Sartorius Stedim Biotech S.A. (DIM) Earnings Call Transcript & Summary

Madame and Monsieur. Welcome to the 2024 ordinary and extraordinary Annual Shareholders' Meeting of Sartorius Stedim Biotech S.A. My name is Joachim Kreuzburg and as Chairman of the Board, I will chair the meeting. I would like to thank all shareholders who are personally attending today here in particular. I also would like to thank all shareholders who casted their vote remotely ahead of the shareholders' meeting and all participants in our webcast. We have once again opted to provide a live webcast due to the positive experiences made with the combined physical and virtual shareholders meeting in previous years. In particular, it allows us to better reach out to our international shareholder base. With me today are Mr. Rene Faber, member of the Board and CEO of the company; Madam Pascale Boissel, member of the Board and President of the Audit Committee; and Mr. Olivier Guitard, Head of Controlling of the BPS division. I now need to appoint the officers of the assembly. Is there any shareholder who would like to volunteer as a scrutineer of the meeting? If so, please be reminded that scrutineers will have to stay after the closing of the meeting to sign the minutes of the shareholders' meeting. As we do not have any volunteers, I would like to appoint Madam Pascale Boissel and Mr. Rene Faber to act as scrutineers, which they accepted and Mr. Olivier Guitard as Secretary of the shareholders' meeting. French interpreters are also present here today. I will now continue with the formalities of the shareholders meeting. I will start with a quorum that allows us to hold this combined shareholders' meeting. The quorum is 93.44%. The final percentage of the quorum will be available after the final counting by the bank. With regards to the convening of the annual combined shareholders' meeting, the agenda and the text of the resolutions are available here and have been published in all the standard documents and publications like the bulletin of the BALO and the legal newspaper approvals. No draft resolutions or new items on the agenda were requested and please refer to the universal registration document for further information. All documents required by law, which you may have received from Uptevia or your financial intermediary are available here during the meeting and on our website. The attendance list been signed at the beginning of the meeting. It includes the number of shares and number of rights of the shareholders present as well as the number of shares and rights represented by proxies, which we received before the meeting. After reading the agenda, we will proceed to the vote, and I will present you the preliminary results of the votes for the shareholders' meeting. I will now proceed with the agenda of today's annual combined shareholders' meeting, and I will focus on the main lines and the bullet points, I think, and the details you have in front of yourself. So under the competence of the ordinary shareholders' meeting, first, reading of the 3 reports of the Board of Directors; second, reading of the 3 reports of the statutory auditors; third, approval of the financial statements for the financial year ended on 31st of December 2023 and discharge of all directors; fourth, approval of the consolidated financial statements for the financial year ended on 31st of December 2023; fifth, allocation of the financial results for the financial year ended on 31st of December 2023; and then eighth resolutions is the sixth point concerning the remuneration of the members of the Board will follow in compliance with the say on pay doctrine as described in our URD, and there are respective resolutions attached to those agenda items, of course, and we will come to that later. So I don't read out the different numbers of these resolutions now. Then there are 4 resolutions under the seventh point concerning the renewal of or end of terms of mandates. And then eighth is the authorization granted to the Board of Directors to enable the company to trade in its own shares. And that is then the last and 16th resolution of the ordinary shareholder meeting. Under the competence of the extraordinary shareholders meeting, there are another 10 resolutions, and this reflects then 4 agenda items. The first one of the extraordinary shareholders meeting is the ninth, in total reading of the 2 reports of the Board of Directors. The 10th is reading of the special report of the statutory auditors; the 11th is the amendments to the company's Articles of Association relating to Board meetings and shareholder meetings. And then under 12th, there are then 9 delegations of authorities granted to the Board of Directors in relation with the shares and capital of our company, and these are then another 9 resolutions. Before proceeding with the voting process of our combined shareholders meeting, I would like to ask our Chief Executive Officer, Mr. Rene Faber, to explain the 2023 annual financial statements and the development of the company, including information about our sustainability strategy as well as to show the prospects for the future, Rene, please.

Thank you very much, Joachim, and welcome also from my side to this year's Annual Shareholder Meeting. I will be talking about the 2023 results, the last year results as well as our focus areas and the guidance we have for the current year and also give you an outlook how we see the midterm development of the market and also what our midterm guidance is about. So starting with the 2023 year, looking back was a year which was unusual for the whole industry. It was a year which was challenging for the whole life science industry, and by that also operationally challenging for our Sartorius Stedim Biotech business. We have been moving through the normalization after the pandemic in 2023. Our customers were consuming their inventory levels, which they have built during the pandemic to secure materials to be able to make vaccines -- corona vaccines and other drugs they have been supplying to patients. This main impact of post-pandemic effect, the destocking resulted in a decrease of our revenues in 2023 by 20.5% to EUR 2.8 billion. The profitability declined by 35.7% to EUR 785 million, mostly driven by lower volumes, but also a shifted product mix to more equipment -- lower profitability equipment business. The resulting EBITDA margin was at 28.3%. Putting that bit in the perspective, looking at 5 years development from 2019 pre-pandemic year until 2023, we are looking at almost doubling our revenues over these 5 years and 86% increase in EBITDA profitability. So overall, actually well on a growth trend, but looking again at a deep and temporary normalization dynamics last year. Having a bit more detailed view on a quarterly basis, you see here the quite volatile environment on the -- in the yellow line, you see order intake picking up in the middle of the pandemic. And then around mid of 2022, we started to see this normalization, customers ordering less because of consuming the inventories until Q3 of the last year, where we have seen the first signs of getting back to the growth trajectory. And in Q4, we have recorded for the first time after -- since mid of 2022, our book-to-bill ratio slightly above 1 and again, increased order intake and revenues. Now their destocking was not the only, even was a major factor impacting our 2023 business was not the only one. Customers have been or started to further adjust their inventory levels down to protect cash and capital. We're reluctant to spend money in -- investing money in equipment, and we have seen a drop in order intake for equipment by 1/3 last year by that. Overall, in the sector after the pandemic, China market significantly slowed down the funding environment. The financing was muted, not only in China, but particularly also in the largest market, biopharma market in the United States. Macroeconomic factors were not positive, economic slowdown we have seen across the globe and rising interest rates as well. We have stopped our activities and business and discontinued business in Russia that also had a negative impact on our results, and we have noted also ongoing decoupling tendencies, which added to these overall factors. Yet after a strong increase of resources we have done during the pandemic to be able to supply our customers, last year, we started to correct back according to the business development overall since 2019. However, we added more than 4,500 new jobs. We have -- almost 60% of employees are with us for less than 5 years. So it's a fresh workforce we have and we've also seen quite a positive and dynamic internal job market where we have been able to fill the most of the positions more than 70 with internal management positions with internal candidates. We are international, getting more diverse. 84% of our managers are non-French. We have average age in the company of 40. It's a young -- relatively young team, and you see also with well-balanced age structure, with young, but also long years and experienced employees with us. 39% of total workforce were women last year. And on the first and the second management level, we have 24%. We have here a target to achieve 1/3 by 2025. Now looking at the share price development last year due to the dynamics I have described, the share price decreased by 20.8%. However, again, putting that into perspective and comparing to relevant biotech or life science tool indices, we have recorded a well above average growth of the share price over the last 5 years since 2019 to 2023. Due to the lower profitability, EBITDA margin, the underlying earnings per share decreased to EUR 4.19 and now we had a payout ratio then of 17.4%, which was on a similar level than the previous year. Now I would like to move to the current year, what are our priorities, focus areas and the guidance, how we see the year developing. We are still going through the normalization, it's ongoing. We have guided and expect to see a rather moderate or weaker first half of the year and then a pickup in the second half of the year. So our outlook is positive. We expect profitable growth in 2024. And again, shifting the focus and priorities from -- during the pandemic, building quickly, expanding quickly, not only the capacities, but also resources, people and building also inventories to be able to supply our customers. Now shifting to efficiencies improvements, adjusting back to the current business development, deleveraging and managing working capital closely. And last but not least, putting our focus more on own organic development and innovation, bringing faster new products, innovative products to the market to help customers get their process developments done faster and also their manufacturing processes at lower cost and more efficient. One trend we are closely following and acting on is selling -- is our new modalities, which are becoming more and more relevant in our industry. We are coming from biopharma industry, which has been dominated by proteins, monoclonal antibodies, modalities. Since a few years, we have seen increased dynamics and innovation in areas of cell and gene therapies. Today, 1 out of 3 new molecules, which are in development by our customers, is either cell and gene therapy. There are more than 6,000 new candidates in the development, which offers a new and excellent opportunity to participate in that innovative market. We also have seen that approvals of these innovative drugs are getting more and more, 5x increase of the approval rate since 2019. And those dynamics will drive an above-average market growth of -- in that segment, 20% compared to the core monoclonal antibodies growing at around 10%. So very, very innovative and promising dynamics. We have been working strategically on building a portfolio for cell and gene therapies. Last year, we have closed an important acquisition, an important milestone and building block in our cell and gene therapy acquisition of Polyplus. Polyplus brings a complementary innovative and strong market position in transfection reagents that's used for gene and gene-modified cell therapies applications. They are specified in a large number, a large portion of those therapies, which are being developed. It's again, complementary. It adds new skills, new competencies into our portfolio and workforce. And we expect significant synergies and positive synergies with the other technologies we have been adding to our portfolio. And those you see here, since several years, we have been building this technology platform for cell and gene therapies, adding critical materials like growth factors, recombinant albumin, media and other supplements, which altogether when properly adjusted to work as a solution, will provide to customers significant improvements in their processes and decrease the costs in combination with our broad core bioprocessing portfolio like bioreactors, filters and innovative technologies, we have also added for purification or process analytics. I think we are very well positioned to win the majority of the new drug specifications in development. And meanwhile, we have recorded a bit more than 10% of revenues coming from the products used in cell and gene therapies applications. In addition to inorganic additions to our portfolio, we continue and strengthen our focus now also, as I mentioned at the beginning, at our own developments. We are looking very much at technologies, which help customers to speed up their process development. We are looking at technologies, which intensify the processes, meaning customers allowing to build smaller facilities with higher output, reduce the investment costs, automating the workflow, not only in process development, but also in manufacturing, so new automation technologies and also software solutions, which allow our customers to use their data in a more efficient way for better results here. On top of that, a more and more important area which we are looking at and currently have on our agenda and executing on is making our products sustainability friendly, making them as much as possible recyclable. We have been working with partners in the industry and showed that we have the first film -- plastic film actually in the industry which is recyclable using available industrial recycling methods. We are working on reducing the use of plastics in our products significantly and last but not least, also looking at innovative technologies, which allow for reducing environmental footprint from transportation when customers moving their drugs from one location to the other as an example here. We continue to invest in our infrastructure as well to build and prepare for the future growth. I will talk in a minute about our outlook, midterm outlook, improving our -- strengthening our global resilience, getting more redundancy in our manufacturing sites and getting them also closer to our customers. The major programs we are running in Aubagne here investing in expanding manufacturing of single-use bags, but also investing in R&D infrastructure in Songdo, South Korea, the hub for contract development and manufacturing with the largest installed capacity, meanwhile, in the world. We are building manufacturing and services facility for most of our consumables, filters, bags and cell culture media and also process development and service labs for customers in the region. We will supply from there and cover the Asia, Asia Pacific region outside China in the future. In Fribourg, it's a CellGenix site. We are expanding our GMP manufacturing of critical components for cell therapies, so Culture Media and in Goettingen, adding membrane filter and also R&D infrastructure. This year, we expect in 2024 to spend roughly 13% of our revenues into the expansions, I just mentioned. Beginning February in 2024, this year, we have successfully conducted share capital increase of 5.15 million shares at EUR 233 per share price. Sartorius AG participated 1/3 to this capital increase, resulting in EUR 1.2 billion gross proceeds. This capital increase will help us to accelerate the debt deleveraging and put us quicker into, again, an overall strategic flexibility, which we need moving forward as we are looking at a very innovative and dynamic market looking ahead. So looking at the guidance for 2024. Overall, again, a positive outlook, still going through the normalization. It's ongoing. We know that not every customer, every customer yet consumed over the inventories they have built. So this is still ongoing. Step by step, we will see the recovery resulting then in H2 stronger increase then in revenues. We expect 2 percentage points will be contributed from the Polyplus acquisition to the growth and our EBITDA margin in 2024, we see it to be above 30%. I mentioned the CapEx ratio of 13%. And thanks to the capital increase and a strong focus on organic working capital optimization, the underlying net debt to underlying EBITDA is anticipated to be slightly then below 2.5 by end of 2024. Now with that, I move to the outlook, midterm outlook, how we are looking at the market, the market trends. We see them and the fundamental drivers for growth being intact and we have set ourselves ambitious midterm targets from now to -- for the next 5 years to 2028. So what are the market fundamentals we are talking about for our market. Of course, first of all, health remains one of the most important and relevant global topics. The population is growing, but is also aging. By that, there will be increased need for medications, the medications, which are innovative, which provide cures, which provide better treatments and those are increasingly becoming the biologics. So the biologics portion of the new medicines is increasing and will be increasing, and that's the focus area of Sartorius Stedim Biotech. It's a biopharma, biologics development and manufacturing. And this will drive a growth of that industry the market expected at 10% per year. So a solid fundamental drivers are in place. I mentioned we are seeing quite a dynamic innovation going on. Since 2010s nd 2000-teens, we have seen first very innovative cell and gene therapies being launched during the pandemic, very new modality RNA became available in the modality for vaccines and for corona vaccines and new are coming and this trend is going to continue moving forward. Yet, there is a -- the majority of the cancers are not well treatable today. There are 400 million people suffering from rare diseases, sometimes devastating rare diseases where there is no efficient treatment available, 1 in 9 people in the age over 65 suffer from Alzheimer disease also without appropriate treatment. And we know that our customers are heavily working and innovating to address those challenges. So the new innovations are coming. Cell and gene therapies are showing being effective. They didn't bring the promise to cure diseases. They demonstrated it, yet the manufacturing is cumbersome. They are very expensive. In some cases, one treatment cost, a cure treatment exceeds even EUR 1 million level. So the customers need suppliers and partners like Sartorius to help them improve the efficiencies. And on the right side of this chart, you see how that improved or how that happened in the area of monoclonal antibodies when they started in 1980s, the efficiencies in manufacturing was similarly unproductive or inefficient, but with the help of new technologies and evolvement of single use, for example, what happened with our help as well, we could show a significant increase. And this is what we expect to happen also for these innovative technologies now moving forward. And we have put a portfolio together which is very much suited and will be helping customers to achieve exactly that. On top of that, we have set ourselves ambitious sustainability targets. We want to by 2030 decrease or until 2030, decrease our CO2 emission intensity, which is like gram CO2 emissions per euro revenues by decreasing that by 10% for the Scope 1, 2 and 3, emissions for Scope 1 and 2, which are directly in our influence, we target 0 avoidable emissions. We want to use 100% electricity from renewable sources by 2030. I mentioned that we are working more and more on design of products, selection of materials to make our products recyclable. So more than 75% of our revenues by 2030 will come from products which are recyclable. Also without or with 0 waste going to landfill. By 2045, our ambition is to achieve together, of course, that's necessary with our supplier partners and with our user customer partners, a net zero emissions from overall supply chain and 2025 next year, first time, we will be reporting then also in accordance with Corporate Sustainability Reporting directive on our progress with this -- achieving these ambitious targets. Now mid-term outlook, again, looking at robust solid market fundamentals for our business, we are projecting to grow low to mid-teens range from now to 2028. 1/5 of that growth will be contributed by acquisition, that's our expectation. And we want to increase the margin from the target this year, which is slightly above 30% to above 35%. And that includes also expenses for the mentioned reduction of company's CO2 emissions of around 1% of our revenues of our sales. With that, thank you very much for your attention. But to summarize, our position, Sartorius Stedim Biotech, we see ourselves extremely well positioned in a strong market with strong fundamentals with the team, which is ambitious, which is very customer focused and skilled equipped with a highly competitive portfolio, broad product portfolio, integrated product portfolio guided by clear strategy and ambitious ESG agenda and supported by ongoing investments and infrastructure in production and R&D. Thank you very much for your attention. Happy to take your questions later.

Thank you very much, Rene, for your presentation and the detailed explanations. Gentlemen, we are now continuing with today's agenda topics, and we'll start with Topic 1 and 2 of the ordinary shareholders meeting. Topic 1 relates to the 3 reports of the Board of Directors. I won't read out those reports because they are available in our URD and on our website as well. So the 3 reports are the management report of the Board of Directors and the group company management report. The Board of Directors' report on resolutions for this ordinary shareholder meeting and then the corporate governance report. Topic 2 of our agenda relates to the 3 reports of the statutory auditors, which are published on our website as well is the report on the financial statements, the report on the consolidated financial statements and then the report on the regulated agreements. Our statutory auditors from Deloitte and KPMG are not present with us today and excused of not being here, their reports have been made available to you in accordance with the law and are posted as said before on our website for your easy reference. We will now continue with the vote of each resolutions -- each of the resolutions of the ordinary part of the meeting. And this relates to the shareholders here present in the room. So for your information, as I said before, I would like to inform you about the final quorum, it's 93.44%. And concerning the voting procedure, I ask the shareholders present to write your vote for each resolution on the certified paper form that has given to you at the time of signing in either by ticking for, against, or abstain. The paper form will be considered as proof. You don't need to raise your hand to express your vote. The voting form will be collected after the voting session. We will share the results resolution by resolution with you at the end of the shareholders' meeting. I will now go through the resolutions, one by one. After each resolution, I will make a pause and you will have to fill in the certified voting form in accordance with explanations received at the entrance of the meeting. So as I said, tick the respective box. So first voting, first resolution. And we will proceed to Topic 3 and vote for the first resolution. This is the approval of the company's financial statements for the financial year ended on the 31st of December 2023, and the discharge to all directors. So first voting. [Voting]

Second voting, second resolution. We will now vote for the second resolution, approval of the consolidated financial statements for the financial year ended on the 31st of December 2023. [Voting]

We will continue with topic 5 of the agenda and the third resolution, allocation of the financial result for the financial year ended on 31st of December 2023. [Voting]

Now we will continue with topic 6 of the agenda, which comprises 8 resolutions, and they are clearly linked one to the other about the remuneration of directors in compliance with the say on pay doctrine. So these are the fourth voting related to the fourth resolution, fifth voting sixth voting, 7 voting, eighth voting, ninth voting, the 10th voting and then the 11th voting related to the 11th resolution. So resolution #4, approval of the remuneration policy and determination of the amount of the total annual remuneration to be allocated to the Board of Directors for the 2024 financial year. [Voting]

Resolution #5, approval of the information mentioned in Article L 22-10-9 of the French Commercial Code concerning the remuneration paid or awarded to the corporate officers for the 2023 financial year. Resolution #6, approval of the fixed, variable and extraordinary components of the remuneration and the benefits of all kinds paid or awarded to the Chairman and Chief Executive Officer from January 1, 2023 to March 27 of 2023. This is the sixth voting. [Voting]

Resolution #7, approval of the fixed, variable and extraordinary components of the remuneration and the benefits of all kinds paid or awarded to the Deputy Chief Executive Officer from January 1, '23 to March 27, '23. This is the seventh resolution and then the approval of the fixed, variable and extraordinary components of the remuneration and the benefits of all kinds paid or awarded to the Chairman of the Board of Directors from March 26 to December 31, '23. This is the eighth voting. [Voting]

And then the resolution #9 is the approval of the respective remuneration components and benefits of all kinds awarded to the Chief Executive Officer from March 28 to December 31, '23, ninth voting for this. [Voting]

And then Resolution #10, approval of the remuneration policy of the Chairman of the Board of Directors for the 2024 financial year and the approval of the remuneration policy of the Chief Executive Officer for the 2024 financial year is then the resolution #11, respectively, the voting #11. [Voting]

Now we will continue with topic 7 of the agenda and go through the resolutions 12 to 15 and the respective votings as these are closely related topics dealing with the mandates of the Board of Directors and of our statutory auditors. So resolution and voting #12 are about the renewal of the term of office of Ms. Susan Dexter as Director. Number 13, renewal of the term of office of Madame Anne-Marie Graffin as Director and then #14 acknowledgment of the expiry of the mandate of a statutory auditor and appointment of new statutory auditors in replacement, it's 14 and 15 then is the appointment of a statutory auditor to certify sustainability information, 15th voting. [Voting]

And finally, Resolution #16, that's the authorization granted to the Board of Directors to enable the company to trade in its own shares. So and with that, we have come to the end of the voting process for the ordinary shareholder meeting. So we, therefore, now can start the voting process of the extraordinary shareholder meeting today. These are first about the topics 9 and 10 of the agenda. 9 refers to the reading of the report of the Board of Directors on the proposed resolutions and on the complementary report of the -- that is a person to the respective provisions of the French Commercial Code and 10 refers to the reading of the statutory auditor special report. The Board of Directors' report on resolutions and the complementary report and the special report of the statutory auditors submitted to the extraordinary shareholders' meeting have been made available as per the conditions prescribed by law and are described -- and are disclosed, sorry, in their entirety on our website. And therefore, again, I will not read them out today. We now continue with the vote -- voting for those resolutions corresponding to the topics 11 and 12. And the voting process is just as described before for the voting and the resolutions before. So therefore, the seventh voting now, and this is regarding the seventh resolution. This is about the amendments to the company's Articles of Association relating to Board meetings and shareholders' meetings. [Voting]

Topic #12, then concerns 9 resolutions. And these are those from 18 to 26. They cover several delegations of authority granted to the Board of Directors in order to act on the shares, securities and on the share capital of the company. So these are the resolutions and voting 18 to 26. And now I will briefly mention those 9 resolutions. Delegation of authority granted to the Board of Directors to issue shares and/or securities giving access to the share capital of the company and/or securities giving the right to the allotment of debt instruments with preferential subscription rights of the shareholders. This is the 18th voting or 18th resolution and the 18th voting about that. [Voting]

Then I would like to continue with the Resolution 19 and give you time for the 19th voting. That is the delegation of authority granted to the Board of Directors to issue shares and/or securities given -- giving or capable of giving access to the share capital of the company and/or securities giving the right to the allotment of debt instruments without preferential subscription rights of the shareholders through public offerings other than those referred to in Article L 411-2 of the French Monetary and Financial Code. So 19th voting. [Voting]

I continue with Resolution #20. This is the delegation of authority granted to the Board of Directors to issue shares and/or securities giving or capable of giving access to the share capital of the company and/or the issuance of securities giving the right to the allotment of debt instruments without preferential subscription rights of the shareholders through public offerings addressed exclusively to qualified investors or to a restricted circle of investors as defined in article L 411-2 of the French Monetary and Financial Code. 20th voting. [Voting]

I continue with Resolution #21, delegation of authority to the Board of Directors to increase the number of shares and/or securities given or capable of giving access to the share capital of the company to be issued in case of share capital increase with or without preferential subscription rights of the shareholders. 21st voting. [Voting]

Resolution #22, delegation of authority granted to the Board of Directors to decide to issue shares and/or securities giving or capable of giving access to the share capital of the company as consideration for contributions in kind in shares and/or securities giving or capable of giving access to capital without preferential subscription rights of shareholders. 22nd voting. [Voting]

Resolution 23, delegation of authority granted to the Board of Directors to increase the share capital of the company through the capitalization of reserves, earnings or premiums or any other sum upon which capitalization would be permitted. 23rd voting, please. [Voting]

Resolution #24, delegation of authority granted to the Board of Directors to issue shares and/or securities given or capable of giving access to the share capital of the company reserved for members of company savings plan without preferential subscription rights of the shareholders. Voting #24. [Voting]