EssilorLuxottica SA

PAR:EL

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Essilor's First Half 2018 Results Presentation. Today, I'm pleased to present Mr. Hubert Sagnières, Chairman and Chief Executive Officer of Essilor. [Operator Instructions] Mr. Sagnières, please go ahead.

[Hubert Sagnières, Chairman & CEO]

Thank you. So good morning, everyone. I am here in Paris with the full IR team, Laurent, Hilary and of course, Alexander. You know already actually the big news we got this morning, and we are very pleased to confirm that we have obtained the approval of the combination from the Chinese authority. So this is another day, of course, of celebration and step-by-step to the D Day, where we will celebrate the new and fantastic company we are building with Mr. Del Vecchio, EssilorLuxottica. So after the EU, the U.S., Brazil and Canada, as you know, this is the last condition precedent, which opens the way to finalizing the combination, the merger with Luxottica and Essilor.Let me back up a little bit on a few topics I would like to share with you before giving the mic to Laurent and his team, who will go also in depth on the other news, which is the actually outstanding second quarter we had, and then shall review the perspective for 2018.So yes, I know, I mean, you're like me, you're exhausted like all my team and the Luxottica team because it has taken a lot of time. But you have to understand, I think we have to understand, that China is, today already and now for a few years, the first and the biggest market in the world for eye care and eyewear. This is where we have the highest demand in volume for eyeglasses. As you know, out of the 1.3 billion, 1.4 billion people in China, we have 800 million to 900 million myopic people. We have 2 -- more than 200 now, actually, presbyopes all willing to get progressive lenses and Varilux. So this is already the biggest market of the world.And of course, the Chinese authorities, like the other authorities of the world, have taken their time very thoroughly, very detailed, in a very professional way to analyze all the market positions, to analyze who are the actors in this industry and to make sure that the leaders in their country will build a business model with products and services that actually will make sure that all the Chinese in the following years will have the best services and the best products to correct their vision and to contribute to the happiness and health of all the Chinese citizens.So it has taken a lot of time. We have taken a lot of time explaining what we are doing. We have taken a lot of time with Luxottica also explaining our business model but also explaining our mission and how we are doing business everywhere in the world and how we plan to do business in China. In a nutshell, we have confirmed to the Chinese authority that we are willing to operate, like we do in every country of the world, in open business model.And now that you -- I think all of you know and have read the commitment we have given to the Chinese authority, our commitments are around 3 key, let's say, points. The first one is, of course, like we do everywhere, to inform the authorities about the acquisitions -- the future acquisitions we will do in China. The second key point, which was very important for them and us, was also to make sure that all our products are available to all the customers, all the consumers in China. And the third key point is, at the same time, commitment to make sure that we will not distribute on an exclusive way some product to some specific target. We want our product to be available in all the stores -- not only in the store that we own, and of course, that we will not discriminate any customers in China.So really what's, for us, extremely important, that we will continue to be in China in very open business model, being able, actually, to accomplish our mission of eradicating poor vision from the world; developing solution, services to all the actors of -- in optics in China; and also moreover, to distribute eyewear and eyecare to all the Chinese at every price point.As you know, we have this strong mission everywhere in the world of eradicating poor vision in the world. We make a commitment a few years ago that by 2050, we want everyone on earth to see well, either wear the fantastic Ray-Ban frame with Varilux in it or a few dollar eyewear because this is what they can, what she can, what he can afford. And what we have now agreed with the Chinese authority is actually being able to develop all those open strategy in China like we are doing in Europe, in the States, in Brazil, in Latin America, in Africa and also with Asia.Again, what's extremely important and guiding our strategy is our ability to create value at every price point, every level of the market and to create value by distributing all our products in every country towards the consumers using all the brands that we have, the more luxury brands, the more affordable brands, the premium brands but also actually, the midrange brands, in order to make and give good vision to all consumer everywhere in the world.So in China, our commitment with the Chinese authority will allow actually to develop all those plans to create value for our shareholders using all the assets of Essilor, all the assets of Luxottica and make sure that in certain amount of year, 1.3 billion, 1.4 billion Chinese people in China will all see well like we are doing everywhere in the world.So in a nutshell, this is what I wanted to tell you as opening comments. I'll let Laurent the pleasure actually to comment on the second quarter, the first half and also to give you perspective on the Essilor businesses.

[Laurent Vacherot, President, COO & Director]

Thank you, Hubert, and good morning, everyone. So yes, we will comment to you this first quarter and especially the second -- the first half and the second quarter. And I will be helped during the Q&A by Paul and Hilary for more specific questions.So in Slide 5, as you have seen, after our already strong first quarter last year, we delivered a healthy first semester this year. Our goal strategy is delivering value. And in a nutshell, I think the key takeaway that you should remind for this first half are: first, we see positive result of the new product launch in the last 18 months. You remind that for the last different calls, we comment on all those product launch. All over brands, lenses, online and some glass are driving growth. And we have a robust growth in U.S. and fast-growing market, accelerating driven by Brazil and China. At the same time, business in Europe is solid.This term in value creation measured as gross margin ratio improvement and healthy cash flow, and this makes us confident to continue to accelerate investment and development in growing channel, growing categories, new countries and also to grow our team to be able to attract all those capability to grow.Turning to the first half revenue growth on Slide 6. We have seen a small decline of 3.5% of our revenue in the first half, highly impacted by close to 8% negative currency effects. Based on the -- our end of June rates, we're expecting a roughly neutral currency effect for H2, which will diminish these negative effects of the full year between minus 5 and minus 5% -- minus 4% and minus 5%.More importantly, we posted a 4.4% growth during H1 in constant currency term, combination of 4% like-for-like, exactly on our target for the full year; and 0.4% acquisition growth, knowing that, obviously, for the last 18 months, we have slowed down acquisition, being focused on building this beautiful combination with Luxottica.On Slide 7, I would like to give you a few comments on the Q2. So first, all region and all division improved from Q1 to Q2. That's the first takeaway. So if we go more in detail, Lens & Optical Instrument business increased from almost 3% to 4% like-for-like sequentially.This was supported by more than 1% improvement in North America. And here, we continue to see the impact of all our investment in brand and product and this combined Ultimate Lens Package that provided the best vision boost for presbyopes and myopes in the U.S. in addition to our past investment in independent ECP segment through alliance group and Essilor Expert strategy.We also had a good momentum in China -- actually, good momentum measured at almost 15%, 1-5 percent, growth in domestic lenses. So as we mentioned earlier, a very dynamic market. Also to mention that Japan is supporting Asia Pacific region as far as growth. As I mentioned, we have a solid Europe in Q2. And we see solid improvement in Brazil, Colombia, Argentina. We continue to work to accelerate growth in other markets of Latin America, including Mexico.Moving to Sun & Readers. After several quarters of investment and hard work with our positioning, all brands are working well. And Bolon is back on the objective we had to grow double digits.If you want to take more high-level vision on the H1 in Slide 8, you see that the key highlights are obviously the 3.6% growth in Lenses & Optical Instrument. We continued to grow in all category and acceleration in our key brands. Varilux benefited from the ongoing rollout end of last year in North America and Crizal, the new Crizal. The Crizal 360 Sapphire has been launched in Europe over the first half of this year.We are quite happy to see very healthy growth of transition lenses sold by our own network, 6%. I think it's the result of all the work done by the team, Essilor and Transition, in the last year. And also because of the dynamism of the brand and some renewed image of the brand and product of Transition, we see also a much slower decline in sale of Transition to some continents, especially in North America.We see also for the first half a good selling season mainly where we are positioned in the U.S. and China. Costa in the U.S. continued to expand geographically. And Bolon, the result of the hard work done in the last years expanded the distribution, pushing online sales, well-received sun collection, starting optical frames expansion and also opening stores, all of that supported by a state-of-the-art supply chain, is doing very well and growing very fast.On Slide 9, a few message on the acquisition. So as you know, since we had the major approval of authorities in March 1 in the Europe and the U.S. We started again to reenergize the pipeline of acquisition. We are -- we see already in the end of the first half a few results, very positive. EUR 27 million of total yearly sales that we closed in May and June for most of them. Mainly in fast-growing markets, with high potential obviously like Mexico, Honduras and Vietnam. Obviously, we have revealed in the last months a strong back line looking forward, and it is a good indication that we could accelerate this contribution to the growth and the value of the company for really late in H2 and beginning of '19.So moving to the P&L on Slide 10. As you know, and it's all detailed in the appendix starting in Slide 17, there have been a few adjustments because mainly of the combination and also restatement of our P&L in 2017 to comply with the new IFRS 15 regulation.So what I will comment is adjusted and restated, which is the best way to reflect how the company is moving. So the main message is that our growth model continued to create value. And you have seen the EPS, earnings per share, growing in line with sales.So 2 key message on this P&L from my side. First, the quite impressive improvement in gross margin ratio, 60 basis points, which is well spread across all our main business -- all the business line. Obviously, the best -- the biggest driver for this improvement in gross margin is the lens business, which is really the result of growth in category, innovation and better product mix. Also, e-commerce, the gross margin is boosted by an increased contribution from higher margin segments like eyeglasses and sunwear versus contact lenses, where as you know, we have lower margin.The second key learning is we invest more and more in our growth model because we are -- because of the safety of this model. And I will give you a few example. In the U.S., we significantly -- we are significantly expanding Essilor Expert program with -- we will more than triple from the end of 2016 to -- by 2018. And today, we have 300 -- 3,800 ECPs, eyecare professional, optometrist, that decided to join that program because they believe it's good for their practice, it's good for them and it's good obviously for their consumer.We continue to grow e-commerce platform. We continue to develop existing categories like progressive addition lenses and photochromic wears still under development and looking at new one, specifically looking at myopia, which as you know, will be the biggest health problem in the future. We continued to expand our sunwear brand, store for MJS and Bolon, Costa expanding regionally.We continue to reinforce our team and to develop employee shareholder program because we believe it is one of the recipe to success of the company to associate and align our employee with the value creation that we can deliver. And we'll also continue to make progress toward eradicating poor vision. And actually, we have 4 million new consumer that benefit of better vision -- good vision since beginning of this year.Then when you look at the bottom of the P&L, you will see slightly more other expenses capturing mainly usual [ operating ] expense that we are adjusting our capability to different situation and also obviously performance share. Financing cost is slightly down versus last year, which is great. And the tax rate came at lower end of our expectation for the full year, and we still see the full year tax rate between 22% and 23% for the full year.Moving to the cash flow. Well, very simple. Healthy operating cash flow coming from the strong -- I'm sorry, healthy free cash flow generation coming from the strong operating cash flow generation, growing at more than 10% excluding currency, while we continue to invest in capacity to sustain the growth of the industry. You also see the debt decreasing almost EUR 300 million from June '17 to June '18.Now let's spend a few minutes on how we see the second half and beginning of '19. So on Slide 13. Basically, I have 4 message. The first one is basically, we expect to sustain the momentum in our lens business based on the same successful drivers that we have seen in H1, which are new products. We have Crizal Sapphire, as I mentioned, that will be deployed all over the world. We have a new product in Transition, more fancy, targeting younger population, the styled colors and styled mirrors, especially in the U.S. launch beginning of July at the National Sales Meeting in -- at the U.S.. We have new and expanded range of Eyezen, these lens that protect your eyes against bad blue and help your eyes not to be too tired at the end of the day. And also, we'll finish -- we'll finalize the launch of Varilux X in Japan, which is obviously a big market.We continue to sustain our brands, Varilux, Transition, Eyezen, all around the world. We will continue and accelerate the development of program for ECPs all over the world, including what I mentioned in the U.S. And we see fast-growing markets continue to improve their position versus last year with Brazil and China showing strong momentum.In our Sun & Reader business, we target mid-single digit for the second half as Bolon is back on track and Costa continued to perform well.Third, we have worked very diligently to refill our acquisition pipeline, as we told earlier. And we are now in a very good position here.And fourth, we'll continue to reinforce the team. And we are very happy to inform that we have appointed 2 new members to the Management Committee of the group, the Management Committee being the internal governance body that defines strategy and makes choices and allocation of resources for Essilor. So the 2 new member will be Norbert Gorny, which joined Essilor in 2011, which has a strong knowledge of the industry for many years and is at the moment Chief R&D Officer for Essilor.And we'll welcome as well Grita Loebsack, which is our new Chief Marketing Officer that joined actually 1 month ago and is actually around the world to discover this beautiful industry and its beautiful potential and also understand our industry and Essilor. And she's coming from -- with a strong background as in marketing and business management for a global company in consumer goods, cosmetics and luxury. The objective being to increase focus of the Management Committee on innovation and market development because we believe it's key for the future on the top of all what we do.So with those 2 new members, the Management Committee will be a group of 12 person with 7 different nationalities. So a lot of diversity. And I think this is the way we can continue to build this beautiful story with all the themes for the future.And in my speech, I had finally -- we expect the finalization of the EssilorLuxottica combination. And as you understand, we had, just before this call, the great news about China.So with all of that, we can confirm now guidance that we propose to you beginning of this year. So like-for-like growth around 4% and contribution from operation at least at 18.3%. But most importantly, we will continue to implement the successful growth strategy based on innovation, mission, market development, employee shareholding and acquisition in the second half and as well into the future.So with this, I'm handing over to Hubert for some closing remarks.

[Hubert Sagnières, Chairman & CEO]

Thank you, Laurent. I think as far as closing remarks, I will actually give the mic to all of you and we'll start the Q&A. This is maybe the best way. So can we start? I don't know who has the first question.

[Operator]

[Operator Instructions] Our first question will come now from Anne-Laure Bismuth from HSBC.

[Anne-Laure Bismuth]

It's Anne-Laure Bismuth from HSBC. I have 3 questions on my side. So congratulations for the clearance in China first. So can you give us some comments about what are the next steps following the clearance in China? I know that Turkey is not mandatory, but do you expect to [indiscernible] in Turkey by end of the month? Will you wait? And can you start to work together with Luxottica without the approval in Turkey? My second question is about when could we expect an announcement about the management structure of the new [ coup ] and potentially [ CMD ]? And my last question is about do you have any concerns about the continued lack of growth at Luxottica?

[Hubert Sagnières, Chairman & CEO]

Anne-Laure, thank you for your question and so on. So as you know, yes, we have -- definitely, now is the last condition precedent. So technically, the closing of the transaction is possible. But as you know, at the same time, we are working with the Turkish antitrust authorities to coordinate their approval. And also at the same time, actually, we have spent a lot of efforts during the past few months actually in all the negotiations. And I think all the team needs a little rest to make sure we are using all the times to actually starting day 1 and locking together. So most likely scenario, we will, let's say, rest for a bit for a few weeks, make sure that we are not pushing legal, financial team to work hard during the months of August. And most likely, we plan to do -- if we got all the -- if we got enough time, all the approval also for the Turkish authority. We think that most likely, at the end of September, we'll do the closing of this operations, which will allow actually all the teams to work in depth on joining forces, working on the plans, joining the resources during end of August and September to make sure that we are -- we start the merge really from the right foot. So there is no rush in any case now that we have all the condition precedents. The certainty of the deal is done. But honestly, we need more time and we need to rest after all this. It was very long. And now that we know the transaction is certain, we can really work altogether. How we'll manage the new company and all this? Again, give us a little time. We have done the extensive teamwork, everyone in the world with Luxottica team. Building such a leader, building such a company whose responsibility, whose mission is to improve vision everywhere in the world, it is taking time. It will take time. Both companies have fantastic assets. We know exactly how we could extract synergies, growth synergies, some cost synergies also. We explained all this along the past few months to all of you. And we will communicate to you certainly during the fourth quarter of the year, how we will technically operate. But again, we need much more time to make sure that we are building the right way all the foundations of these new companies. Your other question regarding the -- if I take your word, it's not my word, it's your word, if I understood that, the lack of growth of Luxottica. I don't want to comment. I think Luxottica has fantastic assets. They have fantastic brands that we need to protect. They did a fantastic job protecting their brand. They took tough decisions in order to make sure that their brand will be protected for the long term. Some of those decisions has resulted into slowdown in sales. I think we have to respect that team who has the courage of doing this specifically as a public company. But now with Essilor and with Luxottica assets, believe me, we have, in our hands, all the tools to actually capture the growth and satisfy all the consumers around the world in all their demand, in all their needs. Yes, they need Ray-Ban frames but at the same time need the perfect lens for their vision in those Ray-Ban frames. Yes, they need Vogue frames, Bugatti, CHANEL, all the fantastic brand special that Luxottica is managing. And at the same time, they need also the perfect Varilux, Crizal, Eyezen, Transitions. The combination of all that will continue to actually accelerate the growth specifically because, as you know, the visual defects in the world are accelerating and by joining forces with brands, retail, lens and labs, which are really the 4 key categories of EssilorLuxottica, we will not only capture the growth but accelerate the demand because we'll be able to serve the consumer in a much better way to communicate, to explain, to detail all those products for the benefits of their look and the benefit of their vision. But really, thank you, Anne-Laure, for your questions.

[Operator]

Our next question will come now from Cedric Lecasble from Raymond James.

[Cedric Lecasble, Financial Analyst]

Three questions for me, if I may. So the first 2 on China. I must be stupid or tired, but I don't really see the difference between the green light you've had in China and in the headlines on the screens, we can read conditional green light. And what will be different from the other approvals you've had in the other regions? That's my first question. So second one maybe to elaborate a little bit on China. You said it was the first market on volume. Maybe you can tell us where you stand in terms of global volume and value market share in China. And maybe between the high end, the midrange and the low end, give us a little more color. And the last question is maybe for Laurent. On the full year margin guidance, it used to be more than 18.3%. It's still more than 18.3%, but there are some restatements of the base and we've seen that in H1. So initially, it was at least 2017 margin. Is it still the case? And what will be the IFRS 15 restated full year '17 margin?

[Hubert Sagnières, Chairman & CEO]

Thank you, Cedric. I think you know all the excitement we have here on the announcement. I have understood question 2 and question 3, but can you rephrase maybe your question 1? I am not sure I really understood it even though I think I know what to answer. But rephrase it maybe with different words.

[Cedric Lecasble, Financial Analyst]

Sure. Maybe I wasn't clear. I'm sorry about that. When we read the highlights on the screens for the approval of the Chinese authorities, there's a mention of conditional approval. And actually, given what you say about remaining on an open model, not being discriminating competition, it looks pretty much like what you have promised in the other regions also. So what's different about this conditional approval? Or is it a mistake somewhere with that on the screens?

[Hubert Sagnières, Chairman & CEO]

No, no. Okay, thank you. I was confused with what you call the screens. I think you're referring to what Bloomberg has published on the...

[Cedric Lecasble, Financial Analyst]

Exactly.

[Hubert Sagnières, Chairman & CEO]

Before the call or maybe over. But yes, okay, I understood. Well, I don't want to comment on what Bloomberg has put on the screen. What I'm going to comment is really on our commitment. So bear with me. We have not committed on any asset deal or asset transaction at all. What we have committed is more what we have actually confirmed with the Chinese authorities, is all commitments regarding our behavior. But it is very important for the Chinese authority. Again, this is the first market of the world. And they have to pay attention to the vision of 1 billion people, 1.2 billion people in China. So making sure that the leading optical company of the world will continue to behave in China the same way they are behaving everywhere in the world, making sure that we are developing innovation, making this innovation available to the Chinese consumers and over the Chinese networks, specifically in a country that they know growth is in front of us, huge growth and significant growth is in front of us. We also know that in China, as we speak, we are, EssilorLuxottica, underrepresented as far as number of point of sales. So all this was extremely important for the Chinese authorities. And they need a thorough and in-depth analysis of all the positions to make sure that we will commit, we will confirm that we will behave in China, yes, the same way we are behaving everywhere in the world, but just making sure, we are doing it and we are walking the talk. On top of that, they asked us to be informed about all acquisitions we will do in China. But as you know, you have read, Cedric, enough communiqué, press release from all of us. We communicate all our acquisitions to the stock market and to all of you. It's all public. And it's important also to be public because it shows that actually, we have a growth strategy and we are willing to make sure that everyone on earth and in China, we are talking about China, will continue -- will have access to innovations and new products. So all those commitments, all those behavior, it was extremely important for the Chinese authority that we confirm them in written. And this is what we have been doing and we have been discussing, negotiating with them the past few months. Then you had questions I will let Laurent answer on the other one.

[Laurent Vacherot, President, COO & Director]

Yes. I think there was a follow-up question on the China, which is where we are today in China. So maybe you remind Cedric that we said, I think it was in Feb, that for 2018 we are shooting to be around or above EUR 500 million business in China, Essilor standalone, and half of the business being traditional lens business, high end and mid-tier with our partner and the rest being Bolon, MJS and now Aojo, so sunglasses, and also network of retailer, monobrand sunglass and optical lenses as well. So that's where we are in this big country. So close to be the #2 country for Essilor standalone again by 2018.

[Cedric Lecasble, Financial Analyst]

Just if I may, do you have a rough figure for the Chinese eyewear market?

[Laurent Vacherot, President, COO & Director]

Not in -- well, not in detail. I think as far as number of lenses, it's above 200 million lenses, the domestic market. So slightly above the U.S. markets itself at the moment. This is the why we said -- and we can do a follow-up with the [indiscernible].

[Hubert Sagnières, Chairman & CEO]

Yes. And I will add also that China is really a specific country. Today, #1 in volume. But I don't know, maybe, I don't know if it's 5 years or 10 years, we'll be #1 in value. So we need to fine-tune our strategy. We need to make sure we're actually using all the assets we have to sell the best to the Chinese consumers and the Chinese market. And maybe we owe you, one day, in the near future, really a full session on what is our strategy in China, during which you will find and you will get all the data and the information you need, Cedric. But give us a little more time to gather all of these. As you know, during this part of the time of negotiations, we're absolutely unable to exchange data between both teams. Now that the deal is certain and we'll work together, we really can develop a much more thorough strategy. As soon as it's ready, we'll share it with all of you.

[Laurent Vacherot, President, COO & Director]

So Cedric, your third question was about the IFRS impact in 2017 on the profit -- net margin profitability. So I think the impact is now we know. We didn't knew at the beginning of this year, number one. Number two, I think the spike is 20 basis points. So if you restated to '17 net margin, it will go from 18.3% to 18.5%. And what we are telling for the full year now is we will be above 18.3%. We have been at 18.4% in the first half. And maybe because you need to understand that because with the momentum we feel and delivered in the last quarters, basically starting last quarter last year, we believe, and the measure of the value creation with the gross margin expansion as far as the ratio of 50 basis points, we are kind of willing to keep some flexibility to invest in programs that could continue to build this value creation and growth history. So 18.3% -- more than 18.3%, we are 18.4%. And we have a lot of program that we believe could be interesting to also at the end of the year to prepare to '19 and also entering this combination with a strong momentum.

[Operator]

Our next question will come now from Alex Gibson from Morgan Stanley.

[Alexander Matthew Gibson, Research Associate]

I have 3. The first one is on initiatives and ideas that you're working on separately from Luxottica last year. I seem to remember your talking about 10-plus. Now that you don't have any restrictions in the EU, U.S. markets, can you communicate what maybe some of the top ideas that you've been discussing are and how they've aligned with any discussions that you have had with Luxottica since you came up with the ideas? And I have a follow-on with the 2 later.

[Hubert Sagnières, Chairman & CEO]

This was your first question. And what was the 2 others?

[Alexander Matthew Gibson, Research Associate]

Right, yes. So the 2 others are going to be, why has Europe growth been so subdued for the first couple of quarters? And how much of a pickup do you expect in Q3, Q4? What's driving the improvement versus how much will be market improvement? And then my final one is on any implications from U.S. China tariffs. I know it's an evolving debate but one that's been important for a number of companies. So it would be interesting to get your perspective.

[Hubert Sagnières, Chairman & CEO]

Okay. Thank you, Alex. Laurent, maybe I will take the first one, the first one and the second question, and then you continue and do the tariff at the same time. Yes, sure, I mean, all the initiatives, all the discussions we had been able legally to have with Luxottica have been around a few key topics. The first one is how can we be culturally the best company for all our colleagues, employees. We'll be a group of 160,000, 170,000 people all around the world with a heavy load in the U.S. And we, with Mr. Del Vecchio and Francesco Milleri and the Luxottica team and my team, we deserve actually to build the best company for all of us. So we had a lot of discussions around this topic to make sure that we will take the best of the culture of every company and build a new one that will not be Essilor, that will not be Luxottica but will be the best of both in order to build a high level of comfort all among -- and motivation and excitement, all our employees. This is an example of one of the topics we discuss with the top management of Luxottica. Another key topic and initiative we discussed together is using all our assets, their ability to develop, to innovate, to control their brands, to simplify a lot of processes on Luxottica side, our ability actually to deliver at every price point better vision to everyone, how we can join forces to define and invent a better product for the consumer. Think a minute. It will be the first time in basically 2 -- 20 centuries that the lens maker and the frame maker together will be able to define the new product, to define something that will be more comfortable, will enhance vision, that will actually fulfill all the wishes and aspirations from all the consumers, the consumer willing to pay $1,000 or the consumer willing to pay $10. So we have been discussing all those topics with the Luxottica team. Of course, we also have developed initiative, let's say, more a quick fix on how we could -- I don't want to say extract synergies even though you know that this is -- I know this is the word you like, but how we could actually make sure we are spending our money wisely in order to build a new company and effectively spending in the right area to improve processes, to reduce cost, to improve the supply chain, to accelerate the go-to-market, all those kind of things. At the same time, we had discussions also on how we could continue to grow the market, of course, without discounting our product but really capturing the value at every price point as available where we have product brands. And also, we also discussed, of course, how we could continue to grow our own company and create value with acquisitions and partnerships like both company has done the past 20 years. Luxottica has a tradition to do, let's say, more large acquisitions that we have done. We have the ability to do small acquisitions in a lot of remote area. Both of us will continue. So we have -- in a nutshell, all our discussions around all those initiatives. Now after day 1, we will be able to implement them one by one. Yes, we have a great product -- we had a great quarter because we have a great product and because our consumers love all the innovations we have. But I will let Laurent and Paul actually maybe to comment on this. Paul maybe. Yes.

[Paul du Saillant, Chief Operating Officer]

Yes, Hubert. So on Europe, I think you have to keep in mind that we always told you we were expecting -- you should be expecting growth in Europe in between 0 and 2%. We are stronger than this number in 2015, '16, '17. So you got just a bit of north of 2% growth. The first semester is right into this 0% to 2% growth with 1%. And it's a quality growth. It's a little growth in volume and value in a market which has been a little less strong, specifically in Germany, Italy, Spain and France. The market has progressed. It is transforming itself. In that context, our teams are leveraging very well the full product offering of new products and our key brands are, with very good agility, positioning themselves with our network strategy that you know very well and working with all channels while we develop the online presence in Europe, for Western and Northern Europe, U.K., in connection with the [indiscernible] to the lens presence. So our lens activity is robust. Our teams are well focused, and we are right where we always told you we would be. We could expect a slight acceleration in H2. That is what we're working towards.

[Laurent Vacherot, President, COO & Director]

Then, Alex, you had this third question about the U.S., U.S.A. with the tariff. So as far as we know today, optical lenses, sunglasses, reading glasses, they are not part of any rise of tariffed rate between U.S. and China. So no impact at the moment. Then maybe a few reminder that most of the value added is created locally in the U.S., like everywhere. Also that from the import in the U.S., China is one country among a lot of other countries that we source -- they source from. And finally, we have also ability to shift eventually sourcing should we anticipate big impact in the future. So at the moment, it's not a concern at all for the profitability and the development of Essilor.

[Operator]

Our next question comes from Francesca Di Pasquantonio from Deutsche Bank.

[Francesca Di Pasquantonio, Research Analyst]

I have a couple of follow-up questions, please. The first one is on the gross margin, which had a nice expansion. I assume the expansion could have been higher on a currency-adjusted basis. Can you confirm? And if so, what can we expect for the second half in terms of gross margin? The second question is about what we should expect about the magnitude of the acquisition's contribution in the second half. So will it be higher than the first half? And thirdly, just technically, will the merger document be available at some point in September according to what you just said at the beginning? Finally, a question on capacity and in lenses and whether looking out to the integration you think the structure is fine or whether you are considering new investments, new step-ups.

[Hubert Sagnières, Chairman & CEO]

Okay. Thank you, Francesca. I will let Laurent answer the 3 first questions and give a view on capacity. Francesca, all of that was actually anticipated. As you know, when we -- Essilor, you know our story. It's a growth story. So we have always made sure that we have enough capacity everywhere in the world to serve our consumers and customers while at the same time in our -- with our feasibility team, we are also always improving the efficiency of projections. So be reassured we have all the capacity we need actually to face growth within the existing Luxottica stores, growth with eventually some potential acquisitions we could make, growth of the market, which is accelerating. A few years ago, the growth of [indiscernible] was around 2.5. Now it has reached 3.5 to 4.5 in volumes everywhere in the world. While at the same time, you also know that we have a lot of capacity in our labs everywhere in the world, around 450, 460 labs everywhere in the world, which are not used today at full capacity, in fact, as far as the number of hours of working. So extending the world of -- in all our labs with all our sales in the growth without really any strong investment. So no, we don't plan to actually spend more money than usual on building new capability. We have everything we need playing with the working hours in some cases.

[Laurent Vacherot, President, COO & Director]

Okay. Francesca, so question number three, the merger document, if I understand well. This is a document that we will -- that will become public a few days before the closing. And so the date has not been defined. So we have to wait. I think we refer the document to AMF.

[Francesca Di Pasquantonio, Research Analyst]

Yes.

[Laurent Vacherot, President, COO & Director]

Okay. So it's a few days before closing. Your question on the gross margin. No, the impact of currency on gross margin is not significant. So we -- most of the growth is really improvement of business itself and not really currency. As you know, we have cost and sales quite aligned. And the second question was on acquisitions. No, I think the pipeline -- first of all, we don't control the date and we cannot monitor specifically the date. I think it will be the benefit will you go on the back of the year and the beginning of 2019.

[Operator]

[Operator Instructions] We'll now take our next question from Julien Dormois from Exane.

[Julien Dormois, Research Analyst]

I have 2, if I may, please. One is a follow-up question to Anne-Laure at the beginning. Basically, she asked whether you would be ready to hold a Capital Markets Day somewhere toward the end of 2018. So I would reiterate the question. And then the follow-up on that one would be, do you believe that you will be able to give some kind of midterm guidance for the new entity at some point or whether you would rather wait a little bit more and have worked in depth with Luxottica before coming up with a pledge on that side? And the second question is, let's say, that you have insisted quite a lot that you would take your time in order to execute the combination with Luxottica, that you don't want to rush into this. In the mind of many investors, this is a bit counterintuitive with generating synergies, especially in the early days of the merger. So what could you say to reassure them that you will stick to the synergy target and that we should see them already, let's say, already in 2019?

[Hubert Sagnières, Chairman & CEO]

Yes. Thank you, Julien. But I mean, I am learning a lot from you. So always we are extremely prudent, and now I prefer to give you good news than bad news. I'm talking about your third question, if I may so. So no, I mean, it's not because we said we will give -- we'll not rush that we will not do things together and there's a lot of quick fix we can put together in place. So this will happen during the next few months and quarters post the closing. Yes, absolutely, the figures we shared with you earlier will have to grow as far as synergies. I mean, cost synergies are absolutely -- but we can't confirm this. We do see much more growth synergy actually. Really, the market has also accelerated. And now that we know even much more the power of each asset on both sides, the potential growth in front of us is actually maybe bigger than we thought 2 years ago. But again, we have to put the teams together in the same room and build action plans, which we were not legally authorized to do up till this morning. So really, we'll take another few weeks of vacation in Milan, in Paris, everywhere in the world. And then we'll reconvene the team and work together at the end of August, September to build those plans. But yes, of course, I can confirm all what we have explained to you with Luxottica team as far as synergies. Now you asked 2 questions on do we plan to hold a Capital Day in 2018. I don't think so. Again, once we will be ready and we'll have the right information to share with you with the right developed data, then we will do that. But don't push us to do it in the next -- in the following 3 months after closing. It's not really -- work more to do. And on top of that, as you know, post-closing, we have to launch an N-Q on the minority shareholders. And I am not sure that we really can do this type of event during the time of the N-Q. Guidance, that I'm not sure either. I think you asked 2 questions where the answer is no and sorry. Don't push me in that problem today. Let's celebrate the great news, and then we'll talk about guidance.

[Operator]

And we now take a question from Ed Ridley-Day from Redburn.

[Edward Nicholas Ridley-Day]

Also congrats from my side on the approval. Just a couple of follow-ups. Online is going very well. Can you give us a bit more color on what proportion of your sales are now online and the growth rates you're seeing in particularly the U.S. and China in online sales? That will be helpful. And my second question is actually with regard to sun. Obviously, this is a merger where you have the lens leadership and Luxottica has the sun leadership. But your performance in sun is going rather well, as we say, relatively. What are you doing right? And what is particularly driving that business? And how -- should we expect that momentum to be sustained?

[Hubert Sagnières, Chairman & CEO]

Thank you, Ed. Nice to talk to you this morning. What are we doing right? Come on, we have the best team and the best product. That's all. And it works. That's my answer. Now really, Laurent can comment on this.

[Laurent Vacherot, President, COO & Director]

Okay. So follow-up on the -- your question on sun. So what we did is we were very focused on very specific brands. Two different situations -- 3 different situations, one in the U.S., which is a young growing brand where we did strong D&A about the seashore and protection on the sea and so on. And the team is building on that. And it's also on the performance of the lens. The story of this brand is it came from a fisherman that was bothered with eye fatigue and eye trouble being on his boat all day long in Florida. And he looked for better lenses, better protection, better vision, better clarity, respect of the color of the beautiful nature for years. And he end up in [ Vouvray ] in France, a long time ago, maybe 10, 15 years ago, where we have a small company, whose name is BNL, that is producing exactly the lens he needed, which is patented. So I know the story started from there. And then finally, a few years ago, we acquired this growing young brand, which has a lot of potential for expansion because it's a young brand in the U.S. and in other countries. In China, it's a bit different. We -- as you understand, for the last 20 years and more specifically in the last 6, 7 years, we expanded our asset in China in order to provide Chinese consumer and Chinese eyecare professional the most -- the wider range of products from very sophisticated high-end product to very simple products through the mission and through the 2.5 NVG initiatives. And in the sunglass perspective, we target some key consumer brands, mid-tier, we call, and some retail stores to sell also and focus to Chinese consumers as brands. And there is a big appetite of Chinese consumer for protecting their eyes, looking great at an affordable price. So that's the ECP that we focus on Essilor standalone at the moment. Online, so yes, we are quite happy about the result of all the action plan and initiative we drive for the -- in the last few years. The portfolio of activities is quite well balanced or better balanced now because eyeglasses and sunglass are almost half of the business online, the rest being contact lenses. And as you know, contact lenses is structurally growing at a slower pace with slower margin -- lower margin than the 2 others. So we kind of rebalance the business mix in a nicer way. And as far as geography, it's a big field in Europe and a big field in North America and a small field in the other part of the world. And in China, it's 8% of the revenue with impressive growth, which is -- I read the 40% growth. So as you know, China is one of the country where the consumer is the most, if I may say so, digitalized. And it's a lot of learning for us. A lot of learning for us coming from there for China first and for the rest of the group. And this is why we invest in China in digital, in e-commerce and so on big time. Coming back to really your question on -- I'm coming back to your question on the sun because I mentioned maybe the more simpler information about what we do right. By focusing on mid-tier, this is the part of the market, especially it's our growing market, which is growing the fastest because of the growing population that starts to have access and power of buying and start to buy those kinds of products. This is where it's growing the fastest compared to luxury, which is great, and compared to more high-end product. So this is where -- thank you.

[Edward Nicholas Ridley-Day]

Just one quick follow-up on online. Just can you give us the proportion of your global sales that were online?

[Laurent Vacherot, President, COO & Director]

I think we have targeted kind of another EUR 500 million this year. So it's 6%, 7% of our total sales.

[Hubert Sagnières, Chairman & CEO]

So do we have another question? Yes, Veronica.

[Operator]

We now take the question from Veronika Dubajova from Goldman Sachs.

[Veronika Dubajova, Equity Analyst]

I have 3 questions, please, if I can. My first one is on France. And I'm curious what you expect the different reimbursement reforms that are being discussed, what kind of impact they might have on the growth in the market going forward. Would love to get your thoughts on that. My second question is on Transitions and the third-party business. It sounds like you're finally seeing some stabilization in there. Do you think that's sustainable as you think about the second half of the year? And then my last question is a big picture question on the very exciting merger that lies ahead of you. And Hubert, I think you've previously expressed quite a lot of optimism about the revenue synergy potential in this business. And I would love to get your thoughts on whether that has changed at all not just from an absolute perspective but also from timing, when we might start seeing those.

[Hubert Sagnières, Chairman & CEO]

Thank you, Veronika. First of all, we are not squeezing you at the end of the Q&A. We are listening carefully to your very important question, Veronika. So I will let Laurent or maybe Paul, you're the expert in this, so you could comment on the France situation and also Laurent on the third party. Veronika, you know my answer is yes about this merge and specifically on 2 key points because it's really fulfilled all our mission on fighting against poor vision and giving the opportunity for all consumer in the world to have a fashioned frame on their face while at the same time, having all the assets to continue to inform, to educate the consumers on the importance of vision and serving them the best. So what has changed between 2 years ago when you and I, we chat about the merge and the growth and the potential growth, on my side, that's my excitement. Really, I have, of course, learned much more and specifically in the past few weeks when, between you and me, we knew that we are close to the end. I have learned much more about all the assets, all the powerful and the power of the teams that Luxottica has everywhere in the world and how they are managing their brands, managing the network and also how my team, with our lens brand and sunglasses brand, could actually enhance the demand and capture the growth of the market. So I am even much more -- seriously even much more confident and enthusiastic about the potential of this merge, which we'll confirm in data and growth percentage that you will see in the figures but also our ability to serve the consumer better with the much better products than previously and a much faster or better service as far as reaching them, informing them in the point of sale and leading the voice in the optical industry. As far as timing, again, I will reiterate that all those negotiations were very important and we are very respectful to all the authorities, but this is true, Veronika, it has exhausted all of us in negotiations, in a lot of posturing discussions. Now I'm sure that Luxottica team is like mine. We need to rest a few weeks, start again in September and building, capitalizing all the key strengths and the assets that we had. And you will see the growth coming step by step. Luxottica has announced actually great improvement in the way they're managing their stores quarter-after-quarter. And I will say again what I said to Anne-Laure. They have taken necessary measures, very important measures to protect their brands everywhere in the world because we are merging with them because they have fantastic brands and they need to protect them. On our side, we are not in the same situation. We have accelerated innovation to make sure that the consumer will have always the product they need on the left eye and the right eye. So you see me today really even much more enthusiastic as far as the growth. Give the financial team of Luxottica and Essilor, the Investor Relation team of Essilor and Luxottica, give them the time actually to really build the right story, share with you the right figures on growth. And you will see all this coming quarter-after-quarter after closing, just as I said, which we think will be at the end of September. But again, still absolutely much more excited than I was when we chat, you and I, about the merger a year, 1.5 years ago. I hope I answered your questions, Veronika. And I will maybe let Paul on the France situation and then Laurent on Transitions.

[Paul du Saillant, Chief Operating Officer]

Okay, Hubert, thank you. France, first I'll remind you that the massive transformation in France started as from 2014. And we always told you that we were participating and compiling this market transformation and that we're very well positioned with further offering for all price points for all type of needs. So the new step in the reform that is -- that has been discussed this year and that will be put in place from 2020 is trying to synthesize -- is trying to address the accessibility to our exam, which is not enough -- there is not enough eye exams capabilities in France. Second is to ensure that there is access for everybody and that there is no more renunciation to access to provision care while keeping the freedom of choice, the freedom of [ alternative ] to an open model and keeping innovation as part of this market. So we are very supportive to this transformation. We participate into it. I think Essilor -- and the more Essilor looks in the future, it is well positioned to combine this transformation and to actually bring solutions to all of the points that I've just highlighted. So we -- and we have proven to you in the past 4 years that we were able in the context of the first step of the reform from 2014 to deliver good performance in France because we had local presence and solution for all budgets.

[Laurent Vacherot, President, COO & Director]

So your question on Transitions, this is Laurent speaking. So a few very simple answer. Number one, it's a totally underdeveloped category. Only 10% of the population in the world wear total [indiscernible]. Number two, Transition is the leader in this category and very powerful consumer brand in many countries in the world. Number three, after the acquisition of Transition, we spent a few years on the integration. And since now, almost 2 years, we are back on the growth strategy, developing the category and developing the brand and developing the product. We have a kind of renewed team with a new leader [ Crystal ], and with new marketing. And I think it starts to show results. Number one, inside Essilor itself, where as I said, we grew 6%, the quantity in the first half. And also, the outside groups, third party that are customer of Transition. Maybe after the acquisition, they were wondering if open model will remain so open and if Transition will still be as open as it was in the past. And I think now, with this renewed strategy on growth, repositioning of the brand, especially toward younger population, now that they know that yes, we are still there to propose end product and sell their product because as I'm sure Hubert will love it, because our mission being to protect 7.4 billion people of the light management and those people seeing well, Transition has to sell to everyone. And I think it's understood by most now of the third party buying from Transition. So it's more energy, renewed strategy, new team and confirmation that the open model is still on and we welcome any third-party customer to discuss with Transition to satisfy their needs.

[Hubert Sagnières, Chairman & CEO]

Yes, Laurent, I love it but the Transitions consumers love it also.

[Laurent Vacherot, President, COO & Director]

Absolutely.

[Hubert Sagnières, Chairman & CEO]

Thank you, Veronika. Did we answer all your questions?

[Veronika Dubajova, Equity Analyst]

That was very clear.

[Operator]

We have one follow-up question now from Julien Dormois from Exane.

[Julien Dormois, Research Analyst]

Sorry, guys, I could not let you go on vacation without asking this very important one. It's for the Sun & Readers, just making sure that the mid-single-digit growth you are targeting, we are talking about H2. Or that's for the full year of 2018?

[Hubert Sagnières, Chairman & CEO]

It's H2.

[Julien Dormois, Research Analyst]

H2, okay.

[Hubert Sagnières, Chairman & CEO]

That was an easy question. Thank you, Julien. If we have no more question, thanks all of you who have been on this call and webcast. It's really exciting time. Now we all rest a bit, enjoy vacation and come back in really good shape on good sight of the Alps in Italy and in France and everywhere to build EssilorLuxottica altogether. Thank you. Thank you all of you, each of you.