Lonza Group AG

Ladies and gentlemen, welcome to the Q1 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call Operator. I would like to remind you that all participants are in listen-only mode 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 and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Pierre-Alain Ruffieux, CEO. Please go ahead, sir.

Thank you, Sandra. Good morning, good afternoon, and welcome to our first quarterly qualitative update. As you will recall, we have scheduled this meeting to have a touchpoint between our half-year and full-year financial reporting. We are intended to provide a general business overview so we will not be discussing our financial performance today. As usual, we will share our full financial update during our half-year call on July 21st. Today, I will start by sharing a view of the overall group and our macroeconomic context, then provide a short update on each division. After that, our CFO, Philip Dick, and we'll answer any question you have. Let me start by saying that our group performance after the first three months is in line with the trajectory we expected. This means we are confirming our Outlook 2023 at high single-digit constant exchange rate sales growth and a core EBITDA margin of 30% to 31%. As we forecasted when we reported our full year results in January, we anticipate a strong second half of the year balancing a softer H1. Let's now take a moment to look at our macroeconomic context. In Q1, we have seen a number of macroeconomic factors influencing our business in different ways. In line with the wider industry, we are observing soft demand for early stage services and capacity, driven by constraints in biotech funding. We began to see this in 2022, and the banking crisis earlier this year has continued to limit access to capital for biotech. However, Commercial supply make up around 70% of Lonza's CDMO business, and here we continue to see a strong interest. Turning to our growth projects, we are making good progress with capex spending being on track. We are also pleased to have started operation in two new facilities in VISP for fill and finish and bioconjugates. we were happy to see that FDA approved the first oral live biotherapeutics from Ceres Pharmaceutical. The scale-up of this novel therapy will be supported by Bactera, our joint venture with Christian Hansen. Now, let's take a look at each of our divisions. In biologics, we see strong underlying sales growth versus Q122, excluding the prior year alakose termination fees and mRNA sales. There is a lower demand for early-stage offering, driven by biotech funding constraints, but we see solid demand for long-term, large-scale programs across mammalian, microbial, and antibody drug conjugates. This is supported by advanced commercial discussion with large pharma and well-funded large biotech. Weaker performance in China is driven by low interest from our international customers and a challenging local market. Looking at our growth project in Q1, in this, the tech transfer for the first commercial product of our new drug product line is ongoing, and we have completed an extension of our conjugation facility. We also commence the construction of our new 500 million commercial drug product facility in Stein. Finally, in January, we mentioned two growth projects that were delayed by a couple of quarters. Since we updated the schedules in 2022, the projects are now continuing to progress as planned. In small molecules, a solid Q1 builds on the momentum of H2 last year. This is supported by good demand visibility. While industry funding challenges have caused a slight decrease in inquiries, the number of new customer signings remains consistent with previous years. We are also pleased to see a continuing portfolio shift to more high-value and complex small molecules. Let's now turn to the cell and gene division. In bioscience, cell growth is aligned with expectations and driven by good demand and pricing power. In cell engine therapies, the biotech funding challenges have impacted preclinical and phase one demand. This has led to a reduction of new inquiries and placed pressure on margin and growth in Q1. Nonetheless, we remain committed to this base, which continues to hold strong long-term commercial potential. In the capsules and health ingredient division, we have seen continuing strong demand for pharma capsules. We are also pleased with our progress on pricing, which has allowed us to mitigate some of the increase in the price of gelatin, a key raw material for our capsule business. However, excess manufacturing capacity has been driven by lower demand for nutraceuticals in the U.S. as customers reduce their inventories ahead of a potential economic downturn. This means that the division saw some pressure on top and bottom line in Q1. In January, we announced our intention to start a share buyback. As planned, the program commenced early April and is currently scheduled to complete in H1 2025. The buyback is executed via a second trading line on the Swiss exchange. Finally, I want to confirm that we will host our Capital Market Day on the 17th of October. This will replace our quarterly qualitative update for Q3. The event will be hosted in our site in VISP, and we will take you on a tour of our facilities. To close, I will summarize by saying that we are in line with the expected trajectory towards our outlook 2023. And as we anticipated in January, our H2 performance looks set to be stronger than H1. Looking at our industry fundamentals, we are well positioned to capture value with a strong focus on quality, our broad range of offering, our global asset base, and our technical expertise. With that, I would like to thank you for your attention, and I will now pass back to Sandra for the Q&A session.

We will now begin the question and answer session. Anyone who has a question or a comment may press star and 1 at this time. The first question comes from Matthew Weston from Credit Suisse. Please go ahead.