a rebound in Sunglasses & Readers business, almost plus 7%; a robust performance in equipment division, more than 5%; and a less dynamic performance in the lens division, which is up only 2.9% like for like.
Let’s review now market by market what happened and I will start with North America. And I will start with the Lenses & Optical Instruments business in North America. The performance of that division in North America is 1.3%, like it was in Q2, so no improvement. In fact, the news we have is we had the measure of the market dynamic in the U.S. which just has been released for Q2. What do we see?
We see a very dynamic year in 2015, almost plus 4% of growth in the market, which is quite unusual. As we said during the July call, we confirm the slowdown in Q1 only 2.5%. And the main issue came from the Q2, where the market in the U.S. as measured by Vision Council decreased by 0.7%. And we see no evidence that it will have recovered in Q3. We believe in Q3 we see the same low dynamic of that market.
So in that context, how did we perform? In fact, in the U.S., the lens business performed pretty well given the market condition, because they delivered 2.5% growth in Q3. We saw sluggish growth in independent optometry, while the overall business with key accounts remained positive.
Besides its quite okay performance considering the market conditions, the total performance has been affected by three factors: number one, like in Q2 the decrease in Transitions sales to other lens casters; number two, flat sales in Canada; and number three; sales at Coastal and Clearly, online brands, still not positive.
Let’s move to Europe now. Europe, at the contrary continued to deliver a good healthy growth, 3% like for like, which is still a very good performance in our mind. This performance mainly stems from the improvement in the product mix, notably driven by Crizal and ongoing deployment of Eyezen, which is successful in countries like France, Spain and Switzerland. Actually we will reach probably around 1 million consumers wearing Eyezen by the end of the year, which is considered as on track with the plan.
We also had a good quarter in the Nordics, where our business with key accounts and our online business enjoyed good results. On the other hand, where the situation in Germany - the situation in Germany was more challenging and it was also less dynamic in UK compared to the first-half.
To conclude with our performance in more mature markets, Australia and Japan trend favorably, thanks to improvement with retail chain.
Let’s move now to fast-growing markets. Total fast-growing markets grew organically at a pace close to 8%, with four different situations. Number one, Brazil. After a strong resilience in H1, where Brazil delivered slight positive growth, the economic recession, all the political nightmare resulted in a sharp weakening of in-store traffic, which in turn, provoked a decline of our organic growth about 3% in Q3.
High-end products will be - were the most strongly affected, while mid-tier products are still growing. Second situation is related to Turkey and Middle East in general, and more specifically Saudi Arabia, where external situations, political and so on, I’m sure you know about it, penalized Q3 for a few weeks. It seems the situation has now been normalized in those countries and we are seeing again strong growth in these countries.
Third situation, China, we have the same situation in H1. And despite the traction of our partners’ mid-tier offerings, our sales are only in mid-single-digit growth, which is below our mid-term growth ambition, given the vision needs in China. All the other fast-growing markets delivered strong growth and some of them very strong growth. Mexico, India, Russia are delivering the strongest performance.
Colombia, Chile, Costa Rica and the other ASEAN countries also kept very strong momentum. Overall, all those fast-growing markets except China, Brazil, Middle East, Turkey, are growing at 13% like for like in Q3.
The equipment division now, so you have seen a good momentum, as the demand for more advanced technology is solid in all geographies, and as the industry in general invests to sustain the future growth. Sunglasses & Readers, we see this quarter the rebound of the Sunglasses & Readers division. It was planned with revenue up almost 7%, close to the mid-term ambition for this division.
The rebound has been driven by a good performance of the sun-wear business at FGX in North America, which benefited from much more better weather conditions compared to H1, and the improvement of Bolon performance, which bodes well for a very dynamic end of the year.
My last comment will go on the acquisitions. As you have seen, we have delivered a very good contribution, 4% growth coming from acquisitions in Q3, mainly driven by large lab US Optical we signed in July, I guess; and MyOptique, a leading European online player, later in the quarter. With four new acquisition transactions signed since October, 1, the company has now added 60 new partnerships representing €205 million to its activities.
In Europe, we continue to reinforce our position in e-commerce. After the acquisition of Vision Direct earlier this year we have strengthened our portfolio with MyOptique. And we have now, based in UK, a total of £90 million business in this new division. You have seen that in Latin America we have added some capabilities in Mexico, after what we did earlier this year in Chile and Peru.
In the equipment division, we acquired a small French company, SLC, which is a company acting in the leading growing segment of equipment providing coatings and high-quality coatings. Based on those new acquisitions and other transactions under review, we will - we aim to maintain this solid momentum in Q3 and probably beginning of next year.
So, in conclusion, as Hubert mentioned at the beginning, the performance in Q3 and the situation in some key markets I described to you will make obviously more challenging and more difficult to reach our annual objectives. For sure, you can be sure that the teams everywhere in the world, they are working very hard to be as close as possible from those objectives - those annual objectives. Thank you very much and I give back the mike to Hubert.
Laurent, thank you very much. So let me share with you what we are doing to try finishing the year close to what we said but, more important to well prepare 2017 and continue our growth for the following years.
So on the Sun & Readers division, Bolon continues to accelerate growth with new collections of sunglasses and with the push of the new Anne Hathaway campaign. We have also reinforced the top team with talents in digital marketing, operations and finance. Duty free and internationalization continue to fuel the growth, the Bolon brand becoming more and more an Asian-international brand.
We are also starting a brand new manufacturing center in Xiamen to face growing demand and high-quality standards. Regarding FGX, Costa and Merve, for those of you who were with me for the fieldtrip you have seen the powerful actions in place, new management at the head of Costa, very successful new marketing campaign and accelerations of online activities of all our branded sunglasses. And this will continue in the next few quarters.
On top of that, we continue to acquire brands in order to enlarge the size of this division so to contribute positively to the accelerations of Essilor growth, more to come in the next few months.
On online, four things are happening as we speak. One, days after days we are fixing all the issues of Coastal in the US. The deployment of the new site is on its way, but we need a few more months to see positive results. And this is a task of our teams in Vancouver, where Coastal is based.
Second, we continue to accelerate the growth of all of our sites. They are all performing very well. And the strategy here is to enlarge the offers on the sites with eyeglasses and sunglasses. It’s to accelerate cross-selling and develop offers in new countries, like we are doing in China and India.
Third, we continue the acquisitions on the online division, here also to increase the size of this division so it will be positively accelerate the overall organic growth of Essilor. And fourth, still on the online, the teams are working to continue to improve the profitability of this division by leveraging Essilor capabilities in logistics, production and products with our R&D.
To accomplish all this we have strengthened the top management team by moving internally several group’s key talents and by hiring young talents with specific capabilities. This is the game-plan for the next few quarters.
Now let’s move to the core business, lenses and labs. New products continue to be launched or deployed through the world, fueled by our R&D. First among them, the worldwide rollout of the Eye Protect System, EPS, which is progressively taking place. As you’ll remember, this is our new lens, which is combining front and back anti-UV, blue light filtering and full transparency without blue glare. It has started in Europe and in the U.S., but its global launch will mean much more volume potential.
We are also launching new range of Eyezen in the States and in Asia, new choices of color for Transitions, like the one called sty-colors [ph], and new tints of flash mirror in prescription sun. And in the course of 2017, we will roll out new versions of our key categories, progressive lenses and coatings, based on a step change in innovation and in the way consumer benefits are taken into account. I can’t say more on this right now but you can expect leading-edge moves in the fields of precision, transparency and clarity. Yes, we continue to accelerate innovations. The consumer needs always better type of lenses to face the change of their vision.
More deep-dive in the U.S., as we explained during our recent investor visits in Dallas, we are speeding up the deployment of solutions to ECPs, specifically through our doctor alliances. And this includes better product availability in stores, a logistical simplification called [French Dream] [ph] being rolled out to 260 stores by yearend, and our Essilor expert footfall program reaching a much larger number of eye-care professionals.
New Transitions lenses will be launched and new programs to accelerate the penetrations of antireflective coatings in all channels. In fast-growing markets, Essilor can rely on vast global footprints to offset the momentary slowdown in certain areas, like Brazil, Turkey and Middle East. This means forcing the pace in areas like Africa, Southeast Asia, Korea, or other countries in Latin America than Brazil.
Here also, we are strengthening the teams to face geographical deployment with management positions and sales-force.
Europe continues its growth momentum with programs to accelerate activities in key accounts, and to roll out of new products, specifically the Eye Protection System and Eyezen. Transitions will also be accelerated in the next quarters through Europe, where it remains still underdeveloped.
Now, globally we have decided to continue our consumer branding effort by increasing our media spend to about €250 million in 2016, higher than last year. This will be mitigated by cost containment elsewhere. But it is important to support the power of our brands and the many new products to be launched in the next few quarters.
On the acquisition side our execution is intact. The industry is fragmented in our three markets: lab and lenses, Sun & Readers, online. And you will see more acquisitions going on, small ones and bigger ones. We continue to strengthen Essilor and create value through our capabilities to acquire and integrate acquisitions over time.
And on our fifth pillar we have also strengthened the teams in Asia, Europe, USA, Canada, Latin America to continue the rollout of all our inclusive business activities like 2.5 NVG, as well as the creations of new Essilor foundations. It also has immediate effect on our ability to enter new countries, specifically in Africa and Middle East. And this has been well perceived by our observers, with Essilor stock entering into the DJSI and STOXX global ESG indexes.
Finally, the group has implemented initiatives to improve the generation of cash, among them the program to reduce the working capital. And our excellent financial rating and the current conditions of the financial market allow us to finance our future growth at minimum cost. So, before moving to Q&A, in conclusions what you can see is that we are developing our strategy step by step in order to continue to provide better vision to 7.2 billion people in the world, while strengthening Essilor on its markets and creating long-term value for shareholders.
What I suggest now is that we move now to Q&A session.
Thank you, Mr. Sagnières. Ladies and gentlemen, the question-and-answer session will be conducted electronically. [Operator Instructions] We will now take our first question from Cedric Lecasble of Raymond James. Please go ahead.
Yes, good morning, Hubert, Laurent and team. Cedric Lecasble from Raymond James. I would have three questions, if I may. So the first one on the U.S. market, can you maybe give us a little more on the relative performance of the chains and the independent opticians in Q3? And do you believe your best guess is that for a negative market trend in Q3 after the negative market trend in Q2? That’s the first one.
Second one, what were your growth trends in China between optical and sun? It could be useful for us. And the last one is about margin guidance and operating leverage, like for likes are pressured. What kind of flexibility do you have to reach your margin targets, despite lower operating leverage? Thank you very much.
Cedric, can you repeat your question number two on China, I missed it?
Yes, on China, simply between the optical operations and the sun operations, if we could have an idea of the split in trends.
Okay. So as Laurent said, we got basically very late this year on the overall Vision Council. We got it basically early October the Q2. And we have seen in the published data a decrease of slowdown of the market; after 2015 year, which was really growing fast. So, again, it has happened many times in the past 15 years. After one or two years of high growth, U.S. market slowed down for one or two quarters.
We don’t have yet the data, of course, for Q3. They will be publicly published basically I hope before yearend but we don’t have that. We think that it’s still under the same trend. Now, is it minus a few tenths or around zero? What I can assure you, it’s not in the positive data like it was even two quarters ago. And you have all understood this, basically, has been the main things we have not at all anticipated, such as slowdown in the U.S. demand.
Is it linked to the economy? Is it linked to the elections? Is it linked that people are watching too much CNN and Fox News? We have no idea, honestly. But this is what’s happening.
We believe, based on our own market share and sales, that some of the chains are doing better than others. But independents, specifically the independents which are grouped in two alliances, are performing a little better than the overall retail chains. But, again, it is based on our own market share, our own estimates, and we will know more when we will get from the Vision Council the data for the Q3. China…
I can take maybe the question on China. You want me to take it? So just pure factor, as I mentioned, the optical performance has been lacking the first half mid-single-digit growth. And the sun, you’ll remember the first quarter was minus 30%, the second quarter was still a little bit negative, to end up at minus 19% in the first-half. And in Q3, they were slightly - just slightly positive. And obviously they expect a very good Q4.
Thank you, Laurent. Now, your question on the perspective and guidance and everything, bear with me a minute. We are facing things that actually we did not anticipate on some markets, U.S., Brazil, some key countries, where we have activities in - strong activities in Middle East and so on.
The way we plan to finish the year on the three key indicators we communicate every year, which are total top-line, pure organic and operational margins. On total top-line, we think we will be close or at that level. Again, big portion of that is the timing of the closing of acquisition. And we have, Laurent and I give instructions to the teams not to rush signing or closing of acquisitions just to please the stock market.
So we may reach 8, we may be a little lower, but we will close the acquisitions one by one in the timing that makes sense and guarantee future growth. On pure organic growth, no, we will not be at 5 or 4.5, we don’t think so. We will be close. Again, it depends on few things we don’t control today, which are what the U.S. market will do in Q4. We have signs. We have ideas. I can’t tell you how the market will be after the elections, no idea.
We don’t know also which impact will have the increase of the oil price in all the Middle East and countries where there is a demand from consumers, who have been waiting and waiting and waiting to get basically eye-glasses. Again, we don’t control that and we don’t know. What we know is that our products are successful. What we know that, the way we are deploying our activities that we control and we are developing.
Another point we don’t control in our pure organic growth is the speed we could keep or lose the Transitions sales third-parties. We don’t know what will be the sales in Q4 on this side. When we did, did acquisitions few years ago, we told you that one day we will lose the third-party Transitions sales, because all our efforts are put to actually put Transitions through all our Essilor networks and partners.
We are seeing some effect on some accounts, some key accounts, I mean, our lens competitors purchasing Transitions. We are seeing some effect in Q2 and Q3. I have no idea what will be their reaction in Q4.
On operational margins, the 18.8%, again we think we will be close or maybe at that level. It obviously depends on the level of activity we will have in Q4. At the same time I told you we are not slowing down our spending on our brands, because this is critical for the future, this is critical for actually the promotion and on all our brands. And Essilor needs strong Transitions, Varilux, Essilor, Crizal brands to win quarter after quarter in the optical market.
Thank you very much.
We will now take our next question from Ashley Wallace of Bank of America Merrill Lynch. Please go ahead.
Good morning. I have a few questions. First of all, just on the sun and readers division. Are you able to give us a little bit more color on the growth in the sun category versus readers? And second question on this division. How much of the sequential improvement in the sun division was due to Bolon versus better weather conditions?
And then my second question just on the slowdown in the North American lens & optical instruments division. Can you talk about what you think is driving this? Do you believe it’s due to lower traffic for opticians or is it driven by ASPs and lower take-up of higher value-added product?
Thanks, Ashley. I will let Laurent answer on the growth and on the two first questions. So he could gather the data while I am actually answering you on the U.S.
We see traffic, because the data we have is really on volume. What’s published by the Vision Council is dollar spending and volume. In volume we are seeing Q2 and within Q3 a decrease of eye exams and demands versus a very strong 2015 year. We don’t see that much pressure on our prices, no more than the usual gains that actually we’ve been facing the past 50 years everywhere in the world. We are absolutely able through our partners to value the innovation, to introduce features of a blue coat, a few cents, few tenths of $0.01, $0.5, $1, up to higher price than the previous generation.
We don’t see this - we don’t see the average selling price dropping at all. We really believe there is a slowdown in the demand. Now, what are the roots of this? Economy, we know the situation of the middle-class in the U.S., not easy. We believe also that all this turmoil on the U.S. elections has an impact on how people are spending their time. But honestly, this is basically all what we have today to analyze this drop in the optical demand on the U.S. Q2 and we think Q3.
Laurent, you want to maybe take the lead on sun/readers and Bolon?
Yeah, sure. So actually the improvement in Q3 has been both. As I mentioned for the previous question, Bolon going from large negative to mid-negative to slightly positive in Q3, and actually, Foster Grant mainly in U.S. growing mid-single-digit in Q3 versus low-single-digit in the first part of the year, and a little bit better in readers and a little bit slower in sun.
Okay. Thank you very much.
I think - okay.
Thank you, Ashley. Next question, please.
We will take our next question from Julien Dormois of Exane BNP Paribas. Please go ahead.
Hi, good morning, everyone. Thanks for taking my questions. I have three. The first one is about innovations. You have alluded in your prepared remarks as to a new wave of innovation. Can you just tell us a bit more on that side and whether this is something that should be frontend loaded for next year? Or should it more like progressive during full year 2017? So in a nutshell, should that fuel good growth early in the year or should we wait a bit more?
My second question is on the U.S. weakness, you seem to be blaming the market for the weakness, but you also mention in the release that you’ve lost some contracts with the Veterans Affairs, with Medicaid in some states. Do you see that as being a result of more competitive pressure? And do you see that as a concern going forward?
And my third question is on the turnaround of Coastal. You have mentioned that we should next a few more months. Just can you remind us what gives you confidence that the turnaround will happen at Coastal, because this is obviously a drag on your growth at the moment?
Thank you, Julien. So on innovation, yes, we have new products, of course, but next year quite interesting ones that actually will be launched. You will see the impact quarter-after-quarter. It is not front-year loaded, it is not specifically backend loaded. But it’s deployed at the speed of our teams able to deploy new products, as they do in the U.S. more in Q1, Q2, and spread rolled out quarter-after-quarter during the year. But no, don’t expect this fueling a specific first quarter.
The first quarter next year will be challenging, specifically, because we had in 2016 a very strong first quarter. And no, it’s not innovation that actually could help us to offset the strong first quarter we had in 2016.
Second, U.S. weaknesses, it is hard fact for Q2, which we strongly believe has actually covered the Q3, it’s not assumptions. The U.S. market, the demand has slowed down. Now, Julien, you’re referring to two specific situations, which are the Veterans and the Medicaid, which were really specific decisions from the Supreme Court on another jurisdiction for one of them.
One on the Veterans, which was the big business of some of our labs in the U.S., on this side the U.S. regulators have decided to apply the law, which is in order to sell to Veterans you have to be a small business at least 50% hold by Veterans. It is obviously not the case for us, not the case for a lot of companies in the U.S. But this is what they have decided and it creates, believe me, a confusion on the U.S. market for those Veterans.
Medicaid, same, it’s not a situation of competition whatsoever, just the regulators have decided to stop the reimbursement of some specific products, specifically AR coatings and things like this and, obviously, it has also an impact on Q2 - on our sales in the U.S.
Now, Julien, your third question was the turnaround on Coastal. We have a new site, I love it, it is efficient, it has great features versus the previous one. Again, we are still fighting on the way we do promotions. Coastal in the U.S. prior to the acquisition was based on free pair of eyeglasses. Value at a price; vision at a price; it has a cost. We just can’t continue deploying free pair of eyeglasses on our site, so we decided to stop all this.
And we are in a mode of testing value solutions, which are working very well everywhere in the world on our other sites. But we have not yet found the silver bullet that actually will boost Coastal to a plus 20%, like it should be, when we have all the other sites in the world actually growing between 25%, or some of them, 60%. So again, I can’t tell you if this will be fixed in Q4 or in Q1.
Okay. That’s very helpful. If I could just have a follow up on the U.S. situation, you’ve mentioned Medicaid deciding to stop reimbursement and I think it was specific to two states, as you mentioned in the release. Is there a risk that they take the same decision for the other states?
Yes, two states where we have big - actually big facilities, yes.
Okay, so this is very specific. We won’t see another effect in the other states going forward?
Again, if you want to have the hard facts Veronique will give that you, but the states which have been actually impacted by these decisions are the states where, at the same time, we had our biggest activity in Medicaid. We have a little bit Medicaid activities everywhere but on those states, Ohio, specifically, it was basically the main activity of two of our partners. So, yes, we have been impacted.
Okay. Thank you.
Thank you, Julien. Next question, please.
Our next question comes from Veronika Dubajova of Goldman Sachs. Please go ahead.
Yes, good morning, Hubert and Laurent. Thank you for taking my questions. I have three, please. The first one just on the U.S., and can you help us understand what the growth in the business would have looked like excluding Transitions? I think you gave that information to us at the second quarter. It would be just helpful to understand what impact was from the third-party Transitions sales versus the underlying market?
My second question is just on China, and if you could comment on what you’re seeing in that market, and why you think this quarter, in particular, was so much slower on the optical side, not specifically for sun, but on the optical side.
And then my last question, Laurent, slightly bigger picture. If you look at the guidance, and I appreciate you’re working very hard, but should we think about it as there being a greater risk to the revenue portion of the guidance or the margin portion of the guidance? Or are the two connected to the extent that if you do not make the revenue guidance, we should think about you also not making the margin guidance? Thank you very much.
Thank you, Veronika. I will answer U.S. and guidance, and maybe, Laurent, you could - I will answer China and guidance, and maybe, Laurent, you could answer the - make the calculations really on the Transitions U.S. impact and all that. So China, again, China we are used to grow at double-digit. The Chinese market overall has slowed down, so we are more in the mid-single-digit growth, as you have seen, again, purely a matter of economy.
Now in China we just have 800 million myopic people, and we all know they have actually to renew their prescriptions at the same time as they are getting a job, finding a job, or moving from the field to the big cities, where it has an effect. It does accelerate myopia big time. So we believe it is just the type of situation we have been facing many times in the past. Consumers are postponing their purchase. We don’t see specific decrease in ASP or things like this, but we see a little less traffic in all our types of clients.
On the objectives of the year, let me elaborate on what I was answering to Cedric. Again, overall revenue, I think we’ll be pretty close or even around at 8% or few tenths above all depend on the timing on the acquisitions we have ongoing. On pure, pure, pure, organic growth, this is where we will not be at the figures we tell you.
On margin, very little risk. I don’t know if it will be 18.8% or €0.01 or €0.02. Overall we want to continue the pressure on advertising, and we don’t think that this specifically point is really at risk. All the other points that actually are elements of the balance sheet, and financial indicators that actually are important to value the company, we are pretty confident on working capital, on earnings, we will be at the level, actually we want; showing growth versus last year. I hope, Veronika, that has been useful and I let Laurent answer on the breakdown Transitions U.S. and non-Transitions.
Yes, a much more complex question and I will give the best answer, actually, it’s significant. In the U.S., the decrease of sales of Transitions product to third parties, out of group parties, out of group casters, it has been 0.7% of growth in Q3. So yes, it’s a significant part that is affecting us at the moment. And this is why I told you that finally 2.5%, or close to 2.5%, growth in the U.S. is not so bad, considering market situation, considering Veterans and Medicare, and considering the Transitions situation.
That’s very helpful. Thank you, both. Laurent, if I can just follow up on the transition to third parties. What kind of visibility do you have in this business? Is it - do you have any ability to predict whether you see a rebound in these sales? Or is this really just revenue that you book as you go? And now I’ll jump back into the queue. Thank you.
No, we have very limited visibility on what those also companies want to do. And it’s really month after month that they place order and we deliver, obviously, when they place order.
Excellent. Thank you very much both.
Thank you. Next question, please.
We will now take our next question from David Cerdan of Kepler Cheuvreux. Please go ahead.
Yes, good morning. Most of my questions have been answered, but I would like just to come back on your guidance for Q4. Do you think that you will be able to accelerate your organic growth rate in Q4 versus Q3? So is Q3 the lowest point for you? And just a question on Coastal.com, can you make an update on what were the problems, where you are today, and where you expect to be in the next months on Coastal.com? Thank you.
So on Q4, David, no. It’s impossible for us to tell you anything else than actually we have shared with you, you have to look at the roots of the situation. Yes, we believe that actually sun will absolutely be very positive in Q4. That we have the orders in hand, we have visibility on all this, and so it will be an outstanding quarter in Q4. I don’t know what the demand will be in the U.S. Even being a decreasing market in the U.S., we are taking shares. We are growing at the higher pace than the U.S. market. But will we see the market bouncing back in Q4 or Q1 next year, I don’t know.
So that’s way too many factors we don’t control. We don’t know at which speed Brazil will recover and our sales, and activity in Brazil will really recover. We don’t know the activity, if we have big drops in Middle East, will this be offset now that actually oil is better and all this? Honestly, we don’t know.
And last figures, we don’t know if Coastal.com, I mean, will recover faster or if it will take another few months before fixing the growth, and the impact of Coastal. So yes, of course, we are positive. Yes, we believe that overall we’ll see an improvement, but I am unable to tell you the size of the improvement.
And what is your objective for Coastal.com? And the key issues you have already resolved or not?
You say Crystal.com or Coastal.com?
No, Coastal. So sorry, the website Coastal.com.
Yes, yes, yes. As we speak, month after month, we are seeing - for the past few months we are seeing a significant decrease of sales by having stopped the promotion on free pairs. And with the swing between the old site and the new site, we are monitoring that daily. We do see some improvement since the beginning of the month, but it is way too early to tell you if we will be at minus 5% or at plus 5%. And I don’t want to commit on that today.
Okay. Thank you.
Thank you, David. Next question.
The next question comes from Michael Jungling of Morgan Stanley. Please go ahead.
Thank you, and good morning, everyone. I have three questions. Firstly, on Transitions penetration in Europe, can you comment where you are in the third quarter of 2016 compared to the third quarter of 2015?
Secondly, on DTC spend, what was the spend in the third quarter? And will this continue at the same rate in Q4, even if the markets in the U.S. are weakening?
And then question three is in relation to your mid-term guidance. And does the slower growth that you’ve seen in 2016, despite significant growth investments that you’ve made, feel you’re less confident in your mid-term guidance? And the reason I ask this is, because you highlighted, for instance, for the fourth quarter that there are many factors that you can’t control, meaning some uncertainty. Why would these factors be more likely to be controlled, if you look at your mid-term guidance? Thank you.
Okay, thanks, Michael. Laurent will let you some time to compute the TO eye penetrations and so on. On spending to consumers we have taken a strategic decision, a business decision, which is to continue to spend a little more this year, [€215 million] [ph], in marketing to the consumers, because we believe it is money well invested to protect our brands, and to promote the benefits of those lenses, and eyeglasses to the consumer.
And we believe that we have enough programs of restructuring, improving production costs and all this within the company, that our spending could be totally, or close to be totally, offset by those programs. Regarding the mid-term ambition, I’m assuming you’re talking about reaching 6% in 2018, and your comment on things we do control and things we do not control. We have a strategy to reach that number. And I think you have understood what our strategy is.
Our strategy is on the core business overall to have a kind of growth - pure organic growth around 2% to 3% depending on the plus and the minuses impacted by the things we don’t control, and to have bigger mass of business in online and sun that actually should continue to grow for one of them around 7%, 8%, for the other more close to 20%, and by doing that we will reach this 6%.
Now will we reach them the last quarter of 2018? Will we reach them the first quarter of 2019? Again, we think that around those years, we will be at that level, because this is the result of pure mathematical calculations of what, and how we are doing with our strategy. So there is no change on the mid-term plan, as you say. 2018, 2019 we will see depending on again the speed and our ability to make those acquisitions in the growing segment of sun and online. Laurent, you wanted to add something on?
Yes. I think the question was about the growth of the Transitions and the penetration in the sales from Essilor to outside customers from Essilor network. So globally we have put in place during the H2, and it will be bigger - even bigger in the Q4 plan, promotion, media to accelerate the growth of Transitions products sold by Essilor entities.
And we have seen some acceleration in Q3, and specifically in September, almost everywhere except U.S., where the plan really started - we started in Q4. So in Europe at the moment, specifically for your question, the acceleration of Transitions is faster than the growth of the quantity sold. So penetration is increasing starting end of Q2 and probably for Q4.
Thank you, Laurent.
So is the penetration rate of Transitions within your own lenses? Do you have a sense of what it was in the quarter versus a year ago? For instance, was 10% of your lenses on Transitions and last year it was - ?
I think it was quite the same for the beginning of the year. And we see some increase of penetration, we could guess maybe 0.5 point, something like that, in our own sales in Europe.
Okay. Because when you bought Transitions, Europe was a major growth driver for Transitions. And I’m surprised that after sort of two or three years that the penetration rate is not rising faster for an excellent product?
That’s an opportunity that we are tackling very efficiently at the moment.
Okay, great. And then on the DTC spend, could you please tell us what the actual DTC spend was in the third quarter?
So I don’t have the exact figure. What I can tell you is this year we frontloaded in the first part of the year. And what I know is that for the second part of the year, the second half total, we will have the same level of pressure - of media pressure than last year, knowing that learning on how to use those budgets, we believe, we’ll become more efficient in the throughput of those euro.
And, if possible, one last question on equipment. What was the reason for the optical chains investing more heavily in surfacing and coating machines in the U.S. especially?
Yes, interesting. You know that we spoke a lot about innovation and product. We spoke a lot about Essilor driving and putting on the market innovating products. And the chain and laboratories of this world, in order to cope with the demand of the market, which is more and more innovating products, more and more layers on the lens for coating, they need to invest in new technology every three, four, five years.
And in order to cope with that the increase in demand, if they want to meet the target, the demand, as far as quality and sophistication of the product they need to invest, so it could be cyclical, it could be - but this is what’s happening at the moment.
Michael, you have seen in the past few years, actually the past two years, a slowdown of this division, people investing less. In optics you can’t do business if you don’t invest. So some of them have old [junior weather] [ph] or they are missing the [box quota] [ph] and actually they are investing in our technologies. They are catching up with few years of no investment, like us, where we are constantly actually investing in new piece of equipments in our labs. It’s a good sign overall that actually, as we say, people are catching up after a few quarters or a few years of lower investment and CapEx in the case of our clients.
Great. That’s very helpful. Thank you.
Thank you. Next question, please.
The next question comes from David Adlington of JPMorgan. Please go ahead.
Hi, guys. Thanks for taking the questions. Two, please. Firstly on your marketing spend, how do you think about allocating that? Do you allocate that more to the U.S. to try and take a more share in a slowing market? Or do you allocate ex-U.S. to try and offset the slowdown in the U.S. market?
And, secondly, in terms of that marketing spend, the additional spend that you’re putting through, you mentioned savings elsewhere. I just wonder where those savings are coming from, please. Thanks.
Okay. So I may - I will answer on the marketing spending, and you can take the question, Laurent, on the programs we have synergized and all these things going on. We have not changed Q3 and Q4, the plan of where and how we are investing our money - our consumer money. We are investing them in our brands, and we are investing them in regions, where we have the right distribution and the right teams to execute the plan, obviously, U.S. is part of it.
So we have not accelerated or decreased the spending in the U.S, it’s still at the same pressure. We are accelerating in countries, where we have better distribution, better reach and where the position of our brands are important, some European countries, a lot of countries in Africa to build on the future, Canada, China, also India quite a lot. But, no, we are not adjusting the spending, because of, let’s say, a slowdown in some specific countries, it would not be wise. Laurent, if you want to take the question on…
Yes. I would say, it’s the continuous effort of Essilor to be more efficient. Obviously, various programs in manufacturing, and more and more lean manufacturing programs developed in our plants. We have what - it’s true, we didn’t talked about it for a long time, but all those investments in what we call export lab, and actually, I think, beginning of this year we started the third big export lab in Mexico on the West Coast, in Tijuana, to serve the western part of the U.S. market. Those are big labs working seven days a week, 24 hours per day, so with much more efficiency as far as cost of goods and capacity utilization, and asset utilization.
And also in countries where we have increased the footprint through partnership acquisitions in the last few years there are synergies that could - that are activated. So that’s the three different levels of improving year after year, quarter after quarter, our ability and efficiency, and obviously part of it is reinvested in programs to develop activities, whether it’s media marketing, or new countries, or new initiatives in existing countries.
Great. Thank you.
And maybe just one follow-up, you mentioned working capital as a focus in your prepared remarks. I just wondered if you’re able to quantify how much you may be able to extract from those working capital efficiencies.
It’s quite complex, the answer, because, as we develop the group in different activities, as we develop the group in different geographies, where the structure of the working capital could be different, the result could be different depending on what we do. What we do country per country, business per business, and company per company is making sure we increased - we improve inventory, we monitor sales - customer or customer accounts, and actually, at the end of August and we improved by €20 million the working capital and we expect to continue in Q4.
We will take our next question from Rosanna Burcheri of Artemis. Please go ahead.
Hello, hi, can you hear me?
Yes, we do.
Hi. Can you please quantify the impact on the third-quarter U.S. sales on this loss of the VA and Medicaid, please?
Quantify on the U.S. market the Medicaid and the - Laurent?
Actually, I don’t have the number - the specific number for Q3. What - so the two headwinds, if I may say so, started end of last year, and when it could be up to a little bit less than 1% of a decrease of sales during the year in the U.S.
So on a full-year basis 1%.
On a full-year basis in the U.S. ending, and it will - but the effect of the decrease will slow down Q4 and Q1 next year.
Okay. Thank you.
Next question, please.
We will now take our next question from Catherine Tillson of Credit Suisse. Please go ahead.
Hi, good morning. Thank you for taking my questions. Just two questions from me. First of all, what stage would you say we were at in the investment cycle across the optical industry, with respect to your equipment division? Just trying to understand a bit more about the sustainability of that LFL for the division?
And then, more generally, I was interested to hear about your thoughts on omni-channel versus pure online, whether you think one has an advantage over the other in gaining consumer engagement or whether actually there was no advantage kind of offering the across channel services, just given that you’re investing in pure online only? Thank you.
Yes, hello, Catherine. Laurent will cover the omni-channel and online strategy, and you could cover the equipment. Let’s look at how consumer purchase online. Today on online, what we - the consumer purchase basically three types of products, contact lenses, eyeglasses, sunglasses. On contact lenses, absolutely, no specific advantage on omni-channel or things like that. Sunglasses, same.
On prescription eyeglasses you need to have a prescription, and you need to actually deal with the measurements. So it all depends on which type of consumer you are. If you’re a consumer with myopia, it’s a very simple prescription. Once you have your prescription you absolutely can shop online, and there is no specific benefits on omni-channel.
When you are on the preview and you need actually, going forward, bifocals or progressives, and you really want to actually shop online, yes, that - it’s required maybe more involvement of those stores. So those are the general - let’s say, high-level umbrella of what’s going on in this industry. Now, more important, it’s all depends on which country, on which market you’re talking about.
Our online activities are booming in India, it’s because there are no stores. They are booming in China in specific, in areas where there is absolutely no stores. So again, there is an equilibrium on all those channels. We don’t believe that for what we are selling online, which is contact lenses, sunglasses, and prescription eye ware for myopic, there is a specific advantage on the omni-channel, because at the end, the benefits of the online compensate for some inefficiencies of some type of retail stores in some countries.
So again, for the next three, four, five, seven years, 10 years, I don’t know, we don’t see any advantage of the omni-channel. Now what’s important is actually to make sure that consumers have the right eye exam. So they need to go to the store, but we do see and so to see - to do the eye exams, do the practices and all that. But in many countries where they go and get eye exams at the ECP level. But then the consumer experience, based on 10 years of sales, is actually very strong and powerful online.
On our existing site, we - the penetrations of key categories is much higher than in the stores, because the explanations dedicated on benefits of the lenses, is very well explained, very well thought out, versus the case, not all of them, but some stores, the level of explanations is not necessarily at the request of the demand of the consumers. So it’s a long answer to your question, but we don’t believe in the products we are selling that there is a benefit of omni-channel.
So on your question on the equipment division, actually in the equipment division there is two-part, there is business of selling technologies to produce lenses. And this part of the business is linked to the growth of the industry. When you have more and more myopes in the world, which is growing very fast, you need more edgers to edge the lens. When there is more and more presbyopes in the world because of the edging population, then you need more surfacing machine and digitally surfacing machine to serve those customers.
And the second part of the business is consumable, which means produce you need in the existing lab to produce the lenses. And this one is growing like the industry is growing, mid-single-digit, I would say.
Thank you. Next question, please.
Thank you. As there are no further questions in the queue that will conclude today’s question-and-answer session. And Mr. Sagnières, I would like to turn the call back to you for conclusion.
So thank you. Thank you, all of you. Just a few words to finish, you have seen through the explanations, I hope that this slowdown we have experienced in Q3 is absolutely not structural, but really linked to some key specific factors we have explained. Obviously also it makes short-term objectives more complicated to predict versus mid-term or much longer objective more easy to predict.
Okay. Thank you very much. And I will see all of you in February for the final results of Essilor. Thank you all of you and have a great day.
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