Lonza Group AG

Ladies and gentlemen, welcome to the Lonza Half Year Results 2023 Investor and Analyst Conference Call and Live Webcast. I am Sandra, the course call operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions over the conference call by pressing star and one on your telephone and follow up the presentation over the webcast. please limit yourself to one question and then re-enter the queue in case you have a follow-up. For participants over the webcast, kindly note that you have the possibility to increase and decrease the size of the media player by placing the mouse between the slideshow and video. For operator assistance, please press star and zero. 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.

Good morning and good afternoon to all of you, and thank you for joining us for our half-year results presentation. I'm here today with Philippe Diguet, our CFO. He will be joining me in presenting the update and answering your questions. Looking at our agenda, I will start with an overview of our performance in H1 2023, before handing over to Philippe to talk through our financials. Then I will take you for a tour of our division and say a few words about our priorities for the second half. As usual, we will make sure that there is plenty of time at the end for us to answer your questions. Let's start by taking a look at our group results. In H1, we delivered sales of 3.1 billion Swiss francs. This represents a 5.6 sales growth as constant exchange rate against an elevated H1-22 base, mainly set by high COVID sales. Looking at our underlying performance, we grew about 10% at constant exchange rate, which reflects the continuing momentum in commercial CDMO business. Turning to a core ABTDA, 922 million Swiss francs resulted in a margin of 30%. Looking at our performance and the current market dynamics, we have updated our outlook to mid to high single-digit concentration-generated sales growth and 28 to 29 core ABTDA margins. This reflects lower growth than expected in early-stage services coming from a lower level of biotech fundings. It also reflects continued weakness in the neutral pharmaceutical capsule business. Both of these factors led to lower utilization of assets. Regarding our mid-term guidance, we confirm our three-year sales growth trajectory, but our margin range has been updated at 31% to 33%. More on this in a moment. Looking at some of our key events in the first half, we are pleased to report solid underlying growth in biologics. This has been driven by your bioconjugate, mammalian, and microbial businesses. Also in biologics, we saw a healthy increase in value of contract signing in H123 compared to the first half of the prior year. In small molecule, strong performance was driven by high asset utilization, a favorable mix from production phasing, and an ongoing focus on more complex and high-value offerings. As we noted in our Q1 qualitative update, our cell engine division continued to experience low demand. In our biologic division, we saw the same trend increasing in Q2 due to low funding of biotech. In our capsule business, we have seen softer demand for nutraceuticals, mainly as the U.S. customers are destocking the inventory they built in the pandemic. And there is a lower demand from the end consumer in the current economic environment. Looking at new investment, in June we were happy to announce our agreement with Vertex to build a dedicated manufacturing facility for type 1 diabetes cell therapies. Construction at our US site in Portsmouth is scheduled to begin later this year. Turning to our gross investment, we are making good progress across our larger assets, with the series of milestones reached in H1. At our biopark in Vist, two new bioconjugates manufacturing suites can come online, as well as a new line for commercial drug products. Our U.S. presence in biologics has also been extended with an early development service lab in Cambridge, Massachusetts. We have already mentioned our collaboration with Vertex. This is a great opportunity for us to leverage all strong crack records in manufacturing cell and gene therapies and our experience in bringing new facilities and technologies online. In June, we announced the acquisition of Synaphix, a biotech with the leading platform to develop ADCs. The acquisition has brought an impressive team of scientists to Lonza, as well as new and innovative technologies. Synafix already has multiple contract with small and large biotech, bringing a potential future source of royalties revenue. The transaction is revenue and margin accretive from the date of the acquisition. By combining all existing capability with the Synafix technology and IP, we can deliver a best-in-class offering to streamline our customer paths from ADC discovery to commercialization. the acquisition leaves us uniquely placed in the industry with the complete ADC offering. We see ADCs as an exciting modality which brings effective treatment for patients and is driving growth for Lonza. Moving to ESG, Lonza has made significant progress in its emission reduction program. we submitted a letter of commitment to the Science-Based Target Initiative, a leading carbon footprint reduction initiative. The letter confirms our commitment to reduce scope 1 and 2 of green gas emissions by more than 40% by the end of 2030. We also signed a 10-year virtual power purchase agreement for solar electricity with IGNESIS, the Spanish renewable energy group. Under this agreement, IGNESIS will produce more than 300 GWh of solar electricity, which is equal to our electricity needs across Switzerland and the European Union. Together, these programs support our carbon reduction program and underline our long-term commitment to doing business in a responsible way that protects the environment. As we come to the end of this section, I wanted to share our priorities for the second half. Ramping up our new commercial assets will support growth in biologics in the second half and beyond. We will also focus on converting more early-stage opportunities, which help us to optimize our increased capacity in this area. Finally, our continuous improvement initiative will drive performance and cost efficiency across the network. With that, I will conclude our group update and hand over to Philippe for a more detailed look at our financials for the first half.

Thank you, Pierre-Alain. Good morning and good afternoon to you all. Before we start our financial review, let me remind you that growth is reported at actual exchange rates, except sales growth, which is reported at constant exchange rates. Let's start by taking a look at our financial highlights. Overall, our H1 results are solid, despite market headwinds impacting our early-stage and nutraceutical capsules offerings. The group delivered sales of 3.1 billion Swiss francs, growing 5.6%. 922 million Swiss francs core EBITDA resulted in a margin of 30%. We are pleased with the performance of biologics and small molecules supported by sustained customer demand across our businesses, especially for commercial assets. Our cell and gene and capsules divisions were impacted by more adverse market conditions. We will look at the divisions more closely in a moment. On an underlying basis, Lonza sales grew around 10% in H1. Our underlying growth excludes the effects of the COVID sales loss and the aliquots cancellation fee, as well as other disclosed one-time effects in H1-22 and H1-23. Margins reach a solid 30% in line with expectations, but it's three percentage points lower than the high base in 2022, which included the items just mentioned. Let's move to the next page to look at our margin in more detail. Looking at our margin evolution, we have reported the decrease of 3.1 percentage points in H123 versus H122. Breaking it down, the decline can be explained by three key factors with roughly the same contribution. First, the loss of COVID sales, which delivered good margins. Second, the overall negative impact of current and prior year one-off items. And third, the impact of lower utilization in early stage and CHI assets. Of course, we continue to deliver productivity gains and operating leverage. These are offset by our usual gross project dilution, divisional and business unit mix, and a small residual effect of inflation like we saw last year. Moving to our divisions, Biologics reported sales growth of 2%. This represents double-digit growth when adjusting for MRNA sales loss and the prior year aliquots cancellation fee. We are especially pleased with the growth of our different modalities, particularly bioconjugates, mammalian and microbial. The newly acquired Synafix business is now also part of our biologics division. However, it had a minimal effect in the first half as the acquisition completed in June, meaning only one month of revenue and margin was consolidated. The decline in the biologics margin was mainly driven by the effects on sales just mentioned and the dilutive impact of the assets in ramp up. Turning to small molecules, the division reported a strong first half performance. Assets are highly utilized and delivered sales growth at 37.5%. Adjusting for last year's H1, H2 customer shipment phasing, growth would be high single digit. Margins were strong at 35% due to good product mix and phasing. The benefits will reverse in the second half, so we can expect full-year performance to be in line with the mid-term divisional guidance. The cell and gene division had a softer H123, with sales growth at 11%. Looking across the business units inside the division, we see two different dynamics. Bioscience performed well through a combination of volume growth and pricing. However, cell engine technologies was impacted by weak demand due to the current biotech funding environment and some clinical stage customer failures. The decline in the regular business was more than offset by the accounting treatment of the Kodiak Bioscience bankruptcy resolution in Q2. The termination with Kodiak, Lonza's former Exosome partner, released Lonza from a multi-year manufacturing liability of around 50 million Swiss francs, which positively impacted both sales and margin. We have provided more detail at the back of the presentation. It is important to note that Lonza remains fully committed to the Exosome space, and we continue to operate our site in Lexington, purchased from Kodiak in 2021. Finally, our capsules division reported flat sales in H1. This was driven by a weak nutraceutical market as we see customers destocking post-COVID alongside a slowdown in end consumer demand. Other areas of the business showed a more positive performance with sales growth in pharmaceutical hard capsules and good dynamics in the APAC region. Margins were below the first half of the prior year, mainly from underutilized production lines and increased global prices for gelatin, the most important raw material for the capsules business. As Pierre-Alain already mentioned, in H1-23, Lonsa spent 765 million Swiss francs, or 25% of sales, on CAPEX. Around 80% of this spend was focused on growth projects, mainly in our biologics division. The remainder was invested in maintenance as well as infrastructure and systems projects to support the growth of our different divisions. We remain on track to spend the guided amount of around 30% of sales in CAPEX projects in 2023. I will finish my part of the presentation with a look at our free cash flow. Our free cash flow was negative 62 million Swiss francs, mainly driven by our capital allocation strategy of continued organic growth investments. Our pre-growth investment cash generation remains solid at around 20% of sales. Inventory has not declined as expected, with our day's inventory outstanding still at around 7 months, which is in line with year-end 2022. The absence of a reduction is mainly due to higher-than-expected finished goods and work-in-progress inventories. It's also important to note that we make to order, and so there is little risk around the inventory. We remain committed to reducing inventory by about one month over the next year. With that, I thank you for your time and I will hand back to Pierre-Alain.