Merck Kgaa

A very warm welcome from my side to this Merck Q2 2024 results call. My name is Konstantin Fest. I'm Head of Investor Relations here at Merck, and I'm delighted to have today here with me Belén Garajillo, the Group CEO, as well as Helene von Röder, Group CFO. Also, joining for the Q&A part of this call, we have Matthias Heinzel, CEO of LifeScience, as well as Peter Günther, CEO of Healthcare, and Kai Beckmann, CEO of Electronics. In the first few minutes of this call, we would like to guide you through the key slides of this presentation. After that, we'd be happy to take all of your questions. With this, we are ready to directly start and I'd like to now hand over to you, Belen, to kick us off. Over to you, Belen.

Thank you, Konstantin. Welcome, everybody, to our Q2 earnings call. Please stay on slide number five of the presentation where we have the highlights of the quarter. First of all, we had a very strong second quarter, significantly beating expectations, as you saw in our ad hoc release from Friday of last week. Healthcare continues to show excellent performance across the portfolio at very attractive underlying margins. In electronics, the good news is the semi-market for AI and advanced nodes has inflected, driving sales and EBITDA pre of the business while life science perform within expectations. And I am happy to say that Merck has already returned to organic and reported sales growth in Q2. The low light of the quarter was certainly the termination of our SEBINAPAN program. While you may have questions on it after the introduction, I want to say very clearly that a priori, it does not change our capital allocation priorities. Turning to our operating performance, the group sales increased by 2% organically, and as a result of one-timers, primarily, EBITDA pre went down by minus 1% organically. Life science showed an organic sales decline of minus 4%, with the magnitude of the year-on-year decline being less pronounced than in Q1. Be reminded that while we no longer segregate the effect of COVID-related sales, it still represents a headwind for life science as a business, as well as for the group in 2024, since we delivered 250 million of COVID sales in 2023. Healthcare again contributed to the positive organic performance of the group with plus 5% organic sales growth driven primarily by our CM&E and oncology franchises. Electronics was the best performer this quarter with 8% organic sales growth driven by semiconductor solutions, which showed year-on-year growth for the second quarter in a row at an accelerated pace. Reported sales were 5.352 billion, which is an increase of 1% as the currency was a one percentage point headwind. Reported EBITDA pre of 1.509 billion was down by 3%, including a slightly dilutive effect from FX. On EPS pre, we are back at the level of Q2 2023 of 2 euros 20 cents. Beyond our strong operational execution, you have also seen a number of portfolio announcements for Merck overall. First of all, the diversity of surface solutions. And even though surface solutions only represent a little more than 10% of our sales in electronics and around 2% of the group sales, the diversity of surface solutions is strategically relevant, It will help us further sharpen our focus on high-tech applications in electronics. It follows a suite of different activities, both in electronics and life science, over the last few months, which expand our portfolio in the breakthrough technologies of the future and, as well, supports our long-term growth journey. Myelus Bio complements our offering for the development and production of novel modalities, such as cell and gene therapy. UnitySC adds metrology and inspection tools that increase our relevance to customers for AI in semiconductors. Now, turning to the guidance, we are upgrading our forecast and now anticipate net sales in a range of 20.7 billion to 22.1 billion, a beta pre of 5.8 to 6.4 billion, an EPS pre of €8.20 to €9.30, thereby slightly improving our guidance corridor for organic growth in sales and lifting our organic growth guidance range for EBITDA pre. I will cover more details on our assumptions at the end of the presentation. And now on page number six for an overview of our performance by business sector. As announced last Friday in our ad hoc, our key growth engines in the quarter were electronics and healthcare, while life science performed within expectations. Life science showed a decline of 4% organically, still against a somewhat strong base in 2023. While science and lab solutions and life science services were up in the quarter, Process solution was still down organically, but also to a lesser extent than in Q1. Order intake in process solution grew sequentially and year on year for the second quarter in a row. Book-to-bill stayed at around one, as we have projected, and this is giving us confidence that life science will return to organic sales growth in the second half of this year. delivered a robust organic sales performance in Q2 and raised revenues by 5%. This was mainly driven by the CM&E portfolio, as I mentioned before, which was up 14%, one-fold, and our oncology portfolio that grew 9% in the quarter with both Herbitux up 8% organically and Babencio with 6% organic sales growth having contributed. Mavenclad hit record sales ever in the quarter. However, you have seen that organic growth was muted because of a particularly strong Q2 2023 when we saw some channel dynamics that distorted that quarter in 23. At 8%, electronics showed the strongest organic growth of all the three business sectors in Q2. as our semi-business was up by 11%, driving the growth of the electronics sector. Display solution was slightly down organically year on year, and for the group, FX was a headwind on sales across the board with a minus 1% impact. Regarding earnings now, EBITDA pre-came in at 1.509 billion, only slightly down organically by minus 1% or minus 12 million in absolute terms. This was due to life science, where organic EBITDA pre was down by 6% or minus 44 million in quarter two. For healthcare, we were able to show an organic EBITDA pre growth of 5% in Q2, about in line with organic sales growth, even though we booked a termination provision of a mid-double-digit million euros amount on Shevina Pant in Q2 this year. Evita Pre in electronics was down by 3% organically, and this is in relation to the one-time impact from the UDC patent agreement that you may remember. We landed in the year earlier quarter, so in 2023. was a stronger headwind on EBITDA pre than on sales, mainly due to healthcare and life science. I would also like to highlight that excluding the UDC patent agreement, one-timer from Q2 last year, and the termination provision of Sevina Bank from Q2 this year, reported EBITDA pre for the group would have shown robust growth in the mid-single-digit percentages. With this, I'm going to hand it over to Helena for a more detailed review of our financials.

Thank you very much, Belen, and a warm welcome also from my side. I am now on slide eight for an overview of our key figures in the first quarter. Let me emphasize, we not only returned to organic sales growth in Q2, but we also made it back to reported sales growth. Taking into account currency headwinds of minus 0.7%, net sales did increase by 0.9% to 5.352 billion euros. On the back of the Xevinapan termination provision, EBITDA pre was down by 2.9% to 1.509 billion euros, with a slightly higher FX headwind on EBITDA pre compared to sales. EPS pre was flat at 2.20 euros. Operating cash flow came in strong at 861 million euros, which represents an increase of 38.4% over the year earlier period. That was mainly due to lower bonus payments as well as LTIP. Net financial debt increased by 450 million compared to the end of December 23, which is mainly due to the payment of our dividends, which took place in the second quarter. Let me also briefly comment on our reported results, and with that, I am now on slide 9. EBIT was down by 18.3% year-on-year. This was above the decline in EBITDA pre, mainly as a result of the high level of DNA, which was in turn due to the 140 million impairment we are taking on Xevinapant, as well as the operating performance on LifeScience. The financial result was markedly up by 69 million to just minus 7 million in the quarter. This was mainly driven by tax items and lower provisions for a long-term incentive plan alongside higher interest income. The effective tax rate came in at 22.9%, which is at the top end of our guidance range of 21 to 23%, and reflects a slight shift in the overall tax rate for the full year due to the Xevinapan program termination and as well due to a slight increase in the expected Pillar 2 expenses. Reported EPS came in at €1.40, which represents a decline of 13.6% year-on-year. Now with that, let's move on to the review by business sector And I'm starting with life science on slide 10. Overall, life science did deliver on our expectations in Q2. Sales were still down 3.7% organically year on year in the quarter. But remember, we only started to see the full effect of customer destocking and process solutions over the course of Q2 of last year. In Q1 24, we still had an organic sales decline of 12.6%. So we saw a trend reversal and importantly, LifeScience improved sequentially across the board. Supported by a broad and diversified position, we continue to expect a further recovery during 2024. Now two of the three businesses in LifeScience also showed organic sales growth year on year in Q2. So with that, looking at process solutions first, the business, which faced the toughest comps in Q2, sales were down 12% organically, which represents an improvement versus the minus 19% which we have seen in Q1. Sales showed a positive sequential trend and went up by 7% quarter on quarter. Order intake again went up sequentially as well as year on year. Book-to-bill remained at around 1. We continue to expect a sequential improvement in order intake throughout the year, and that book-to-bill will remain at around 1 during 2024. Now we will take a closer look at science and lab solutions. Sales were up 1% organically, the first positive organic sales development year-on-year since Q1 23, and it was driven by demand from industrial and testing as well as diagnostics. Demand from pharma companies has remained soft, especially in North America, while academic research spending is experiencing more normalized growth now in 2024. Sequentially, sales in science and lab solutions were up in Q2 and therefore grew for the third quarter in a row. Turning to life science services. our third and smallest business within life science. Sales increased by 8% organically, driven by our clinical testing business, which went up in the mid-teens. Our CDMO activities also increased slightly. Looking to the coming quarters, I would like to mention that our CDMO business can be volatile on a quarterly basis, as project phasing has a significant impact on the performance. When modeling Q3, it should also be remembered that we benefited from an end of a contract payment of a low to mid double digit Euro million amount relating to COVID in Q3 of last year. EBITDA pre-declined 6.1% organically in Q2, which was mainly due to lower volumes with idle costs from underutilization. Sequentially, however, EBITDA pre-increased with the margin having moved up by 50 basis points as a result of stringent cost control as well as some operational leverage. I am now on slide 11 for an overview of the performance of a healthcare business sector. Healthcare delivered a robust organic sales growth of 5.3% in Q2. By franchise, it was a CME portfolio, which was a star performer at plus 14% organically, with strong growth supported by contributions across all segments and all regions. The growth has been amplified by successful tender business and the prior year's slowdown in the diabetes market in China. Oncology showed a strong performance in Q2, growing 9% organically. This was also driven by all brands. Urbitox was up 8%, supported by nearly all regions. And also Baventio grew by 6%, in line with our expectations. With all regions up, expect North America, where competitive pressures led to a decline in the mid-teens. As a reminder, Bavencio sales in North America make up less than 30% of the global Bavencio sales. And furthermore, TabMedCo also contributed to the organic growth of the oncology franchise. Our NNI franchise was down 7% organically this quarter. MarvinClad grew only 1% organically versus a high basis last year. This is also the case for Rebiz. which declined by 18% organically this quarter. Looking at the H1 numbers, the NNI franchise has been stable. Regarding Mavintlet, we hit record sales this quarter. U.S. prescriptions continue to expand both in breadth and in depth. Concerning the pipeline, as announced in June, we decided to discontinue the Xevinapan Phase 3 program based on the insight into the data we gained from the interim analysis of the Trilinx study in Q2. In NNI, we initiated a new Phase III program to investigate cladribine in generalized myasthenia gravis. The recruitment to the study is now open. At ASCO, we have presented strong data for our ATR inhibitor 2-Vuzertib and ADC M9140 and are now moving on to the execution of our DDR and ADC strategy. So with that coming to EBITDA pre, I am happy to say that even though we booked a mid-double-digit million euro termination provision on Xevinapant in Q2, our EBITDA pre margin declined only slightly from 34%. to 33.7%. It was a strong sales growth which supported the growth margin paired with lower underlying R&D and a positive effect of the Baventure repatriation, which is now coming close to its first anniversary. For modeling, we expect underlying R&D to remain structurally lower also for the remainder of 2024. Please do have in mind that the provisions for both ibuprofenib and Xevinapant have an impact on our absolute R&D costs in 2024. We also expect gross margin levels to normalize more in line with the last quarters amid rebate dynamics. Overall, EBITDA pre amounted to 720 million euros in Q2 and was up 4.6% organically only slightly below the organic growth in sales. And with that, we will now move on to electronics on slide 12. Electronics showed an acceleration of organic growth to 7.6% in Q2. The key driver was semiconductor solutions, which was up 11% organically. Our semiconductor materials businesses drove organic growth in the quarter driven by AI and advanced nodes, while our DS&S business was largely flat sequentially and year on year. As we mentioned in our last earnings call in May, we generated revenues until the completion of the large US project in Q1, which did support our Q1 DS&S sales. However, Contrary to our expectations, we did see an unanticipated increase in demand for delivery equipment during Q2, which compensated for the large project we knew that was ending in Q1 in the US. Our semiconductor materials business continued to deliver sequential growth at a stronger pace. While a wider inflection of mainstream semiconductor end markets particularly in the areas of 3D NAND and analog, is not yet visible, the semi-market for advanced nodes and II has inflected. We've seen an acceleration in demand for thin-film materials for advanced logic nodes and semiconductors, which is driving sales. Turning to display solutions. We saw a slight organic sales decline of minus 2%. Volume growth was again not able to offset continuous price pressure in liquid crystals. Glenn has already spoken about the strategic rationale to sell surface solutions. So let me also say a few words about the financial implications. As the expected completion of the transaction is more than 12 months away, it will remain part of the reporting and group guidance. We will not define surface solutions as a discontinued business or as it held for sale as of now. Returning to our performance in the quarter, the EBITDA pre-margin declined by minus 240 basis points year-on-year to 26.7%. But please do bear in mind that the EBITDA pre-margin in Q2 of last year benefited from the patent agreement with UDC, which contributed around 60 million euros to EBITDA pre back then. Sequentially, the EBITDA pre-margin increased by 120 basis points. This is mainly driven by the sales increase in semiconductor materials and resulting leverage and positive mix effects within semiconductor materials from products associated with advanced nodes. For the further evolution of sales, please bear in mind that the dynamics in the semiconductor market have diverged from our previous expectations. While the semi-market for advanced nodes and AI has inflected earlier, the broader semi-market is developing at a more gradual pace. Regarding the further evolution of EBITDA pre-margin, I want to stress that we continue to be convinced of the long-term secular growth of semiconductors. Therefore, we do sustain high level of R&D and are already bringing capacity expansions online. So before handing back to Belen, let me also briefly comment on our balance sheet and cash flow statement. As you can see on slide 13, our balance sheet increased by 1.4 billion euros compared with the end of December 2023. Now let's take a closer look at the asset side. Cash and cash equivalents increased to 2.7 billion euros from 2.0 billion at the end of December 2023, driven by the strong operating cash flow. Inventories went up slightly, as did receivables. Property, plant, and equipment increased driven by our investments. And lastly, intangible assets increased slightly due to the FX effect on our goodwill. And the liability side, financial debt increased, which was largely offset by a decline in other liabilities, in turn affected by the dividend payment in Q2. Pension provisions were down due to interest rate changes. Payables decreased from 3.4 billion to 3.0 billion due to in-license deals signed in the prior period, which resulted in payments this year. And net equity increased by 1.8 billion euros thanks to growth in profit after tax and higher gains recognized in equity driven mainly by FX. As a result, our equity ratio strengthened yet again from 55% at the end of December 2023 to 57% now. Now, we will turn to cash flows, which are on slide 14. Operating cash flow came in strong at 861 million euros and was up by 239 million euros compared with Q2 of last year, despite the decline in profit after tax. This was mainly due to changes in other assets and liabilities, which were in turn driven by lower bonus payouts and taxes in the quarter amid a high level of DNA, including the one-off impairment in relation to healthcare R&D. Cash out for investing activities increased, primarily due to higher investment of excess liquidity in non-financial assets, and slightly increased capex on property, plant, and equipment, as we continue to invest in capacity expansions in a responsible manner. Last but not least, the difference in financing cash flow can be explained mainly by proceeds from bank loans. And with that, let me hand back to Belen for the outlook.