Grifols, S.A. (GRF) Earnings Call Transcript & Summary

Hello, everyone, and thank you very much for taking the time to join us today with such a short notice. This is Nuria Pascual, Investor Relations and Sustainability Officer; and I'm joined by the senior executive leadership team, chaired by Thomas Glanzmann, our Executive Chairman and CEO; Raimon Grifols Roura, Chief Corporate Officer; Víctor Grifols Deu, Chief Operating Officer; and Alfredo Guerra, CFO. This call will last about 45 minutes, and there will be some company remarks of approximately 20 minutes followed by a Q&A session. For the sell side -- and remember, this is only for the sell-side analyst -- if you want to raise a question, press * followed by 5 when the session begins. We will kindly ask you to limit your questions to a maximum of 2. As a reminder, this call is being recorded. The transcript and webcast replay will also be available on the Investor Relations website within 24 hours after the end of this conference call. And with that, I will turn to Thomas Glanzmann, CEO of Grifols.

Thank you, Nuria, for the introduction. Good afternoon, and good morning to everyone joining us on this call. We convened this call to address the serious and false acquisitions made by Gotham, a short seller, in the report they issued on January 9. You have probably seen the statements we have sent to the regulators and much of what has already been written. However, we want you to hear directly from Grifols and receive answers to your questions. We will provide information with the same integrity, transparency and ethical conduct that has characterized Grifols since its inception in 1909. Additionally, we will be covering the strategic alliance with the Haier Group in China as well as reassuring Grifols strong financial position and operational performance in 2023 as we head into 2024. But first, let's focus on Gotham. It is known that Gotham is speculative and profits from short selling. In our case, they are repurposing financial information that is several years old, already in the public domain, and has already been reviewed, validated and signed off by regulators and an internationally renowned accounting firm. What Gotham does is out of pure self-interest and financial gain. Gotham, as the short seller, reduced its short position in Grifols the day the report was issued to 0.06% from 0.6%, thereby financially significantly benefiting from the dramatic fall in our stock. To us, this confirms the speculative nature of the report, which in their report on Page 2, even highlights verbatim that Gotham City Research's interest is to see the price of the issuer stock decline. We take these allegations very seriously and would not want this report and subsequent market reaction to affect our reputation nor the interest of all our stakeholders, including shareholders, employees, patients, donors and so many others that have been negatively affected. For that reason, the Board, which is fully aligned and supporting the company has decided to initiate legal action against Gotham, the short seller. Let me be crystal clear: as a company built on the principles of transparency, integrity and ethical conduct for more than 100 years, we categorically deny and reject all of these allegations. With regards to our communication, we try to be clear and open, but there is always room for improvement if you do your best. Having said that, the Spanish regulator yesterday, in line with their duties, sent us a request for clarifying information that we are we are in the process of preparing answers to. We will submit our responses shortly. As a publicly traded company, we maintain the highest standards of disclosure and accuracy in our financial reporting. To this end, our financial statements and controls are robust and subject to rigorous annual audits by a Big 4 audit firm. which has consistently, and I repeat, annually released unqualified audit reports. All the related party transaction and disclosures that appear in the report have been fully disclosed and audited since 2018 and reported to the regulators. We pledge to maintain the highest standards in our accounting and reporting practices, and to that end, our audit committee is also only comprised of independent directors. We are proud of our governance and as the governance world and the requirements evolve, we will, I can assure you, continue to diligently upgrade our governance as well. Building on our corporate governance focus, let me address Scranton. Scranton has proved to be a long-term shareholder of Grifols, having provided support for the company's international expansion on several occasions. Scranton is not a Grifols family office. Indeed, Scranton comprises 22 investors, of which only 3 are members of the Grifols family holding less than 20% of Scranton. I also want to point out that all interactions with Scranton have been made on arms length. Moreover, the links between Scranton and Grifols relate only to 2 specific collaborations: rentals of the Grifols headquarter, which has been in place since 2012 as a consequence of the Talecris acquisition; and Haema and BPC since 2018. There are no other links between the companies. Alfredo, in his part, will get into all of the details. Today, I also want to confirm that our underlying performance is very solid and consistently improving. In 2023, we will deliver on all the commitments that we made to the market, including our operational performance, innovation, governance, establishing a performance culture and signing the China transaction. We will present the 2023 results on February 29, which we are expecting to be very solid and in line with the latest updated guidance. As we ended 2023 on a high note with the signing of a strategic alliance with Haier, we today also want to bring that transaction back into focus, as it will tackle one of the market's current and persistent major concerns, our leverage. Raimon will shortly walk us through the highlights, but the transaction is of significance, not just from a monetary perspective, but also from realizing and participating in the significant China opportunity going forward. Before doing so, Alfredo will now address the main accounting and financial specificities mentioned in the Gotham report.

Thank you, Thomas. In my section, I'm going to clarify the most significant accounting items included in the Gotham report. First of all, I'm going to talk about the consolidation of Haema and BPC. IFRS 10 clearly stipulates that if a group has control over the company, it must be consolidated. The assessment of control considers the rights that give an investor power over a company. Power means, among others, holding voting rights or potential voting rights, which in this case involves having an exclusive call option. Since Grifols holds a call option, it is required to consolidate these 2 companies. This consolidation has been fully disclosed and audited since 2018 and reported to the Spanish regulator. This call option can be executed or reported at any time, but there is no obligation. Grifols acquired back in 2018 Haema and BPC, and subsequently sold these companies to Scranton in the same year for the same price. The total amount was USD 513 million. The terms of the sale agreement include the call option to acquire these companies back. Again, this is an irrevocable and exclusive call option, not an obligation. If Grifols executes the call option, it will be done at the same price at which it was sold to Scranton, same amount, USD 513 million. Currently, this price is way below the market prices. The consolidation of these 2 companies added in 2022 approximately EUR 30 million to the group's EBITDA, which represents around 2% of the consolidated EBITDA. Here, once again, the Gotham report is absolutely wrong and misleading. The associated cash to this EBITDA belongs to Scranton. The details of this transaction and the rationale of the consolidation were properly disclosed in Note 3 -- Business Combination of our Consolidated Annual Accounts from 2018 to 2020. The transaction was audited and reviewed by KPMG and detailed information related to the accounting treatment of this transaction was shared with the Spanish regulator early 2019 per the request. What was the rationale of this transaction? In 2018, Grifols was short of plasma supply due to the strong underlying demand. As these 2 companies obtain roughly 2 million liters of plasma on an annual basis, this transaction resulted even more important to face later on the significant COVID impact in our collection -- in our collections. Everybody remembers what happened in 2020, '21, '22 in our collections, that we have a significant hit. But thanks to these acquisitions, we were able to navigate through those years. In addition, in 2018 the leverage ratio of the company was too tight. So as Thomas explained, Scranton, a long-term committed and reliable Grifols shareholder, made the investment. In connection with this transaction, Grifols signed a vendor loan agreement with Scranton for an amount of $95 million at an interest rate of Euribor plus 2, due December 2025. This is a standard financial agreement in which Scranton assumes all financial risk. The details of this agreement were properly disclosed in Note 30 of our 2022 consolidated annual accounts. Once again, Gotham report, by saying that this was not disclosed, made a wrong and misleading statement. Regarding the consolidation of GDS, considering that Grifols has 55% shareholding on GDS, therefore control of the company through majority of voting rights, Grifols consolidate line by line, 100% of GDS. Subsequently, the 45% of GDS is eliminated within the nonconsolidated interest P&L caps. This applies the same to the Haema and BPC, where that EBITDA is fully eliminated at the bottom line of the company in the caption called noncontrolling interest or minorities right before the profit attributable to the group. Another item that I want to share with you is the related party. Thomas just mentioned the 2 transactions. So to be more specific, the first one is the plasma supply agreement in connection with the sale of Haema and BPC. Already mentioned, a plasma supply agreement is in place with these 2 entities. The plasma purchase price has been set following an arms length principle, which means at market prices. This has been verified by external auditors. Please also note that since we consolidate these 2 companies, these transactions are eliminated in the consolidation process. The second related party transaction relates to the leasing of our corporate office. As disclosed in Note 30 of our 2022 Consolidated Annual Accounts, Grifols pays on an annual basis a lease amounting to EUR 6.3 million to a related party, which is determined based on, once again, market prices. Another item that I want to share with you is the leverage. In the Gotham report, they challenge our leverage calculation. So the leverage ratio is calculated on a quarterly basis in accordance with the clauses and terms specified in the Credit and Guarantee Agreement dated November 15, 2019. Pursuant to this agreement, the company issues a compliance certificate to the agent bank on a quarterly basis. This certificate includes a detailed breakdown of the calculation conducted in accordance with the terms and conditions of the agreement. The calculation set by the agreement involves the exclusion and inclusion on certain items to both EBITDA and net debt. The main adjustments made to the EBITDA following the credit agreement are the following: IFRS 16 leases, [ external ] items such as restructuring and transaction costs, as well as cost savings and operating improvements on a run rate basis. For your information, the net impact of these adjustments, that means the difference between the EBITDA reported and the EBITDA used for the leverage calculation, was around EUR 60 million last year. So therefore, the -- this represents less than 5%. We have consistently reported the leverage ratio over the past years. The resulting leverage ratio over the previous year reflects the deleverage path of the company, which has reduced from 9x in the first half of 2022 to 6.7x at the end of the third quarter. Just to recap, make it very clear be 100% sure that this company have been always follow the IFRS accounting rules. I will be pleased to further clarify anything else in the Q&A. Thank you.

Thank you, Alfredo. This is Raimon Grifols talking, and thank you, all of you, for joining us today. Going back to our key business priorities, I would like to touch on the strategic alliance with Haier Group, which tackles 2 main objectives. Number one, once executed, that transaction will significantly reduce our debt with the sale of a 20% stake in Shanghai RAAS for close to USD 1.8 billion cash consideration. It will accelerate our deleveraging path to reach our target of 4x this year. Number two, China remains core to our growth strategy. As a forward-looking transformational alliance with a global leader in innovation and a growing presence in the health care industry, it will strengthen China's health care systems while we drive synergies to contribute to the country's fast-growing plasma markets. Now going into specifics, the share purchase agreement will result in USD 1.8 billion in cash, which represents a premium of approximately 15%. The USD 1.8 billion will be solely used to repay outstanding debt within the framework of the current credit agreement. We will provide further details upon the closing of the transaction. As we will still retain a significant 6.6% stake in Shanghai RAAS and a seat on its Board of Directors, we will continue to build on the alliance we initiated 3 years ago, which has successfully allowed Shanghai RAAS to become a top player in the Chinese plasma market. Considering China's demand for albumin is expected to continue growing significantly in the coming years, we are also excited to lengthen our exclusive distribution agreement for this protein with Shanghai RAAS through at least the next 10 years and possibly 20. We expect to close the transaction in the first half of 2024 as the completion of the transaction is subject to customary and regulatory approvals. Now I'll leave it back to you, Thomas. Thank you.

Thank you, Raimon. Before going into the Q&A, I would like to briefly make some final remarks. Following the 3 announcements we made over the last 2 days, we hope that this call is another evidence of our commitment to continue communicating effectively with you in an open and transparent manner. We want to make sure that you walk away from this conference call with a clear understanding of our unequivocal stance on Gotham's report, which had clear speculative interest. Our accounting practices and financial disclosures comply with international standards that are certified by the annual approvals of our auditors. That is why the entire Board of Directors has agreed to pursue legal actions against Gotham City Research to protect the company's reputation, which has been successfully built throughout more than 100 years of history. Be assured that we are not allowing a report with false allegation derail our turnaround or our consistent focus on creating value for all our stakeholders. We are committed to our customers and our patients, their well-being, and to continue to build a strong, value-driven growth company. As someone once said: by doing good, we will do well for all our stakeholders. Looking ahead, as previously mentioned, we anticipate reporting a robust set of results for full year '23, marking it a year of a significant turnaround. Throughout this period, we have consistently fulfilled our commitments and are poised to continue this journey of successful value creation for all our stakeholders also in 2024. Thank you once again for your trust and support. I now turn the word back to Nuria.

Thank you, Thomas, and thank you all for your time. So with that, let's start the Q&A session. [Operator Instructions] And with that, our first question comes from -- sorry, Guilherme Sampaio from CaixaBank.

Thank you for holding this conference. So the questions that I have, the first one is on your actual plans to repurchase Haema and Biotest U.S. from Scranton. I know that you're not obliged to, but I would like to know whether you have that plan? Second question is related to the [Technical Difficulty]

Guilherme, sorry, we could not hear your second question. It was cracking -- the noise was cracking a little bit. Can you repeat the second one, please?

Yes. My second question is how do you see the [Technical Difficulty] in the future?

You've been cutting out, but did you say how do we see Scranton as a partner in the future?

Correct.

Okay. For the repurchase of Haema and BPC?

Yes, the -- right now, we are not planning to repurchase the shares of Haema and Biotest plasma companies.

And your question 2, Scranton. Scranton is a major shareholder for us. We've done these cooperations with them in the past. But right now, there is nothing that we are contemplating.

And now we have Tom Jones from Berenberg.

They're kind of related and one of them is somewhat of a follow-up. But thank you for all the additional detail you've given us. I guess the sort of bigger picture question I wanted to ask is, Grifols is a business that I've been following for a long time, and over the years, it has become sort of slightly more complex in its holdings. And as you're well aware, that's become an issue for investors. And you had already begun the journey to improve the governance of the company and to simplify its structure. To what extent do you think or do you feel that the recent attack by this short seller has perhaps given you fresh impetus to improve -- further improve, I should say, the corporate governance of the company and perhaps accelerate the simplification of the corporate structure of the company? Because those are clearly 2 issues that you're well aware of and have been starting to address, and I'm sure will continue to. But I guess the question is to what extent do you think the events of the last few days have given you fresh impetus to get on with the job and get it done quicker, I would say.

Thank you, Tom. To your first question, clearly, the company is working to simplify the structure of the company. And moving forward, all the transactions that will be done will be kind of plain vanilla. This good example is this divestment of the 20% of Shanghai RAAS shares, which is a very straightforward transaction. And the -- that's on one hand. On the other hand, the best way to counterattack those, I would say, reports is to deliver our operational results, to deliver our EBITDA, top line, to deliver the deleverage and to generate cash flow. So those are the main arguments against any of those short sellers attacks.

Perfect. And then my second question, I think I already know the answer, but it's one I've received from a lot of investors, so it would be good for you to give an answer as well. In your mind, has the events of the last couple of days created any incremental risk to the potential closure of the Shanghai RAAS transaction from either a regulatory or approval standpoint? I certainly can't think of any, but a lot of investors have asked me that question, so I thought I'd give you the opportunity to answer it as well.

Okay, Tom, thank you. This is Raimon. You are correct. We see no issue or no problem in closing this transaction.

We have now questions from Thibault Boutherin from Morgan Stanley.

The first one is on the outlook for cash generation improvements in 2024. So probably the best way to address investor concerns in the mid term around the quality of profit is through improving cash generation. And we saw the margin improvement through 2023, and the expectations from the market of some of the margin improvement this year. But I just wanted to know if you could comment on the kind of profile for cash flow generation improvement through this year. So basically kind of maybe the weight of cash generation between quarters. And I guess basically the question is at what point this year do you expect that the picture will become clear in terms of cash flow generation improving? Second question is on the debt repayment priorities. Just if you could share with us which bonds or loans you would prioritize the repayment for with the proceeds from the sales of the stake in Shanghai RAAS. So would you focus on the 2025 maturities? Or is there anything in your creditor agreements that would make you repay some of the later maturities like 2027, for example?

Okay. So related to the cash flow generation, '23/'24, basically, is the same approach where basically the main driver of the cash flow, as you know, is the EBITDA generation. The EBITDA improvement in '23 versus '22 and '24 versus '23 is and will be very significant. Therefore this will have a very positive impact on the cash flow. And another item that we always take a close look is the inventory variance. And as we speak, we have put in place this year on a plan to improve the inventory or reducing the cycle on one hand. On the other hand, the lower cost of plasma is one of the main drivers of reducing the inventory. So that's about the cash flow. Regarding the debt repayments. All I can tell you right now is that 100% of the cash proceeds coming from the sale of the 20% of Shanghai RAAS shares will be used -- fully used to repay debt. When the time comes, we'll figure out, based on the market dynamics, if we will repay the '25 secured, the unsecured, we can refinance the unsecured, can repay the -- also the pro rata versus the secured. So there are many options that when the time comes, we'll tackle that. But clearly, the 2 maturities that are now on our way, which is in 2025, will be removed.

Next questions are coming from Niall Alexander from Deutsche Bank.

Niall Alexander from Deutsche Bank. Apologies if this has been already stated, but just wanting to confirm if Grifols plans to provide the exact contribution of consolidated entities such as BPC and Haema and to their consolidated group EBITDA, and/or if you'll provide a split of the earnings into noncontrolling interest for those respective companies. So that's the first question. And then second question, I know you just slightly touched on it on the previous one. But again, operating working capital and inventories was -- saw a material drag on negative cash flow. So I'm just wondering when this is exactly going to begin reversing.

Okay. So the EBITDA contribution of these 2 companies at EBITDA consolidated level is around EUR 30 million. And then the -- remember, this is an EBITDA. So at the noncontrolling interest, just to everybody understand what is the accounting standards, we eliminate the net profit of the noncontrolling share of the company. What it means that for -- in the case of Haema and Biotest, we'll eliminate 100% of the net profit of these 2 companies. And in the case of GDS, 45% of the net profit of these companies under the caption noncontrolling interest. Regarding your second question, the inventories, the 2023 basically and some in 2024, the reduction or the contention of the inventory increase basically is based on the cost reduction. However in 2024, as we set that -- this plan in place, the approach is to reduce the -- usually, we talk about 10 months. So we're trying to squeeze this inventory cycle to optimize our working capital. This will take place in 2024. We are fully devoted to optimize our inventory levels.

Okay. And now we have Alvaro Lenze from Alantra Equities.

My first one would be, if I understand the accounting principles of your noncontrolling interest, I think that the bigger question that is raised here is what is the balance sheet situation at the parent company and the group that does not have non-controlling interest. So if you could provide the separation between the net debt at those subsidiaries in which you do not have full control and what is the free cash flow generation at the parent company, to see how easily you can meet the upcoming maturities, which are 100% concentrated at the parent company, I think that would really help put the concern to rest regardless of the accounting policies that you're using. And the second, just a follow-up on the previous question. So I understand that you're looking to reduce the inventory levels for this just to understand whether the free cash flow outflows from working capital will revert into working capital inflows? Or are you still looking to some additional investment in working capital, although smaller than what we have seen in the last couple of years?