Krka published its 3Q12 results after the Slovenian market close on 15 November.
Krka reported a disappointingly weak net profit of € 21.5m (-6.5% y/y) or an EPS of only € 0.65. The negative factors include the decline in Western Europe and Romanian sales, a very soft gross margin of 56.3% (vs. 62.7% a year ago) and higher than expected S&M and R&D expenses, as well as a huge tax rate of 23.4%. Krka’s EBIT came in at € 26.4m (-42.4% y/y) missing our expectation by 43.5%, implying an EBIT margin of only 10.6%, which is a record low for the company. Top line reached € 248.7m (+3.9% y/y), missing our expectations by 2.4%. While Bloomberg shows only 1 estimate for 3Q12 consensus, we believe the weak set of numbers will be taken negatively in the short term by the market and cause some slight downward earnings adjustments for 2012. 9M12 EBIT and net profit is down 15.1% and 3.4% y/y, respectively. 9M12 EPS make up 65% of consensus (€ 5.15) and our estimate (€ 5.17).
(-) First y/y decline in WE sales since 4Q10: WE sales unexpectedly declined by 8.7% y/y, missing our estimates by 10.3%, as the region witnessed increasing price reduction pressures.
(=) CIS sales delivered strong growth: Sales in Russia and other CIS countries came in slightly below our estimate, but still showed strong growth of 29.5% y/y, with Russia posting a 36.9% y/y growth.
(+) CEE sales turned the corner: After two quarters of declining sales on a y/y basis, CEE sales finally managed to post a positive growth of 11.8% y/y, as Hungarian (+16.3% y/y) and Polish (+18.5% y/y) sales came in significantly above our estimates, despite adverse regulatory environment in both countries, implying that the worst is behind now.
(-) SEE sales down due to Romania: SEE sales came in 15.7% below our estimate and were down 14.7% y/y, mainly because of weak Romanian sales (-40.9% y/y).
(-) Operating Expenses up 9.1% y/y: Total operating expenses of € 113.7m rose more than twice as fast as the top line (+3.9% y/y), which together with the low gross margin of 56.3% resulted in a record low EBIT margin of 10.6%. S&M expenses rose by 12.7% y/y and made up 29.4% of sales, while R&D expense rose by 5.8% y/y and made up 9.7% of sales. 9M12 EBIT margin of 17.6% is now 440bp below the 9M11 EBIT margin of 22.0%, and implies that consensus and our 2012F EBIT margin of 19.5% and 19.2%, respectively, may require some downward adjustment.