Profit soars at Hungary's Richter

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Highlights of the report:

• stagnating domestic sale;s
• major sales increase in Russia, Europe and the USA;
• sales and marketing expenses, which represent the largest chunk in total sales, grew the most;
• financial gains totalled nearly HUF 2.3 billion, mainly over the change in the quarterly closing price of Russia’s rouble compared to the base period;
• after-tax profit soared by over 70%, and Richter’s 12-month trailing profit rose to a new all-time high;
• cariprazine royalty income increased significantly in the USA compared to the base period;
• Richter’s net cash pool expanded further and is now over HUF 100 bn.

Richter’s sales revenues and operating profit came in well over of what analysts in a Portfolio poll projected, whereas gross profit was practically as expected. Net profit overshot even the highest estimate.

It is not a shocker that Richter reported better profit figures than expected, for it has had the habit of overshooting the market’s consensus estimates for both operating and net profits. The rate of outperformance is not outstanding either.

What were affecting Richter’s results?

The key factors shaping Richter's Q1 earnings were the following:The bulk of Richter's sales revenue is from exports, which means that sales revenue is highly sensitive to currency rates. Although the share of the Russian market in Richter sales has been steadily shrinking, it still accounts for about one-fourth of sales revenue, which makes the rouble a key currency for the company. RUB once again had a positive impact on Richter’s sales, having firmed 8% versus the forint on quarterly average.

Meanwhile, the euro - which is becoming an ever more important currency for Richter as Esmya sales keep on rising - was practically steady to the forint compared to the average EURHUF in Q116.

Partly owing to the favourable foreign exchange impacts, Richter’s consolidated revenues rose sharply by 26.1% year on year in January-March.At an over 26% yr/yr revenue growth, direct costs of sales also showed a double-digit increase, which led to a 16.3% rise in gross profit. Gross margin dropped 4.6 percentage points to 54.3%. Price erosion experienced on Richter’s traditional markets, an increase of costs related to tightening regulatory measures, together with the amortization Esmya and Bemfola impacted negatively on the gross margin, Richter said. Furthermore, the share of turnover of the lower margin Wholesale and Retail segment in Romania increased which also negatively impacted gross margin. All the above were only partly offset by royalty income received from Allergan in respect of Vraylar and the appreciation of the rouble both against HUF and EUR.

Costs

• sales and marketing expenses increased 12.8% yr/yr in Q1 in forint terms, mainly over higher marketing costs incurred on the EU15, on the Chinese and on the Latin American markets and the inclusion of Finox into the consolidation, and also due to increased expenses in Russia, in Ukraine and in Other CIS region (following several years of cost containment). The cost-to-sales ratio came in at 27.5%.
• research and development expenses rose 3.4% yr/yr in forint terms.

• the balance of other income and other expenses deteriorated by nearly HUF 1 billion (to HUF -1.18 bn), but the base period figure included one-off income amounting to HUF 3,453 million (EUR 11.1 million) recorded 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.
• Administrative and general expenses increased 14.1% due to the inclusion of the Finox group together with higher labour costs, legal assistance and other advisory fees.

Despite a considerable rise in operating profit, consolidated operating margin dropped 2.4 ppts to 13.9% in Q1. The base period was very much influenced by a one-off income (HUF 3,453 million, EUR 11.1 million) related to the acquisition of the Gedeon Richter Rxmidas JV Co. Ltd. When excluding the impact of this one-off reassessment item, operating margin in the base period was 12.4%.

Financial income gave a major boost to quarterly results, showing over HUF 4.4 bn profit. This was made possible primarily by the RUB which gained 7.7% (end-quarter closing level) compared to the end of March 2016. This facilitated a positive result on the reassessment of deposits, receivables and liabilities.

Profit

After-tax profit reached HUF 19.96 bn, up by a staggering 70.6% yr/yr. The 12-month trailing profit rose further to a never-before-seen level.

Cash pool on the rise

Although the company’s net cash flow suffered a blow due to an acquisition in 2016, it once again shows a rising trend. Net cash per share reached 8.6% of Richter’s share price.

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