Lonza Group AG

Ladies and gentlemen, welcome to the Half Year Results 2024 Investor and Analyst Conference Call and Light Webcast. I am Sandra, the Chorus 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 1 on your telephone and follow the presentation over the webcast. Please limit yourself to one question and then re-enter the queue in case you have a follow-up. In the webcast, we have a chat box, which should only be used if your question cannot be heard over the phone line. 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 Wolfgang Wienand, Chief Executive Officer. Please go ahead, sir.

Thank you very much Sandra and good morning and good afternoon and a warm welcome actually to our H1 results presentation. It's actually great to be here with you today. As we begin, I would first like to take this opportunity to introduce myself. My name is Wolfgang Wienand and as many of you will know, I joined Lonsa as CEO at the beginning of this month. I joined Lonsa from secret. where I was CEO for the last five and a half years. Before that, at Siegfried, I held the roles of Chief Strategy Officer and Chief Scientific Officer. Prior to joining Siegfried, I spent time in a series of leadership roles at Evonik Industries, most of the time also in the CDMO space. Over the last two decades, my career has helped me to gain a deep knowledge of the CDMO space to build a broad network in our pharmaceutical industry. I'm very much looking forward to using all of this in order to, together with my team, bring Lonza to the next level on this extraordinary journey. While today is only day 19 in my life at Lonza, it is still important for me to engage with you and to at least share some first impressions and thoughts about my plans for H2 at the end of this presentation. What I will not do, though, is present the results of H1 2024 to which I didn't contribute myself, or to comment or take questions on actual financials, the financial outlook for full year 2024, or for the mid-term. For that, I will hand over to our CFO, Philip, who is with me in the room. and who will now guide you through the set of figures of the first six months in 2024. So over to you, Philipp.

Thank you, Wolfgang. It's my pleasure to present our business in the first half today. As usual, we provide an update on the group as a whole and a financial summary before going into the divisional deep dive. We will also make sure there is enough time for a Q&A at the end. Before we start, let me remind you, our figures are reported in Swiss francs, growth is reported actual exchange rates, except sales growth, which is reported at constant exchange rates. So let's start with the group overview. As you can see here, our sales growth in the first half was well on track to deliver our full year outlook. Our sales were 3.1 billion Swiss francs, growing 1.8% versus H1 2023. We delivered a core EBITDA of 893 million Swiss francs, representing a margin of 29.2%. We have also reported solid free cash flow at 296 million Swiss francs. We achieved this through good performance across our CDMO business, despite challenges in the hard, empty capsules business of our CHI division. With these results, we confirm our group outlook at flat sales growth in constant exchange rates and a high 20s core EBITDA margin. We also confirm our mid-term guidance 24 to 28, which we upgraded in March of this year, following the announcement of the Vacaville site acquisition. Now let's take a look at some commercial highlights in our CDMO business. We have seen a healthy number of new contract signings across the first half. We also see good momentum in early phase inquiries across biologics and cell and gene technologies. In the first half, we have signed new business in line with our expectations, but among the multiple signings, let me highlight one in our cell and gene division where we have reached an important commercial supply agreement with a key customer. This provides for manufacturing services from both our Portsmouth site in the US and our Geleen site in the Netherlands. We have also seen strong interest in signings driven by our new ADT linker technology, which was integrated into Lonza as part of the Cinefix acquisition last year. Supported by strong and sustained interest in our mammalian manufacturing offering, we have signed an agreement to acquire the Genentech site in Vacaville from Roche. Many of you joined our investor call in March, in which we shared details of the agreement. It will allow us to double our global mammalian network and significantly increase our presence in the important U.S. market. The antitrust process remains on track, and our integration plan is progressing on schedule. This is supported by our close collaboration with the Vacaville site leadership team, and we are encouraged by the site's positive response to the acquisition plan and process. We are currently looking to close the transaction in Q4 of this year, and therefore do not expect any significant impact on our full year financial results. The announcement of the acquisition has been well received and we see strong interest from new and existing customers in gaining access to this additional capacity. We have already completed a couple of site visits with customers and are pleased to report the signing of the first letter of intent with a key customer. We see this level of interest as an early confirmation of our rationale to acquire the site. Moving to ESG, we continue to take steps forward in meeting our ESG commitments with a focus on clean energy. In the first half, the science-based target initiative has validated our targets to reduce our near-term emissions. Additionally, our recently agreed renewable energy certificate will enable us to achieve 100% renewable electricity from 2026 across our current US operations. Taking our European China and America's power agreements together, around 90% of our electricity will be renewable from 2026 onwards. Finally, we have been recognized by Ethics Fair for the third time as one of the world's most ethical companies. This reflects our continued commitment to showing integrity in the way we conduct business with our partners, customers, and colleagues. Now let's take a closer look at our financials. As just mentioned, our sales growth was 1.8% with a core EBITDA margin of 29.2%. Excluding the termination of the COVID related MRNA business last year, the group grew at around 6%. Overall, we have seen a robust performance across our CDMO businesses. This is partially upset by a weaker than expected market demand for our hard empty pharma capsules. and to a lesser extent softness in our buying science business unit. Sales and profits were negatively impacted by currency exchange rates due to the Swiss brand depreciating versus the same period last year. Our margins remain well protected from currency movements mainly due to our good natural hedge. Assuming today's rates remain stable, we expect a lower impact on sales of minus one to minus 1.5 for the full year, as the US dollar and the Euro have returned to rates similar to the prior year period against the Swiss franc. Turning to our margin evolution, we reported the decrease of 0.8 percentage points in H124 versus H123. This is mainly due to a higher base in H123 from the COVID-related mRNA sales and the Kodiak termination as well as the impact from significantly lower margins in CHI in the first six months of this year, which impacted the group margin by 1 to 1.5 percentage points. Excluding these effects, Lonza improved its margin mainly through a favorable product mix and higher productivity, which included network optimization activities initiated in 2023. As part of our continuing commitment to growth, we invested more than 600 million Swiss francs of capex in H124, mainly in the biologic division. Of the total capex, around 65% was gross capex and used primarily for large growth projects. The remainder was deployed in maintenance, infrastructure, and systems. H1 capex in percent of sales is at 20% due to the timing of capex spending, which is expected to accelerate in the second half. Overall, while we may end slightly lower than the guided 25% of sales for the full year, our growth project delivery remains in line with that. Finally, let's take a look at cash generation. We achieved a strong free cash flow of 296 million Swiss francs for the first half. This is due to a combination of factors, including the phasing of capex, favorable customer funding, and normalized inventory levels compared to H1 2023. We expect a lower free cash flow in the second half as our capex investments accelerate. Now let's take a look at each of our divisions. Here, we see a snapshot of divisional results and key performance drivers. As we already noted, we have seen positive performance in biologics in both sales and margin, and positive sales growth in small molecules. More generally, we have seen solid performance across our CDMO businesses, while the CHI division was impacted by market weakness in heart and T-pharma capsules. Now let's take a more close look at each division in turn. Starting with the biologics division, We have seen 7.3% sales growth versus H1 2023, corresponding to mid-teens sales growth when excluding mRNA sales in the prior year period. We have also seen a healthy level of contract signings over the first half, largely in commercial, with signs of recovery in clinical. Divisional growth was supported by mammalian and strong sales in bioconjugates, both driven by commercial demand. The positive margin evolution was supported by favorable product mix in the first half, strong operational performance, and cost focus. Looking at two of our biologics business units, in the median, we continue to see strong commercial interest as well as initial signs of early-stage recovery. While our early-stage work is a smaller part of our business, it establishes relationships that provide a pipeline of future large-scale opportunities. The current sign of early state recovery comes from the more positive funding environment, which has evolved since the beginning of the year. As we noted before, we are taking steps to optimize our extensive global Nameli network. Our acquisition of the Roche site in Vacaville, California, is designed to expand our large-scale offering in a location that is attractive to our customers. It will allow us to ensure that our customer needs can be matched with our site offerings and locations. We are also nearing the completion of the site closures in Hayward and Guangzhou, China, which were announced in January with our full year 2023 results. Turning to our bioconjugates offering, we have seen good levels of clinical and commercial demand. Thanks to our integrated offering, more than 50% of ADC projects involve now multiple modalities. We're extending our work with existing customers as well as gaining new customers in the space. As I mentioned, there's also strong interest in our extended ADC offering since we completed the acquisition of Synafix in 2023. To maintain momentum, we are focused on expanding our large scale capacity to accommodate increasing customer demand. Turning to our small molecules division, we continue to see sustained demand for highly potent and complex offerings. Our H1 sales growth is lower than fully expectations due to the timing of customer campaigns. We expect higher sales in the second half, which will also include sales from our new HP API facility in VIST due to commence operations in the second half. In H1, the solid core EBITDA margin of 33.6% was supported by a combination of favorable product mix, good operational performance, and high asset utilization. We remain pleased with the strong margin progression in recent years in this division. IntelliGene. The division declined 6.6% versus the prior year period, but showed robust underlying growth at 10% if we exclude the Kodiak termination in H1 2023. The CellEngine Technologies business delivered solid sales and positive core EBITDA margins. Performance was supported by a focus on operation improvement and strong commercial manufacturing. The strong underlying performance was partially balanced by headwinds in bioscience. In this business unit, we provide researchers with tools and materials to support treatment discovery, quality and testing. Here, sales of media and self-discovery products were impacted by lower customer demand, resulting from the recent early stage funding constraints. Despite these challenges, BioScience delivers solid margins due to a combination of product mix and strict cost control methods. Finally, let's take a look at our capsules and health ingredients division. After an extended period of post-pandemic destocking, we see demand recovery in our nutraceutical hard anti-capsules business. The same applies to dosage form solutions and health ingredients. However, industry capacity for nutraceutical hard anti-capsules increased over the past years to meet demand, and this has led to increased competition for volumes today. With pharmaceutical hard anti-capsules, We have seen the impact of destocking only since the second half of 2023. I will get to this in more detail in a minute. The 24.8% core EBITDA margin is the result of the continued destocking in pharma and recovery in a more competitive nutraceutical business. These temporary market headwinds were only partially offset by cost containment and network optimization measures. In H1, we have successfully installed and started the first of our new generation of hard-empty capsules production lines, confirming strong improvements in productivity and quality. We will continue to progress with the rollout of this new technology over the coming quarters. Let's now take a moment to review the historic and future demand evolution of hard-empty capsules in more details. We see the temporary headwinds experienced over the past two years in both the nutraceutical and the pharma segments, which were triggered by the COVID pandemic. Looking at the hard-empty capsules market, it generally remains attractive with a history of stable growth. In the two graphs on the left, we have taken pre-COVID demand as a benchmark and charted the demand lines through the pandemic and post-pandemic phases. We see that for nutraceutical hard empty capsules in the upper graph, the pandemic rapidly led to higher demand levels. Nutraceutical customers were also quick to reduce orders and destock around mid 2022. Six to eight quarters later, we are now seeing demand back in line with historic trends. We expect the market in this segment to return to its previous growth trajectory of around 3% per annum. Now looking at pharma hard empty capsules in the lower chart, We see that pharma customers also increased demand during the pandemic, but at a slower pace. They also started destocking only in mid to late 2023, and it remains ongoing. At this time, we expected destocking for pharma hard anti-capsules to be completed by the end of 2024 or early 2025. From this point onward, we anticipate year-on-year market growth of around 2%. While the past two years have been volatile, we are confident that the market will return to its historical growth pattern in 2025. With long-term strong reposition in this industry and with the continued investment in both product and production technology, we are confident we will return to attractive growth and margins. As we conclude the tour of our divisions, let me take a look at our full year outlook before handing back to Wolfgang for an update on our board governance and priorities for the second half. Please note, this slide was updated at 9 a.m. CET this morning from our first release, so please refer to this version. Based on our first half results, we are well on track to deliver on our full year outlook for 2024, which includes flat constant exchange rate sales growth and a core EBITDA margin in the high 20s, so between 27 and 29%. We anticipate higher CDMO sales in the second half, which will allow us to maintain group sales at around the same level as H2 2023. You will recall that the second half of the prior year included large COVID-related MRNA revenues following the Moderna contract termination. Margin in the second half are expected to be lower than H1, mainly due to less favorable product mix across businesses. Looking quickly at each division, Biologics will mainly benefit from the ramp-up of growth assets and to a lower extent from capturing opportunities from the early-stage funding recovery. In small molecules, the phasing is favorable to the second half, and we will also see first contribution from our new HP API asset coming online. In cell and gene, we are expecting our bioscience business to stabilize after a softer start in the first half. We just spoke about capsular and health ingredients where the recovery is anticipated in 2025. And now, before we move to the Q&A, I hand over back to Wolfgang.