Recording in progress.
I am hosting today's event together with Mr. David Bratož, member of the management board, and Mr. Brane Kastelec, Finance Director, who will provide detailed interpretation of Krka's latest results. Both will be available during the Q&A session that will follow. We invite you to address your questions live. May I remind you that this webcast is intended for professional audience only, not media representatives, and is being recorded. Mr. Bratož, the floor is yours.
Good afternoon, ladies and gentlemen, and it's again my great pleasure to welcome you to today's webcast. I'm David Bratož, member of the management board, and today I would like to present the unaudited consolidated financial statements of Krka Group for the first quarter of 2024. This year, we are very proud because we are celebrating our 70th anniversary. Krka was founded in 1954 from a small pharmacy with only nine employees at that time. Today, we are one of the world's leading manufacturers of generic medicines, with almost 13,000 employees. We rely on our vertically integrated business model. Krka has well diversified activities. We offer our high quality and affordable medicines in over 70 markets worldwide. More than 100 million people use our medicines on daily level in different therapeutic groups. groups. We operate in many low- to middle-income countries, generating significant savings for patients and health systems. In this way, we maximize our social responsibility by providing access to medicines, which is also an important part of our sustainable approach. Let me start with the most important highlights related to the first quarter. In the first quarter of 2024, we achieved our highest turnover and profit to date. We generated revenue of EUR 436 million, that's 6% more than in the first quarter of the last year, and net profit of EUR 99 million, this is 11% more. Earnings before interest and taxes remained high. We achieved a strong EBITDA margin of 28.5%, which is well above the strategic forecast. Sales increased in all regions except overseas markets, and also sales increased in all products and service groups except OTC, due to high base effect from first quarter of 2023. We obtained 5 new marketing authorizations and completed more than 200 marketing authorization procedures in different markets. Investments amounted to EUR 27 million. This is +24%. We have established a new joint venture company, Krka Pharma Private Limited, in Hyderabad, India, with our long-term partner, Laurus Labs from India. We hold 51% share and Laurus, 49% in the newly established company. The goal of this new company is to enable production of finished products for the new markets, including Indian markets and other markets outside EU, where neither party is currently present. As I already mentioned, sales increased in five out of six sales regions and in most single markets. In the left part of this slide, you can see a pie chart showing sales divided by region, and on the right part, five largest and most important markets for Krka. Region East Europe recorded the highest sales, representing 32% of Krka sales, with 9% growth. Sales in the largest individual market for Krka, this is Russian Federation, reached EUR 85 million, a slight decrease, actually by 3% compared to first quarter 2023. However, sales expressed in local currency, ruble, increased significantly by 25%, with a 9% volume growth. This discrepancy between the euro and ruble sales index is due to ruble depreciation. In Russia, we saw a good growth in sales of cardiovascular products and also high growth in sales of veterinary medicines, especially those for pets. Products launched in the last 6 months or 12 months contributed significantly to the good sales results. Competition in this market is strong, especially from domestic manufacturers, but also from western competitors. But the most important is that Krka is growing faster than the market in terms of both value and volume. We hold the first position in the pharmacy segment and the leading position in the cardiovascular segment. Important to add is that in Russia, we have production facility that covers almost 80% of Russian needs, and also that we do not manufacture products in the Russian Federation for sale of in any other country outside of Russia. Also, collection of receivables runs smoothly, and also the repatriation of euro from Russia has not been any problem for us. The demand is there. We have increased our sales in local currency. Therefore, also, our aim is to continue to outperform the average market growth in this market. Growth was also recorded in most other regional markets. In Ukraine, we more than doubled our last year's sales, and in Uzbekistan, which is third largest market, the sales index was 116. The second largest region in terms of sales is Central Europe. Sales generated on Central Europe represents 24%, an increase of 6%. Poland remained the leading regional market and the second largest single market for Krka, with very impressive 18% growth for the first quarter. We ranked third among foreign suppliers of generics in this country, and sales increased also in Hungary, Slovakia, and Lithuania. Our third region, Western Europe, accounted for 19.2%. In Germany, Krka's largest market in the region and the fourth largest single market, we recorded flat sales. We have successfully launched a gliptin product a year and a half ago for the treatment of diabetes, and according to the latest independent data, we are number one among all suppliers on the market, and we have more than 35% of market share. We also achieved sales growth in most other regional markets, the highest in Scandinavian countries, Great Britain, Spain, and Italy. Sales in the region of Southeast Europe, plus region Slovenia, together account for about, for a good 20% of Krka's total sales, which is comparable to the previously mentioned Western Europe share of sales. Slovenia, Romania, Croatia, and Serbia contributed the most to the sales of these two regions, and here we are the leaders on the markets. For instance, in Slovenia, we hold almost 8% share of the Slovenian market by value, and we are the leading supplier of pharmaceuticals in the country. Volume-wise, or if we count them, 20%, or I would say one in five, issued pharmaceutical product in pharmacy is Krka's. The overseas markets region is the smallest region, but has achieved slight decrease of sales due to tensions in the Near East, affecting our business operations. So nevertheless, we recorded growth in three out of four sales offices within that, this region. This is, I would mention, the highest in China. But decent growths were noted also in Far East and Africa, too. If we go further, as far as the structure of sales is concerned, prescription pharmaceuticals remain the most important group for Krka. They represent almost 83% of the sales. We increased the sales of prescription pharmaceuticals for almost EUR 30 million or by 6%. Sales of non-prescription pharmaceutical or OTC business, representing 8.8%, decreased by 9% because there was no flu on our major markets. Sales of animal health product, representing 6.2% of Krka sales, increased by 6%, and here again, it's important to underline that more than two-thirds of sales of animal health are for companion animals. We have, as I mentioned before, also diversified product portfolio, not just geographically, but also the product portfolio. And here, the treatment in cardiovascular represent more than half of our portfolio. Second biggest group is products for treatment of gastro segment. Then on the third place, we have products, medicines for central nervous system, followed by pain, by pain. On this slide, you can see our leading prescription pharmaceuticals in terms of sales. We are the leading generic producer of sartans, statins, and ACE inhibitors on many markets. These therapeutic groups are important one, because they are, they have, they see a lot of patients who are not treated yet on many our markets. Our sartans are available in 60 markets across the world, and we are the only pharmaceutical provider in Europe that offers a sartan combination with a statin within single tablet. And here, we are showing you also diabetes. Krka is becoming the leading generic producer of gliptins. As I said, despite having decent market shares in all these therapeutic groups, these market shares can be about 30%-40%. We still see many possibilities for further growth in these therapeutic areas. As far as research and development is concerned, we are currently working on 170 new products in our pipeline. And again, our goal is to be among the first on the market when the patent expires, because this is the most important for us being generic company, because being first on the market means that we can have gain better prices, and we can gain market shares faster than others. We invest up to 10% of our revenues in R&D activities, and more than 800 internal experts are involved in research and development activities. But if we count also the cooperation with our long-term partners, and strategic partners, we have much more experts that are involved in our R&D activities. In first quarter of 2024, we added five new products to our portfolio, and here I would highlight one new single pill combination, which is listed. This is Co-Amless Neo , which is important, taking into account our approach towards combinations. And also, I would mention new products for China. Besides 5 brands or new MA, we also received more than 200 new approvals for products which are already established on some markets, and this is also extremely important, because this actually help us to to enlarge our portfolios on certain markets. We are innovative branded generic manufacturer, which own research and development. And again, we, Krka, was the first generic to introduce many single pill combinations, and today we have more than 150 single pill combinations. And we are number one in terms of the number of the single pill combinations in our portfolio, and this is for sure, very strong competitive advantage. Because with adding these single pill combinations to our portfolio, we are actually prolonging our life cycle management of our brands. In this way, we offer doctors and it's about all patients, access to high quality medicines by combining two or even three, APIs, in a single tablet, simplifying the administration of prescribed medicines and achieving better adherence to treatment, which is very much welcomed and accepted by patients, patient societies, and doctors as well. Besides that, our medicines are available in different forms, in unconventional dosage forms, such as oro dispersible tablets, tablets with oral delivery system, then bilayer tablets. Here it's important to underline that we have more than 1,000 products in our portfolio. All these together, I mean, a lot of single pill combinations and these unconventional dosage forms, many strengths, different packaging, give us, I mean, give Krka a great opportunity to differentiate ourselves from other competitors, being generics or originators, which is important for also for further sales growth that we are having in our plans. We invest for increasing and technologically upgrading production facilities and capacities for research and development and quality control. So actually, plant CapEx for this year is on the level of EUR 150 million. Last year, we had about 130, so we have trend, growing trend, and as I said, predominantly for strengthening and optimizing our vertical integration at all levels. On this slide, you can see some investment projects in Slovenia and abroad. On this slide, we have our profit and loss account for first quarter. Revenues went up by 6%, costs increased by 15%, and gross profit remained flat. R&D expenses increased by 7%. They represent almost 10%, which is in line with our strategic objective, while marketing and sales costs increased slightly by 2%. We achieved EUR 114.1 million of operating profit, down 5%. But if we compare this figure with the last quarter 2023, or with the average quarter of 2022, we achieved, of course, the nice growth of EBIT as well. Net financial result was positive, +EUR 4.4 million, and profit before tax, almost EUR 119 million, Index 111, and net profit, EUR 99 million, Index 111. The development of the ruble, US dollar and Polish zloty exchange rate has impact on the net financial result, while the effects of some other exchange rates are marginal. In first quarter, the ruble, where we have a long position, recorded just a minimal depreciation against the euro. So it means that the impact on the net financial result was positive or favorable, but at the same time, the average value of the ruble expressed in euros was 20% lower in first quarter than in the same period of the last year. Therefore, the impact on the upper part of the income statement was unfavorable. We have a strong financial position, we doubt that, and inventories remained unchanged. Although we would like them to be even higher because they give us great flexibility on different markets to react on some shortages. Trade receivables increased by 11%, which is in line with the sales growth, but also due to the growth due to the fact that we are no longer using factoring in Russia to the same extent as we did last year. All margins are good. They are pretty high, predominantly due to sales growth that we are generating from quarter to quarter, from year to year. Also, volume growth and good product mix with many single pill combinations, which are replacing some monotherapies. And also, thanks to recently launched many new products, meaning, brand new and also the products which are added to the new markets, gliptins, for example. And also due to increased productivity and well-controlled costs. So based on this, our EBITDA margin is 28.5%, and this is above strategic goal, 25%. So as you can see, these margins are good, high, but we have to be prepared that they could decrease to a certain extent in the future... due to some inflationary pressures and price of certain costs. But nevertheless, our goal is that, to keep these margins well above strategic, strategic, threshold, also in the quarters to come. This slide shows, the continued and healthy growth of revenue and EBITDA for the last five years. The compound average growth rate of revenue has been 6.4% over the last five years, and the average growth of EBIT has been 11.4% annually over the last five years. And here we can summarize that the growth in sales and profitability over the last five years has also contributed in significant growth in earnings per share. The compound average growth rate of EPS has been 13% over the last five years. Here we have two slides, related to our share, and you know that we remain committed to our long-term, stable dividend policy, allocating every year at least 50% of profit for dividends, taking into account also all the needs, financial needs for investments and potential mergers. This has resulted in an average dividend yield of almost 14% over the past 10 years. Nearly EUR 1.2 billion were allocated for dividends in past 10 years. Actually, we stopped today, but we realized a lot of buybacks, and currently we hold a stake of 6.1% of shares. We are listed on two: Ljubljana Stock Exchange, in Ljubljana and Warsaw, and we have 47,000 shareholders. Our shareholder structure is rather stable. The larger group of shareholders are Slovenian private investors who hold 41.1% shares. They are followed by the state, who owns which owns 27% of the shares, and on third place are international investors who hold about 20% of our shares. The current market cap is on the level of EUR 4.1 billion. Our strategy pursues sustainability aspects and objectives of operations as we strive to preserve the economic, social, and environmental responsibility towards the environments where we operate. The important fact is that at the end of November last year, we received S&P Global Score which ranked Krka among top 10% companies in the pharmaceutical industry. This excellent ESG rating that we got actually give us a commitment for further development of sustainability in the group. Activities that are currently ongoing are to implement the requirements of the Corporate Sustainability Reporting Directive and the ESRS. It means that we are upgrading, reporting and everything that will be also subject to external audit in 2024. Here we have few slides about our ESG goals and results for 2023, and also objectives. The first one is related to environment. So the most important goal is to undertake all activities to reduce the carbon footprint. Our goal is to reduce it by 48% by 2030, and we are quite successful right now. Then we also have other goals to implement circular economy practices, to use of regenerative solvents, reuse of water, separate collection, et cetera. Then, on S field, we have many goals that refer to accessible medicines, then to product quality and patient safety, talent interaction. If I mention just some of them, yeah, we will maintain balanced gender structure for all employees. Right now, we have 60% of women and 40% of men, but on the managerial position, we have very balanced structure, like, so 50% of men and 50% women. Then, governance, so G, is here I would like to underline the most important one. We have good leadership and governance practices and integrity and transparency. We will proceed with this, and here we also have our EBITDA margin goal, investments goals, and net profit objectives, which is in line with our with our stre... business strategy, where we have integrated all the ESG goals, the last, when we updated last year, at the end of the year. On this slide, we see our targets for this year. Our target in revenue is EUR 101.85 billion for the time being, and then on bottom line, 310, a good 310 million of net profit. And this is the last slide. And on this slide, you can see that we have long-term, stable operating business operations. The green bars in this chart represent revenues, and the blue dots, which you see the volume of tablets produced and sold annually. We can see that our revenues, revenues and quantities, volumes of tablets, more than tripled from 2005 to 2023. The compound annual growth rate of revenues is about 7%, and the volume as well, while the compound annual growth rate of net profit for this period is almost 9%, which is a decent result. But the most important fact is that during this period, we have outperformed the market growth, which is important to know. So with this slide, I would actually end the first part of today’s webcast. I hope that you gained a clear insight at our result for the first quarter and the impact of the current situation and developments on our business operation. Thank you for your attention, and now we can start a Q&A session. Thank you very much.
Thank you, Mr. Bratož. We will now start with the Q&A session, and you are most welcome to address your questions live. However, I see that some of you have already put some questions in the chat, so I'll read out the first. Mr. Pavlović is asking two questions. First one is: Are there any new products from cardiovascular segment in the current pipeline?
Let me start maybe with this first question. In our development pipeline, there are definitely also products from cardiovascular group. However, relatively, that means in a percentage, I would say that they represent lower percentage than cardiovascular products generate in terms of our sales today. Why so? Simply because we are adding in our portfolio of products also some new indication groups, like in the last few years, we increased products for oncology. Then there are more and more diabetes products, painkillers. So in pipeline cardiovascular products, they do not dominate, but they are there for sure.
Thank you. Second question: Was the drop in the gross margin to 57% a consequence of relatively high inventories in the first quarter of last year compared to the first quarter of this year?
Okay, thank you for your question. There was a slight decrease in gross margin, this was caused due to the fact that actually we produced a bit less during the first quarter as we reduced the year before. And at the same time, we remained with some inventories which were produced under higher costs due to the strong ruble depreciation during the first quarter. So the combination of two facts, actually.
Okay, third question comes from Mr. Holwell. He is asking about trade receivable, receivables, cash conversion, and discontinuation of Russian factoring. How much of Russian factoring is there still to be unwound? And when do you expect the cash conversion of net income to move towards the historic 100%?
Here, okay, maybe I will start, and Brane will add some details. As I said, so our receivables, receivables, trade receivables increased by 11%. This is partially due to increase of sales by 6%, but at the same time also due to the fact that we are not using factoring to such an extent as we did in the past. However, we are challenging ourselves, and we will see in the months and quarters to come if maybe this approach will change as well. So maybe, Brane, you can add a bit more to cash conversion.
I would just add that as far as factoring in Russia is concerned, that influenced the level of trade receivable substantially in the years 2022 and 2023. So we continued with reduction of factoring in the first quarter of this year. So by the end of the first quarter, we practically, you know, reduced factoring to a very low level where it will stay. So it means in the second quarter of this year and in the coming quarters of this year, factoring or reduction of it should not have any influence on our trade receivables and consequentially, on cash conversion anymore.
Okay, we have a question from Dawid Gorzynski. On the EBITDA margin, EBITDA margin may decrease in the future towards the 25 percentage point level. What type of costs may, in particular, put pressure on the profitability?
Yeah. Okay, thank you for the question. I mentioned that it can happen that these margins are high, and that could decrease to a certain extent. But at the same time, I add that we will do our best to keep it as high as possible also in the future. We are working all the time on improving our efficiency in production, and to keep the prices of that, of intermediates or APIs that we are buying on the same or even lower level that we have. So that we are very cautious when we work with all items of cost. I mean, that we also we always take into consideration what to do in order to prevent certain increases in the future. future. So yeah, but of course, there are certain items, of course, that will grow most for sure. There are salaries. This is general trend all over the world. So this is something that can, that most probably can influence also on EBITDA. But as we repeat many times, that we always have this golden rule in the company that we do not allow on the long term, that the costs are growing faster than sales, and this relates to every and each employee and every and each market in Krka. So it can happen that during certain quarter or quarters, can be some disproportion, which are not in line with this general rule, but nevertheless, on the long term, on the half year results or on the three quarters, then everything has to be in order. So we are quite ambitious also in the future, and quite confident that the margins will be somewhere around existing current levels.
Mr. Buring has two questions. First one, on the level of stocks at the wholesalers in Russia, were they destocking or restocking?
The levels of stocks in Russia and elsewhere are normal. I mean, normal to that, in order that markets can function. Russia is big continent, so it means that they have different rules than some other markets, but there is nothing special. So, there is also a good demand. They are ordering the goods and the growth of the markets, taking into account our therapeutic areas where Krka is present, is decent.
Mm-hmm. Maybe I would add one info on the same subject, but, for the, for one other country, not for Russia, but for Ukraine. Somebody maybe was surprised when, he or she saw practically 100% increase in our sales in Ukraine in the first quarter of this year, compared to the first quarter of last year. So that was also, or I could say, even mainly a consequence of, destocking, you know, and, restocking, in these two quarters. That means, in the first quarter of last year, we had a rather low primary sales, while secondary sales were normal, and this year, just the opposite. So we increased also secondary sales, in Ukraine compared to the first quarter of last year, but much less than primary sales. sales. A huge increase in primary sales in the first quarter of this year in Ukraine was a consequence of very low stocks at the end of last year.
Thank you for this, Brane.
Are you seeing a cost increase for APIs and intermediates?
For the time being, nothing special is going on on this field, so the prices are quite stable.
I would add here that really, I mean, our strategy or tactic, where we have for each and every important product, and APIs and intermediates for those products, two or more suppliers works. I mean, this tactic is good. This way, we can avoid, you know, difficulties with supply on one hand, and our negotiation power when we talk about prices, is better as well.
Could you say that poor cold and flu season had, let's say, a significant impact on gross margin in the first quarter?
No, it was not a significant impact because OTC and these flu products are not representing an important part in Krka portfolio. They, of course, had to a certain extent, but as I said, this is just goes for OTC products and for certain segments of OTC products.
Mm-hmm.
Nothing really-
If I may add, however, this fact has influenced sales levels, so OTC sales were down, but I think you mentioned-
Yeah
... this before. So OTC sales were down in the first quarter of this year due to this reason. Because in the first quarter of last year, you know, we were coming out of a pandemic and so on. So people reduced social distancing, you know, they abolished wearing their masks and so on. So consequentially, at the end of 2022, and in the first quarter of 2023, you know, there was a huge increase in flu and other winter-related illnesses in the first quarter of last year. This year, situation was, let's say, more normal, back to normal situation.
Yeah, because sometimes some countries can announce the flu, and this year, that was not the situation in case of the largest market for Krka. So there was no flu officially, therefore, also, the sales was lower. But as we both said, okay, yeah, some, some impact on sales, but not really on profitability.
Second question from Mr. Gorzinski about the sales growth in Western Europe. Why is it-- was it lower than in other geographic regions in first quarter?
Yeah, this is hard to answer very precisely, because here we have many markets, as I said, some of them really developing and growing very good. So Spain with index is 122, Scandinavian countries, almost 110. Then I mentioned Ireland, 117, Great Britain, 177, et cetera, et cetera. So many of them were growing like crazy, but still we have some markets that were not growing. And then when we put all this together, Germany, for instance, which is part of the biggest one, that caused that the whole region did not grow as it could, or on the similar as the average growth of Krka. But we believe that this will change. change. If I answer for German market, yeah, because we applied for less tenders than we did a year before, but that was done by purpose in order to improve our profitability, because the prices in Germany on tenders were pretty low.
Are there any, further questions? Please go ahead if you have one. Okay, we have one from Mr. Holwell. Strategically, do you want to balance the product portfolio somewhat away from cardiovascular segment over time?
Thank you for this question. I was waiting for it. So because there is the second part of the question, cardiovascular demand could be impacted by GLP-1 advances over time. Actually, we will keep, and we will continue to work with cardiovascular also in the future. We don't see GLP-1 as a something that would be a threat to our cardiovascular segment. Opposite, we see as a complementary. So if someone has problems with diabetes or would like to lose weight, then he would decide to use, and he could use GLP-1, but at the same time, he will, he or she will still have the problems with blood pressure, with cholesterol, and all the other diseases that are also present. So we don't see this. this. It's more theory that this GLP-1 will solve all the problems and will overcome also to other portfolio. And it was already confirmed by some articles.
Another question from Mr. Gorzinski. The acquisition of treasury shares increased year-over-year. Do you also plan to increase it in the full year?
Yes, we will continue with buybacks and... But now we stopped, I think, because of AGM, yes? Brane, please add.
Yes.
And yes, we can go up to 10%, and we aim to go to this level.
So we start purchases of our treasury shares last Friday, because we published today, of course, invitation to our general assembly, and we will not buy shares until shareholders meeting that will take place on eleventh of July. So I am not so sure about... So of course, share of treasury shares among all shares has been growing steadily, but otherwise, we do not, in fact, change our aggressiveness in terms of purchases of our own shares. So they depend on a turnover on the stock exchange. Because we always, you know, we strictly follow rules of European Union directive, that means, we do not buy more than 25% of shares on Ljubljana Stock Exchange and so on. We are very cautious in ordering these purchases. If purchases really increased recently, then that was a consequence of increased turnover on the stock exchange itself.
Thank you both. We have reached the end of today's session. Thank you again for your participation. In case of any further questions, don't hesitate to reach to our investor relations team. The transcript of today's webcast will be available on our website in the following days. Thank you for participation, and have a nice rest of the day. Goodbye.
Goodbye. Thank you.
Goodbye.