Lonza Group AG ($LONN)

Ladies and gentlemen, welcome to the Lonza Q1 2026 Qualitative Update Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Philippe Deecke, CFO. Please go ahead, sir.

Thank you, Sandra. Good afternoon, and good morning to those of you joining us from the U.S. Welcome to our Q1 2026 qualitative update. Before we go into the details, please let me remind you that our qualitative updates are intended to provide you with a general business overview, and we will not be sharing figures related to our financial performance. We will do so on the 22nd of July with our half year update. All contents unless otherwise specified, refers to our CDMO business, which excludes Capsules and Health Ingredients. I'll start with an overview of our group performance before we move to the performance of our business platforms, our business contracting and growth projects. Afterwards, I will provide you with an update on our One Lonza journey, followed by a few comments on the current macroeconomic environment before I close for the Q&A session. Today, we reported a strong Q1 performance across our CDMO business platforms, entirely aligned with our expected full year 2026 trajectory. As already communicated in January, we confirmed that CER sales growth and core EBITDA margin will be notably stronger in the first half of 2026 than in the second half. This is primarily due to the prior year base, which was much stronger in H2 than in H1 as well as the following 3 drivers: advanced synthesis with the contribution of different growth projects and a favorable batch release phasing; second, some revenues in specialized modalities moving from late 2025 into the first half of 2026; and third, a strong sales contribution of Vacaville in H1 '26 due to planned shutdowns in the second half as the site drives ahead the CapEx investment program and introduces new molecules. These drivers also positively impact core EBITDA margin in H1. Absolute sales, therefore, should be more balanced than in the past between the 2 halves of 2026. In the first quarter, we saw a strong operating performance across business platforms. We are, therefore, confirming our 2026 outlook with sales growth of 11% to 12% at constant exchange rates compared to the prior year and a further core EBITDA margin expansion reaching a level above 32%. Before focusing on our CDMO core business, a short word about CHI, which continues to see the robust demand trends already reported in the second half of 2025. We, therefore, continue to expect mid-single-digit percentage CER sales growth as an improving core EBITDA margin. I will comment on the exit process later in my update. Finally, finishing on the group overview, based on FX rates of early May, we anticipate a year-over-year growth headwind of around minus 3% on sales for full year 2026 with the first half being more impacted than the second due to last year's U.S. dollar trading pattern. However, our margins remain well protected through a strong natural hedge and our financial hedging program. Moving to the performance of our business platforms. Let's start with Integrated Biologics. Integrated Biologics continues to see good momentum driven by increasing utilization with the maturing of growth projects in mammalian and drug product. We see healthy demand for our small-scale and large-scale mammalian assets, which includes Vacaville, for which we confirm our expectation to reach peak sales in the early 2030s. We also see our more mature base business as an additional growth driver in 2026. This is supported by good operational execution and a favorable mix. We are, therefore, pleased to report that Integrated Biologics is performing in line with our expectations. Turning to our advanced synthesis platform. We continue to see strong growth in our small molecules and bioconjugates businesses. Growth is supported by the rapid and simultaneous ramp-up of growth projects added in 2025, which are primarily contributing to growth in the first half of 2026, reaching a high level of utilization and lapping the ramp-up from last year in the second half, leading to a lower growth contribution. Furthermore, we see a strong operating execution and an attractive product mix with Advanced Synthesis additionally benefiting in Q1 from a favorable batch release timing. We, therefore, expect stronger growth in the first half than in the second and are confident that Advanced Synthesis can continue to deliver strong margin levels in 2026. For our specialized modalities platform, we are pleased to report that the business saw significant growth against the lower prior year base. This strong performance is mainly explained by our microbial business with growth further supported by sustained momentum in Bioscience. Cell & Gene made further progress in strengthening its operational performance and is on track for Q2 normalization. We therefore, expect growth in 2026 to be driven by all 3 business platforms as already predicted with our business outlook for 2026. Let me say a few words on the progress of our different CapEx projects and the business momentum that we see. Our large-scale [ bioconjugation ] site in Visp continued its ramp-up process with the production of different GMP batches. Commercial operations will commence in mid-2026, in line with the previously communicated time lines. Revenue growth contribution is expected to start in the second half of 2026 as part of the multiyear ramp-up of commercial output. We also see good progress at our large-scale drug product fill and finish facility in [ Stein ], with production expected to start in 2027, while we expect our large-scale bioconjugation site in Visp test to start production latest in 2028, also in line with the latest time lines. At our large-scale mammalian site in Bacavin, we are making good progress in upgrading the sites to increase the operational flexibility needed to operate as a CDMO site with additional upgrade measures requiring targeted shutdowns taking place in the second half of 2026. This will lead to lower sales contribution in the second half. However, on a full year basis, we confirm our expectations that sales in 2026 will be broadly in line with 2025. Operational execution remained strong, and we have successfully transferred the first non-rush product and produce the first GMP batches. The team is already preparing the site for the introduction of the next non-rush product. In Q1 2026, we saw sustained business momentum across sites and technologies. We secured multiple drug substance to our product deals which highlights our strong offering as one of the only a few CDMOs that can provide such integrated offerings. Our Cell & Gene business signed an extended commercial manufacturing agreement for genetics, ZYNTEGLO, further strengthening our positioning as the leading commercial cell and gene CDMO. Customer interest in Vacaville remains high, and we expect additional contract signings over the course of the year in addition to the 5 contracts reported to you in January 2026. As announced in early March, we made strong progress in our One Lonza journey to become a pure-play CDMO with the announced divestment of a 60% stake in our Capsules and Health Ingredients business to Lone Star, divestment of other noncore [indiscernible] a total of 4 divestments since the announcement of our One Lonza strategy at the Investor Day in December 2024. The remaining CDMO businesses are powered by the Lonza Engine and its unique set of strengths and capabilities. With CHF 1.7 billion immediate proceeds from the CHI divestment and additional future proceeded full exit we have significant firepower for value-creating bolt-on M&A, while maintaining our commitment to BBB+ rating. In line with our Lonza strategy, we are proactively building a funnel of public and private M&A opportunities, and we are confident in our ability to pursue some of these over the midterm. Focus remains on delivering capacity, technology and portfolio expansions. To rebalance our short-term capital surplus with our balance sheet strength, with a net debt-to-EBITDA ratio below 2 today, we have decided to return CHF 500 million of surplus capital to investors through an expedited share buyback upon receipt of the upfront CHI exit proceeds at the close of the transaction. The close is expected to take place in Q3 2026. Before closing my remarks and opening the Q&A session, let me briefly address the geopolitical developments we are observing. Against the backdrop of recent development in the Middle East, we currently do not anticipate any material financial impact on Lonza. Supported by proactive risk management and in line with our well-established hedging policy, we have secured almost our entire energy needs for 2026 and also a sizable share of our 2027 needs. In addition, our long-term customer contracts include, as you know, price adjustments class providing an additional layer of protection against energy-related inflation. Further, Lonza has no manufacturing footprint in the Middle East sources almost no raw materials from the region and has very limited revenue and customer exposure. We can also reiterate that we expect no material financial impact on Lonza from the U.S. trade and tariff policies. This includes the outcome of the latest Section 232 investigation. Based on our understanding of the published outcome of this investigation, we also do not anticipate that our customers are materially affected. Nevertheless, we continue to expect a gradual shift towards more regionalized drug manufacturing with regional demand increasingly being served regionally. In this context, we remain confident that our well-diversified global manufacturing footprint with large capacities in the U.S., in Europe and in Singapore will enable us to support our customers' global manufacturing requirements today and in the future. In light of the significant recent U.S. investment announcements from large pharmaceutical company, with only a small part of investments going into manufacturing assets, outsourcing decisions may take time -- may at times take a bit longer to conclude, but demand for CDMO solutions remains healthy in 2026. We see the CDMO industry as part of the solution in this gradual shift towards regionalized supply chains and biotech and large pharma companies continue to outsource. These investments are likely more a shift in global CapEx spend towards the U.S. rather than a change in outsourcing strategy with an overall increase in capital investment into manufacturing. Biotech, which are approximately half of our revenue, are an important customer group for Lonza, will continue to rely heavily on CDMOs to minimize capital requirements into manufacturing. To close, let me share a few final remarks. Against the backdrop of ongoing geopolitical uncertainty, loss has continued in the first few months of 2026 to demonstrate the resilience of a CDMO business model which supports effective risk diversification. We are on track to deliver on our strong full year 2026 outlook. We see sustained customer demand and we are making good progress across our diversified CapEx program. With the divestment of CHI, Lonza is becoming a pure-play CDMO, and we remain confident in our ability to pursue value-creative M&A opportunities alongside the initiation of our CHF 500 million share buyback, following the closing of the CHI transaction. The Lonza Engine is firing on all cylinders, and we are well positioned to deliver strong shareholder value. With that, I would like to thank you for your time. Sandra, over to you for the Q&A.

[Operator Instructions] Our first question from today comes from James Quigley from Goldman Sachs.

So I have a question on bioconjugates. So Daiichi Sankyo today highlighted provisions for overbooking capacity at CDMOs and in the approval documents, Lonza is listed as a manufacturer for Enhertu industrially. So is there any impact here for Lonza in the short or medium term, to what extent of the guidance would account for cancellation fees? Again, I appreciate that's difficult to predict, but is there anything that's already in the guidance to take this into account? And then aligned to that as well. Can you talk to the demand growth you're seeing in bioconjugates? In a recent interview, Christian said that 70% to 80% of all ADCs are outsourced. So where does Lonza fit in this -- in the production chain? And do you continue to see strong growth in this area?

Yes, thanks for your question. So obviously, we have also read the announcement issued by Daiichi Sankyo this morning. I'm not going to comment specifically on Daiichi Sankyo. But I think we are -- we continue -- we have always been a leader in the agency space. This is a category that is showing significant growth. There is a projected growth of over 20% a year for the next 5 years. So this is a very interesting space. We are certainly the largest commercial manufacturer for ADCs and recognized as a very secure source for this very complex modality. I think I can confirm that today, as of today, there is no cancellation fees planned for this year. I mean there's nothing sizable. We always have small cancellation fees here and there, but there's nothing significant that I would have to mention to you. And so I think for us, this is a continued area of high interest. Christian mentioned that in his interview, we continuously build capacity to expand our footprint on conjugation. And this is a business area that is going really well, and you'll see this once we publish our numbers in the half year.

The next question comes from Zain Ebrahim from JPMorgan.

Zain Ebrahim, JPMorgan. We'll stick to one question, which is on contracting momentum which you talked about in the prepared remarks. But maybe if you could elaborate in terms of what you've seen from customers in Q1 because the indicate customers are taking longer or may take longer to sign contracts amid the U.S. investments. So have you seen any change in customer behavior in Q1 specifically? And tied to that, your confidence level in backable seems to be unchanged and you're reiterating peak early 2030. So what you're seeing from customers continues to underpin that confidence?

Yes. Thank you, Zain. So look, I think Q1 was a good contracting quarter for us. I think given the uncertainty in the market around tariffs, around geopolitical situations around investments in the U.S., et cetera. I think it's understandable that companies are maybe taking a few months longer to take decisions. Remember, these are anyway quite long negotiations if you're talking about commercial contracting. So I think what we wanted to say is that we continue to see strong demand and strong requests for our capacities in the small-scale area as well as in the large-scale area. But yes, I think discussions tend to take longer. Remember, we sit on a high backlog of contracts. So this is not worsen, but I think it's a fair reflection of what we see when discussing with large companies, which we wanted to share with you. So I wouldn't read into this a change in strategy for pharma. I've mentioned this in my script before. The interest for pharma companies, both large pharma as well as biotech, remains unchanged. There is still a significant need for outsourcing. Remember what is driving outsourcing. One, of course, is an attractive pricing, which we always need to provide; but second, it's derisking the capital investments of pharma and thereby creating a true economic value in the industry. So this has not changed. And so we are not worried about contracting in general. If you want to talk about Vacaville, I think, again, not sharing details on a site-by-site level, but People are obviously continuing to be interested in U.S. capacities and Vacaville is a very strong, high-quality capacity available in the U.S. And so we see -- continue to see good interest for the site.

The next question comes from Charles Pitman-King from Barclays.

Just my key question just relates to the comment you made around the base business being able to support growth based on improving execution. I'm just wondering if you can speak a little bit more around the potential delta that's available to you from improved yields as a result of AI, that seems to be an area where investors kind of see a great opportunity for the CDMO space. I'm just wondering if you see that as an opportunity as well for yourself. And just a very quick clarification on backlog contracting, can you just confirm that you're not going to be talking about backlog contracts going forward? Just to clarify your message earlier in your prepared statement.

Thank you, Charles, for your questions. So on the basis of, I think, I'm happy to address AI in a second. But this is a lot, I would say, a lower tech than what you may be reading to this comment. I think our -- when we talk about our base business, these are assets that have been online for a while. And I think we have renewed our intensity in improving operations, debottlenecking, some of these assets really driving what we call value stream mapping. So employing all kinds of Six Sigma and Lean methods. And so you're basically creating capacity in older or more mature assets. And this capacity can be sold and therefore, we are generating, if you want, growth out of older assets and not only relying on new assets to create growth. So this is all possible to be done without AI. These are our engineers and technicians and operators that are working together to debottleneck assets. So this is how we improve the, of course, the other thing, which takes longer, which is what we call portfolio management, where we are replacing all the contracts with more attractive contracts. But I would say this is something that has been ongoing. But I think the renewed push on debottlenecking is what is creating the help on the base business. Now AI, I think we see as a positive tool for us in the future. I think the specific use cases of AI in terms of what probably people now understand is large language models is probably still early stage. But we've been using AI in terms of machine learning for a while. And this is used -- we at Lonza are on a wealth of data from the decades of work we've done with many different molecules. And this data can be, of course, used to improve yields or improve how we synthesize certain molecules. So I would kind of say that AI in terms of large language on early stage, but we have applications in the back office, in quality, et cetera, where we use that. I wouldn't say that we're using that extensively yet for yield.

And any comments on the [indiscernible] contract announcement?

Yes, yes, yes. Sorry, Charles, this was not my intention. But you're right. I think as we said in January, we have now fully integrated Vacaville into our Mammalian network. And so I think contracts for specific site will not be shared unless these contracts represent something very special, which we've done in the past. So large strategic contracts or integrated contracts that we will continue to share with you as long as the customer is also okay with that. But we will not be counting contracts with you on Vacaville anymore.

Next question comes from Charles Weston from RBC Europe.

My question is on the specialized mortalities division, please. First of all, you talked about Cell & Gene therapy normalizing in H2, I guess, those operational issues have been going on for over a year or maybe now. So can you just talk about the journey there and perhaps any phasing we should be thinking of in terms of weak or strong comps half-to-half. And on that same division, just how core is Bioscience because that's not what we would normally think of as a CDMO business model?

Yes. Thank you, Charles. So on SPM, I think we're pleased with the start of the year for the platform. Again, if you remember last year, we had a weak first half and a better second half. And I think the first half has proven to be now much stronger versus that low base. Also some of the phasing that we had at the end of 2025 moved successfully if you want into the first half. So I think we were right in kind of that phasing forecast. And so I think the first half was strong and the microbial side, was strong on bioscience and also our Cell & Gene improved. I think Cell & Gene would be probably a further improvement over the course of the year to go. Very pleased as well to be recognized by other customers to give us their commercial products. So you saw that we signed one more commercial products, which is helping to stabilize -- of course, the production and the manufacturing for Cell & Gene. So overall, I think SPM looking at a much better year than last year. And this is also driving our stronger first half because the first half in SPM would be better than the second half. In terms of growth. In terms of bioscience, I think we've -- you saw that we've cleaned up a little bioscience by selling our software business within bioscience. And we're now really focused on the areas of this business that we want to maintain and keep because they're actually very closely related to our CDMO business being around testing or being around media. So these are really things that are integral part of our CDMO manufacturing offering. So from that point of view, I think this is core to us. And I think we believe that we have now reached a level of businesses that are fit. We have actually done a small acquisition as well called Red Berry in the high-speed testing. We believe this is a place where we can help our customers, but we can also significantly benefit in our own manufacturing.

The next question comes from Charlie Haywood from Bank of America.

Charlie Haywood, Bank of America. Just on the saving commentary, which was helpful, you've inserted notable into the commentary along with, I guess, slightly more committed on first half or second half margin phasing. I imagine some of the '25 batches that were delayed would have been the base case to come in first half '26. So I wanted to understand if anything had changed in the second half, i.e., a pull forward or different batch phasing or if first half is maybe just trending better than expected? And then just on that, if you could provide a bit more color on the Vacaville sort of first half versus second half phasing and this sort of shutdown or sort of commentary on the second half that you alluded to just a bit more color there would be helpful.

Yes. Thanks, Charlie. I'm not sure I fully, fully understood acoustically the very start of your question. So if I'm not answering properly, just ask again. I think I understood that you were asking more about the phasing of '25 into '26 and then H1 and H2 dynamic. So I think indeed, remember at the -- during the summer of '25 last year, we said that some of the batches and some of the business in specialized modalities could be very late in '25 or could move into early '26. This has happened, which is, of course, helping the first half of 2026. So this, in that sense, has been developing the way we had expected, so no change on that. And then in general, I think our first half was always expected to be stronger than the second. We've mentioned that in January. This is not accentuated, if you want, it has not become more than what we were expecting, which is confirming to you now that this is the case. And I provided you a few of the drivers, which is really across the platforms where each platform actually sees a little bit of benefit in the first half versus the second half. For Integrated Biologics, this is really around Vacaville as well. I think remember as well, we were talking about Vacaville having a simple year in 2025, where we were basically continuing to produce what I had done before. '26, we said would be a more complicated year, if you want, because the site has to manufacturing for our important customer, Roche. We have to do CapEx construction work and we have to introduce new products. So it's a much more busy year for the site. However, we can confirm now that the sales will be roughly in line with what we did last year. So was the margin for the site. But yes, we will have a stronger first half because we have a planned shutdown in the second half to implement some of these productivity investments into the site or upgrade. And therefore, this is expected to have an impact on the revenue and the margin for the second half.

The next question comes from Paul Knight from KeyBanc.

The China market is becoming a top or second largest originator of biologics. How do you see this playing out? Will they manufacture those ex China? Or will it also be in China? And will you participate in China? Or will you select the ex China? I love your vision on what happens in that market.

Yes. Thank you, Paul. Indeed, I think if you look at the statistics, it's quite impressive how much of the innovation is coming out of China. I think we -- our view on this is that most of the China innovation will need to go broader than China to be successful and financially viable the Chinese market at the price level of China will not be sufficient for this company to become economic viable. So yes, they will need to spread beyond China. Some may do this alone. Others are doing this through collaborations and licensing like we've seen several occasions over the last few months and quarters. So we have strong beliefs that once do this step either through another pharma company, a Western company or themselves, they will need a Western partner to do that with them. And here, Lonza is very well positioned to be the partner of choice for Chinese biotech companies wanting to expand the reach of their products. We are working with China today already. I think our cell line -- our Lonza cell line is being used in China in several occasions by several biotech companies. So the Lonza name is known in China, and it's a well-respected name. So I think on the one hand, we have this type of work. So the cell line, and this is then a more natural fit for these companies to come to us for manufacturing and development. And we also have seen at different occasions that the buyer or the in-license of such molecules are actually relatively quickly reaching out to Lonza to support them in expanding the reach of the molecules. I think what we hear also from PE companies that, of course, having a PE or a pharma company, having Lonza in your supply chain is usually making due diligence much easier. So I think it's a big difference if you have Lonza in your supply chain or if you have no name Chinese CDMOs. And so this is also helping making these molecules more attractive for partnering.

The next question comes from James Vane-Tempest from Jefferies International.

I've got one clarification just on the prepared remarks, just in 2 points, actually. You mentioned in your phasing commentary about first half, second half about a notably stronger second half, similar to how that was viewed in January. And I know we had a question on this already, but the word notably introduced today compared to the full year. So I was just wondering what changed for you to update that language? And then the second clarification is, I know you don't want to share individual site level contracts. But on Vacaville, you mentioned additional signed contracts over the course of the year in addition to those announced in January. So that [indiscernible] have been signed since January. So I was just wondering if you can clarify the prepared remarks?

Yes. Thank you, James. Yes, I think the word notably is probably introduced because when we look at the collective consensus of all of you on the call, I think it was more of a timid reaction to our comments in January. So we want to make sure that we were probably thinking about slightly higher difference between H1 and H2. So that's the hint we're giving today. Second, so I hope that answers your question. Nothing has changed in terms of our underlying view of the 2 halves. In terms of Vacaville, I think I would not get into that discussion. I think we are not commenting on additional contracts for Vacaville. I would like to reiterate and reconfirm that we continue to see high interest in the site. We continue to have very strong commercial discussions and negotiations with customers. So all this is really on track for Vacaville. We've reconfirmed today the midterm outlook. We have reconfirmed today the outlook for 2026. So Vacaville continues to be a success story and a very good opportunity for us and for customers.

We will now take the last question from Max Smock from William Blair.

Maybe just a quick one on some of the language in the press release around M&A. You talked about building out a funnel of M&A opportunities. Just wondering if you can give more color on where exactly you're prioritizing in terms of your focus? And just when we can expect any sort of update around adding additional capabilities to the platform moving forward.

Max, look, M&A will remain opportunistic, obviously. But I think the big difference from where we are today versus where we were one year ago, is that we have truly created an attractive pipeline of opportunities that will be triggered when they become available. And I think what we are really doing is, I think, looking beyond probably what everybody gets offered and really reaching out to companies or have assets we like or that have part of the business we like and really actively approaching to see if there is a business combination that makes sense. So I think the discussions are much more intense, if you want, or developed, but I think the timing remains opportunistic and will happen when it happens. So the priorities on this remain the same. I think we are highly interested in capacities of high-quality. Why? Because they basically accelerate the ability to offer more capacity to our customers. And usually, you get a team that is used to operate at assets like we've seen in Vacaville, people with high experience running an asset just generate more high-quality business. And so these are things that are really interested. Second, obviously, I think the U.S. is an interesting location in general, given I think the shift in the supply chains to be more regionalized. We have a lot of sites in the U.S. We have a lot of our capacity in the U.S., but we don't have all modalities in the U.S. And so this is also something that we are trying to see if we can accelerate that. With that, thank you very much for all your questions. I hope this Q1 update was helpful to you. And we will close the call for today. And back to you, Sandra.

Thank you. Ladies and gentleman, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.