Sartorius AG

Ladies and gentlemen, welcome to the Sartorius and Sartorius Stadium Biotech Conference Call and Live Webcast on the Preliminary Full Year 2023 Results. I'm Sascha, the Chorus Call Operator. I would like to remind you that all participants will be listening on remote and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Star 1 on your telephone. For operator assistance, please press 4 and 0. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Dr. Joachim Kreuzberg. Please go ahead.

Thank you very much, and also welcome from our side here, and thank you for being available a little bit earlier than usually. So, therefore, good day, but also good morning, I guess, to some of you. So, let me start the presentation by walking you through the most important highlights of the year 2023, which really has been a year of transition in a very volatile life science industry where everybody has been impacted by several partially expected, partially unexpected developments. So, first of all, the preliminary results for the group and both divisions are well in line with the adjusted guidance that we shared with you in October. You will see the numbers in a minute. We have seen that the demand continues to gradually pick up. So for both divisions, and therefore, of course, also for the group, the book-to-bill ratio for the entire fourth quarter has been slightly above one. We think that's quite encouraging. Nevertheless, of course, still maybe not a completed normalization. We'll talk about that later. We definitely would like to highlight the PoliPlus acquisition. as being an important milestone for the Sartorius Group, and particularly in the context of building up a strong and differentiating technology platform in the area of cell and gene therapies. We have continued to make significant investments into organic growth, so that means into capacities on a global scale, which has to do with our view that we should invest into customer proximity and resilience. And I think it's clear that now, maybe differently to five or maybe even 10 years ago, that means also a bit of different idea about the global footprint that one has to develop. And sustainability, of course, is part of our investment program as well. For 2024, our guidance is that we expect group sales revenue growth at a level of mid to high single digits. This reflects a positive outlook on the, regarding the general market trends, and at the same time, a certain caution regarding how quickly these trends will fully kick in and the actual trends of normalization will have been really completed. And we expect the EBITDA margin to increase to slightly above 30% for the group. We are fully committed to reduce our debt leverage rapidly through a strong organic cash generation. However, at the same time, we want to underline that potential additional equity measures remain an option, as you know from all of our previous communication. For the midterm, we have defined a new outlook, and I think we gave you a little bit of a heads up that this would be framed in a little bit of a different way than we did this over the last more than 10 years. And we have chosen to use a time horizon until 2028, and we are expecting a sales revenue caregiver to be in the low teens and a further increase of our EBITDA margin to about 34% by the year 2028. So let's jump into the details of what we have achieved. And before sharing the numbers for the group and the divisions with you, I would again like to use a chart that we have shown to you, I think, throughout the year in these quarterly calls. And that is taking a little bit of broader perspective on how sales revenue and order intake have developed since the beginning of the pandemic. So therefore, I think it's helpful to compare where we are at the moment with the year 2019, so the last year before the pandemic. So sales revenue at the end of 2023 or for the year 2023 is almost 90% above the 2019 level. Order intake is still about 60% higher. And we believe that those numbers also reflect a growth above the average market. You will also see in a minute that the profitability of the Sartorius Group for 2023 is above the one of 2019. As we communicated as early as in October 2020, we have seen a non-sustainable over-amplification of economies of scale and top-line growth because of the volatility that you all are aware of. So but nevertheless, I think the level where we are at the moment is a healthy one. So now let's take a look on the key P&L figures for the Sartorius Group. Space revenue came in at 3.4 billion euros. Order intake at 3.1 billion euros approximately. The decline in sales revenue has been 16.6% in constant currencies, so within the bandwidth that we have ordered, within the guidance that we have given to you about three months ago. Order intake decline as expected even a little bit higher because of the strong decline in the first part, the first half in particular of this year. The underlying EBITDA asset at 963 representing a 28.3% EBITDA margin. Earnings per share stand at 4.94, respectively 4.95. Maybe without reading out all the additional information that this chart provides, I would like to Just say that the sales decline excluding COVID-related, directly COVID-related effects is around 12% in constant currencies. And then, of course, now we could discuss about the effect coming from Russia, which would be around one percentage point, et cetera, et cetera. But we will provide some more detail later. So, from a regional perspective, it's fair to say that all regions have been affected by this normalization. and all those trends we talked about for both divisions. However, as China was particularly weak, very weak indeed, the total Asia Pacific number therefore shows also a stronger decline even. If we would deduct for that, then Asia Pacific would have performed better than the other regions, as you can see. And then for the European region alone, The effect from Russia accounts for roughly three percentage points. So, I think, but this is, again, very much in line with the trends in the life science sector during 2023. So, for the bioprocess solutions division, obviously, the full year has been strongly impacted by the headwinds, particularly by the reduction of the inventory levels by our customers. we have seen a sequential recovery of the order intake and book-to-bill came in above one for the fourth quarter. Denis will expand on this a little bit more when presenting to you the SSP numbers later. So, sales revenue decline was 17.6%, again, in line with our most recent guidance as the profitability, which stands at 29.2% for 2023. The LPS division, again, I had to deal with very cautious low investments by many customers, particularly to be mentioned here are customers in China, where the market has been very weak across the board, and the U.S. because of the more significant role that small biotech firms play here within our customer base, and I think that is the same for many peers as well. So our sales revenue came in at roughly 720 million euros, order intake at a good 660 million. Sales revenue declined by 12.7% in line with our most recent guidance as the profitability, which stands at 25.1% for the full year. Booked a bill for the fourth quarter, as we have seen a positive trend for LPS as well after, as we talked about three months ago, a disappointing third quarter. quite encouraging above 1, slightly above 1 as for BPS as well. So taking a look on the cash flow numbers and some other information here, what I would like to highlight again without reading out all the information that this chart provides to you, the third bullet point on the right-hand side, we have seen an overrating cash flow. quite a bit above previous year's number, which shows that the improvement of our working capital position as planned, and particularly here, the reduction of our inventory levels already have shown some results in 2023, more to come in 2024. I mentioned at the beginning that we are executing on a quite broad and also ambitious investment program, a very conscious long-term oriented build out of our capacities with an eye on the robust regional setup, as I said before. And just two examples on the right-hand side, just in the center of the U.S. in Ann Arbor, we are about to complete the build or the construction of a site, particularly for our analytics products, but also other activities that we have in the left division in the U.S., And in South Korea, we have started to build a site with quite a broad scope of products to be produced there for Asia, where we took the conscious decision to position it in Korea, as we have strong and very relevant customers there. And we consider that to be a rather very stable market to run such operations. And we have a strong activity in Korea already today. The balance sheet, of course, reflects the recent M&A and the acquisition of Polyplus in particular. So I would say no surprise here. Again, I would like to mention also along this chart that we are fully focusing on a rapid deleveraging as a key priority for Saturis for 2024 and beyond. So let me now expand a little bit on this topic, and I mentioned it already when walking you through the most important topics for 2023 and the beginning of 2024. We have a strong focus on organic test generation, but at the same time, We can imagine to take also equity measures to accelerate the leveraging. You see some conceptual charts or a conceptual chart here on the left-hand side where you can see that our organic path forward would lead to approximately that leverage around three in 2025. and maybe this would be one turn lower depending on a potential equity or equity-like measure if taken. And the key point here is not so much backwards looking but very much forward looking. The idea would be to accelerate the debt reduction and to strengthen our strategic flexibility. So, and as you can see on the right-hand side in the bullet points, and again, let me reiterate on what we communicated for a long time now in our capital market days, et cetera, or also during our AGMs where we got those authorizations for such potential measures. Those measures, in principle, are available on both the SAG and the SSB level. And what I also would like to say is, because that could be some concern, if such measures would be taken, our rough estimation would be that the reduction of interest payments would compensate for any effects from higher numbers of shares. So now let's shift our perspective on the guidance for 2024. We are shooting for profitable growth. while expecting a moderate start into the year, a moderate first half of the year, particularly maybe a moderate first quarter of the year. And that has partially to do with the rather strong comps that Q1 represents, but on the other hand, also on what I said before, we believe that we will still see some weaker market environment when it comes to the appetite for investments in amongst the young biotech firms, which will affect probably the LPS division mostly as well as the rather weak market in China that we also would anticipate not to recover very quickly soon. Again, maybe this would have a bit of stronger impact on the left division. And at the same time, while we see quite now for four months roughly, a healthy trend in order in checking power process. We nevertheless would consider this normalization and the rundown of inventory levels at customers not to be fully completed. And again, René will expand on that maybe in a minute as well. And therefore, we believe that there will be a gradual trend during 2024 with a second quarter, second half of the year to be stronger than the first half of the year. And overall, what we are expecting is for the Sartorius Group, a top-line growth of mid to high single-digit percentages, including 1.5 percentage points from acquisitions, which is basically the first seven months, roughly, of polyplast, because we were consolidating them since late July of last year. So there is this remainder to come. Bioprocess solutions also mid to high single-digit percentages. Here, this effect would be approximately two percentage points, LPS, low single-digit percentage growth, and then the EBITDA margins are slightly above 30% for the group, above 31% for BPS, and approximately on the 2023 level, which was 25.1% for LPS. And again, you see that excluding any possible capital measures or theoretically also any acquisitions, we would anticipate the net debt to underlying EBITDA to come in at around 4 for 2024. So, and then, just briefly, as this chart will be part of the presentation on SSB in a minute, and maybe René will talk a little bit more on that as also an opener and the background information for our activity in cell and gene therapies and advanced therapies. Just briefly, we consider the fundamental growth drivers in our industry to be intact, and that is where we base our midterm guidance on, which you can now find on the next chart. And as said before, we are now taking a perspective onto the year 2028. We are expecting to continue outgrowing the market. For the group, the target is to grow in the low teens and to achieve a 34% everyday margin. I said that before when walking through the first chart. The distribution or the contribution, I should probably say, by the division that we are expecting is for BPS low to mid-teens percentage growth and an EBITDA margin of approximately 36%, and for LPS mid to high single-digit percentage growth and 28% of EBITDA margin. For both divisions and the group, our estimation is that one-fifth of that sales revenue growth could come from acquisitions. And then my last chart now would be on our quite broad set of ambitious sustainability targets. I think we presented quite a few times already on our target or set of targets regarding the reduction of CO2 emissions, which is an important part, of course, of this agenda. At the same time, now we have Additionally, we have set ourselves targets regarding reducing the consumption of material, so quite some ambitious targets regarding circularity. And, of course, we also do have some social targets. One that we mentioned here, which is also, as the others are relevant for compensation schemes, is the annual employee net promoter score, an important measurement for employee satisfaction. So, so far for the Sartorius group, and now I would like to hand over to Rene for SSD.

Thank you, Joachim. Hello, and welcome, everybody, to the Sartorius setting biotech part of our call today, starting with the five-year view. The chart looks very similar to what Joachim showed for the Sartorius AEG group, showing the post-pandemic transition we went through. the last couple of years. The growth you see from 19 to 23 corresponds to a strong above-market 18% CAGR we have achieved. I want to again highlight the positive trends in order intake we have seen since the end of Q3, started in September, and now also in the Q4. Despite the slowdown we anticipated, the stocking dynamics, we see order picking up. And the book to bill in the last quarter climbed slightly above one very positive signal. So the positive trend is visible, yet the destocking at some of our customers is not yet over. And we expect it will take the H1 to get through it. In a full year view, sales revenue for Sartor Steading Biotech decreased compared to previous year's high base to 2775 million euros in 2023, which corresponds to a decline of 18.7% in constant currencies. We guide it around minus 19. This includes a growth contribution from acquisitions of around two percentage points. If we would exclude here the pandemic-related, directly pandemic COVID-related business, the decline in Constant currency was slightly then above, below 14%. The temporarily weaker market environment was even more reflected in the order intake, which decreased by 23.6% in constant currencies and achieved 2.476 million euros. The group's underlying EBITDA margin decreased to 75 million. by 35.7%, mainly due to the volume development and product mix effect means it higher than usual portion of equipment revenues here. The resulting margin was 28.3%. We got it here slightly above 28%, so well within the guidance. Price effects on procurement and customer side largely have set each other and the underlying earnings per share dropped from 864 to 419 in 2023. Looking at the regions at all, we see that the general market weakness affected all the business regions, EMEA region, which accounted here for around 39% of total revenue. Sales revenue declined by 16.7% compared to previous year. The growth in EMEA was negatively influenced by the discontinuation Business with Russian customers, the Americas region were down 15.5% against the backdrop of inventory reductions and low investment activities by customers in the U.S. This corresponds to a share of around 38% of total group revenue. The investment slowdown was particularly pronounced in China. Joachim mentioned that, leading also for the SSB group, more significant decline of 26.5%. 4% in sales revenue in Asia Pacific region, which accounted for around 23% of the total group sales revenue. Underlying net profit, total 386 million euros compared with 797 million euros in the prior year period, while net profit amounting now to 310 million euros compared to 876 million euros in 2022. Net operating cash flows stood at 746 million euros compared to 612. And previous year, the increase was primarily achieved through the optimization of working capital as we planned that. You will remember that we have systematically increased inventories in 22 and previous years as well to secure our supply ability in view of a temporary constraint supply chains. that allowed us to gain market shares during the pandemic. We are now reducing back the inventories as planned. Apex ratio was up to 17.1% by 4.8 percentage points. As we want to keep our best-in-class delivery ability, we continue investments. investment program in both R&D and operations infrastructure to get it ready for future above-market growth and make it more resilient and closer to our customers. Yet we do it at adjusted speed, reflecting the temporally market slowdown. Major strategic investment in capacities is the Songbo site in South Korea. It's close to the largest installed cell culture capacity in the world. where we will produce all major consumables like cell culture media, bags, filters, and also run products, process development and customer training, laboratory serving not only Korean but also Asian market outside, mostly outside China. Moving to the key financial indicators, very much in line with what Iriakim explained for the Sertorius Group, the equity was 2673 million euros as of December 31st, 23, following the PolyPlus acquisition, the equity ratio stood in line with the expectation, 34.5%. Net debt stood at 3,565 million euros and resulting in a ratio of net debt to underlying EBITDA for SSB Group 4.5. Beyond focusing on customer satisfaction, innovation, organic roles, we will fully concentrating on further efficiency gains in strong cash generation in 2024 to rapidly run down the debt leverage, which is at an elevated level following the PolyPlus acquisition. You see here how the potential equity measures Joachim described would accelerate the leveraging by approximately one turn for the SSB group then to 1 or 1.5 in 2025. That brings me to now to 2024 outlook. This year, we anticipate the return to profitable growth for SSB. As said, the inventory optimization measures of some customers have not yet been fully completed, and the visibility is still somewhat limited. We expect business momentum to increase then only gradually over the course of the year, leading to a moderate first half of 2024 with continued Gradual pickup in orders followed by H2 rebound in sales. With that, we forecast an increase in sales revenue in the mid to high single-digit percentage range, including a contribution of polyplus of around two percentage points. In terms of profitability, we expect the underlying EBITDA margins to rise to more than 30% compared to the previous year figure of 28.3. The above average profitability of PolyPlus business will here also strike the positive effect on the margin development. The capex ratio is projected to around 13% compared to 17.1, as I described previously. Including the potential capital measures and our acquisitions, the ratio of net debt to underlying EBITDA is expected in 2024 at 3.5. So we can already talk about the market fundamentals briefly. So I would maybe focus more here on particular cell and gene therapies. You see it's a market segment which is becoming more and more relevant for our business. We expect also that market segment growing above average with around 20%. On the left side, you see that then a portion of such new therapeutics in the customer's pipeline is already relevant at 30% and growing. If we look at our activities in that space, we have been putting together a technology platform of media and critical materials used in this young yet increasingly relevant market segment. PolyPlus acquisition was a key milestone for us, bringing already quite a nice footprint in the pipelines of gene and gene-modified cell therapies. Our SSB exposure to this attractive market segment is now at above 10%, and we expect above-average growth here, as I mentioned. Having said that, there is a need for continuous innovation, not only to help customers to bring such innovative novel modalities, therapies to life, but also further drive process and resource efficiencies in more traditional monoclonal antibody like biologics manufacturing. With our broad portfolio, we see ourselves extremely well positioned to continue outgrowing the market. And we are forecasting now low to mid teens percentage range growth over the next five year period to 2028. Acquisition are anticipated to contribute here around a fifth and the underlying EBITDA margin is also expected to increase and reach slightly above 35% for SSP group in 2028. And with that, then we move to the Q&A.