Lonza Group AG

Ladies and gentlemen, welcome to the Lonza Q1 2025 Qualitative Update Conference Call and Live 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 at any time by pressing star and 1 on your telephone. 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 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 Philip Dekes, CFO. Please go ahead, sir.

Good morning, good afternoon, and a warm welcome to our Q1 2025 qualitative update. And thank you, Sandra, for the introduction. With our qualitative updates, we intend to provide you with a general business overview, but we will not be sharing figures related to our financial performance. We will do so on the 23rd of July with our half-year update. Let me start with an overview of our group performance, the current macroeconomic situation, and our growth projects before we move on to the divisional performance. We experienced a strong Q1 performance across our CDMO businesses aligned with our expected full-year trajectory. Supported by this strong performance, we are confirming our 2025 outlook for the CDMO business, with sales growth approaching 20% at constant exchange rates compared to the prior year and the core EBITDA margin approaching 30%. Including Vacaville, which is expected to contribute half a billion Swiss francs in sales at a dilutive core EBITDA margin, we expect low teens organic CR sales growth and a margin improvement in our CDMO business. As a reminder, we define our CDMO business as Lonza, excluding the capsules and health ingredients business. As anticipated with our full year release in January, we confirm our expectations of higher sales in H2 2025 than in H1. However, we now anticipate the core EBITDA margin to be more equally balanced between H2 and H1, with a stronger than expected H1 leading to a correspondingly softer margin in H2. Main reason is a strong operational execution and more favorable mix in the first half. As in previous year, we continue to experience a healthy level of contract signings across all CDMO businesses, highlighting the attractiveness of our commercial offering and providing a strong basis for our future sales growth. Customer interest in Vacaville continues to be strong and a third long-term customer contract has been secured for the site. We can confirm that multiple contract negotiations are ongoing and we expect more signings in the balance of 2025. Our early stage business saw high utilization in Q1 2025, and we have good visibility for 2025 demand. At the same time, we remain attentive to the evolving funding landscape and the political uncertainties surrounding regulatory approvals in the US. We are also closely monitoring the recent volatility in the FX market, with the Swiss franc gaining significantly in value, especially to the US dollar. Based on FX rates at the end of April, we would expect a year-over-year headwind of around 2% on sales and core EBITDA for full year 2025. However, our margin is well protected due to a strong natural hedge and our hedging program in place. Before turning to our growth projects, let me say a few words on the current geopolitical and macroeconomic environment, which is characterized by an increased level of uncertainty. We believe that Lonza's global manufacturing footprint, including its significant presence in the US across modalities, provides a competitive advantage that will allow us to minimize the impact of recently announced trade policies on our business. At this time, we do not expect tariffs on our manufactured products or raw materials, including pharmaceuticals, should such tariffs be implemented, to have a material financial impact. However, we continue to monitor the situation closely. On our US capex spending, tariffs may have a modest financial impact, potentially leading to a slight increase in overall spending. But due to the capitalization and the subsequent depreciation, we do not expect any material impact on our P&L. Given its strong manufacturing presence in the U.S. and Mexico, our capsules and health ingredients business is currently well positioned to navigate tariff dynamics and may even experience a competitive advantage. Recent countervailing filings have been accepted by the U.S. International Trade Commission and U.S. Department of Commerce against unfair trade practices related to imports of hard anti-capsules sold in the US market are likely to add to these relative trends. The case continues according to schedule and affirmative preliminary determinations in the countervailing case were published on March 31st with 2 to 10% duties being implemented. Concurrent anti-dumping duty investigations are ongoing. Now turning to our growth projects, overall we are making solid progress. Our highly potent API facility in Wisp, Switzerland, reached a critical milestone and commenced ramp-up activities in Q1 2025, while we expect our large-scale mammalian facility in Wisp to launch GMP operations in Q2 2025. Construction is progressing well at our recently announced large-scale bioconjugation site in Wisp, which we expect to become operational in 2027 or 2028 at the latest. We also now expect operations to commence at our large-scale drug product facility in Stein, Switzerland in 2027. Originally anticipated for late 2026, the timeline has been slightly adjusted due to an updated delivery schedule for critical equipment. We do not expect material impact on our financials for 2026 and 2027 from this adjustment. For Vacaville, we have now entered the implementation phase for the upgrade CAPEX and expect the majority of the 500 million CHF to be spent in the next 2-3 years. As a group, we confirm our expectations to spend CAPEX in the low 20s as a percentage of sales in 2025. Consistent with our historical spending pattern, we would expect CAPEX to be higher in the second half of the year. Now let me guide you through our divisional performance, still using our former divisional setup, as it was still in place in Q1 2025, starting with the Biologics Division. There was good momentum across the Biologics Division with a strong demand for our commercial offering. Improvements in the biotech funding in 2024 have resulted in an uptick in early-stage RFPs, and we expect a high asset utilization in our small-scale assets in 2025. Looking at selected business units, bioconjugates continue to see strong growth, supported by recent asset ramp-ups. The mammalian business units saw continued momentum from growth projects, including the ramp-up of our small-scale mammalian facility in Portsmouth. The Vacaville integration is progressing as planned, and the site has successfully maintained a strong quality and execution track record since joining the Lonza network. Turning to our small molecules division, We continue to see strong commercial demand and good operational performance. The division is supported by our continuing portfolio shift to higher value and complex small molecules. With high asset utilization and the ramp up of our new highly potent API facility, we anticipate sales and constant exchange grade growth in the second half to exceed H1. The ramp up of this new asset is proceeding as planned with additional key milestones expected to be reached in the remainder of 2025. Looking at our cell and gene division, there has been continued customer interest in our late-stage and commercial offering. We see good progress in our collaboration with Vertex for Casgavy, and we are ramping up production in our site in Geleen, the Netherlands, and expect our site in Portsmouth, US, to follow later this year. Including the approval of Mesoblast Rioncil, we now have a portfolio of five commercial cell and gene therapies, and we expect to add further commercial molecules in the midterm. Supported by the improved biotech funding environment and the increased number of RFPs in 2024, we observe sustained demand for our clinical cell and gene technology offering. We are thus pleased with the current performance, but remain attentive to the broader market environment and the low maturity of the industry, which is inherently volatile. Finally, and before moving to CHI, we are pleased to confirm that our bioscience business unit has returned to growth in Q1, with good demand for our media and buffer bioprocessing solutions. For 2025, we expect a solid performance and the business to show healthy growth again. In our CHI business, we have observed a steady recovery in demand, with Q3 2024 representing the trough. For the pharma heart empty capsules market, We expect a return to pre-pandemic levels in the second half of 2025, while demand for nutraceutical capsules is back to positive volume growth versus the same period in the prior year after a long period of post-pandemic destocking. The recent geopolitical developments illustrate the benefits of having a strong manufacturing presence in North America. We have the largest US manufacturing site for capsules in Greenwood, South Carolina, and our site in Puebla, Mexico, allows us to produce for the U.S. market at high quality and is currently tariff exempt under the U.S.-Mexico-Canada Agreement . Progressing successfully on its recovery path, we confirm our 2025 outlook for CHI to return to positive low- to mid-single-digit CER sales growth and an improving core EBITDA margin in the mid-20s, a small improvement versus our initial guidance for the CHI margin. Before I close, let me say a few words on the progress to parts way with the CHI business. We see a high level of continued commitment from the affected colleagues and a strong focus on operational execution during the transition period. We remain strongly committed to the CHI business and continue bringing new product innovations to market as well as the rollout of our next generation D90 capsules manufacturing lines across our network. In addition, We just recently announced to expand our capsules manufacturing capacities in India and China for the fast-growing APAC region. In Q1, we mandated our external advisors and we are currently in the preparation phase of the carve-out. Considering the positive business development in recent months, in line with expectations, we are confident of the successful completion of a transaction at the appropriate time, point in time and in the best interest of customers, employees and our shareholders. To close, let me provide some final remarks. We are seeing good momentum and are confident of delivering our full year outlook 2025. We see strong contracting levels and good interest in our early stage offering. As said, we are well positioned in the current geopolitical environment and do not expect any material impact from tariffs on our business. So we continue to monitor developments closely as the situation is constantly evolving. On April 1st, we have implemented our simplified and streamlined operating model to support our new one-launcher strategy. This setup will provide us with a more scalable organization, improve the customer experience across business platforms and technologies, and provide us with elevated execution capabilities in the construction and operation of our assets. This Q1 update will therefore be the last time we comment on our former biologics, small molecules, and cell and gene divisions. For our half-year results, we will comment on our new business platforms, integrated biologics, advanced synthesis, and specialized modalities. We will continue to report on capsules and health ingredients in its existing structure as it will continue to operate as a separate business within Lonza. To provide comparability with historic financials, we will publish restated 2024 financial figures ahead of our half-year reporting in late May. And with that, I would like to thank you for your time. Over to you, Sandra, for the Q&A.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the telephone. You will hear a tone to confirm that you have entered the queue. Kindly limit yourself to one question only. You can get back in the queue again if you have a follow-up. If you wish to remove yourself from the question queue, you may press star and 2. Questions on the phone are requested to disable the loudspeaker mode. In case of difficulties with understanding your question on the phone, we will ask you to submit your questions via the chat box in the webcast. Anyone with a question may press star and 1 at this time. Our first question comes from Ibrahim Zain from JP Morgan. Please go ahead.