Lonza Group AG

I am Sandra, the course co-operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentations will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone and follow the presentation over the webcast. Please limit yourself to one question and then you can re-enter the queue in case you have a follow-up. In the webcast, we have a chat box which will 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 is my pleasure to hand over to Philippe Desquet, CFO. Please go ahead, sir.

Thank you, Sandra. Good afternoon and good morning to those of you joining us from the U.S. Welcome to our Q1 2026 qualitative update. Before we go into the details, please let me remind you that our qualitative updates are intended to provide you with a general business overview and we will not be sharing figures related to our financial performance. We will do so on the 22nd of July with our half-year update. All content, unless otherwise specified, refers to our CDMO business, which excludes capsules and health ingredients. I'll start with an overview of our group performance before we move to the performance of our business platforms our business contracting and growth projects. Afterwards, I will provide you with an update on our one-lancer journey, followed by a few comments on the current macroeconomic environment before I close for the Q&A session. Today, we report a strong Q1 performance across our CDMO business platforms, entirely aligned with our expected full-year 2026 trajectory. As already communicated in January, we confirmed that PER sales growth and core EBITDA margin would be notably stronger in the first half of 2026 than in the second half. This is primarily due to the prior year base, which was much stronger in H2 than in H1, as well as the following three drivers. Advanced synthesis with a contribution of different growth projects and a favorable batch release phasing. Second, some revenues in specialized modalities moving from late 2025 into the first half of 2026. And third, a strong sales contribution of Vacaville in H1-26 due to planned shutdowns in the second half as the site strives to have the catapult investment program and introduces new molecules. These drivers also positively impact core EBITDA margin in H1. Absolute sales, therefore, should be more balanced than in the past between the two halves of 2026. In the first quarter, we saw a strong operating performance across business platforms. We are therefore confirming our 2026 outlook with sales growth of 11% to 12% at constant exchange rates compared to the prior year and a further core EBITDA margin expansion reaching a level above 32%. Before focusing on our CDMO core business, a short word about CHI, which continues to see the robust demand trend already reported in the second half of 2025. We therefore continue to expect mid-single-digit percentage CER sales growth as an improving core EBITDA margin. I will comment on the exit process later in my update. Finally, finishing on the group overview, based on ethics rates of early May, we anticipate a year-over-year growth hedge wind of around minus 3% on sale for full year 2026, with the first half being more impacted than the second due to last year's US dollar trading pattern. However, our margins remain well protected through a strong natural hedge and our financial hedging program. Moving to the performance of our business platforms, let's start with integrated biologics. Integrated biologics continues to see good momentum driven by increasing utilization with the maturing of growth projects in mammalian and drug products. We see healthy demand for our small-scale and large-scale mammalian assets, which includes vacavale, for which we confirm our expectation to reach peak sales in the early 2030s. We also see our more mature-based business as an additional growth driver in 2026, This is supported by good operation execution and a favorable mix. We are therefore pleased to report that Integrate Biologics is performing in line with our expectations. Turning to our advanced synthesis platform, we continue to see strong growth in our small molecules and bioconjugates businesses. Growth is supported by the rapid and simultaneous ramp-up of growth projects added in 2025. which are primarily contributing to growth in the first half of 2026, reaching a high level of utilization and lapping their ramp up from last year in the second half, leading to a lower growth contribution. Furthermore, we see a strong operating execution and an attractive product mix with advanced synthesis additionally benefiting in Q1 from a favorable batch release timing. We therefore expect stronger growth in the first half than in the second and are confident that advanced synthesis can continue to deliver strong margin levels in 2026. For our specialized modalities platform, we are pleased to report that the business saw significant growth against the lower prior year base. This strong performance is mainly explained by our microbial business, with growth further supported by sustained momentum in bioscience. The LNG made further progress in strengthening its operational performance and is on track for a Q2 normalization. We therefore expect growth in 2026 to be driven by all three business platforms, as already predicted with our business outlook for 2026. Let me say a few words on the progress of our different CAPEX projects and the business momentum that we see. Our large-scale mammalian site, Invis, continues its ramp-up process with the production of different GMP batches. Commercial operations were commenced in mid-2026 in line with the previously communicated timelines. Revenue growth contribution is expected to start in the second half of 2026, as part of the multi-year ramp-up of commercial output. We also see good progress at our large-scale drug product fill-and-finish facility in Stein, with production expected to start in 2027, while we expect our large-scale bioconjugation site in Fiske to start production later in 2028, also in line with the latest timelines. At our large-scale mammalian site in Bunkerville, we are making good progress in upgrading the site to increase the operational flexibility needed to operate at the CDMO site, with additional upgrade measures requiring targeted shutdowns taking place in the second half of 2026. This will lead to lower sales contribution in the second half. However, on a full year basis, we confirm our expectations that sales in 2026 would be broadly aligned with 2025. Operation execution remains strong and we have successfully transferred the first non-rush product and produced the first GMP batches. The team is already preparing the sites for the introduction of the next non-rush product. In Q1 2026, we saw sustained business momentum across sites and technologies. We secured multiple drug substance drug product deals, which highlights our strong offering as one of only a few CDMOs that can provide such integrated offerings. Our cell and gene business signed an extended commercial manufacturing agreement for genetics, Synteglo, further strengthening our positioning as the leading commercial cell and gene CDMO. Customer interest in Vacaville remains high and we expect additional contract signing over the course of the year, in addition to the five contracts reported to you in January, 2026. As announced in early March, we made strong progress in our One Lanta journey to become a pure-play CDMO with the announced divestment of a 60% stake in our capsules and health ingredients business to Lone Star. Divestment of all the non-corporate businesses is a total of four divestments since the announcement of our One Lanta strategy at the investor day in December 2024. The remaining CDMO businesses are powered by the launch engine and its unique set of strengths and capabilities. With 1.7 billion Swiss francs immediate proceeds from the CHI divestment and additional future proceeds at full exit, we have significant firepower for value-creating bolt-on M&A while maintaining our commitment to triple V plus ratings. In line with our one long-term strategy, we are proactively building a funnel of public and private M&A opportunities, and we are confident in our ability to pursue some of these over the mid-term. Focus remains on delivering capacity, technology, and portfolio expansion. To rebalance our short-term capital surplus with our balance sheet strength with a net debt to EBITDA ratio below 2 today, We have decided to return 500 million Swiss francs of surplus capital to investors through an expedited share buyback on receipt of the upfront CHI exit proceeds at the close of the transaction. The close is expected to take place in Q3 2026. Before closing my remarks and opening the Q&A session, let me briefly address the geopolitical developments we are observing. Against the backdrop of recent development in the Middle East, we currently do not anticipate any material financial impact on Lonza. Supported by proactive risk management and in line with our well-established hedging policy, we have secured almost our entire energy needs for 2026 and also a sizable share of our 2027 needs. In addition, our long-term customer contracts include, as you know, price adjustment costs providing an additional layer of protection against energy-related inflation. Further, Lonza has no manufacturing footprint in the Middle East, sources almost no raw materials from the region, and has very limited revenue and customer exposure. We can also reiterate that we expect no material financial impact on Lonza from the US trade and tariff policies. This includes the outcome of the latest Section 232 investigations. Based on our understanding of the published outcome of this investigation, we also do not anticipate that our customers are materially affected. Nevertheless, we continue to expect a gradual shift towards more regionalized drug manufacturing, with regional demand increasingly being served regionally. In this context, we remain confident that our well-diversified global manufacturing footprint, with large capacities in the US, in Europe, and in Singapore, will enable us to support our customers' global manufacturing requirements today and in the future. In light of the significant recent US investment announcements from large pharmaceutical companies, with only a small part of investments going into manufacturing assets, outsourcing decisions may at times take a bit longer to conclude. The demand for CDMO solutions remains healthy in 2026. We see the CDMO industry as part of the solution in this gradual shift towards regionalized supply chains, and biotech and large pharma companies continue to outsource. These investments are likely more a shift in global capex spend towards the US, rather than a change in outsourcing strategy, with an overall increase in capital investment into manufacturing. Biotechs, which are approximately half of our revenue, are an important customer group for Lonza, will continue to rely heavily on CDMOs to minimize capital requirements into manufacturing. To close, let me share a few final remarks. Against the backdrop of ongoing geopolitical uncertainty, LOMS has continued in the first few months of 2026 to demonstrate the resilience of its CDMO business model, which supports effective risk diversification. We are on track to deliver on our strong full-year 2026 outlook. which sustains customer demand, and we are making good progress across our diversified CapEx program. With the divestment of CHI, Lonza is becoming a pure player CDMO, and we remain confident in our ability to pursue value-created M&A opportunities alongside the initiation of our 500 million Swiss franc share buyback, following the closing of the CHI transaction. The Lonza engine is firing on all cylinders, and we are well positioned to deliver strong shareholder value. With that, I would like to thank you for your time. Sandra, over to you for the Q&A.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. You will hear a tone to confirm that you've entered the queue. Kindly limit yourself to one question only. You can get back in the queue again for a follow-up question. If you wish to remove yourself from the question queue, you may press star and two. Questions on the phone are requested to use only hands that are asking a question. In case of difficulties with understanding your question on the phone, we will ask you to submit a question in writing via the chat in the webcast. Anyone with a question may press star and one at this time. Our first question from today comes from James Quigley from Goldman Sachs. Please go ahead.