Bachem Holding AG (BANB) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Bachem Half Year Results Presentation 2022. There we go. So for those of you who are joining us for the first time or as a reminder, we're using a Zoom call, so this is a Q&A section. [Operator Instructions] Also, keep in mind that this call is being recorded, and the playback will be available on bachem.com in due course after the conclusion of the call. I am very happy to be joined today by Thomas Meier, CEO of Bachem; and Alain Schaffter, CFO. My name is Daniel Grotzky. I'll be moderating this call. Thomas is joining us from the U.S. West Coast, where he is on business travel and Alain and myself are in Bubendorf, Switzerland. Without any further ado, we get to the agenda. Thomas will speak to the half year results, and Alain will cover the financial perspective, and then Thomas will conclude with the outlook, and then we'll get to the Q&A. And that gives us Thomas. Thomas, welcome and happy to hand over to you to give us a walk through the results.

Thank you, Daniel, and thank you, everyone, for joining us on our call for the Bachem Half Year Results 2022. Before we dive into the numbers, I think it's important to provide the context of these results. At Bachem, we are focused on the long-term perspective and development of the company. And so I recommend that investors take this long-term perspective to heart too. Historically speaking, this is still the third best half year result ever for Bachem. And we think in H2, we will be able to deliver another record half year for Bachem. And this in front of the backdrop of an intensely tense macroeconomic environment. Altogether, this speaks for the solid and strong underlying stability and resilience of our business. With that, we move on to the first slide. As you could see from the press release this morning, we reported sales of CHF 234.9 million. This is a slight decline from the first half year 2021. We are very confident that this will turn into a positive growth figure by the end of 2022. And I will go into more details on the outlook later. Sales were driven by an impressive growth of the CMC development product category. However, this growth was offset by a decline in commercial API. The main reason for this was that we saw lower order intake for a somewhat slower product launches. This is by itself a typical risk of our industry. But it's important for us to mention that we do not see a structural indicator of slower demand for peptides or oligonucleotides. In addition, we could stabilize the commercial API category with strong generic business. But make no mistake, this portfolio structure, of course, also affected our earnings. As you can imagine, ramping up multiple new products, new projects in development requires greater effort in time and people, and this has an effect on margins. In effect, we landed with the EBITDA at 28.7% and with an EBIT margin of 22%. We believe we can improve this towards the full year. As our all companies, we are also affected by the macroeconomics. So for the team at Bachem, we have been weathering this pretty well so far. That being said, inflation, supply chain and energy costs remain 3 of the top risks we see going into the future. As we see the ongoing long-term demand for peptides and oligonucleotides, we are continuing our expansion of our capacity. The construction of Building K in Bubendorf is moving ahead as planned, and so is the search for an additional site in the northwestern part of Switzerland. These are now the figures in detail. As I mentioned, we had a revenue of CHF 234.9 million, with EBIT of CHF 67.3 million at 28.7% EBITDA, sorry, EBITDA at CHF 67.3 million with a margin at 28.7%. And EBIT at CHF 51.6 million and a margin of 22%. Net income took a little bit of a dive, and Alain will give details on that in the later part of this presentation. As I mentioned at the beginning, we need to see these results in the context of the long-term growth trajectory at Bachem. We added this historical chart to illustrate for 2 reasons. Firstly, it clearly shows that in the first half, we often see a somewhat less dynamic business for Bachem then we have it in the second half of the calendar year. Secondly, you can see then in 2021, we had an exceptionally strong first half year that brought in revenues ahead of the second half of 2020, something unheard of over the recent years. This made, of course, for a very difficult benchmark to beat. If you look at the product categories, we see, as I have mentioned, this really strong showing of the CMC Development with 50.2% increase in local currency and a decline in the commercial APIs of 13% in local currency. And our third category to Research & Specialties, we were happy to see that they were also growing. Looking into the geographies. I wanted to give the context to that, too. And as you have seen, when you follow us over the last couple of years, there has been very strong growth in North America. Given the portfolio structure now, the slower launch is mostly affected the North America region. And hence, their results were compared to Europe, less positive. That's okay. We can move on. What is important to highlight on this slide is that, again, despite some fluctuations, we have a very solid and stable structure of our business. Individual customers might pop in or step out of the tiers. But overall, it's a healthy balanced picture with the top 5 and the top 10 making up about 50% of our revenue. On to the next slide. I think especially in this year, it's important that we look at the result in 3 category. First of all, what has happened in the first half of the year; second, what we expect for the second half and third, what is happening long term in the market and with Bachem. We have already spoken about the first half year. For the full year, we expect to see CMC development to keep driving sales. What's add to this is that the new oligonucleotide business is also heavily pointed towards the development. In the space of commercial projects, we see a return of sales to the previous year's level by the end of 2022. All in all, CMC Development dynamic should be enough to deliver group-wide sales growth in the mid- to high- single digit at the end of 2022. For the long term, I'm optimistic the industry pipelines are full of both peptides and oligonucleotides. With the needs for CDMO partners, we see an interest from large pharmaceutical companies. We have many good discussions, and that's nothing new. I think this trend is rather accelerating. And for Bachem, I believe that new NCEs will have an important part, but also the generic business will help grow the commercial API product category. And all in all, those are the reasons why we are confident that we can hold on to our target goal of in average 50% for the period of 2022 until 2026. But you might ask, why are you so confident for the long term? And this, of course, has to do with the dynamics of the peptide and oligonucleotides and their demand. In many aspects, I think we see the full potential of peptides right now and also especially over the last half year. And I just want to pick out 2 examples. I felt the weight loss data for tirzepatide was really remarkable. And I also are looking forward to seeing pegcetacoplan approved for geographic atrophy, a disease where right now, to my knowledge, there is not a real treatment out in the market. Looking at the oligonucleotide. We can certainly say that we are on track to make those CHF 100 million sales in 2023. And we see a positive business and market environment for Bachem, who's accepted and respected as a player in the field and also for the whole field that is developing nicely and expecting very many positive news over the coming decade. We are ramping up the development business, and we are also working on having the capacity for the oligonucleotide business. And in that respect, we are -- we think it's important and we are happy to have this collaboration with Eli Lilly that we announced in the first half year of this year that provides us with 2 things. It certainly gives us a long-term planning perspective. And it also shows that Bachem is getting an established player in the oligonucleotide field with success with smaller and larger companies. The second highlight of the first half year is our sustainability rating from EcoVadis. EcoVadis is a well-respected rating agency. Many large and smaller company work with EcoVadis and it's accepted in the industry. And when it comes to sustainability, for me, it's always important 2 things. One is that we do our business of producing oligonucleotide and peptides in a sustainable manner. But it's also important to remind all of us that Bachem is a supplier of API for medicines. And our business itself makes an important contribution to the sustainable development of our society. So what we are doing our sustainable products, APIs for medicine. And with that, I think I pass it on to Alain. Alain, please?

Thank you, Thomas, and also welcome from my side to this call. Again, key figures. As a reminder, Thomas already talked about the sales down to EBIT. On the net income, he also mentioned, as you can see, major drop in the numbers. And let me give some words here. We have from the capital increase purchased some securities as stated in our notes. And due to the financial market situation, the macroeconomics, on the securities, we have a number of unrealized loss of CHF 13.5 million from the valuation in the first half year '22. On the other hand, we also have a realized profit or gains from these securities, which is coming from dividend and interest. But in fact, it's a negative CHF 12 million that is hitting our P&L here on the net income line. And then on the next slide, what are the drivers of the change in our margin? When we look at where we started and compare first half year '21 to the actual one, we started with 25.9% percent in the margin. And you see here in the cost of goods sold, it's the major part of the drop and there are several reasons for that. One is, as Thomas already mentioned, is the product mix, which is not that favorable, like in the last -- in the first half year '21. But there's also that we have hired new people, to hire new people, the new colleagues are very important for the future growth, for our plan. It's also ramp-up costs for the new buildings, for new products. And also the higher depreciation we have from our CapEx program play into that number in the first half of '22. On marketing and sales and also on the G&A, it's very similar. We have, as expected, higher costs now from traveling again. We have exhibitions. We have fairs. There are more costs as expected. We also hired here new colleagues to support us also in general, administrative and marketing and sales to support the growth of the company and our plans. And also in the G&A, we have an impact from higher capital tax due to the capital increase, which is also substantial number in the cost here. This leads us to a 22.0% EBIT margin in the first half of '22. On the next slide, maybe I've already seen it, it's now talking about the EBITDA. And why is there a jump from EBIT to EBITDA? There are several reasons for that. EBITDA for us would be a future number to report. It's more relevant for us because we have a better operational control there. The depreciation will increase due to our CapEx program. And depreciation is just given by accounting principles. So it's not something we can influence. So we see EBITDA as a number that is also used from our competitors in the market and which will also make it easier to compare with the market participants. So talking about that, it's a first half year like the slide that Thomas already mentioned, past -- short term and long term. Mentioned the downside on the margin is the product mix, the ramp-up costs that we have in FTEs, but also in hours to be ready for the growth in the next half year, but also in the future. And then we compare with the strong first half year in '21 as a base. What are our full year estimates? So with the sales growth for full year with about mid- to high single-digit number, we expect a better distribution of our cost of goods sold across the higher sales volume in the second half, so which means the economy of scale that we can benefit there, but also that our marketing and sales and G&A costs are stable or grow under proportional to the top line. But of course, we still have the macroeconomic uncertainties that are already ongoing. On the long-term outlook, we see though, we have a pricing power. There is limited industry capacity, and we are building up in this capacity at the moment. We see the potential of the scale-up from the oligos but also the management of our own project portfolio. On the downside potential, again, the macroeconomic, which is not just a phase, it's here to stay as it seems. But also the risk that some projects or products become a commodity and then we have more competitors or we have the pricing pressure here that could impact our numbers. On the long term, we say we go ahead of 30% in the EBITDA margin. This doesn't mean that there is not a chance to improve that or to increase that number. It's a floor, it's our target that we achieved that. It's -- especially also for '22, a target that we need to achieve. We need to work for that, but we see this as a floor target for the next few years. On the next slide, we see what happened with the cash. We have earned with the cash flow analysis. We started with an operating cash flow before change in working capital with CHF 67.4 million. We had a positive impact in the receivables and current accruals. It's mainly we have reduced -- we were able to reduce our trade receivables by almost CHF 12 million. On the other hand, we have invested heavily in our inventory, mainly a raw material, but also work in progress, which can be invoiced in the second half of the year. The raw material is clearly also driven by the actual situation and the challenges in supply chain. We just want to make sure that we have the raw material in place to produce and to deliver the product as requested and in the quality we need to deliver to our customers. On the payables side, we also have a positive impact, and there is one factor I want to mention. We are -- as already announced, what we try is to get prepayments from customer there. We increased by CHF 8 million our number to make sure that we already have cash and do not play like a bank and go in upfront with the cash situation. At the end, we have an operating cash flow of CHF 50.7 million, and we have spent it for mainly 2 topics. One is the CapEx of CHF 70.6 million. This is the cash out. This also includes the change in account payable for CapEx project between the balance sheet dates. That's why it's a higher number than the CapEx we see in the balance sheet. On the acquisition side, there is a separate slide later in the deck. We spent a net cash of CHF 21.9 million. And to cover all of this cash out, we had a sale of securities, mainly money market with CHF 72 million in the first half of the year. On the financing side, we paid out a dividend in May with CHF 51.6 million. And we repaid the loan of CHF 20 million, that was already in the books at the end of last year. And in addition, with the acquisition, we have taken over a CHF 13.5 million loan from the seller, which also has been repaid at the acquisition date. This leads us to a net change in cash in the first half year of CHF 54.7 million as a cash out net cash. On the next slide, the balance sheet analysis. Here on the left side, you see the working capital. You see that the cash or securities, which are cash like as always can be sold. So it's not the current, it's all current money. We reduced by CHF 120 million for the CapEx and for others like just seen on the other slides. On the bottom, the current financial liabilities, the CHF 20 million went down to CHF 0.3 million, which means that about Bachem now at the moment is debt free. There are no external loans anymore. It's a part of financial leasing liabilities that are in there. On the equity side, we have a stable equity with CHF 1.1 billion with a ratio of 88% at the end of June 22. So this shows we are financial independent, which is always a very important topic for Bachem to be able to act independently. And then talking about the CapEx. On the next slide, we have invested about 16.5% of our revenue in the CapEx. CHF 29.7 million out of this CHF 38.7 million is invested directly in capacity, be it building or equipment. And for the full year, we expect about 25% to 30% CapEx in relation to our revenues. It also includes the new projects at the new site from the acquisition we have taken over in April. That will be our projects now and will be our CapEx. And we see that depreciation now increases, as mentioned from the past CapEx, this is an impact that now is coming through from going live with the new capacity. And then on the next slide was just mentioned before, it's the expansion at the Bubendorf site. One thing that we are talking now for a long time is the building K. On the left side, you see the progress there. The construction is on track for the launch of manufacturing in '24. It will have capabilities for both peptides and oligos. It will have a strong focus on green chemistry with automatization as this is a very important topic at the moment also in the industry. The investment in the first construction phase is about CHF 220 million until '24, and a part of that has already been spent over the past few months and in '21 for bringing the building up as it is today. It has a modular expansion of the '24 for the overall doubling of the Bubendorf capacity in the future. And then second, the consolidation at the Bubendorf site. So when you're in Bubendorf, there was a premises with office buildings just across the suite and on April 25, Bachem AG has acquired 100% of this -- of the company, Breiten Immobilien AG where Ingro Immobilien AG and Bachem is now the owner of the office buildings there, the parking lots. And until that time, all the buildings and the parking lot has been rented out from the Breiten Immobilien AG. Both acquired companies have already been merged with Bachem AG as of June 21 and are part of Bachem now. The total consideration of the shares amounted to CHF 23.8 million, which included also one [ CHF 0.1 million ] in cash. And based on the preliminary purchase price allocation, the net assets we have taken over, had a total value of CHF 23.7 million at the time of the acquisition. With that, I'd like to hand over back to Thomas for the outlook '22 and beyond.

Thank you, Alain. I'm happily look into the future. And as always, we can do that with a more specified outlook now at the half year mark. Alain and myself, we have already mentioned that we think we can deliver mid- to high single-digit growth with a strong order book, in particular the CMC development space. We also believe that we can get EBIT and EBITDA margins to a level comparable to 2021. This needs action. This needs a lot of hard work. And we are focusing between others on managing our capacity utilization and controlling our costs as always. We will however, continue with our investment into Bachem into the long term, and that means capacity expansions. And there, the larger part of the investments will happen in the second half of 2022. We will also continue our investments in technology and knowledge and work on our R&D projects because we know that this knowledge is actually what our customers look most for at Bachem. And that's where we are leading, and that gives us the strongest outlook for the future. If you look at the long-term perspective on the next slide, we also reviewed those for the half year. And given the macroeconomic environment that has rising material costs, inflationary risks, and also rising energy costs, we felt we better go cautiously and say, that we are updating our long-term profitability guidance to an EBITDA margin of more than 30%. For the top line growth, there is no change. As already mentioned, we are confident that we can make this 50% compounded annual growth rate in average for the 5-year period. And if it goes faster, nobody is unhappy, and this is certainly not impossible. And that brings us to the Capital Markets Day. We set up a Capital Markets Day for Tuesday, September 20 for many reasons because first of all, we would like to have the opportunity to meet you face-to-face again. And also the entire corporate executive committee has a lot to tell. I think we should give an update of what happened over the last years and such a face-to-face event is certainly a great opportunity to not just listen and see Alain and myself talking together with Daniel here, but really get a sense of where we are as a team, as the leading team of Bachem. It's a face-to-face event, as I mentioned, 2:00 in the afternoon, but there is also an option to dial in. And of course, we are happy to have as many as ever joining us and telling you the story of Bachem as we see it developing in 2022. But also going forward, what are the opportunities in the market. How can we make this company even stronger and what we see as opportunities out there. And with that, I think we are at a half hour mark, and we're ready for questions and answers.

Thank you very much, Thomas. Thank you very much, Alain, for your remarks. So just reiterating to everyone, we -- you can pose questions in the Q&A feed. We already have a few or you can raise your hand and then we'll take your call. I have already 5 raised hands and questions, so we'll try to mix it a little bit. Let's start with a question here. One note, we do have 96 participants overall. So there's quite a lot. Also from more external. So we hope that we'll be able to cover as much as possible in the next half hour. And so, I'll also ask Alain and Thomas to be as brief as you can and also people who ask questions, please try to be as brief as you can so that maximum number of attendees can get what they want. First question here by Carlos Moreno goes to Thomas. Thomas, what do you think will be the long-term split between fermentation for peptides versus chemical synthesis? The chemical route appears cheaper and more batch consistent, Thomas, question to you. Quick answer from the peptides.

Yes. I'll try to be very quick. For Bachem, we are only active in the chemical synthesis. So our split is 100% chemical synthesis. For the industry, it's certainly nice to see for us as chemists and chemical company that tirzepatide is a chemical process. So far, the large GLPs were mainly produced by recombinant expression systems. And so there's a certain shift in there. And I think the long-term trend could be to the chemical synthesis because it offers a broader diversity of medical chemistry. So you can actually play around and extend your half-life and other things. And I think that's the main driver for chemical synthesis.

Okay. Let's take a question now from someone on the calls. Raise your hand. Daniel Buchta from ZKB. Daniel, you should see something popping up or you can unmute yourself now and please ask your question.

Maybe 2 questions. The first on the updated margin guidance. I mean, you left your top line guidance basically unchanged, expecting 15% sales growth per annum on average. And before you guided on EBIT, so we are not exactly comparing the same things. But nonetheless, I mean, you indicated that margins should drive structurally while if you are above 30%, that could also include, I don't know, for example, 30.5%, so that would not mean an increase in terms of margins. I mean, is that to be understood in a way that you got more cautious? And if so, why is that the case? I mean, consensus, at least if I look on Bloomberg this morning, we're still expecting clearly rising margins in the coming years. If you could share a little bit more light in that direction would be great. And then maybe the second question. Maybe for you, Alain. On the cost base. I mean, obviously, the COGS quite a drag on profitability in the first half with the input cost inflation that we see, I mean -- and also what your competitor from [indiscernible] was saying in the last couple of days and weeks. I mean, how do -- how confident do you feel that you can pass on the rising input cost completely? And how long would it take until this is really fully pushed through almost completely? Those would be my 2 questions.

Maybe Alain, take the COGS question and maybe I'll also already add a little bit on the margin and then Thomas can add to the margin question.

Sure. So on the COGS question with inflation, yes, I mean we are not -- it's not that we don't see the impact. But for us, it's an external factor. And we have to take measures to sort it out and to balance it out as good as we can and it's not that we are not affected, but it's something we need to sort out. It will have or it has actually an impact, of course, like all the others, but we try -- we have contracts, and we try to increase our prices to our customers. So if there are clauses in the contract where we can pass on the cost. If we have new projects, it's already based and invoiced on a higher cost base. It's an ongoing process. Our sales team, BD team is doing what they can. It will not be that we can increase the prices on every contract we have. But of course, we do what we can to pass these costs to our customers.

On the margin question.

The margin question. I mentioned in my talk that we see the macroeconomic climate as one reason, but the main reason for this somewhat tough first half year is really the product mix and certain timing issues. So we feel we improve in the second half of 2022. And we're going to continue to work very diligently to have the margin to remain independent. And at the same time, we want and we must invest into our business. That's knowledge and that's new teams and education. So we really tread that line very narrowly and make all decisions based on our long-term perspective. And we right now believe that we can remain above EBITDA of more than 30%.

Thank you, Thomas. And I'll read a question here from the chat from [indiscernible]. Question, how should we directionally think about sales growth in 2023 considering that this year's growth will be below average? Is it fair to assume that growth could be clearly above the 15% in 2023, let's say, high-teens sales growth year-on-year? And what areas would you expect growth to come from? And some color on 2023 margin dynamics would be appreciated as well. Thomas, I'm not sure we can say about 23%, but maybe sort of long term.

Yes. I guess what I can say is that our long-term perspective to 5 years, I mentioned the 15%. I see a strong demand, especially in the later years of those -- this 5-year period. And that is in line with additional capacity coming on stream in 2024. So we are focused on finishing out the construction work, and we have demand for that. But until then, I think it will be maxing out existing capacity in Bubendorf. We kind of bounce toward some capacity limitation, I would assume for the coming years.

So lets take another question from the raised hands, Tanya Hansalik just raised her hand.

Yes, can you hear me?

Yes.

Okay. Yes, some of my questions were answered, but maybe a few more then maybe back to the midterm margin guidance. The change from EBIT growth ahead of sales to EBITDA of more than 30%. Could you also put this into context? What does this mean on the EBIT line? Should we expect EBIT to begin to decline with these investments in capacity and higher depreciation costs? That's my first one.

I think that one is for Alain.

Yes, I mean, if we would stay at the floor of 30%, it's the math that -- and the fair assumption that an EBIT margin would decline.

Okay. And then another question just maybe to make clear on COVID effects. You said neutral in the last 2 years, but just to make sure, were there any positive effects on the revenue base in H1? And do you include anything in your guidance for the future?

Thomas.

No, I think the positive COVID situation, the positive effect we have seen, they are still -- they almost completely have vanished. And we -- as I mentioned, we still had some rather slower-than-expected introduction that were partly affected by COVID, but I think that hopefully is also behind us.

Okay. And then if I could squeeze in one more. I think it's been asked a bit, but just if you could maybe give a bit more color on the guidance for the full year 2022. Implies if they're stable or comparable margins for the full year to last year, then you'd have quite a significant margin uplift in the second half around 28% EBIT margin, which is -- seems quite demanding. And you haven't had that in a very long time, such a high margin. So maybe if you could give us a bit more of the drivers of that high margin uplift.

Yes. What I mentioned or tried to say is that, I mean, we have a significant better sales forecast for the second half. And it's very important that we do not grow over proportional or proportional to that on our COGS and also on the other functions like G&A and M&S. And with that, so every additional Swiss franc should have a higher impact from a percentage-wise than the existing business. And there, we expect that it's possible with the economy of scale with the volume that we can produce at more or less the same cost base that we have an important contribution to the EBIT margin.

Thank you, Alain, for that. Let's take another question from the chat from Antoin [indiscernible]. There are 3 questions here. I'll cover them briefly. And can you specify your growth guidance? Is this a local currency? So a quick one probably for Alain. Then can you explain why you implied half 2 EBIT margin ahead of 28%, way higher than your past H2 margins? I think Alain, you just covered that one. And then are there some adjustments backed into your results? Maybe quickly cover this?

So the first one, it's in Swiss franc. So it's a reporting currency, that we guide. The second one, I just explained from the question from Tanya. And on the third one, no, there is no impact in our results.

Next question from the call raised hand, Daniel Jelovcan. Please make sure you press the unmute button and yes, now we should be able to hear. Hello? Daniel Jelovcan? You were unmuted from our end, but you have to unmute yourself. Should be a button popping up. Doesn't seem to work right now. Let's just take the next [indiscernible] then while we're seeing. And Daniel Jelovcan, please, otherwise, if it's not working, use the chat while we [indiscernible].

Most of the questions are answered. But I have a few more. You said sales guidance is in Swiss franc. In the first half, you had 1.2% currency effect, a positive currency effect. Could you tell us how much you expect for the full year on the top line? And secondly, the sales decline in the U.S. was very strong with 27% minus. Could you give us more color why, especially in the U.S., the sales development was so weak?

Yes. Okay. Maybe I'll take the second question first. It's correct that the development of the U.S. sales numbers is not very pretty. There are many reasons behind. The main reason is that there are slower product launches, and they are affecting those U.S. customers. Those launches might be worldwide, but they were somewhat delayed. And the second thing that's very important to us and everybody at Bachem, the U.S. market by itself remains very, very attractive. We see many, many good customer interaction there. We see many early-stage projects. So we really don't see a structural weakness of the U.S. market. It's just a few individual situations that came together. And one in addition for this year and then it was very specific is that one invoice address change. We ship the material, not in the U.S. anymore, but to Europe and that triggers a change in our accounting practice. So I think it's really a coincidence rather than a structural situation for the U.S.

I take the other question.

Yes, that will be great.