ALS Limited (ALQ) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to ALS Limited Briefing Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, CEO, Malcolm Deane. Please go ahead.

Thank you very much, and good morning, everyone, and thank you for joining today's briefing. The purpose of this call is to discuss our announcement this morning that ALS is taking full ownership and control of Nuvisan. I'm joined on this call by our new Chief Financial Officer, Stuart Hutton. Last year, in November, we announced that a full strategic review of our investment in Nuvisan was necessary given the financial performance to date. It was important that the company undertook this review to ensure that it made the best decision on behalf of our shareholders. Following the strategic review, ALS is pleased to announce that today, we have agreed with Nuvisan Pharma Holding GmbH to acquire the remaining 51% interest in Nuvisan at nil cost. This decision represents the best opportunity to deliver long-term value to our shareholders based on the following reasons; first, Nuvisan provides access to the full pharmaceutical value chain spectrum from drug discovery through to clinical trials or from the molecule to the patient. It is a highly regarded CRO in the industry known for its quality, client reputation and service offering in the DACH region and France. Nuvisan provides success to a large CRO addressable market with strong future growth potential. CRO services complement our existing analytical testing businesses and services within the pharmaceutical portfolio. We have secured full control and ownership at an overall attractive acquisition price. Nuvisan is positioned to benefit from any expected or potential market recovery, complementing ALS's organic growth outlook. With full control and refocused business development efforts in key markets, we have a defined pathway to grow the business and improve profitability. The acquisition unlocked significant value creation for the pharmaceutical business by extending and enhancing ALS capabilities and leveraging our geographical footprint and customer network. The acquisition and successful completion of the transformation program provides ALS with future optionality. Moving now to the financial impacts. Taking full ownership of Nuvisan provides long-term attractive value creation for ALS shareholders without requiring external capital. We secured a nil acquisition cost outcome for the remaining 51% ownership. Therefore, the total acquisition cost for 100% of Nuvisan will be EUR 145 million paid back in 2021. We will be embarking on a 2-year transformation program to improve profitability. The restructuring plan will provide approximately EUR 25 million benefit and will involve a EUR 20 million investment over 2 years. I'll expand on this in the following slide. There are minor cash costs associated with the full control of ownership and transformation of Nuvisan. [ Old ] funding is supported by existing liquidity and improved profitability. Profit improvement is expected to materialize through our focus on business development, operational improvements and efficiencies and footprint rationalization. A fair value adjustment process for the initial 49% investment carrying value has commenced and will be reflected in fiscal year '24 financial report. We expect that this will result in an adjustment of the majority of the existing carrying value. Turning now to the shareholders' value. As I have noted, acquiring the remainder of Nuvisan currently represents the best use of capital to invest and improve business profitability, particularly within ICB. We expect to deliver overall project returns in the medium term of low to mid-teens through improvements of earnings. We also see the potential for additional value to be unlocked through future optionality and portfolio rationalization. With ALS having full ownership and control of Nuvisan, we will be able to implement a much needed transformation plan. As part of the strategic review, we identified 5 key pillars of opportunity that will increase revenue from investments in business development and improved profitability. We have built a strong team that will be exclusively focused on the transformation project. This will include internal leaders of ALS such as Rickard Olofsson, key leaders of the existing Nuvisan team and external talent that are joining the organization. This will allow us to be agile in the execution of the transformation plan announced today. The business will report under the food and pharma structure leadership with close oversight from the executive team. Specifically, over the next 2 years, the team focus is on operational improvements and efficiencies. This is consistent with recent restructuring announcement made by one of Nuvisan's key clients. Cost rationalization where activity levels will be matched with facilities, shared services operations and the general cost base and the refocused business development agenda on core portfolio services. The 2-year restructuring program will be funded by existing liquidity and improving profitability. Restructuring costs estimated at approximately EUR 20 million over 2 years, and the initiative targets total annual cost reduction of EUR 25 million per annum. We expect the majority of restructuring costs and annual cost savings to materialize in the ICB business. In the longer term, we are focused on scaling up profitability growth in key markets. We will be rolling out expanded services to new geographies and focusing on winning outsourcing contracts. We also expect to unlock additional value through portfolio rationalization. However, our current focus is on finalizing the acquisition and the transformation plan before we determine the optimum portfolio. I'd like to spend the next few minutes talking through the history of Nuvisan's journey, but also more importantly, where it operates and adds value to our clients and our pharmaceutical portfolio. It is important to note that Nuvisan has a long history of over 40 years of serving pharmaceutical and biotech companies. It started back in 1979 as one of Germany's first CROs for clinical development in the pharmaceutical industry. Since then, the company has grown significantly and expanded into many other areas in the pharma value chain. Nuvisan has 6 sites in total and is headquartered in Neu-Ulm in Germany. 5 sites are spread out through Germany, including the Innovation Clinic Berlin or ICB, and on site is in the South of France. Collectively, Nuvisan presently has over 1,000 employees. In October 2021, ALS acquired a 49% stake in Nuvisan, expanding our Life Sciences service offering into the CRO market. ALS has been working closely with the Nuvisan business for 2.5 years through the Strategic Advisory Board, and I want to commend the Nuvisan team for what they have built. The team is passionate, committed and incredibly knowledgeable. Nuvisan represents a high-quality integrated solution CRO that can provide drug discovery and clinical development services. Firstly, Nuvisan ICB focuses on the early stage drug discovery phase of the pharma value chain. This is where the hunt for new medication and treatment begins and includes targets identification and validation, hit identification and lead optimization to develop promising drug candidates. And secondly, on the right side of this slide, Nuvisan GmbH provides preclinical and clinical services through -- sorry through to Phase II of the pharmaceutical value chain. Preclinical services evaluate the safety and efficacy of potential drug candidates before these are tested on humans. Nuvisan GmbH also provides clinical services, which commenced when preclinical research shows promise and the drug enters human trials. Phase I study is set for safety, efficacy and dosage, typically in 20 to 100 trial participants, while Phase II trials evaluate the drug effectiveness in a larger cohort and collect additional safety data. Collectively, Nuvisan provides a full service offering from molecule to patients. I now discuss the strategic rationale behind our initial acquisition of 49% of Nuvisan back in 2021 and where we stand now. The initial strategic rationale remains. Nuvisan provides quality service. It is a well-regarded participant in the market. The Life Sciences market and in particular, within the CRO and R&D services is attractive and growing. The acquisition expands and leverages our footprint into key strategic geographies such as Western Europe. Nuvisan is an innovator. It will become the center of excellence for innovation and technology research and development for the entire ALS Pharmaceutical network. It expands our service offering into upstream services, diversifying and increasing our capabilities. There are also substantial synergies that exist between Nuvisan and ALS Pharma. While some of these have been recognized, we believe we will be able to unlock more with our transformation program. In making our decision on whether to acquire the remaining stake of Nuvisan we determined that additional rationale existed, such as having 100% control and fully influenced overall decision-making will enable us to take the necessary actions to see the business exceed. ALS has a strong culture of growth and cost control. It was a nil acquisition cost for the remaining stake to take full ownership of what is a high-quality European CRO. And finally, the acquisition and successful completion of the transformation program also unlocks future optionality. In summary, we are acquiring Nuvisan in full as we believe there is a strong strategic rationale to expand into attractive and complementary markets and with a defined pathway to improve earnings. Moving to the next slide, I will detail how Nuvisan fits within the broader ALS Pharmaceutical strategy and portfolio. The CRO and R&D markets, which Nuvisan operates in, are large and growing. I'll talk about this in more details on the next slide. Nuvisan clients and portfolio aligns well with our existing clients and services. Taking ownership of Nuvisan enables further development of the Pharmaceutical platform so we can offer a broader range of services to additional clients and geographies. CRO services participation is key to capturing global pharma market access and a larger part of the value chain, which represents approximately 45% from drug discovery to clinical Phase II trials. The CRO services that Nuvisan offers are complemented by existing ALS analytical testing capabilities and alignment with the Beauty & Personal Care business. Now to talk about the CRO market, being the key market which Nuvisan is positioned within. The global CRO market was worth EUR 72 billion in 2023 and is expected to grow at 9% per annum until 2028 to reach close to EUR 108 billion. Volume growth accounts for about half of the growth, particularly from the expanding pipeline and patent cliffs. The market and Nuvisan has experienced challenges over recent years, a result of the economic environment in Europe, geopolitical conflict and lower levels of funding for new drug development. While some headwinds still exist, we are seeing signs that they are subsiding. Peers have pointed to improving biopharma funding, which should be supportive for drug discovery spend. Biotech funding is expected to see a gradual return to trend growth over 12 to 24 months. Outsourcing rate of discovery R&D spending is expected to increase to CROs with specialized capabilities due to the increased innovations and trial complexity. Small molecule remains a key part of the pipeline and are expected to account for about half of the pipeline for the foreseeable future. The European CRO market in which Nuvisan operate is expected to represent almost 27% of the global CRO market in 2028, is the second largest after the U.S. So finally, I'll take the opportunity to summarize our acquisition of Nuvisan. We have exercised both call options for Nuvisan GmbH and ICB at nil cost to acquire 100% ownership of what is a high-quality and well-regarded European CRO. I consider strategic rationale supports our decision. Acquiring the reminder of Nuvisan enables further participation into a high-growth market, which is a strategic fit within the ALS Pharmaceutical portfolio. It expands our geographical footprint into key European markets and broadens our service offering further upstream in the pharma value chain. Once the acquisition is finalized, we will have full control and influence to implement change and drive efficiencies. We will be undertaking a robust transformation program to improve profitability. This program is targeting annual cost reduction of EUR 25 million per annum following a EUR 20 million transformation program over a 2-year period. In other words, for every dollar spent, we expect $1.25 back. We have built a dedicated team that will be exclusively focused on the transformation project, allowing us to be agile in the execution of the plan. We are confident that this transaction creates shareholder value. Acquiring Nuvisan represents the best use of capital to invest and improve business profitability. We expect to deliver overall project returns in the medium term in low to mid-teens. It also provides us with the maximum future optionality, including portfolio rationalization. So lastly, as noted in the announcement, we take this opportunity to confirm that fiscal year '24 underlying NPAT guidance for the current fiscal year will be towards the lower end of the previously steady target range of between $310 million to $325 million. Minerals group has performed well and in line with our expectations despite subdued trading through December and January, specifically, Geochem continue to protect margins and further its growth into mine-site production and high performance methods providing additional client value. The Life Sciences business has traded as expected, with the environmental business continue benefiting from regulatory tailwinds, market share expansion and price discipline. Corporate and interest costs are expected to be slightly higher. Before I finish, I would firstly like to thank the Board of Directors of ALS and our colleagues for their effort and support over the last 5 months while undertaking the strategic review. I also wanted to thank our shareholders for their patience during this process and look forward to discussing this in more detail with you in the near future. So with this, that concludes the presentation, and we are now ready to take questions.

[Operator Instructions] Our first question comes from Jakob Cakarnis from Jarden Australia.

Just firstly, how did you get to the new cost for the acquisition of Nuvisan, obviously, noting that there was a pre-agreed EBITDA margin on a trailing 12-month EBITDA basis. Just wondering what you can comment there about how that was structured essentially as nil cost, given it looked as though the business was still producing EBITDA on a euro basis in the first half of '24?

Jakob, thanks for the question. I will start and ask Stuart to complement. The structure when it was presented in 2021 allow us to have some flexibility on the options that we had starting in January. The optionality was based because we wanted to understand in detail the strategic fit of the Nuvisan business into the ALS portfolio. And the outcome that we achieved was a combination of the structure at the time and the discussions that we had with the owners moving forward and the best thing for Nuvisan as well. Nuvisan, as I mentioned during the call, is a combination of ICB and what we call Nuvisan 3.0. So the overall outcome is a combination of the EBITDA contribution of both businesses. Stuart, do you want to complement anything?

Yes. I think, Jakob, it's a good question. I think what I would say is, in underlying trading sense, Nuvisan 3.0 has continued to trade steadily. But ICB, its performance has, I guess, tailed off with some of these funding constraints that we've seen impact the business in the last 6 to 12 months? So I think if you look at your net terms, you've got one part of it that is steady and profitable. And the other part, which is -- has slipped back a bit. So in net terms, it's basically a breakeven scenario. Hence, we've got to nil consideration for the 51% option.

Okay. And Malcolm, just a follow-up there, then targeting the EUR 25 million of cost out, obviously, it's going to cost you EUR 20 million to implement. Is there any way that this business gets back to the EBITDA margin when you acquired it around that 25% mark? Or are we now south of that moving forward, just as a follow-up.

EBITDA, -- so you won't -- Stuart, I can start. But I think that [indiscernible] that we presented, indicate that this business could be performing in line with peers and other CROs. We believe that, as I said during the presentation, this is a high-quality CRO, and clients really value the service that is provided, is specialized. And we believe that with the transformation program that includes both business development efforts and a restructure of that side of the business, but also cost rationalization, we can move back to those market EBITDA targets that the business should have and that our other peers have. In terms of the margin that we got -- that we had at the beginning in 2021, that was a business that was with the tailwinds of COVID. So probably margins were slightly higher of what we expect in the next 2 to 3 years.

Okay. Helpful. And then just one on the trading update, if you can, please. At the first half, you said that the Minerals business was doing around 33% EBIT margins. You gave us a number in the first half of '24, where sampling flows were around minus 13%. Can you just comment about why, in the trading update you've spoken to those Minerals margins being maintained. Is that year-on-year or relative to the first half? And can you just confirm whether sampling flows were worse in the second half of '24 relative to the first half, please?

Thanks for the question. So we -- what we mentioned on the update is that the business is resilient from a margin perspective, and that's compared with the previous year as well. And that's in line with what we stated on the outlook at the half year results. As you will remember, we made a very precise comment about margins for that business, and we are addressing that point on the outlook statement. In terms of the sample volume, we have not provided that data, but I can tell you that it was a similar trend than what you've seen at the first half. So a trend of slow improvement, but still behind the figures that we had last year. But it's been probably what we made in the comments, a really unstable end of the year. So December and January, a little bit more unstable. We will present more details on the May results. Stuart, anything that you want to add?

No, I think well summarized, Malcolm.

Our next question comes from Rohan Sundram of MST Financials.

Malcolm and Stuart, I might just start with the -- in terms of the acquisition, can I just get a view on how that impacts the cyclicality of group earnings in taking on the ICB business? Is this something that can be managed through cost?

I'll take that. Rohan, I don't think it's going to really impact cyclicality that much. It's not overly material in the group scheme of things. We're going to put that in context. I mean there will be fluctuations in ICB, depending on approval of funding for investment and just general investment in biotechs, et cetera. But I wouldn't see it being a massive impact on the seasonality of earnings for ALS because in overall scheme of things, it's not material.

And last one for me, just with regards to incorporating 100% of Nuvisan in the FY '24 result. That's how I interpret -- does that -- how material is that in the context of the guidance that you've provided, does that have much impact going from that 49% incorporation to the 100%?

No. So Rohan, just to clarify the -- I mean see it as, from a balance sheet point of view, the 100% will be reflected at March 31. But from a trading point of view, the trading won't commence in 100% until next financial year, so from 1st of April. So that 100% will not be reflected in FY '24.

[Operator Instructions] Our next question comes from John Purtell of Macquarie.

Malcolm, and Stuart, I hope you're well. Just had a couple of questions there and just building on the prior question. Just around, Malcolm, originally, the EBITDA of the business was EUR 40 million of EBITDA and there has been a known contract that went in-house. I mean I suppose the simple question is, do you think you can get back to close to that level and just trying to think through that, but obviously, the EUR 25 million of cost out is going to be important and then potentially some market recovery on that. So just wanted to get your thoughts.

Thanks, John. I think it's a combination of both things. The first one, there's market recovery. As you may have read in the news, one of the main clients of Nuvisan, Bayer is going through hardship, right? And that impacted the business performance on the second half as well. But we see market recovering and biotech funding and actually the pipeline, it's quite interesting right now. But obviously, what we have under our control is the cost restructure and big focus of the transformation team is making sure that the efficiencies of that transformation plan are surfaced within the time frame that we just expressed.

And just the D&A of the business, what impact will the write-down and no acquisition costs have on that? Do you expect them to see D&A reduced from where it has been? I think it's been running at EUR 19 million per annum.

Yes, John, I think like in an equity accounting sense, we don't necessarily take up the D&A piece. I think the best way to think of it going forward is CD&A being around 3% to 4%. I mean we're still going to work through this whole write-down process, which will -- is likely to have some impact on the tangible assets, but it's mainly going to be intangible. So we'll see how that shakes out. But I think if you use 3% to 4% of revenues for Nuvisan, that can't be far away.

And sorry, just a final one, if I could, and just again, further to Rohan's question, I mean the business has proven to be much more cyclical, I think, than anyone expected and appreciate the biotech market has been weak. But aside from the cost out, I mean, what can you do to reduce the future cyclicality, particularly around customer mix orientation, that type of thing?

I think, John, that's a great question. There are a couple of areas of Nuvisan that are extremely successful, for example, the bioanalysis side. And that represents 15% of Nuvisan but it has very strong margin. And that's a clear example of an area that we will continue expanding. Another good area that have good strategic fit with ALS is the French business that represents 10% and that is very aligned with our Beauty & Personal Care business. So part of the focus of the team is understanding what are those areas that really Nuvisan has a competitive edge in the market and expanding those, especially those that have very close strategic fit with the ALS portfolio. So there's going to be a rationalization of the efforts in terms of the BD to be sure that we're bringing the best work in those areas that we are creating the best returns. The other part of the focus is, we mentioned about the discipline of the BD and the expansion. We believe that there's still ongoing opportunity to further expand that business into the U.S. by bringing resources here. And we started to see some wins in the end of last year, at the beginning of this year, and we will continue focusing in making sure that the Nuvisan brand is now in this market in the U.S. to bring the work to the German labs.

Our next question comes from Peter Drew of Carter Bar Securities.

Malcolm, Stuart. Just a question. Can you tell us how much -- it just seems like there's been a bit of a sort of negative swing in earnings from Nuvisan first half to second half, just based on that, the acquisition price of 0. I'm just wondering what's the contribution of Nuvisan to the earnings in the second half?

Yes, we're still working through that. But I think it's safe to say, in net terms, as I was referring to before, Nuvisan is in net losses, magnitude-wise, because we're equity accounting half of it, it's not going to be material. But if you want to perhaps to triangulate it all for a number on the call here. If we look at the delta or what we expect to improve earnings with this cost reduction program in the next couple of years, I think that would get us to a return on our original investment around sort of 10%. So from that, if you work [indiscernible], you'd see that I think the business in an underlying sense is probably backwards by somewhere between EUR 5 million and EUR 10 million.

Yes. That makes sense. And just in terms of, I guess, the EUR 25 million cost out. How do you -- how quickly, I guess, can you get the business back to a breakeven? And then within that sort of EUR 25 million cost out, how much sort of, of that are sort of shared services related to easier sort of gains?

So we have not disclosed the numbers, indeed it is a great question. A part of the restructuring cost will be by ending the contract that they have with a holding company and that will create immediate savings. There are some savings that will materialize the first year and some savings that will materialize in the second year. And those EUR 25 million is the run rate starting as of the second year. You can expect -- Peter, you've been following ALS for many years, that from a cost perspective, we are very disciplined. And the team that we got in place is a team that has experienced restructuring this type of business and making sure that we, as absolute priority, we take that business to breakeven as soon as possible and be sure that we capture the upside in the shortest possible term. I think that the term that we provided today to the market is a reasonable term that we believe that will take us to create those savings.

Thank you for the questions. I see no further questions at this time. I will now hand the conference back to Malcolm for closing remarks.

Thank you very much. To close, I want to express again the gratitude to the Board and the colleagues that supported us on this process. And thank you, everyone, for taking the call today, and we'll be open for follow-up questions in this regard. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect.