CSL Limited (CSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to CSL's Market Update. It's Mark Dehring speaking, and joining me online is Paul McKenzie, CSL's Chief Executive Officer; Joy Linton, CSL's Chief Financial Officer; and John Levy, CSL's Deputy Chief Financial Officer. Paul and Joy will shortly provide a brief commentary on this morning's announcement, after which there will be an opportunity for Q&A. We are currently in pre-books close period and consequently, we'll likely need to defer some answers to our full year results announcement in mid-August when we'll have more information to hand. Please note, this briefing is being audiocast, and I'll now pass you over to Paul McKenzie. Paul?

Thank you, Mark, and good morning, everyone. I look forward to seeing many of you in the months to come when we announce our fiscal year '23 results and again at our Capital Markets Day in October. The Market Day will be the first time CSL holds this type of event. And it will be a great opportunity for you to hear insights from our executive team as we describe our strategies for continuing our journey of sustainable and profitable growth. I am pleased to report the company is recovering well from the impact of COVID. However, our current strong performance is being impacted by a volatile currency environment. The purpose of this morning's announcement is to update you on our financial outlook. We have just completed our budget for next year, and I'm happy to continue our practice of providing investors with financial guidance. I want to emphasize, CSL is in great shape as we continue to execute on our 2030 strategy. Demand for our medicines remains strong. The underlying business remains robust. Our R&D pipeline has never been better, including new external partnerships. During COVID, we continued to invest in needed capacities and capabilities, and we have a strong financial base, which has allowed us to remain resilient in a challenging macro environment and develop platforms for sustainable, profitable growth, and most importantly, to allow us to deliver on our promise to service patients and public health around the globe. I'll now hand over to Joy to discuss the financial outlook in a little more detail. Joy?

Thank you, Paul, and good morning, everyone. As Paul indicated, currencies have moved against us. I am, however, able to reaffirm our constant currency financial expectations for fiscal year '23 and pleasingly, we expect the results to come in around the top end of the guidance that we provided at our half year results in February. Our foreign currency headwind on the other hand has further increased, up from $175 million that we expected in February to now between $230 million to $250 million. Using our projected FY '23 reported NPATA as a base, we expect to grow 13% to 18% in FY '24, or in absolute dollar terms, we forecast an NPATA of $2.9 billion to $3 billion at constant currency. Within the FY '24 forecast, we have included a modest recovery of CSL Behring gross margin and the entrance of generics in Europe for Ferinject. Currency movements have affected us in a number of ways. As investors will understand the greater the currency headwinds in FY '23, the lower the starting point when we are determining our FY '24 growth rate. I recognize that analysts tend to use house views on currency expectations. However, at any point in time, our numbers are based off the assumption that rates remain steady throughout the financial year. The second point I want to make on currency is that the CSL Behring has about 50% of our sales outside of the U.S. and yet the majority of costs are in U.S. dollars. And this comes with some counterintuitive impacts. If the cost of production changes in 1 year, it doesn't have a margin impact until year 2 when the product is sold, and that is a function of our long manufacturing cycle. However, if the price of a product changes, we see the P&L impact in the same year, and this creates a timing mismatch between the impact of input cost and sales. Further, our geographic diversification of sales is actually one of our strengths. It not only provides us with financial diversification, but puts us in a position to be able to help more patients around the globe. But a volatile currency environment hasn't helped. Roughly speaking, over the last year or so, currency movements have given the CSL Behring an additional headwind to margin of about 1 percentage point. Finally, as we've grown, we're affected by more currency pairs. A decade ago was all about the U.S. dollar versus the Swiss Franc and the euro. And today, while these currency pairs remain important, so is the yuan and the yen against the U.S. dollar, a reflection of our growth in China and Japan. In addition, the growth of FLUAD, which is produced in the U.K , has also created headwinds, and in the current financial year, as we have major capital works underway in Australia with the new cell culture facility in Tullamarine, the weak AUD hasn't helped here. I'd now like to make a couple of comments about the CSL Behring gross margin. As many of you know, COVID has had a significant impact on our ability to collect plasma efficiently. Both donor fees and labor costs have increased across the industry. Now COVID is receding, it is not a simple matter of just reducing donor fees. We still need to compete for donors. In fact, as we have said before, it is unlikely that donor fees will ever go back down to pre-COVID levels. We are, however, making good progress. Our cost per liter of plasma or CPL, as we refer to it internally, is down from its peak. And as we exit the year, I expect CPL to be down around 15% to 20%. This is encouraging, but still not enough to get the CSL Behring margin back to pre-COVID levels. We will need other drivers to help get us there, and these include operational efficiencies, both in terms of manufacturing and in our plasma centers, manufacturing yield improvements, particularly in IG, the launch of new products along with some modest product price increases along the way. All of this will take some time, particularly in the current high inflationary environment and the foreign exchange reality. But I will say that we fully expect the CSL Behring margin to return to pre-COVID levels in the medium term. And we look forward to sharing more of our plans on this at our full year announcement in August. And lastly, a point on NPATA versus NPAT. We reaffirm that the one-off costs in FY '23 of acquiring and integrating Vifor Pharma are in line with the guidance previously provided. And looking into FY '24, we, of course, see a significant reduction in these one-off costs. In terms of amortization of acquired intellectual property to CSL Vifor, these costs remain in line with the prior guidance for FY '24 at the top end -- sorry, for FY '23, they remain in line with the guidance at the top end, and for FY '24, there will be some additional amortization to be incurred as assets commercialize, particularly Hemgenix. And with that, I'll hand you back to Mark to facilitate some Q&A.

As I mentioned at the beginning, we are limited in what we can say given our financial year is yet to close. But we would like to give people an opportunity to ask a question. Could you start with just 1 question. And then if there is time, we'll come back for further questions. Our first question comes from David Low at JPMorgan.

My question really relates to what you're seeing on the demand side and how things are panning out versus pre-pandemic. I mean I think are we seeing the same level of patients being diagnosed? Are we seeing demand recover as quickly as you expected, and would like a little bit of flavor on how it's spread between the U.S. and other key markets as well, please?

Great. Thanks, David, for your question. Great to hear from you. In terms of our overall demand for our product portfolio, it continues to be robust, as I said. Your question specifically is highlighting IG. And if you look at the IG trajectory in the U.S., diagnosis rates were a little while back 70%, they're now crossing over 80% diagnosis rates of the pre-COVID level. So we're seeing a good trajectory there, and overall demand is robust around the globe. So our product differentiation strategy and our market demand is strong.

Our next question comes from Mathieu Chevrier from Citi.

I was just wondering if you could give us a sense of revenue projections by division for FY '24.

Unfortunately, Mathieu, we'll need to handle that one at the full year results. Do you have another question?

Yes. Just in terms of the components of the gross margin and the cost per liter, there's donor fees. What are we seeing in the other cost per plasma liter, and whether you see those continuing to increase in FY '24 in terms of inflation? Or do you see that kind of tapering going forward?

Thanks, Mathieu. I'll take that question. So clearly, labor costs have increased in the course of the last 12, 18 months. And the inflationary environment in the U.S. is still fairly robust, one would say. Having said that, we have implemented and are implementing a range of initiatives in the plasma centers to really try and drive efficiency of labor, and for example, we've moved to much more flexible work scheduling, part-time workers rather than having to always employ full-time workers, and that's created a bit of leverage for us, which has been good. I think we're cautious, though, because, as I said, that external inflationary environment is still out there. And we're not seeing big demands for wage increases at this stage, but we remain fairly cautious into '24 on that front.

And if I can just add to Joy's comments, Mathieu. I think the digital efforts in plasma, specifically at the plasma centers, how we connect to the donors, how we manage their journey in the centers, how we manage them post their visits is really paying off in terms of our goals for both donor experience and center efficiency.

Our next question comes from Saul Hadassin at Barrenjoey.

Maybe just one for Joy. Joy, just that comment about sort of the medium-term improvement in Behring margin. Can you give us any sense of what does that actually mean in terms of your outlook over the years? Do you expect that to actually take? And is it a case that it's effectively just, as you say, a modest improvement into '24. Is it again a modest improvement into '25? Or is there some expectation of sort of a stronger recovery as we move out into that medium-term time frame?

Thanks, Saul. There's obviously a number of variables. But yes, modest improvement into '24, a modest improvement into '25, and then a 3- to 5-year time frame to return to pre-COVID margins.

Next question comes from Sean Laaman at Morgan Stanley.

Are you able to give a bit more disclosure around how you think about the generic competition for Injectafer in Europe, whether it's double-digit decline, single-digit decline? So what do you expect there?

Thank you, Sean. Unfortunately, we're going to have to leave that one for the full year result. Do you have another question, Sean?

Yes. Just if you could give us a bit of -- how do you think about the flu business or Seqirus going forward? I mean it's done tremendously well over the last 3 years. Do you think in your thinking you can maintain that level of profitability?

Do you have a third question, Sean? We'll leave that -- I'm sorry about that. There's some questions we can't handle now until we have more information to hand.

No. Understood, Mark. I might park it there because they're all down that lane.

Next question comes from Andrew Goodsall at MST Marquee. Andrew?

Just wondering whether you could just put us all on the same page, give us some help with a bridge from NPAT to NPATA on a post-tax basis. And I'm just thinking just obviously [Technical Difficulty].

Andrew, we lost you. So I will try and paraphrase there Joy. I think Andrew is looking for the components between NPAT and NPATA.

So he's -- I'm not sure he's on the call to hear the answer, but everybody else can hear the answer. So we have our NPATA at the top end of the guidance that we provided, amortization of IP, which we said was $140 million to $170 million. The acquired inventory uplift, which is the one-off costs associated with the acquisition. We provided guidance previously of $140 million to $160 million. And our transaction and integration costs, we provided guidance of $120 million to $140 million, and they all still hold true. So hopefully, that gives you a walk between NPATA and NPAT.

Thanks, Joy, and thanks, Andrew. Next question, David Stanton at Jefferies.

Yes. Look, I guess, it's a follow-up for me from Andrew's question. Can you sort of tell us then the goodwill amortization is likely to be for '24? Just so again, we're all on the same page. You talked -- in '22, it was $126 million. You said that's going to step up. I mean, is it going to step up by $50 million, $100 million, $200 million. If you can give us some guidance around that, that would be greatly appreciated.

Yes, sure, David. So there's a bit of a step-up in Vifor because we've got 12 months of the business, not 11. And you might think of that as kind of sub-50, and then Hemgenix comes online once we start to commercialize that business and it's kind of sub-50, but they all kind of then add up to sort of sub-100.

Next question, Craig Wong-Pan at RBC.

Just wanted to ask about Hemgenix. I think the last answer there answered part of my question that Hemgenix is yet to be commercialized. So I was wondering how much we should be expecting in FY '24 for Hemgenix sales?

Well, I think we're happy to say that we're expecting Hemgenix to be -- the first patient to be dosed before the end of this financial year, i.e., in the next week or so. And so we have included really a full year of Hemgenix in our numbers for next year. And again, you'll see more of that at the full year as to what that looks like.

Next question comes from Steve Wheen at Jarden.

Joy, I was just wondering, just looking at the FX, considering the volatility within the FX number. There's obviously the impact going into FY '23 for the last 4 months. If you looked at the rates that were around February, I'm just trying to understand how much of the FY '24 number has been deteriorated by the FX?

Yes. Thanks, Steve. So I might just make a couple of broader comments on the FX. So when we, at the half year, said we were -- if rates stayed at that point, it was about $175 million. The main currency pairs that were really impacted by that were the euro to the U.S. dollar and the Chinese yuan, which is our albumin business in China. They were the 2 biggest components. And in the second half of the year or sort of from December through to about May, which gives us this higher forecast, really, the euro actually slightly improved, and there really hasn't been much movement in the yuan, but we've booked that in the first half of the year. So that sort of still has held true. And then in the back part of the year, the 2 currencies that actually moved the most is the pound to the dollar. And we have this quirky thing where British pound entity in the U.K. is actually not a U.S. functional currency entity, it's a British pound entity. And so we do wear that currency risk on settlement. And then the second one is the Aussie dollar to the U.S., which is a function of the capital investments we've been making in Australia. So I hope that helps.

Next question comes from Laura Sutcliffe with UBS.

Could I just go back to the brief comment you made on plasma yield improvements earlier. Is that something that's required to get the margin back to pre-COVID levels? Or would you characterize it as one of several things that can help you get there? And if it's required, and just given the time frame you mentioned, 3 to 5 years, does that mean we should be building in some plasma yield benefits on a 3- to 5-year time horizon?

Great. Thanks, Laura. The yield is always an ongoing journey, right? That's our constant business, both in Behring business, Vifor business and Seqirus, right? So we're constantly looking at yield, and we have road maps for those yields. So plasma yield, both at acquisition and the plasma centers through manufacturing is consistently a lever that will be a contributor to our journey back to margins. Along with other things that we mentioned in the preamble in terms of other efficiencies, modest price increases, and obviously, the introduction of new products. But the journey of yield is a constant and a critical part of getting back to our pre-COVID margins.

Next question comes from Chris Cooper at Goldman Sachs.

Joy, just a clarification question. When you say cost per liter is going to exit the year 20% or so down, just confirming that's year-over-year or that's from peak? Or are they [indiscernible]. Just a very quick follow-up.

Yes, off its peak, Chris.

Off peak, okay. And the peak was about a year ago?

The peak was about 9 months ago.

Okay. And that cost per liter reflects donor fees that were paid roughly 9 months ago that then kind of went through the system? Or is that reflective of a sort of mark to market doner fee today?

So 9 to 12 months it takes to go through. So when we say donor fees will exit the year, we will see the benefit of the end of this year, like June, or now, donor fees we're paying now, we will see the impact of that in the second half of next year, right, the back end of next year, financial year.

Yes, Understand. So the inference being, if donor fees have come down over the last 9 months, the cost per liter is going to continue to improve over the next 9 months.

That's correct. That's correct.

Next question comes from Shane at Morningstar.

Just following up from prior questions. The quick calc I get for reported NPAT is just over $2.1 billion for F '23. And given you mentioned goodwill amortization is top end around $170 million, would $250 million be sort of ballpark for F '24.

Yes, that's not an unreasonable number.

We have a further question from Andrew Goodsall. I know we lost you there, Andrew, for a while. But Andrew Goodsall at MST.

And apologies. Immaculate time for my battery to drop out. Perhaps just following up on that question. I do get some notes from my colleagues there. But just the tax treatment of any of those items in terms of the way you're adding that back, you're adding them back just cleanly to NPAT? Or are you -- yes, just the whole number, I guess.

Yes, they're all post-tax numbers, Andrew.

Okay. And my colleagues have sent to me the $140 million, $170 million acquisition and similar for ARMOR, which we know. And they are the 2 key numbers I imagine.

And the third one was the acquired inventory uplift which we had guided to $140 million to $160 million, which is the acquisition accounting treatment as required by the accounting standards.

Yes. Got it. And that's an offset to the numbers estimate?

Well, that's a one-off, right? So you don't incur that next year.

Next question comes from Oliver Stevens at Entrust Wealth Management.

You mentioned the FY '24 forecast factoring the impact of generic entrants for Ferinject. Is this different from your assumptions at the time of acquisition? And I guess more generally, do your longer-term Vifor acquisition assumptions hold?

Yes. Thanks for the question. Really appreciate it, Oliver. And just some general comments on Vifor and most of this will have to cover at the full year results. But the integration is proceeding well, we're well on target with our synergies. We continue to explore and execute on opportunities across the businesses, right? As we said, our goal was to be stronger together. And we have developed our execution plans in preparation for the LOE. So the LOE was always on the horizon. We've been working hard on those plans, and we continue to be bullish on the growth and benefit of iron in the health care system.

Next question comes from David Low at JPMorgan.

Just on the same topic, can we just get an update on what you're seeing in terms of generic competition today? And I think last we heard was Sandoz had registered in 12 countries. Just wondering if you could give us an update on what you're expecting in terms of competition.

Yes. At this point, what we're aware of is what you're aware of, Sandoz has been approved in 15 countries in the EU. And then there's other companies that are in that process, but have not yet officially been approved.

Next question comes from David Stanton at Jefferies.

Just a follow-up from me. I noticed that Joy talked to greater pathology -- I'm sorry, plasma collection center efficiency. To what extent has the sort of the delay from the Rika device led to that sort of being pushed out in terms of those plasma collection center efficiencies that perhaps the market was thinking would occur into '24.

Yes. Well, clearly, the rollout is slower than we had originally anticipated when we first talked about it. We said it would take a year and I think the original plan was that it might be finished by about now, and we're still working through that rollout plan. So again, we remain committed to it. We're very positive about it. But it's going to take some time. And I think we always said the execution risk was once you change your center, you cannot go back. So you have to be very confident that it's going to work and it's going to work well. And so I think the right thing for the business is that we take our time and get it right. And that's what we're currently doing. But yes, it's slower than we otherwise would have thought a year ago.

And David, if I can just add, we're still progressing all of our road map plans for Rika. So we've just completed the clinical trial for the individualized nomogram, which is great. But to your point on the efficiencies of the centers, there's many levers we pull in the centers from digital to donor experience to flow and operational excellence. So Rika is just 1 part of that overall equation for us to move the centers forward.

Next question comes from Laura Sutcliffe at UBS.

Just looking at the constant currency guidance range that you've offered us today. Could you just speak to what you think are the key levers that stretch you towards the upper end of that guidance over FY '24?

Thanks, Laura. I mean, we'll clearly provide more at the full year on this, but the business is in good shape, right? We're still growing very strongly. Revenue growth is still are quite strong across the businesses. We're seeing some, as I said, modest improvement in the Behring margin. We're getting some nice operating leverage below gross profit. I think we've been able to show that in the last year or 2, and there's a bit more of that to come. And so yes, I mean, 13% to 18%, we actually think that that's a pretty good reflection of the growth in the business this year, next year, the year after, and the years to come, right? So we remain really positive about into the medium and longer term for the growth across all of the businesses that we now operate. So yes, hopefully that's helpful, but we'll provide clearly more detail at the full year.

Ladies and gentlemen, there are no further questions in the queue, so we'll draw this briefing to a close. I'd like to thank you for your interest in CSL. And look forward to speaking again at the full year results in August. Thank you, and good morning and goodbye.