Sartorius AG

and welcome to the Sartorius and Sartorius Study in Biotech conference call on the second quarter 2023 results. Today's conference is being recorded. At this time, I would like to turn the conference over to Dr. Joaquin Cruzberg, CEO of the Sartorius Group. Please go ahead, sir.

Thank you very much and welcome from our side here as well. Thank you for attending our conference call on a Friday afternoon or Friday morning for some of you, hopefully. We would like to start by walking you through the results of the Sartorius Group and then thereafter through the results of the Sartorius Stadium Biotech Group. We will do this here by myself, Rainer Lehmann, our CFO, and René Faber, Head of the Bioprocess Solutions Division, as well as CEO of Sartorius Stadium Biotech. Let me start by walking you briefly through the main highlights of the first half year's results. As expected, also the second quarter was very much influenced by the temporary early week demand by quite the most of our customer groups, one can say. Of course, the most significant impact has come from the continuous reduction of inventory levels by our customers. At the same time, and this is particularly relevant for the Bioprocess Solutions Division, for both divisions, we also have seen some impact by lower investment activities by customers. Of course, still, there is also some impact from the, I mean, pretty much full omission of the COVID-related business. And Rainer will show you also the impact of both sales revenue for both divisions in a minute. The underlying EBITDA has remained on a quite robust level at around 30% for the group. The cost containment measures that are in place are paying out here. Looking forward, let me flag that here already, of course, it will play a role to prepare for an increasing order intake activity or increasing demand by our customers. And therefore, we are preparing for keeping our delivery times short and our delivery ability high. So that's a key topic going forward. We are confirming the outlook that we have revised five weeks ago. And I also would like to confirm our midterm outlook for 2025 here. And then quite recent news is that we closed our Polyplus acquisition three days ago. We announced that, but we will take the opportunity here today again to introduce the main highlights of this business, the strategic logic, and why we are doing this. René actually will do this in the Sartorial Stadium biotech part of today's presentation. presentation. And with that, I would like to hand over to Rainer for the details of all H1's results. Thank you, Joachim. And also, first of all, welcome to today's earnings poll. Let's have a look how the soft top line development actually translated into the figures for H1. Sales amounted to 1.73 billion. That's a decline of 15%. Excluding COVID, and that's important because really This year, we pretty much do not see any further or related COVID business any longer. This decline would have been in the upper single digit only. It's always important to keep that in mind since last year was still fueled at this point in time with some COVID tailwind. Order intake decreased substantially, but also as expected by a third to 1.45 billion. The decline, as you know, and we have flagged that quite often, related to the destocking that seems to take a bit longer than we initially thought, hence also the update of new guidance that Joachim just referred to in the middle of June, and also some lower investments of activities at our customer side. The underlying EBITDA decreased by almost 26% to 517 million. That's a drop in margin of a good four percentage points. to 29.8%. Nevertheless, still under the circumstances, quite robust margin, functional expenses are back actually on previous year level at this point in time. And as you know, we are volume driven company, as we have seen tremendous economies of scale over the last two years with that two margins up to 34% in a group. Of course, these economies of scale unfortunately also play the other way around. So therefore seeing this development. Underlying earnings per share for the ordinary, two euros and 95 cents dropped by 40%. And for the prefs, it's two euros 96. And again, same drop as for the ordinaries. What's important to know, of course, cost, stringent cost management was key for the first half that will also continue going forward in order to achieve the guidance that also Joachim will reiterate later on. If we go to the next slide, we continue, of course, and I think it's very important to see our current development in perspective and in a broader context over the time. You see here that Q2 has a lower performance or is lower revenue than Q1. We always expected H1 and H2, and we anticipate that actually Q2 now on the order intake, we also hit the bottom. And from here on, we see a recovery in late Q3 and then Q4 order intake picking up for both divisions. If we have the regional view, we see that really all regions have been influenced by the destocking effect and the low investment activities. Sales are, our sales declined in both divisions. LPS was specifically affected here by strong comps. Keep in mind that in the, especially in the US also, we had a very good success with our BioLint portfolio. And that, of course, also now with a bit more tightened environment regarding biotech funding also plays for sure a role here in this normalization. The Americas, we achieved revenues of 646 million. That's a decline of a good 12%. In the EMEA region, we dropped a bit further, almost 16% to 669 million in revenues. LPS was here pretty much stable, we have to say. It was driven by the bioprocess, which, of course, has very high comparables. Most of the COVID-related revenue was stable. related to this region, but also Russia has an influence here. Basically, four percentage points of the drop are attributed to the business or basically the loss of business in Russia. In Asia-Pacific, we see actually sales declines also in LTS. Here, I need to also point out that part of that, and I will come to that when we dive into divisions, but the membrane business, so the basic components for the COVID test played a role. The BPS revenue decreased mainly also due to soft business in China. Yeah, in this regard. And René will add some more color later on during his presentation. When we come to the detail and have a detailed look on the bioprocessing side, we see, and I'll start here on the left-hand side with the order intake, we really see this decrease across all regions, the loss of almost 36% or 35.5% in constant currencies to 1.1 billion is really attributed to that destocking. We can't mention it enough. It took or takes a bit longer than we originally anticipated, as I said, but hopefully, we anticipate that to really bottom out this quarter or last quarter. And sales revenue decreased by 17 and a half percent in constant currencies to 1.35 billion, excluding COVID. And there would be a upper single digit percentage rate decline. When we look at the regional also split here, we actually see that the loss was pretty much across all regions. Again, on the bioprocessing side here, it was around 20% loss. In Americas, a little bit less, only 10%. In Asia Pacific, also 25% revenue decline. Nevertheless, and despite the fact that we lost quite some revenue on the bioprocessing side, we managed to have an underlying ABTA margin. of 30.8%. EBITDA amounted to 414 million. I mentioned it below. We're really here dependent on the economies of scale, which worked or works in both ways. If we have now a look at the LPS division, Electronics and Services, here we really continue to see robust results in a continued challenging market. Also here starting on the left-hand side was the order intake decreased to 348 million. by 22.5%. One of the main drivers here is really the reduction in the OEM membranes that we had some nice business the first six months of 2022. And we also see here clearly the weaker, let's say, market environment when it comes to the early stage biotech funding. Sales revenue. amounted 389 million, a drop of almost 7.5%. Excluding COVID here, we would have a reduction only in the mid single digit range. The underlying EBITDA, I mentioned before, we could continue to keep a high profitability for our LPS division here was 26.3% and amounting to 102 million, really stable outlook or stable performance due to also stringent cost management in that division. We have to look at some key performance indicators underlying everything I just mentioned. If you look at the extraordinary items, of course, they're a little bit higher with 61 million. Let me put some color here. Half of them we relate to the adjustment or to organizational adjustments. Part of that is, for example, our voluntary employee program, as well as ramp-up costs in connection with expansions. but also certain one-time payments with suppliers. So really about this whole topic that we still have the aftermath of the COVID business from last year. And the rest is really integrations and also corporate projects that we normally show in this position. Financial result is influenced, as always, by the volatility of the valuation of the BS separations earn-out liability. So nothing new here. Of course, our interest result or interest expense net has increased due to the funding of the acquisition of Albumedics last year and will, of course, going forward be a lot more substantially influenced by the new acquisition. Underlying net profit amounted to $202 million, a drop of almost 40%. Operating cash flow, and that is actually very happy to report that in these circumstances with that weaker result, we actually were able to increase our operating cash flow by a good 25% to 363 million. Main driver is here that in H1 2022, we had a substantial increase in working capital, which we now could optimize. And also going forward, I really do not expect any further negative development out of that position. Investing cash flow amounted to 327 million. As Joachim pointed out at the beginning, we also continued with our capacity expansions. As you know, a lot of them are in the manufacturing or manufacturing capacities, which, of course, we are adjusting on the timeline a little bit, but therefore we are showing a quite high CAPEX ratio of 17.3%. On the next slide, we have our more indicators, equity ratio, pretty much on last year's level. That's a little bit over 38%. Net debt slight increase to 2.6 billion, which then translate to a net debt divided by underlying EBITDA of 2.1. Slight increase, but of course, with the reduction of the profitability That's a result of that. And with this, I'll give it back to you, Robin. Yeah, thanks, Rainer. So from my side now, just the outlook for 2023. The headline here says 2023 P&L outlook confirmed as revised in June. So that is because we now, of course, factored in the Polyplus acquisition since it's closed since July the 18th. You can see here from the first bullet point below the table that this means that there is one additional percentage points of non-organic sales revenue growth contribution, but no impact on the outlook bandwidth here. And there's also no impact on the approximate profitability outlook that we are giving. The other effect is shown in the last bullet point, the net debt to underlying EBITDA ratio, which is now anticipated to be slightly above four by end of the year. The other numbers are as suggested for five weeks ago. So it's a very busy chart. Apologies for that. But I hope it helps for providing as much transparency as possible here. So therefore, briefly, For the saturated group, we are expecting a low to mid-teens decline in sales revenue. The decline excluding the COVID-related business and the impact from that would be mid to high single digit. Rainer has explained the numbers after H1, so this is the guidance for full year. And the profitability for the group that we are expecting is around 30%. And then it reads the same for the two divisions. And I guess I don't have to read it out here. Then as a recap, because Rana already mentioned CapEx for H1, we expect CapEx to be approximately on the same level for the full year. So, or I mean, the ratio to be around 15%, but the absolute CapEx roughly on the same level. So we are pretty much continuing without changes our capacity expansion program. And let me briefly reiterate why this is. One is because we leave our midterm expectation unchanged. We believe what we are seeing here at the moment is what we always have anticipated, and that is quite significant volatility around our unchanged and positive midterm growth trajectory. And as we didn't change our expectation and our respective activities during strong over amplification of order intake and sales growth because of the buildup of inventories by our customers, we do the same now during this temporary rundown of the inventory levels of our customers. And then, of course, there's also a certain impact from the necessity to build up a certain regionalization of our footprint. We actually have been working on that even before the geopolitical turmoil, but nevertheless, of course, this also adds a bit to our capex as there is particularly to mention the expansion of our North American plant, but as well as the buildup of capacities in Asia. So, and with that, I would like to hand it over for the Saturated State of Biotech Results to René.

Thank you, Achim, and hello everybody also from my side. Welcome to our H1 call. I will start the SSB part with the PolyPlus acquisition we have announced in March and finally closed this week. First of all, a very warm welcome to our new colleagues from PolyPlus. We are very excited to join forces with that great team. PolyPlus is a leading provider of transfection reagents which are used in manufacturing of gene therapies and gene modified cell therapies. The company expanded their offering and added both plasmid design and plasmid manufacturing capabilities and also launched recently new reagents which are used to make lipid nanoparticles for in vivo RNA or DNA gene delivery applications. So highly relevant portfolio for us and very important milestone in our very focused efforts to build a portfolio of cell culture media and critical materials, which are used particularly in making such new therapeutic modalities like cell and gene therapies. Products are highly complementary to our upstream and downstream and fluid management offering we have today and supported by services like cell line and process development, or plasmid design and plasmid manufacturing services. These materials are high quality GMP grade ingredients, which have a strong impact on performance and economics of the manufacturing processes of our customers. They're often used in combination media, for example, with gross factors or transactions reagents are used with cell culture media to make viral vectors so it brings very nice cross-selling opportunities as well. Typically, they are spec'd in preclinical or early clinical development of drugs, and once the drug gets approved, it becomes quite sticky and recurring business. The market for cell and gene therapies is an early, relatively young market, which is becoming increasingly relevant. These new modalities represent now one-third of new biologics pipeline already. the market is growing with 20, 30%. The approved drugs are today rather small indications, typically with regional or country approvals. According to FDA, the expectation is that around 2025, 10 to 20 new approvals might come to the market per year. We have seen quite a nice pickup of approvals recently in the last couple of years. The pipelines are well filled. Two-thirds are early phases, providing for us the opportunity to get those materials packed in early in these processes. PolyPlus here brings quite a nice footprint in these pipelines, both in development but also in already approved drugs. Regarding the financing, Rahner, do you want to take that? Yeah, I'll take this quickly.