At Pandora is no bad news good news?

On August 20th Pandora issued a press release regarding Q2 earnings. The share price subsequently surged; especially following purchases by the CEO and CFO. It seems the absence of bad news is good news in the case of Pandora at the current point of the restructuring plan and at current price levels. Below some important slides from the earnings call and bullet points from the press release.

  • The 2019 financial guidance for organic growth and EBIT margin excluding restructuring costs is unchanged.
  • Organic growth was -7% and total like-for-like sales-out growth (like-for-like) was -10% in Q2 2019 driven by decreasing traffic into the physical stores. Like-for-like in Online Stores accelerated to 22%.
Key highlights
Organic growth waterfall chart
EBIT margin waterfall chart
Financial guidance
Full year 2019 organic growth guidance waterfall chart
Full year 2019 EBIT margin guidance waterfall chart
Online store development

Pandora is still trading at rock bottom prices despite still having a very reasonable EBIT margin in the low mid twenties.

Time series of enterprise value relative to operating income for various jewellery and luxury good companies.
Time series of enterprise value relative to free cash flow for various jewellery and luxury good companies.
Time series of annual operating margin for various jewellery and luxury good companies.

Reuters – Recovery signs boost jeweler Pandora despite profit drop


Kraft Heinz files 10Qs for Q1 and Q2

Kraft Heinz issued a press release on its Q2 earnings on August 8th and has with delay filed its 10Qs for Q1 and Q2 on August 14th. This article will cover a) the goodwill and asset impairment losses, b) the compression of profit margins, c) the debt and bond grade situation, d) the dividend and e) the current value of the company.

Goodwill and asset impairment losses

Additional goodwill write-down and asset impairment losses were observed in Q1 and Q2 in all geographic segments, although they were dwarfed by those in Q4.

Figure 1 – Impairment losses in each geographic segment in the recent quarters.
Figure 2 – Goodwill and intangible asset impairment.
Figure 3 – Goodwill impairment losses.
Figure 4 – Goodwill.
Figure 5 – Net Intangible Assets Excluding Goodwill.
Figure 6a – Goodwill in the US segment.
Figure 6b – Goodwill in the Canada segment.
Figure 6c – Goodwill in the rest of the world segment.

The outgoing CFO David Knopf had the following comments during the Q&A session of the earnings call regarding future impairments.

On the impairment side, first off our impairment testing as you know occurs in 2Q every year. And so we performed our testing procedure this year after we file the 10-K current concurrent with preparing our Q1 and Q2 financial statements. And then to reiterate these are preliminary numbers that we disclose in 8-K. So the preliminary impairment charge in the first half were driven by two main factors. So first off, as you said we did have revised expectations in response to current market factors in some of our international businesses that were evaluated during the first quarter of 2019 as we developed these five-year plans. And as a reminder these are EMEA East reporting unit, LTA Exports reporting unit and Brazil where we had an impairment. Secondly, we also had the application of a higher discount rate to reflect the sustained decline in our stock price since the start of the year. And also you should keep in mind that we did start the year at nearly $60 billion of goodwill and indefinite-lived intangibles with less than 20% attrition relative to carrying value. So what that means is there’s going to be risk of future impairments, given any change in forecasts or modeling assumption can particularly trigger that.

Profit margins

COGS and SG&A excluding impairment losses have been kept somewhat steady in absolute terms for the past quarters but not as a percentage of revenue, because revenue is down. The profit margins are thus down.

Figure 7a – COGS
Figure 7b – SG&A excl impairment losses
Figure 7c – Quarterly revenue and expenses
Figure 7d – TTM revenue and expenses
Figure 8a – Quarterly revenue and income
Figure 8b – TTM revenue and income
Figure 9a – Quarterly margins
Figure 9b – TTM margins
Figure 10a – Revenue
Figure 10b – Gross profit

Organic revenue growth

The drop in revenue is caused by a drop in primarily price but also volume/mix in certain geographic segments. The outgoing CFO David Knopf had the following comments on organic growth.

From a total company perspective, organic net sales were down 1.5% in the first half, including an adverse impact of approximately 1.2 percentage points from retail inventory reductions primarily in the U.S. and Canada.
Volume mix was relatively flat in the first half as the reduction in retail inventory levels more than offset consumption growth in the United States, Canada and Latin America. Pricing was negative, down 1.3 percentage points, driven by three factors. The first factor driving lower pricing was unfavorable timing of promotional expense, representing roughly 80 basis point decrease in price on a global basis, including approximately 90 basis points in the U.S.

The second factor was key commodity driven pricing in North America, representing roughly 30 basis point drag on global pricing in the first half. And third, the remainder primarily reflects continued promotional support behind selects for select U.S. categories, mainly in our Launchables and frozen categories.

Table 1 – Changes to organic net sales in the most recent quarter and the most recent half year.
Figure 11a – Changes to organic sales, price and volume/mix in the most recent quarter.
Figure 11b – Changes to organic growth (average for TTM) over time.
Figure 11c – Changes to price (average for TTM) over time.
Figure 11d – Changes to volume/mix (average for TTM) over time.

Product segments

The product segments taking the biggest hits are “Condiments and sauces” and “Infant and nutrition”.

Figure 12 – TTM net sales (USDm) in each product segment over time.

Geographic segments and EBITDA margins

Adjusted EBITDA decreased 19.3 percent versus the year-ago period to $3.0 billion. The CEO had the following comments regarding EBITDA and profitability.

With respect to profitability, we spoke about our first quarter and indeed our first half being up against our toughest EBITDA comparisons for the year. This reflected our expected net inflation curve, stepped up fixed cost investments and retail channel growth, marketing and our people, as well as pricing not beginning to take effect until the second quarter.

First and foremost the company had a significant decline in adjusted EBITDA margins from a peak of 29.4% in the fiscal 2017 to roughly 24.5% for the trailing 12 months through the end of June this year. This was driven by a combination of inflation in our supply chain, including packaging, freight, overtime, and maintenance costs, as well as significant step up in fixed costs to support sales growth with price increases lagging higher costs.

EBITDA is down in all geographic segments; US -10.7%, Canada -17.0%, EMEA -17.1%, rest of the world -52%. The latter partly because of the Venezuelan Bolivar and the divestiture of Heinz India and the brands Complan, GluconD, Sampriti, Nycil to Zydus Cadila.

Figure 13a – TTM EBITDA margins in each geographic segment
Figure 13b – TTM EBITDA (USDm) in each geographic segment
Figure 13c – TTM net sales (USDm) in each geographic segment

The comments to each of the geographic segments in the 10Qs are as follows.

US – Segment Adjusted EBITDA decreased 10.7% to $1.3 billion for the three months ended June 29, 2019 compared to $1.4 billion for the three months ended June 30, 2018. This decrease was primarily due to cost inflation in manufacturing and procurement, and the unfavorable volume/mix due to higher sales of lower margin products in the current period.

Canada – Segment Adjusted EBITDA decreased 17.0% to $143 million for the three months ended June 29, 2019 compared to $173 million for the three months ended June 30, 2018 partially due to the unfavorable impact of foreign currency (2.8 pp). Excluding the currency impact, Segment Adjusted EBITDA decreased primarily due to lower pricing and higher input costs, partially offset by favorable volume/mix.

EMEA – Segment Adjusted EBITDA decreased 17.1% to $171 million for the three months ended June 29, 2019 compared to $206 million for the three months ended June 30, 2018, including the unfavorable impact of foreign currency (4.6 pp). Excluding the currency impact, the decrease was primarily due to higher supply chain costs, lower Organic Net Sales, and investments in marketing and people.

Rest of the world – Segment Adjusted EBITDA decreased 52.1% to $102 million for the three months ended June 29, 2019 compared to $213 million for the three months ended June 30, 2018 including the unfavorable impact of foreign currency (30.2 pp, including 26.5pp from the devaluation of the Venezuelan bolivar). Excluding the currency impact, the decrease in Segment Adjusted EBITDA was primarily due to the sale of the Heinz India business, higher supply chain costs, and lower sales in Asia Pacific.

Debt situation and bond rating

The CFO had the following comment on the debt situation during his opening remarks.

From a forward-looking perspective, we have now completed the two divestitures we previously announced: India nutritional beverages and Canada natural cheese. These divestitures resulted in a combined after-tax proceeds of more than $1.5 billion. And we remain committed to using those proceeds to further deleverage and strengthen our balance sheet.

Long term debt has remained somewhat constant for several quarters and as a consequence so have the interest expenses.

Figure 14 – End of quarter long term debt

Interest expenses are approximately $300M per quarter, which is approximately 5% of total net sales.

Figure 15 – Quarterly interest expenses (USDm).

As a consequence of the EBITDA being down and the long term debt not decreasing noticeably the debt to EBITDA ratio is up.

Figure 16 – The ratio between long term debt and TTM EBITDA over time

S&P warned Kraft Heinz on August 23rd that their bond rating might be cut to junk, if they don’t cut their debt. The CEO Miguel Patricio had the following comment in his opening remarks during the earnings call.

We absolutely remain committed to our investment grade credit rating.

Debt was paid in the 3rd quarter of 2018 and 2019 and more debt is maturing in 2020; below according to the most recent 10Q.

Figure 17 – Repayment of long term debt

We repaid approximately $350 million aggregate principal amount of senior notes on August 9, 2019.

We have aggregate principal amount of senior notes of approximately $900 million maturing in February 2020 and approximately 800 million Canadian dollars and $1.5 billion maturing in July 2020. We expect to fund these long-term debt repayments primarily with cash on hand, cash generated from our operating activities, proceeds from our divestiture in Canada, and potential new issuances of short-term or long-term debt.

Dividend and payout ratio

The CFO had the following comment on the dividend during the Q&A part of the earnings call.

As we said before we are committed to our investment grade rating and we firmly believe that our business today generates sufficient free cash flow to support both delevering organically over time as we’ve committed as well as to support the current dividend payout that we have. On top of that we have taken actions as you know earlier this year to accelerate the delevering producing our dividend and successfully divesting India beverages and Canada cheese businesses a couple of digits multiple. So again we feel that the business currently generates sufficient cash flow to cover the dividend and also to delever organically.

The payout ratio will probably be firmly above 80% for the time being.

Figure 18 – Income, cash flow, dividends and payout ratio.


In terms of for example enterprise value to operating income Kraft Heinz is trading at absolute rock bottom prices in historical terms and relative to its peers.

Figure 19a – Time series of enterprise value relative to operating income.
Figure 19b – Time series of enterprise value relative to net sales.

This low valuation should of course be seen in the context of the debt load, but also in the context of operating margins of 20% still being at the top of the industry.

Figure 20a – Quarterly time series of operating margin for packaged food companies.
Figure 20b – Annual time series of operating margin for packaged food companies.


If there were to be additional significant impairment losses to report it is probably not too far fetched to think that the CEO would have reported them by now. If there are no significant impairment losses in Q3 this could be a positive catalyst. And vice versa.

Media coverage

Nightly Business Report – August 8, 2019

Bloomberg 08Aug – Kraft Heinz, Tired of ‘Fire Fighting,’ Feels Wall Street Heat

Bloomberg 08Aug – Kraft Heinz Hadn’t Hit Bottom After All

Reuters 08Aug – Kraft Heinz withdraws outlook after dismal results

Nightly Business Report – February 22, 2019

Teva and status on CGRP migraine drugs

Teva Pharmaceuticals issued a press release on their Q2 earnings on August 7th.

Below are excerpts from the earnings call with CEO Kåre Schultz and outgoing CFO Michael McClellan and relevant figures and slides. Further below the CGRP migraine drugs Ajovy® from Teva, Aimovig® from Amgen and Emgality® from Lilly are discussed. The legacy litigations regarding opioids and pricing are not discussed here, but Teva has a $646 million provision for legal settlements following their $85M opioid settlement, which is further described in the earnings transcript and in this Bloomberg article.

Earnings call

If we go to historical development of revenue and profitability, I’d just like to remind you of the situation in late-2017 when I joined, where we saw generic competition coming in on COPAXONE, and we basically knew that revenues were going to fall roughly $4 billion on a yearly basis. That’s also what you see. You see the quarterly revenue coming down from some $5.3 billion to $4.3 billion.

But you also see now the beginning of the trough, as I’ve been calling it, the trough of 2019, which is basically where the revenue stabilises. You also see that the gross margin that was coming down is also stabilising now just above 50%, and the operating margin stabilising now around 23%, which is of course not our long-term target. Our long-term target, as I’ll get back to, is 27%, so we still need to see improvement there.

Talking about the trough, let’s look at the operating profit. If we look at that in the same historical period, then you’ll also see the very big effect of the revenues declining, and us only being able to take down the cost quarter-by-quarter, but still the effect now is that we are stabilising the operating profit at around roughly $1 billion per quarter, and you see that the net income is around $650 million right now. And that results, of course, in the earnings per share stabilising right now around $0.60.

Now this is – as I’ve said before, this is what we expect to be the trough year. It’s not that there will be a dramatic turnaround in the coming years, but the trend lines will slowly change and we’ll start to see a moderate increase in revenues and moderate increases in EPS going forward. But, just to remind everybody, this year will be the lowest year in terms of operating profit and also in terms of average earnings per share

Now, if we look at the business going forward and our financial targets for the business going forward, then I’d just like to repeat these. We have talked about them before, but just so that everybody knows what our long-term plan is. And one key element is, as I said in the beginning, to improve the operating margin. Now, that happens by a lot of elements.

One element is, of course, that you optimise your product portfolio, the gross margin on the products you’re selling. You optimise the manufacturing cost of the products you sell. And you make sure that you have a good and strong overall market development. As I showed you earlier, we are at the level of 23% right now, and we want to improve that up to the level of 27%.

The cash-to-earnings is quite simple because we need the cash in order to reduce our debt. And of course, we have a long-term plan to keep on reducing our debt. The simple math is that, right now, we probably have a net earnings of some $650 million per quarter. That’s 2.6 billion a year. 80% of that, that’s roughly just around $2 billion. So, as you see, we’re also guiding $1.6 billion to $2 billion on the cash flow, so we’re really aiming at getting to that level where we, on a consistent basis, generate most of the result as cash.

There will always be quarterly fluctuations with a big balance sheet as ours. Of course, there are quarterly
fluctuations. But, on a yearly basis, it’s very important that we meet this target of the 80% cash-to-earnings. And that is important because we need to reduce the debt.

As you know, our net debt-to-EBITDA ratio right now is about 5x, and we really want to get it below 3x, and the only way to do that is to generate cash and pay back the debt. So we will continue to use all our cash flows to really pay down debt. And as I stated many times, we do not plan to raise equity. We plan to continue to use cash to reduce the outstanding debt, and we think that’s the best way to create value for our long-term shareholders.

We ended the second quarter with a net debt of $26.6 billion and a net debt-to-EBITDA ratio of 5.72x. As you may recall, during April, we also entered into a $2.3 billion unsecured syndicated revolving credit facility, which replaced the previous $3 billion revolving credit facility that we had. This new RCF can be used for general corporate purposes, including repaying existing debt. As of June 30, 2019, no amounts were outstanding under the RCF. And as of today, we have $500 million outstanding under the RCF.

Today, we are reaffirming all aspects of our annual guidance that were first presented in February and reaffirmed in May, including earnings per share in the range of $2.20 to $2.50 and free cash flow from $1.6 billion to $2 billion for the year. Where we end up in the ranges of the full year will depend on the performance of the branded products, especially COPAXONE and AJOVY, the timing of generic launches, foreign exchange rates, especially the euro, and our expense management.

Spend base

Spend base

Debt Structure

CGRP migraine drugs

The quarterly sale of CGRP migraine drugs were:

  • $23M Teva Ajovy® (Fremanezumab)

AJOVY revenues in our North America segment in the second quarter of 2019 were $23 million. AJOVY was approved by the FDA and launched in the United States in September 2018 for the preventive treatment of migraine in adults.

  • $34M Lilly Emgality® (Galcanezumab)

For the second quarter of 2019, Emgality generated worldwide revenue of $34.3 million, an increase of $20.1 million compared with the first quarter of 2019. U.S. revenue was $33.8 million, an increase of $21.7
million compared with the first quarter of 2019. Emgality launched in certain international markets in the first quarter of 2019 and generated revenue outside of the U.S. of $0.5 million in the second quarter of 2019.

$83M Amgen Aimovig® (Erenumab)

Aimovig was launched in the U.S. in the second quarter of 2018 and generated $83 million in sales in the second quarter of 2019.

Below are important announcements regarding clinical studies and links to these studies.

On August 21st Teva announced that Fremanezumab data in The Lancet demonstrate clinically meaningful reduction in monthly migraine days versus placebo for patients with difficult-to-treat migraine.

On August 5th Lilly announced positive results for Emgality® (galcanezumab) from the CONQUER study in patients who failed previous migraine preventive treatments.

On May 2nd Amgen announced it would highlight extensive long-term safety and efficacy data of Aimovig® (erenumab) across the spectrum of migraine at the American Academy of Neurology annual meeting.

Below are slides and excerpts from earnings call transcripts.

We are very happy about the strong launch we’ve had of AJOVY. We still have above 20% TRx share in U.S., and we have just started the launches in Europe. We’ve seen a moderate decline in the NBRx share. We think it’s related to a couple of factors. One being the fact that we’ve stopped the full pay-down on all scripts, which means that some scripts where we are not covered actually do get declined at the pharmacy level. And we also see that, in some cases, the patients do prefer an auto-injector, and therefore, of course, we are very eagerly awaiting the approval and the launch of our own auto-injector for AJOVY.

And of course, we’re anxiously awaiting the approval of our auto-injection device and the launch of that device which we expect in the next six months. That will be a second stimulus, really, a second phase of our launch, and we expect a significant boost to our new-to-brand and our TRx share as a result of that.