Between Christmas, my own vacation, routine readaptation and past weeks Annual Letter to Readers it has elapsed more than a month since Schott Pharma reported its 23/23 fiscal year results.

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.

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Executive summary

• Revenue €957.1 million, up 6.5% YoY (12.1% at CER¹ ).

• DDS segment reached 55% revenue share on 23/24.

• P&L bottom line, margins and capital efficiency ratios dragged due to high cost of sales caused by capacity underutilization.

• Diluted EPS 0.99€, down 2.0% YoY.

• Schott Pharma AG generated cash flows again, generating €79.4 million of free cash flow.

• HSD revenue growth guidance announced for 24/25 fiscal year, with negative growth expected during Q1.

• Proposed dividend of 0.16€ per share, 6.7% increase YoY.

Income statement

Revenue

The reported revenue for the 23/24 period was €957,1 million, up 6.5% YoY (12.1% at CER¹). Earlier on during 2024, management announced a guidance upgrade for FY24 revenue, expecting it to be in the range of €997.5 - €1015.4 million. However, they missed expectations by 4% compared to the lower end of the announced guidance.

Revenue product distribution

Schott Pharma AG reports revenue in two different segments: Drug Containment Systems (DCS) and Drug Delivery Systems (DDS). Both segments experienced different growth rates during 2024:

• DCS segment: It actually reported negative revenue growth of -7% - being +3.1% at CER¹ . The company reported a remarkable impact of ongoing vials destocking among customers during H1 2024. Although, positive sales growth returned during H2 2024.

• DDS segment: Sales in this segment reached €438.8 million, reaching a revenue growth of 27.7% (25.9% at CER¹ ). Manufacturing capacity expansion focused in this segment plus a pure HVS product portfolio will support strong growth among this segment in the coming years.

The different performance among both segments is further explained by DDS portfolio only consisting on pre-filled and ready-to-use packaging solutions, which are high value solutions (HVS) with better margins and larger demand from customers macrotrend of making their operations leaner by externalizing the packaging’s cleaning, sterilization and glass packaging lot sorting.

Geographical revenue distribution

The EMEA region's revenue share continued to expand, rising from 53% in the 22/23 reporting period to 56% in the current period. This increase is attributed to both growth within EMEA and a decline in revenue from North America, primarily due to customers in that region reducing their vial safety stock levels.

Regarding Asia & South America, the first returned to growth in the 23/24 period while South America stagnation persists for a 2^nd year in row.

Margins

Margin’s relentless improvement observed during the previous years didn’t continue during the 23/24 period. This was caused due to the lower utilization rate of the available manufacturing capacity as customers were reducing their safety stock during the first half of the reported period.

However, FCF margin was the exception. In my last write-up about the company - #2 Schott Pharma AG - Quantitative Analysis - I pointed out that the company reached its lowest FCF margin, 0.7%. It was caused by the several ongoing expansion projects the company was executing. As the core spending phase of these projects was coming to an end I expected a substantial FCF margin improvement during 2024.

For the first 9 months the company reported a FCF margin of approximately 9%, reaching a slightly lower full year FCF margin of 8.29%.

Operating Profit

EBIT has been growing at a 24.8% CAGR since 2020, outgrowing the revenue (11.4% CAGR during the last 4 years). However, this year reported EBIT was flat.

Analyzing the operating expenses - see figure 6 - it can be observed that revenue outgrew all of them and still EBIT margin decreased by 140 bps YoY.

• R&D expenses were reduced to 24.3 million (-9.5% YoY), representing just 2.5% of the revenues. It reflects how the packaging sector is not governed by the same dynamics observed among the pharmaceutical companies which spend 15 to 30% of their yearly revenues in R&D.

• SGA expenses grew by 2% last year, fueled by a 4% increase in administrative expenses. However, the company effectively managed these costs, as revenue growth outpaced SGA expense growth.

Consequently, the flat EBIT reported for the period is exclusively related to the impact of lower capacity utilization and costs associated with new production factories ramp-up.

Net Income

The impact of cost of sales increase previously described cascaded into the P&L bottom as net income for the period reached €150.34 million, -1.0% YoY.

Balance sheet

Main news related to the balance sheet are related to the Net Debt reduction in €30 million attributed to FCF generation destined to repay debt obligations.

Cash flow statement

Capital Allocation

During the investor call, management stated that 80% of capital expenditures are allocated to expansion and reinvestment projects, with 63% of these investments directed towards the DDS segment. The remaining 20% of capital expenditures is classified as OpEx. Based on this information, my spreadsheet analysis reveals that the organic reinvestment rate for the 23/24 fiscal year has declined to 77.4%, a significant decrease from the approximately 100% observed in the preceding four years.

The remaining cash has been used to reduce the company’s net debt as mentioned above.

CapEx as a percentage of revenue has returned to approximately 15%, consistent with the historical average since 2020. This reversion is primarily due to a combination of revenue growth and a €30 million decrease in capital expenditures. OpEx typically ranges between 2-3%.

Regarding the main ongoing expansion projects in Hungary, Switzerland and USA, they all progress as planned.

Working capital

The cash conversion cycle (CCC) has shown improvement since the start of Schott Pharma's reporting period in Q4 2023. This positive trend aligns with the industry-wide decline in destocking activity. Notably, the company's Days Inventory Outstanding (DIO) metric has improved for the second consecutive year, reaching 80.8 days. See Figure 10.

FCFF Generation

A significant positive development is that Schott has resumed generating cash flow after two consecutive fiscal years of low FCF and negative Free Cash Flow to Firm (FCFF). The company generated €73 million more in FCF and €83.9 million in FCFF than the fiscal year before. Investment reduction caused the described improvement:

1. €36 million less invested in net working capital (NWC).

   Accounts payable continue growing YoY at a more moderate pace than the 21.5% YoY growth experienced from 21/22 fiscal year to 22/23 fiscal year. Moreover, inventories remained almost flat.

2. €30 million less allocated to CapEx.

I expect these dynamics to continue in the mid-term.

Metrics Overview

Capital efficiency

All ratios related to a company’s return showed deterioration during the last fiscal year. The main cause, the larger cost of sales due to underutilization of available manufacturing capacity and ramp-up costs. Investments in assets have continued but at a lower pace during last fiscal year as previously discussed.

After normalizing operating profit and net income (assuming a 35% gross profit similar to previous fiscal year’s), the ratios presented in Figure 12 would have remained relatively stable or even exhibited a slight improvement.

Other Metrics

There are other metrics I also like to review which are:

• NWC/Revenue (%)

  No changes observed during the fiscal year.

• D&A/Revenue (%)

  Despite the large investments in new manufacturing facilities, it is in line with previous years.

• EBIT/EBITDA (%)

  It is a good proxy regarding how capital intensive the business is. For the fiscal year 23/24 no trend change can be noted.

• OCF/EBITDA (%)

  Cash conversion has improved, reaching its historical peak at 87.6%.

Management Call & Guidance

The fiscal year results were presented over a month ago, on 2024.12.12. An investors call was hosted that day presenting the results, including a 45min Q&A session.

The management started by remarking how the 23/24 guidance was met at CER¹

As a consequence of the great performance in 2024 and unknowns ahead in 2025 due to sources of instability, the 24/25 fiscal year guidance announced was of HSD² revenue growth.

CFO went even further announcing negative growth for Q1 24/25 fiscal year

The product fields they refer to is mainly the polymer syringes business, a highly profitable segment within the HVS portfolio, contributing approximately 10% to Schott Pharma AG's sales, which was discussed as a potential source of instability during the call. This product mix backdrop is expected to lead to a year-on-year slight DDS segment EBITDA decrease as described in the annual report and later confirmed by the management during the call.

On the product mix they also announced they have no intention on entering the dual chamber business, device currently under Gerresheimer development in connection with cagrisema (Novo Nordisk’s GLP-1 drug under in phase III clinical trial)

Finally the estimated growth will return during H2 2025, depending on when the new facility in Hungary timeline.

Conclusion

After reviewing the annual report, I think the results for the 23/24 fiscal year meet my expectations. Announced short term instability and the expectation that 2025 will be a year of consolidation for the long-term growth of the company does not fundamentally change the long-term investment thesis on Schott Pharma AG.

Order will continue coming, product mix will stabilize, big CapEx projects will be finalized improving capacity utilization and returns leading, all together, to a cash printing. Consequently, current short-term fears are creating the opportunity to buy at a reasonable price a long-term high quality company.

Hope you enjoyed this 23/24 fiscal year earning review of Schott Pharma AG. So please leave a comment, give it a like and share!

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1  CER: Constant Exchange Rate.

2  HSD: High Single Digit.