Carl Zeiss Earnings: Improving Conditions Fuel Sales, but Weak Consumables Pose Margin Pressure

Narrow-moat Carl Zeiss AFX reported third-quarter results that were ahead of our expectations, with total sales up 12.1% year over year. Improving supply conditions and ramped up production helped meet healthy demand across all regions and fueled strong top-line growth. However, operating margin so far for the year continues to lag due to poor product mix and high spending. After accounting for our updated near-term outlook, we lower our fair value estimate to EUR 87 from EUR 90.

Ophthalmology was up 9.2% as Zeiss’ devices business continues to provide a nice tailwind. Demand level is strong and order backlog, while still remains high at EUR 537 million on a firmwide level, is slowly diminishing. However, we still see EBIT margin lagging (18.9% for the quarter versus 20.9% for fiscal-year 2022) due to a slower-than-expected destocking of consumables that was increased in 2021 and a higher research and development spending. Consumables post materially higher margins compared to devices, so the segment’s EBIT improvement is largely dependent on how quickly Zeiss can destock and correct supply issues to improve its product mix.

Microsurgery had a very strong quarter with sales up 22.7% and EBIT margin reaching 27.0%. The segment continues to outperform the market and its workflow solutions, which post higher margins compared with devices, are being well-adopted and showing solid momentum. Since this unit does not have a recurring business like ophthalmology, it is less affected by consumables sales.

In our view, while sequential improvement has been promising, it won’t be until 2025 before Zeiss can post an above-20% EBIT margin on a full-year basis. This is due to first-half fiscal 2024 being further affected from destocking of consumables (management expects a euro-mid-double-digit millions headwind to sales), lower contribution from high-margin intraocular lenses due to volume-based procurement in China, and high R&D and administrative spending.