Hungary Richter shrugs off impact by Russian rouble

1

Highlights of the flash report:

• stagnating domestic sales, rising market share;
• rising revenues in Russia despite the collapse of the rouble;
• sales up on most markets in the region;
• major decline in U.S. sales;
• lower sales in Western Europe despite a 50% rise in Esmya sales;
• first revenue from cariprazine was received at the end of March;
• consolidated gross profit contracted yr/yr;
• operating profit was boosted by lower R&D costs and one-off revenues;
• financial results showed a marginal loss;
• 12-month trailing net profit dropped;
• cash and cash equivalents rose further to over HUF 120 bn.

Richter published its Q1 earnings report at dawn on Thursday. Overall, the figures paint a favourable picture of the company’s operations. Revenues and gross profit were practically in line with expectations, while both operating and net profits beat the market’s call. Operating profit came in 15% higher than the consensus estimate, but it had to do with a HUF 3.5 bn one-off income in connection with the acquisition of a joint venture. Most of the analysts likely did not take this item into consideration.

Richter’s key profits beating estimates is almost boring, and the outperformance in terms of EBIT is not outstanding, either.

What has affected the results?

Below we present the key factors that impacted Richter’s Q116 performance.Most of Richter’s sales are generated by exports therefore it is not all the same how exchange rates change. Due to the group’s European exposure one of the key currencies is the euro, but EURHUF did not change considerably in the reporting period. The forint eased merely 1.0% to the euro on a quarterly average basis in January-March 2016, which had a positive impact on revenues.

In the meantime, Russia’s rouble has depreciated 13% on average versus the forint, which was detrimental for the company, considering that Russia remains its largest market.

Yet, Richter’s consolidated revenues rose 2% yr/yr in forint terms.At a moderate rise in revenues direct costs of sales showed a double-digit increase, which caused a 3% drop to gross profit, and gross margin fell 3 percentage points to 60% (management guidance for the year is 57-58%).

Gross margin was negative impacted by:

• a decline in the turnover recorded on EU15 and on USA markets,
• lower sales levels of Women’s Healthcare products,
• a declining Rouble exchange rate against both euro and HUF
• together with the increase of share in turnover of the lower margin wholesale and retail segment.

At a slight contraction in gross profit, operating profit rose 7% yr/yr and reached HUF 14.8 bn in Q1. The following factors were behind the significant increase:

• Sales and marketing costs went up 2%, mainly over higher marketing costs on the EU15 and Chinese markets. The proportion of S&M expenses to sales was 29.6% in the reported period, which is in line with the annual forecast (29-30%).
• Administrative and general expenses dropped 0.4% yr/yr.
• Research and development expenses, however, declined by nearly 10% and represented 11.1% of total revenues (management guidance for this year is 12.5%).
• The balance of other income and other expenses (net) improved by nearly HUF 2 bn, in connection with the 100% acquisition of the joint venture Gedeon Richter Rxmidas JV Co. Ltd. engaged in the trading of OTC products on the Chinese market. A HUF 3.45 bn one-off income was recorded in connection with this purchase.

As a result of the improvement in operating profit, Richter’s operating margin rose by 1 percentage point to 17%, which is well above the 10% guidance for the year. Adjusted for the aforementioned one-off operating margin came in at 12.7%.

Financial result

Unlike in the base period, Richter’s financial result was a HUF 400 mn drag on key profits. The loss reflects the impact of exchange losses realised on trade receivables and trade payables.

After-tax profit

Richter’s quarterly after-tax profit dipped by 19% yr/yr due to the financial loss and a higher corporate tax burden. The 12-month trailing after-tax profit dropped again following increases recorded in the preceding quarters.

Cash

Richter net cash stock increased further in the fourth quarter to HUF 120 bn, and got close to the all-time high. The last time the company recorded such a high figure was in 2010.

More to follow!

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