Lonza Group AG

Ladies and gentlemen, welcome to the full 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 at any time by pressing star and one on your telephone. In the webcast, you will be able to see a chat box to use in case of weak phone line connection. please note that the questions must be asked via the phone first. 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 Albert M. Beni, CEO at Interim and Chairman of the Board of Directors. Please go ahead, sir.

Thank you for the introduction. Good morning and good afternoon to all of you. And thank you for joining our full year results presentation. I will share our performance at the group and divisional level. Philippe Decquet, our CFO, will present the details of our finances. We will also ensure that there is time at the end to take your questions. Let's start by taking a look at the group results. In 2023, we delivered sales of 6.7 billion, corresponding to a sales growth of 10.9% at a constant exchange rate. A core EBITDA of 2 billion delivered a margin of 29.8%. While maintaining high levels of investment with 25% of sales invested in CAPEX, we also delivered a free cash flow of around 330 million. For 2023, we are proposing a 14% share dividend increase of half a franc to 4 Swiss francs per share. We are also continuing to return excess capital to our shareholders via a share buyback program of up to 2 billion Swiss francs. Finally, we confirm our mid-term guidance 2024 to 2028, which was issued at our Capital Markets Day in October last year. Looking across our four divisions, we saw softer sales and margin performance in cell and gene, and capsules and health ingredients. However, there was strong performance in both sales and margin from our biologics and small molecules divisions. Collectively, these two divisions were responsible for more than 70% of our revenues, and both delivered a margin of more than 30%. I will take a moment to place Lonza in its industry context. In the last year, we have seen some challenges in the CDMO industry. 2023 was a post-pandemic reset year, and this led to higher levels of uncertainty. Weaknesses in biotech funding were most visible in the early stage drug product development process, and we saw customers with further inventory stocking. More generally, we also saw new geopolitical uncertainties. All these factors impacted confidence across the business community. However, I want to take this opportunity to underline the strong and attractive long-term potential of the CDMO industry. Concerns about capacity overbuild can be addressed by the continuing trend towards outsourcing and the sustained commercial demand for manufacturing services. This demand will be sustained by an extensive pipeline in Phase 1 job candidates and an accelerating job approval rate. We have strong visibility on our commercial contracts, which have an average length of seven years. As a result of these trends, we foresee high levels of capacity utilization over the next five years, with longer-term demand also being driven by a new wave of innovative therapies. Over the course of 2023, we signed around 130 new CDMO customers and around 350 new clinical and commercial programs. Looking at our CDMO customers by location, 80% of our sales are focused in Europe and Americas, and these are the areas in which we focus our growth investments. We see a fairly even balance between CDMO sales to small and mid-pharma customers and large pharma customers. Finally, our top 10 customers continue to represent around half of our sales. This diversified and stable customer base provides us with solid foundations to support our performance and growth. Looking at our ongoing growth projects, we continue to progress with more than 20 projects in 2023, each worth more than 50 million in capex. Of these, 60% were in construction, 30% were in ramp-up, and 10% are already in operation. The growth projects range across nine modalities, with 90% of investment focused on commercial and multipurpose assets. Placing these investments in context, we have invested around 75% of CAPEX in growth projects over the last four years. Looking at recent achievements, in September, we saw the groundbreaking of our new dedicated facility for the Vertex Type 1 diabetes cell therapy portfolio at our site in Portsmouth. In October, we announced a new ADC filling line for a dedicated customer at our site in Stein. In the same month, our small molecules monoplant dedicated to our customer Aurinia became operational in Wiesb. We have continued to make progress in our sustainability commitments. We have made further reductions in our energy, water and greenhouse gas emission intensity. Compared to our baselines, we have now reduced emissions intensity by 43%, energy intensity by 35% and water intensity by 30%. Looking at specific initiatives in 2023, we have entered into two power purchase agreements that will decarbonize our Scope 2 electricity emissions across Switzerland, the European Union and China. We have also signed a letter of commitment to the science-based target initiatives to confirm our carbon reduction plan. Finally, we have developed and launched a supplier evaluation program and toolkit to support carbon reductions across our supply chain. Now, I will pass to Philippe to discuss the financials in more detail. Philippe, please.

Thank you, Albert. Good morning and good afternoon to you all. Before we begin, I would like to remind you that growth is reported at actual exchange rates, except sales growth, which is reported at constant exchange rates. I will start by providing a summary of our financial highlights. Overall, we achieved solid results ahead of our revised outlook. This is despite isolated weakness in the early stage and nutraceutical end markets, which, as you know, are a smaller part of our business. The group business delivered sales of 6.7 billion Swiss francs, corresponding to 10.9% of sales growth. CoriBitDA is at 2 billion Swiss francs, resulting in a margin of 29.8%. We continue to see some higher availability in the market for small-scale assets used for early-stage work, arising from the impact of biotech funding constraints. In the nutraceutical business of our capsules and health ingredients division, we also saw the impact of post-COVID customer inventory destocking. Together, these factors drove asset underutilization and impacted our margins in 2023. Let me also clarify the year-over-year change in reported IFRS profit. Reported profits reached 655 million Swiss francs in 2023, down 46% versus prior year. The decline is driven by a high base in 2022 from divestment gains and from impairment losses in 2023, mainly from the closure of our two sites in Guangzhou, China, and Hayward, US, as well as impairments following the Moderna contract termination. The more comparable metric, core EBITDA, is flat year-over-year, as mentioned before. Just two notes on the second half. Higher H2 sales were driven by an acceleration in biologics. This was due to strong year-end operational execution at our sites, favorable timing of customer deliveries, and the Moderna termination which we communicated at our Capital Markets Day in October 2023. H2 margins were close to 30%, but diluted by inventory adjustments from stock buildup during the pandemic to secure customer orders, plus the expected product mix normalization in small molecules. Now let me turn to our sales growth in more detail. As mentioned, we delivered strong sales growth of 11% in 2023, mainly from our commercial CDMO business. Biologics grew sales by 18%, driven by continued progress on our growth project, as well as strong ramp-up in our bioconjugates and microbial businesses. We are pleased with the continued performance of our small molecules business, which delivered more than 900 million of sales in 2023, growing 11%. This was supported by strong customer demand for high-value CDMO services, including HP API in the ramp-up of growth assets. In our cell and gene business, we saw mixed performance. Strong pricing contributed to dynamic growth in bioscience. In cell and gene technologies, the impact of the Kodiak bankruptcy resulted in a positive contribution, as we explained in H1. However, we have seen flat underlying sales growth versus 2022. This as a result of biotech funding constraints driven by the customer prioritization and delays in clinical programs. We also experienced operational challenges at our Houston site, which have now been addressed. Our capsules and health ingredients business continue to experience a slowdown in the nutraceutical market, which became more pronounced in H2. While this delivered negative overall sales growth, we have seen first signs of normalization in the nutraceutical market in recent months. 2023 growth benefited from the Moderna contract termination, which we announced in September. We recognized around 100 million Swiss francs of compensation and around 100 million of deferred revenue. This is on top of around 300 million of regular vaccines business from Moderna in the year. So in total, our relationship with Moderna generated around half a billion in revenue in 2023. This with above average margins. We have summarized the detail on the financial impact of the Moderna termination in the appendix of this presentation. If we exclude Moderna sales from both 2022 and 2023, we saw strong underlying sales growth for the group at 14% and biologics at around 25%. Next, we will look at the key drivers for our margin evolution. Between 2022 and 2023, absolute core EBITDA remained flat, resulting in a core EBITDA margin decline of 2.3 percentage points. This was driven by the factors mentioned before, including the softness in the early stage CDMO business in mammalian and cell and gene technology, and the customer destocking in the capsules market, impacting our CHI division. Finally, the ramp-up of multiple growth projects also diluted margins year over year. These pressures on margins were only partially offset by the positive impact from the Moderna termination, alongside cost containment and productivity measures that have been triggered in 2023 and will continue in 2024. Here are the major ones. First, our decision to decommission two small-scale sites in Guangzhou, China and Hayward, US will help us reduce fixed costs across the network without impacting mid-term growth. Second, we are mitigating margin pressure in cell and gene technologies with commercial initiatives to increase sales and operational improvement programs and cost control initiatives across the network. And third, We are responding to the lower utilization in CHI by optimizing production lines, introducing additional cost control measures, and investing in the next generation of production line technology platform. Here you can see an overview of the divisional performance. Albert will share more divisional details in a moment. As we move forward, let's take a look at our approach to strategic investment. We continue to invest in growth, deploying 1.7 billion of CAPEX in 2023, which corresponds to 25% of sales. CAPEX spend is below our initial guidance for 2023, as we deprioritized small growth project spend in areas with less growth opportunities, as well as selected infrastructure and maintenance investments. We have maintained the pace of investment behind our large growth projects. Around 70% of CAPEX is focused on growth projects, mainly for biologics, which continues to be the growth engine of the company. We currently operate a diversified portfolio of more than 21 large growth projects across the company, which are designed to deliver an attractive risk and return profile. Our thresholds for projects approvals are unchanged, with an expected IR threshold of 15% and a ROIC threshold of 30% at peak. Generally, we are very pleased with the progress in 2023 across our project portfolio. The remainder of investments is deployed in maintenance, as well as infrastructure and systems projects to support the growth of our divisions. Let's now turn to free cash flow. We are pleased to report a strong free cash flow of 329 million Swiss francs for 2023, supported by networking capital improvements and capex prioritization. Before Growth CapEx, we delivered a cash conversion of more than 20%. One year ago, we committed to reduce inventory level by about one month until mid-2024. I am pleased to share that we have now made good progress on our inventory reduction program and that overall inventory levels are now below six months. Networking capital is reduced from 20% of sales to around 13% of sales. This is driven by lower inventories as a result of strong Q4 operational execution, improved inventory management, as well as post-COVID inventory adjustment for shelf life expiry. Historically low receivables benefited from strong year-end payment collections. We achieved solid results in 2023, but expect networking capital to bounce back slightly next year as current levels of finished goods and work-in-progress inventories are low. Turning to leverage, in 2023, our leverage increased to positive territory, which is primarily driven by an increase in net debt of 1.1 billion Swiss francs due to investments in organic growth and the share buyback. While we remain committed to our strong investment grade rating of BBB+, and target a mid-term leverage of between 1.5 and 2 times, our robust balance sheet continues to provide significant headroom for organic growth investments, bolt-on acquisitions, and the return of excess capital. Moving on to the dividend increase, at Lonza's AGM on the 8th of May, we will propose a dividend of 4 Swiss francs. This represents an increase of 14%, or half a franc, versus the dividend for 2022. The 44% payout ratio is in line with the increase range of 35% to 45% announced at our Capital Markets Day in October. To ensure full financial transparency, let me finish by providing you with an additional guidance on financial metrics. First, regarding FX, where we have seen recent volatility. As a reminder, our key foreign currency are the US dollar, which accounts for around 40% of sales, and the euro, which accounts for around 15%. The strengthening of the Swiss franc versus the US dollar and euro, which accelerated in H2 2023, impacted our sales by around 3% for the full year. Based on current FX rates in January, we anticipate a similar adverse impact on 2024 sales. Lonza's margins are better protected due to the good natural hedging, which is complemented by our hedging program. In 2023, the FX impact on margin was slightly positive. Looking to 2024 and based on our current view, we anticipate that FX rates will lead to a minimal impact on margins. Finally, let's take a look at our tax rate. Our tax rate for 2023 was 17%, which included a negative impact from non-tax-deductible impairment costs. For 2024, we continue to expect our tax rate to remain within the guided range of 16 to 18%. This is despite the implementation of P2 legislation in several European markets and Switzerland in 2024, which will lead to an increase of our global tax cost. With that, I'm pleased to hand back to Albert, who will now take you through our divisional performance.