- The Octopus Value Investing
- Posts
- Q3 2024 Earnings Recap
Q3 2024 Earnings Recap
Earnings Review Compilation of Novo Nordisk, Pandora & Lonza AG
The Octopus Value Investing
November 10, 2024
As the Q3 2024 earnings season unfolds, I have undertaken a detailed analysis of the results reported by Novo Nordisk, Pandora, and also the qualitative update of Lonza Group AG. With the conclusion of FY 2024 around the corner, I have integrated these analyses into a shorter singular review, covering the most relevant aspects.
DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.
Support Independent Analysis
This newsletter will always be FREE! If you’d like to help sustain it, consider buying me a beer. With your contribution I will cover any annual costs I might incur and search for alternatives to enhance the experience.
Novo Nordisk
Novo Nordisk reported its 9M 2024 earnings on Wednesday 9th of November. The reported financials were within my expectations. Although I think they also brought light into some concerns I covered back in September 2024.
The Earnings Highlights
While the report met expectations, it still contains some notable highlights:
Sales increased 23% YoY for the period 1 of January 2024 to 30th of September 2024.
North America Operations sales increased 31% while International Operations sales increased 13%.
Rare diseases segment back to growth, registering a 3% YoY sales increase.
A differential growth rate, with revenues outpacing expenses, underscores the company's capacity for operating leverage.
Note: R&D expenses normalization for ocedurenone impairment loss is required.
FCF decreased -5% YoY due to the CapEx explosion. Novo Nordisk spent 31063 million in CapEx in the first 9 months of 2024, an 89% YoY increase.
Figure 1: On the left, Novo Nordisk revenue and EBIT quarterly evolution. On the right, FCF & CapEx evolution. Own elaboration.
Addressing the Existing Concerns
Some of the main concerns there were around the stock are price cuts, volume growth concerns due to the supply constraints and regulatory risks. There is huge focus on GLP-1 when talking about Novo Nordisk, which is completely normal considering three quarters of its revenue are linked to GLP-1 medication. Although, I have also been concerned about Rare Diseases segment sales prospects. As outlined by Novo Nordisk on its long-term roadmap, it is expected that the Rare Disease segment will become the growth engine of the company by the end of the decade.
Obesity market & Wegovy
As a consequence of all the pharmaceutical companies which are developing their own GLP-1 medications, trying to get their share of the prominent diabetes & obesity market there are rising concerns of Novo Nordisk (and Eli Lilly) competitive positioning in the space. The market fears that the dominant players will lose market share to the new competitors based on the new medications coming to the market and the supply constraints of the existing players.
Following this logic, a report from September indicated that JP Morgan estimated Novo Nordisk sales were missing the consensus estimates by 5% and a weak Wegovy performance with sales 9% below expectations. Wegovy sales finally came at DKK 17304 million ($2.5 billion vs $2.3 billion estimated by the consensus).
My take: It is anticipated that sales growth may decelerate due to base effects and potential competitive pressures. However, given the exponential growth of the diabetes and obesity market, Novo Nordisk's market position remains secure.
“Sales growth was driven by both North America Operations and International Operations. The volume growth of the global branded obesity market was 95%. Novo Nordisk is the global market leader with a volume market share of 74.0%.”
Rare diseases segment
Rare diseases segment is back to growth. Looking into the quarterly numbers it can be observed that after several quarters of decreasing revenues (since Q4 2022), growth has been reported again in Q3 2024, 17,2% sales growth compared to Q3 2023. This reversal of trend has resulted in the resumption of growth within our Rare Diseases segment during the first nine months of the year 2024 (revenue up 3% for 9M 2024).
My take: It is too early to assure the supply constraints in the Rare Diseases are solved and more data points are needed. However, in the short to mid-term, the trend reversal has became less important than when it started as the revenue share of the segment has come down to roughly 6% of Novo Nordisk revenue now compared to over 10% of revenue share the segment was commanding back in 2021 and 2022.
Figure 2: Rare Diseases segment revenue evolution. Own elaboration.
Q3 2024 Earnings Call
During the earnings call there were some relevant topics covered in the Q&A session. See below the topics covered and the related quote.
Forward looking statement on 2025 guidance:
(…) And as to the more detailed 2025 outlook, the way I would frame it is that when you look at our absolute growth last year in 2023, which turned into a 36% growth rate last year, that absolute growth is somewhat similar to the absolute growth we're delivering this year yielding a mid-20s like growth. So to get a sense for what could growth mathematically be next year, then if you take that magnitude and apply it to a higher base, namely, this year's sales, and then adjust for the tailwind we've had from favorable U.S. gross to net adjustments related to prior years, then you end in the high teens in terms of sales growth next year. Again, this is a forward-looking statement mathematically based, and we'll come back with more detailed guidance come early February 2025. (…)
My personal view on the 2025 guidance foward-looking statement is that it is a in line or even a little better than what I was expecting as I was modelling 16% revenue growth for FY2025. Although, Novo Nordisk management is usually cautious on its guidance so let’s wait for 2024 annual report.
Insights on monlunabant Phase II a results presented in September 2024:
(…)We also saw both gastrointestinal, but also some neuropsychiatric events increasing with those. On the efficacy part, it was very clear that we were high on the dose response and exposure response curve, indicating maybe that too high doses have been tested from a clinical and from a commercial perspective, and therefore, we can actually say that this works from a weight loss perspective, but we have to work with the dosing to mitigate potential safety issues. (...)
Insights on International Operations (IO) sales performance:
(…) And the starting point is when you look at our performance in the first nine months, we grew 24% and our guidance for the full year entails a midpoint of 25%. So as a consequence, then you should expect an acceleration going into the fourth quarter in terms of growth rates as well as absolute sales.
(…) And what we've seen in the third quarter in IO with a very significant step-up for Wegovy sales, it's pretty much a doubling compared to Q2, albeit with some tailwind from inventory movements, which are associated with launches. Then a nice acceleration in IO in the third quarter, now growing at 22% in the quarter and to get to Q4, even further acceleration into the fourth quarter. (…)
So far, IO has been constrained on Ozempic. On the other hand, you see 60-plus percent sales growth for Rybelsus in IO. So that's kind of the portfolio play we're pursuing in that geography. And then with now more than 15 Wegovy launches in IO, the momentum we are building there is, of course, rather substantial.
Pandora
Moving on to Pandora Group A/S Q3 earnings, they were released on the 6th of November and I think they overall met expectations. However, an unexpected event which will impact company’s financial performance was shared in discussed in detail.
The Earnings Highlights
Sales increased 11% YoY for the period 1 of January 2024 to 30th of September 2024 with 7% LFL growth in Q3 2024.
Fuel with more continued to be the growth engine of the company, posting a 21% LFL sales growth year-over-year in Q3 2024 vs 2% LFL of the Core segment. New collection’s revenue Pandora Essence (released one year ago) in Q3 2024 already makes 3% of all Pandora sales.
In the USA, Germany and Rest of Pandora sales continue growing while in the mature Western markets LFL sales are plain or reporting a slight decrease. In China, the situation is not reverting and -33% LFL sales were reported in that geography for the quarter.
Figure 1: Pandora sales per geography. Source: Pandora’s Q3 2024 report.
Reported network expansion was 5%, surpassing the CMD target of 3% CAGR until 2026. In Q3 2024, 82% of revenue came from the retail store network.
In my opinion, the largest achievement this quarter has been maintaining double digit revenue growth considering the harder YoY comps the company has for H2 2024. EBIT margin compression and debt increase are within the expected yearly variability so they don’t seem concerning to me.
Addressing the Existing Concerns
During H1 2024 the company already discussed their decision to stop hedging silver as its price has risen dramatically in 2024. Pressure on silver prices has continued during the last quarter (since April 2024 silver prices reached a spot price of around 33$ per ounce). The company described the situation as follows:
At the Capital Markets Day in 2023, Pandora announced new financial targets including a 26-27% EBIT margin by 2026. The target was set based on a silver price of USD 23.6 per ounce. Since April 2024, silver prices have increased to a spot price of around USD 33 per ounce as per November 4, 2024. All else equal, and when combined with the current gold price and foreign exchange rates, this represents a material incremental headwind of around 360bp to the EBIT margin target for 2026. This will impact the EBIT margin gradually from Q1 2025 onwards.
The company plans to implement further actions to the 5% price increases implemented in October 2024 to mitigate the silver price increase impact. However, if the actions to be implemented will be enough mitigation is still unknown
(…) In response to the recent further increase in commodity prices, Pandora is taking immediate and firm action. This includes further price increases beyond what has already been implemented in October 2024 and beyond the normal annual 1-2% as well as the initiation of a group wide cost program with external support.
At this point in time, it is too early to conclude on the magnitude as well as the timing of the additional mitigating actions to cover the remaining headwind of 220bp to the CMD EBIT margin target by 2026 of 26-27% (based on a silver price of USD 33). An update will be provided at the FY 2024 announcement.
However, a substantial portion of the silver required for manufacturing has been hedged, and there's a time lag between production and inventory sales. Therefore, no impact in 2024 financials will be observed and the negative impact of higher silver prices on the P&L is not anticipated until the first half of 2025.
Pandora normally hedges silver on an ongoing basis resulting in a 9-12 months delayed impact on the EBIT margin from changes in the spot price. The 2024 price has therefore been almost fully hedged already at USD 23.8 per ounce and the recent increase in silver prices has no impact on the guided margin in 2024. (…) (…) Pandora has currently hedged 39% of the silver and gold used for production in Q1 2025. Adjusting for the time-lag from production through inventories to sales, this means that the P&L for Q1-Q3 2025 is roughly 50% hedged already. (…)
I believe price increases are possible as Pandora is by far the cheapest jewelry manufacturer among its peers (see figure 2). Moreover, Pandora has ramped-up marketing expenses during the previous quarter to build its brand equity. I believe this expenditure can be temporarily reduced without much impact on the overall performance.
Figure 2: Price comparison between jewelry brands from July 2023. Source: own elaboration.
Q2 2024 Earnings Call
The earnings call had an interesting Q&A session, with questions covering very diverse topics. Let me share some of the most interesting ones:
Insights about the company’s situation in China. The brand needs a big repositioning and sales depend on promotions.
On China, I mean, it's neither of the suggestions you had. It's simply trying to clean up the brand and push more sales, which is full price sale on having less, let's say, dependency on promotions. So it's a bit of a tough one when the market is tough, the brand isn't in the perfect place. But we think it's necessary to slowly, slowly start detoxing the brand and then moving it towards a healthier place.
Silver price prospects and rationale for stop hedging. I like how the company assesses silver price trends and decides when to adjust its hedging positions. This strategic approach, akin to opportunistic share repurchases, allows them to capitalize on favorable market conditions.
One of the reasons was that we did speak with a number of different commodity experts. And I think the general feedback that we got was that this is not demand driven, but due to more driven by speculative demand (…) (…) Combined with the fact that it's quite expensive to hedge silver, but if you hedge 1 year out, it's $1.2 or at least at that point in time $1.2 to $1.3 per year of hedging, which felt that when you have to pay a very high insurance premium to hedge something which is already expensive, combined with the feedback that we got from the people that we spoke with made us do some temporary pause.
Having said that, then since then we have been hedging a little bit on the dips. As an example, back in very early August, there was a dip down to around $27 down we took that opportunity to hedge a bit more. (…)
FY2025 operating margin guidance with the current knowledge on the outlined mitigation initiatives.
So I think net net at this point in time, the way to think about it would be that the EBIT margin next year could be up to around 100 basis points down compared to where we are currently trading. And then we need to see how to what extent we can mitigate more on top of that.
Brief reflection on market dynamics in mature markets (in this case, replying to a question concerning the Italian market dynamics). Personally, I don’t like to hear that once a market is mature the brand sales depend totally on customer sentiment and macro environment.
(…) I mean, what we've said this in the past, the larger the market share we have in the country, the more we fluctuate with the consumer sentiment for the category. (…)
Lonza Group AG
On the 24th of October, Lonza published a qualitative update on its financial performance. The publication is quite short, providing very little information. Basically, Lonza confirmed the performance trends already observed in previous quarters of each of its business units. Moreover, full year guidance was again confirmed.
Moreover, the company confirmed the revenue acceleration, in part due to batches release time, and announced they expect a high level of CDMO contract signing for the full year.
More information to be provided on the 12th of December in the Investor Update event.
In conclusion, despite exhibiting a range of positive and negative factors, both earnings reports were in line with my expectations. Consequently, I do not foresee any alterations to my existing positions in these equities. Furthermore, I am looking forward to Lonza’s Investors Update in mid-December and FY2024 earnings report at the end of January 2025 so an initial evaluation on the company’s performance and strategic direction under the new CEO’s direction.
If you found today's earnings review helpful, please share them with friends or colleagues via social media or email.
Stay Always Tuned!
Subscribe now and join a community of savvy investors. Receive the latest insights directly in your inbox each week, ensuring you never miss a valuable opportunity.
Reply