Morning Note: Market news and updates from EssilorLuxottica and RELX.

Market News

US equity markets marched higher last night – S&P 500 (1.0%), Nasdaq (1.3%) – with tech stocks leading the way. Treasuries rose, with the 10-year currently yielding 4.22%. Gold steadied and trades at $1,993 an ounce. Brent slipped to $80.92 a barrel.

The positive mood continued this morning in Asia: Nikkei 225 (+1.2%); Hang Seng (+0.4%); Shanghai Composite (holiday). Japan unexpectedly slipped into a recession last year after GDP contracted an annualized 0.4% in the fourth quarter. Overnight swaps now show a lesser chance of a BOJ rate hike by April. “I think there was a feeling that the BOJ will end the negative rate in March or April, but a north wind is now blowing,” said Takeshi Minami at Norinchukin.

The FTSE 100 is currently trading 0.5% higher at 7,606. Companies trading ex-dividend this morning include BP (1.21%), Shell (1.10%), and Imperial Brands (2.74%).

The UK entered a technical recession in the second half of last year. GDP dropped 0.3% in the fourth quarter, building on the contraction in the previous three months. That was steeper than forecasts of a 0.1% drop. Jeremy Hunt may curb public spending plans to make room for tax giveaways in his budget due next month, people familiar said. Sterling slipped to $1.252 and €1.1694, while the 10-year Gilt yield fell back below 4%.

Source: Bloomberg

Company News

Yesterday evening, EssilorLuxottica released its 2023 full-year results which were in line with market expectations. Trading remains strong and in a show of confidence the group ramped up its dividend by an impressive 22%. The group reiterated its mid-single digit long-term revenue target and its confidence in reaching its 2026 margin aspiration. In response the shares are little changed this morning.

EssilorLuxottica is the global leader (with a 25% share) in the eyecare and eyewear industry with exposure to the design, manufacture, and distribution of ophthalmic lenses, prescription frames, and sunglasses. We believe the long-term outlook for the industry is positive, driven by an ageing population, increased incidence of poor eyesight (caused in part by the increased use of smart phones and tablets), a growing emerging market middle class, increased education regarding sun protection, and the growth of eyewear as a fashion accessory. By 2050, uncorrected poor vision is predicted to reach epidemic proportions with over 50% of the world’s population expected to suffer from myopia (short-sightedness), many with serious vision-threatening side effects and long-term implications.

The company’s competitive advantage is based on its scale, portfolio of premium brands (such as Ray-Ban and Oakley), product innovation, flexible manufacturing base, quality service, routes to consumer, and partnerships. Essilor owns licences for some of the best-known luxury brands, including Chanel, Prada, Armani, and Jimmy Choo. The group also owns a majority interest in GrandVision (GV), a global leader in optical retail with over 7,200 stores and an online presence, ownership of which expands its global retail footprint (to 17,600 stores) and reduces the competitive risk of retailer consolidation. The company states that its mission is to prevent industry commoditisation in Western markets, whilst promoting premiumisation in emerging markets.

During the year, revenue grew 7.1% at constant exchange rates (CER) to €25.4bn, in line with the market forecast, and the third consecutive year of revenue growth above 7%. In the final quarter, growth was 7.1%, an acceleration vs. the 5.2% growth in the previous quarter.

EssilorLuxottica is a vertically integrated player whose go-to market strategy is based on two distribution channels. Professional Solutions includes the supply of products and services to third-party eyecare professionals (i.e., wholesale). In 2023, revenue grew by 7.4% at CER to €12.2bn. Q4 growth was 8.1%. Direct to Consumer includes the sale of products and services directly to end consumers, that is the retail business, comprised of brick-and-mortar stores and e-commerce platforms. In the full year, revenue grew by 6.9% at CER to €13.2bn. Comparable-store sales grew by 5%. Q4 growth was 6.1%.

By geography, North America, the group’s largest region (46% of sales), was up 4.2% at CER in 2023. Elsewhere, EMEA grew by 8.2%, Latin America by 9.9%, and Asia Pacific was up 14.3% thanks to the rebound in Greater China boosted by Stellest, the group’s myopia control lens.

Innovation continues to drive growth – Stellest has been rolled out to additional markets, Varilux XR lenses powered by AI and Ray-Ban Meta (next generation smart glasses) have been successfully launched, and Ray-Ban Reverse (which can shift from traditional convex to concave lenses) has delivered disruptive design and technology.

During the year, the group announced a strategic diversification into the hearing solutions market with a new disruptive technology at the ‘intersection of sight and sound’. The plan is to introduce a new breakthrough hearing technology (i.e., lenses with acoustic technology) to benefit the 1.25bn consumers suffering from mild to moderate hearing loss. The audio component will be completely invisible, removing a psychological barrier that has historically stood in the way of consumer adoption of traditional hearing aids. The innovation was successfully presented at the CES in Las Vegas in January.

Over time, the company has been able to translate its revenue growth into margin expansion, leveraging its vertically integrated business model and successfully absorbing the inflationary pressures on most cost items. Gross margins are high (63.5% in the year), while the pro-forma operating margin grew by 10 basis points at CER from 16.8% to 16.9%. This represents a strong performance given 210 basis points of impact of inflation on the input costs, such as wages, and the 50 basis points directed to strategic investments. Price/mix and operating efficiencies had a positive impact of 270 basis points. As a result, operating profit grew by 7.7% at CER to €4.18bn, in line with market expectations.

The business generates strong free cash flow (€2.4bn in the year) and is financially robust. Net debt (including lease liabilities) fell from €10.25bn to €9.10bn, 1.5x EBITDA. As a sign of the group’s confidence in the outlook for the business, a dividend of €3.95 has been proposed, up 22%, equating to a 2% yield.

Looking forward, Essilor doesn’t provide near-term guidance, although on the analysts’ call, the group disclosed that trading so far this year has been similar to Q4. It also highlighted margins will see a more material expansion than achieved in 2023 as the group benefits from price increases, fading inflation pressures, and GrandVision integration benefits. This is despite a more material strategic investment on new projects.  Overall, the company remains confident in its strategic vision and its ability to deliver on its long-term outlook for annual revenue growth of mid-single digit between 2022 and 2026 and adjusted operating profit margin of 19%-20% in 2026 (vs 16.9% in 2023).

Source: Bloomberg

RELX has this morning released its full-year 2023 results that were slightly better than market expectations. The outlook remains positive and a £1bn share buyback has been announced. In response, the shares have been marked up by 2% in early trading.

RELX (formerly Reed Elsevier) is a global provider of information-based analytics and decision tools for professional and business customers. The company provides data, software, and research services to lawyers, corporates, and academics. It also owns a world-leading trade-show business.

The company’s insights are used by a university benchmarking its performance; a doctor deciding the best way to treat a patient; a litigator assessing whether to take a case to court; a retailer deciding if a transaction is genuine; or an insurance underwriter assessing the likelihood of a claim. Many of its products and services are sold on annual subscription. These products are very sticky – often mission critical – and tend to be deeply embedded into customers’ workflows, as demonstrated by renewal rates remaining on average over 90%. This drives pricing power, attractive margins and strong cash conversion.

The group is enjoying an improvement in its long-term growth trajectory driven by the ongoing shift in business mix towards higher growth analytics and decision tools that deliver enhanced value to its customers. RELX has been embracing AI technologies for well over a decade and has developed and deployed these analytics and decision tools across the company. The ability to leverage AI as it evolves will continue to be an important driver of the business going forward.

In 2023, revenue grew by 7% to £9.2bn. After the impact of M&A, exhibition cycling effects, and currency, underlying growth was 8%. Electronic revenue, representing 83% of the total, grew by 7%, with strong growth in face-to-face activity more than offsetting the continued decline in print revenue.

The company operates through four divisions, all of which grew in the year. In the Risk business, RELX evaluates and predicts risk and enhances operational efficiency. Among other things, the company helps businesses and governments prevent fraud, assess insurance risk, and gain commodity intelligence. During the year, revenue rose by 8% in underlying terms to £3.1bn, driven by the group’s deeply embedded analytics and decisions tools.

In Scientific, Technical & Medical, the company’s peer-reviewed journals and online platforms help researchers and healthcare professionals advance science and improve health outcomes. Revenue grew 4% to £3.1bn as higher growth segments were an increased proportion of the total.

In Legal, the company hosts over 144bn legal and news documents and records (that have become the industry standard), helping lawyers win cases and manage their work more efficiently. Revenue was up 6% to £1.9bn driven by the increase in higher growth analytics. In October, the group announced the commercial launch of Lexis+ AI, its new platform leveraging generative AI functionality.

The Exhibitions division runs around 250 face-to-face events across 42 industry sectors in 22 countries, all of which have digital and data tools and platforms to extend the reach of the event. In 2023, revenue grew 30% to £1.1bn, driven by a significant increase in face-to-face activity with exhibition venues now re-opened across all geographies. Average like-for-like event revenue across the portfolio is now ahead of pre-pandemic levels.

The group continuously drives process innovation to manage cost growth below revenue growth. In 2023, this resulted in the adjusted operating margin rising from 31.4% to 33.1%, helped in part by the positive impact of exhibition cycling. Adjusted operating profit grew by 13% in underlying terms to £3.0bn. EPS grew by 11% at constant currency to 114p.

Cash conversion was strong, 98% in the year, in line with historical trends. This was after capex spend of £477m, around 5% of revenue. The company continued to make bolt-on acquisitions to fill gaps in its portfolio, with six deals completed in 2023 at a cost of £130m. The group is financially robust, with net debt to EBITDA of 2.0x. The average interest rate on gross debt rose from 2.9% to 4.2%.

The full-year dividend was raised by 8% to 58.8p. The company is currently repurchasing its shares. Following the completion of its £800m programme in 2023, the group expects to buy back £1bn of stock in 2024, of which £115m has already been completed.

Looking forward, RELX continues to see positive momentum across the group, and expects another year of strong underlying growth in revenue and adjusted operating profit, as well as strong growth in adjusted EPS on a constant currency basis.

Source: Bloomberg