SCHOTT Pharma AG & Co. KGaA (1SXP) Earnings Call Transcript & Summary

[Audio Gap] gentlemen, and welcome to SCHOTT Pharma's Earnings Call for the Third Quarter and the First 9 months of 2026. The conference will be recorded. [Operator Instructions] Let me now turn the floor over to your host, Tobias Erfurth.

Thank you very much, Eliza, and good morning to everyone on the call. Welcome to our 9 months third quarter conference call for the financial year 2026. My name is Tobias Erfurth, Head of Investor Relations and Communications, and I will be guiding you through today's session. With me are our CEO, Christian Mias; and our CFO, Reinhard Mayer. Christian will begin with a business update, followed by Reinhard, who will walk you through our financial performance in more detail. After that, we will open the call for your questions. Before we kick off, please take a moment to review our disclaimer on Slide #2. It covers our standard safe harbor language for forward-looking statements. And as a reminder, our financial year 2026 runs from October 2025 to September 2026. The 9 months results we are presenting today cover the period from October to June 2026. With this, I would like to hand over to Christian. Please go ahead.

Yes. Thank you, Tobias. Good morning, everyone. Let me open with a headline. Q3 was a strong quarter, and it demonstrates that our growth trajectory is intact. Group revenue in Q3 reached EUR 282 million, representing growth of 8.3% at constant currencies. EBITDA for the quarter came in at EUR 75 million, which corresponds to a solid margin of 26.8%. Our high-value solutions revenue share amounted to 59% in Q3 and was thus in line with our midterm targets of reaching a 60% revenue share. Both segments contributed to the Q3 momentum. What I would like to stress here is that the higher demand was broad-based across our portfolio. So we are not talking about single customers' applications or products, but healthy portfolio-wide dynamics. Let me now turn to Slide 5 for a closer look at the strategy execution. Our high-value solutions business is the engine of SCHOTT Pharma. HVS represents 57% of our revenues. This reflects consistent execution across our 3 strategic pillars: innovation; capacity expansion; and trusted partnerships with the world's leading pharmaceutical companies as well as solution and development partners. The commercial logic is straightforward. High-value solutions address structural and growing customer needs, complex biologics, GLP-1 therapies, the shift to homecare and self-administration and the industry-wide adoption of ready-to-use formats as part of the manufacturing transformation. These dynamics translate into stronger pricing, better margins and more resilient customer relationships. As said, our midterm target is a 60% HVS revenue share, and we are on track. Slide 6 covers 3 developments that illustrate how we are strengthening our position as a trusted long-term partner. First, as already communicated in our ad hoc release in early July, we have reached a mutually beneficial agreement with a key glass syringe customer. It includes both compensation as well as revenue-related components, which will have an impact on future periods. This agreement is a very good example of the strength and resilience of our customer relationships, and it reflects our shared commitment of creating long-term value as trusted partners. Second, also in July, we announced the result of an expanded collaboration with Nemera, a specialist in drug delivery devices. Together, we have verified the compatibility of Nemera's pen injector platform with our 3 ml ready-to-use cartridge system. Pharmaceutical companies benefit from a ready-made solution that speeds up time-to-market and helps avoid technical problems that are common in such combination products. Patients, on the other hand, benefit from a safe system of self-injection. So the offering plays directly into the shift toward a at-home treatment, which is a trend we are seeing accelerate. Third, we have created the new role of Chief Commercial Officer. Fabian Stocker takes on this position while keeping his responsibilities as Head of the DCS segment. Fabian has been with SCHOTT for 14 years, 10 of which are spent at SCHOTT Pharma with a strong track record in developing our DCS business. With the implementation of his new role, we are strengthening our customer centricity through greater collaboration across departments and product groups, making sure that customers get exactly what serves them best with respect to products and services. These three examples share a common logic. Proximity to customers is a competitive advantage from how we negotiate as partners, how we innovate to how we approach the market. Before I hand over to Reinhard, let me briefly summarize the status of our expansion projects. In the United States, we have brought significant additional capacity for core and specialty vials into operation, also in sterile quality. The expansion contributes to our long-term local-for-local strategy, strengthening our presence in the important U.S. market. With the tripling of local capacities for high-value solutions, we are addressing key trends in the pharmaceutical industry, such as manufacturing shift and the rise of biologics. At the same time, we contribute to a resilient healthcare infrastructure, also in the case of medical emergencies such as pandemics. In Hungary and Switzerland, the ramp-up for sterile cartridges is progressing. Both investments strengthen our HVS platform and increase our readiness to meet future demand, particularly for homecare solutions. With that, I hand over to Reinhard for a financial update.

Thank you, Christian, and a warm welcome also from my side. Let me take you through the 9 months numbers and more importantly, what is driving them. On Slide 9, I will start with revenues. Q3 first, then the 9 months picture. A quick note on the chart. Gray bars represent our Drug Containment Solutions segment, DCS, and the blue bars represent Drug Delivery Systems, DDS. In Q3, group revenues amounted to EUR 281.8 million. That represents a growth of 8.3% at constant currencies and 10% on a reported basis. Both segments contributed to this acceleration. In Q3, DCS continued its strong growth trajectory as revenues grew to EUR 158.9 million. This was up 10.8% at constant currencies or 11.3% on a reported basis compared to the prior year quarter. Growth was driven by continued high demand for sterile cartridges, specialty vials and ready-to-use formats. We also saw good momentum in our core vials business, reflecting continued healthy demand beyond the HVS portfolio. DDS in Q3 showed an encouraging recovery. Revenues increased to EUR 123.2 million, notably up from EUR 113.5 million in the prior year. This represents a meaningful recovery versus the first half of the year. Two dynamics drove this: sustained strong demand for prefillable glass syringes, especially for GLP-1 medications; and an increasing momentum in polymer syringes outside of mRNA applications. Turning to the 9-month period. Group revenues amounted to EUR 769.8 million, resulting in a year-on-year growth of 4.4% at constant currencies and 4.1%, as reported. DCS revenues for the first 9 months reached EUR 445.3 million, an increase of 9.2% at constant currencies and 7.6%, as reported. Growth was driven by the same factors as Q3: sterile cartridges and vials; specialty vials; as well as an improved demand for our core vails business. In DDS, reported 9 months revenues were EUR 325.1 million, essentially flat compared to EUR 325.7 million in the prior year and slightly down 1.7% at constant currencies. This reflects the weaker H1, which was primarily driven by lower polymer syringe volumes for mRNA applications. Now let's dive into our profitability. In Q3, group EBITDA amounted to EUR 75 million, corresponding to a margin of 26.8%. This compares to a particularly strong margin of 32.3% in Q3 2025, which benefited from high margins in both segments, supported by a favorable mix and strong utilization. In contrast, the current quarter profitability was impacted by continued lower utilization in the DDS segment as well as costs related to infrastructure and process optimization measures in production. For the 9-month period, group EBITDA reached EUR 205.3 million compared to EUR 213.3 million in the prior year, a decrease of 3.8%. The EBITDA margin was 26.7% compared to 28.9% in the 9 months of the financial year 2025. Let me explain what drove this margin development. The 9 months margin development reflects the Q3 factors just mentioned. In addition, the inventory impairment on customer-specific glass syringes reported in the first half also weighed on profitability. Our EBITDA after 9 months was impacted by extraordinary specific items. They are not reflective of underlying structural margin pressure. Looking at the segments. DCS EBITDA grew faster than sales, rising 10.1% to EUR 109.7 million for the 9 months. The margin improved to 24.6% from 24.1% in the prior year. Volume growth and a positive product mix with increasing HVS penetrations drove this outperformance. The HVS share in DCS reached 25%, up from 23% in the prior year. DDS EBITDA for the 9 months was EUR 95.7 million, down 16.3% from EUR 114.4 million. The margin was 29.4% compared to 35.1% in the prior year. As mentioned, this reflects 3 factors: lower utilization; the Q3 infrastructure and process optimization costs; and the glass syringe impairment from the first half. The underlying DDS business remains well positioned. Now a few lines further down the P&L. Depreciation and amortization increased by 14.2% to EUR 65.5 million. This reflects our ongoing growth investments and was entirely expected. As a result, the EBIT decline was somewhat larger than the EBITDA movement, bringing EBIT to EUR 139.7 million. The financial results improved significantly by 35.6% to minus EUR 6.2 million. This reflects lower interest expenses following the optimization of our financing structure, a meaningful step forward. Income taxes were EUR 30.2 million, corresponding to an effective tax rate of 22.6%. This is in line with our communicated expectations. Overall, net income for the 9 months amounted to EUR 103.4 million, down 9% year-on-year. Earnings per share were EUR 0.68 compared to EUR 0.75 in the prior year. Now let me turn to the cash flow. Cash flow from operating activities for the 9 months came in at EUR 140.7 million. Free cash flow improved by 49% year-on-year to EUR 58.9 million, up from EUR 39.6 million in the same period last year. This improvement was benefited from working capital changes, lower tax payments and the optimization of our financing structure. Capital expenditure for the 9 months was EUR 82.5 million, slightly below the prior year level of EUR 89.3 million. We have continued our investment program in both segments with particular focus on HVS capacity at our sites in Switzerland and Hungary, while improving cash conversion. That combination demonstrates the financial discipline underpinning our growth. Based on our 9 months performance and our continued positive order book development, we confirm our updated guidance for the full financial year 2026. As communicated on July 8, we raised our revenue growth guidance to 5% to 6% at constant currencies, up from the prior range of 2% to 5%. We expect an EBITDA margin of 27% to 28%, up from the previously guided around 27%. This upgrade was supported by Q3 momentum and today's results confirm that the positive dynamics continue. For additional context, we continue to expect capital expenditure in the range of EUR 140 million to EUR 160 million. We expect our HVS revenue share to remain at the prior year level of 57% for the full year. With our guidance confirmed and Q4 already well underway, let me briefly touch on the fourth quarter. As our guidance implies, we expect revenue growth to slightly accelerate in Q4 compared to 9 months of 2026. And as you know from the previous years, Q4 is seasonally weaker for the DD -- the DCS segment. This will again be the case in Q4, so that DCS revenues likely come in below the strong level seen in Q3 2026. Good growth momentum in DDS should contribute meaningfully to the group's growth and coming clearly above the Q3 2026 level. This concludes the financial update. And with that, I will hand it back to Tobias.

Thank you very much, Christian and Reinhard, for your presentation. We will now open the Q&A session. Eliza, our operator, will assist with the registration. Please go ahead.

[Operator Instructions]

I think we have the first people in line. We will start with Odysseas Manesiotis from BNP Paribas.

Firstly, could you share a bit more color on where the polymer strength is coming from and help us potentially with quantifying how significant that was perhaps in terms of sequential step-up from Q2, along with what you expect for that business in Q4? Secondly, your full year margin guide implies quite a big step-up in Q4 margin if we assume we're landing at the midpoint, around 300 basis points in my numbers. Where should we think that comes from? Is it fair to think that this will be driven by the strength you're seeing in polymer given that's where underutilization has dragged you back a bit? Or should we assume that the lower end of the 27% to 28% range is more likely here? And thirdly, one of your GLP-1 -- one of the GLP-1 market leaders recently booked notable termination fees because of the downsizing of large supplier contracts given lower volume expectations. Should we read this across as a risk to your midterm or full year guide?

Odysseas, thanks for the questions. Obviously, I mean, about polymer strength in the Q3, we have described that -- in the earlier quarters that we have basically seen a slowing decline of the mRNA volumes. And at the same time, we have seen an expanding increase of other applications, which are now in a position that we, so to say, compensate for the declining volumes on the mRNA polymer. And this will continue. We will not specifically describe how much more growth this will deliver. But obviously, the polymer strength continues and is broad-based on the five other applications we have within that, let's say, segment. And then to the second part, yes, where comes the margin increase? And obviously, it will be a meaningful step-up in margin for the fourth quarter. And you mentioned, let's say, range is most probably not wrong. And I would also see that to be in that range, mainly driven by, as we said, a stronger portion of DDS growth, and that both supported by better utilization in our factories and also, let's say, a stronger polymer side in the segment. And that will help to drive the margin increase in Q4 over the first 3 quarters. And I must ask you on the third question, I didn't quite get it. Maybe you can repeat this again?

Yes, of course. So we -- one of the GLP-1 market leaders recently booked notable termination fees because they downsized a few large supplier contracts given lower volume expectations. I was -- I wanted to ask whether that's a risk to your full year or midterm targets?

Understand. Well, obviously, we have highlighted that we have concluded with at least one of our large clients, a new contract, which, so to say, rebalances the contract to new terms. In that way, we will have similar structures like take-or-pay clauses in the contract. And in that consideration, we need to see, let's say, most of the large contracts. So far, we have, let's say, with that been able to deliver the growth and the margins as expected, and we foresee that to support our, let's say, midterm guidance, which we laid out beginning of the year and which is still intact and confirmed.

Next question comes from Giang Nguyen from Citi.

I have one follow-up on Odysseas's questions and then two of my own. I think Odysseas was asking whether the lower end of the 27% to 28% margin range is more likely here. I just wanted to double check that, that was your -- yes is the answer to that question? And then two questions from me. The first one is, can you provide more color on the agreements with the specific glass syringe customers and whether there was any revenue or compensation that was recognized in Q3? Or is there anything that you're expecting to recognize in Q4 that could help explain part of the step-up? And then the second question is, can you quantify the costs associated with production infrastructure that you incurred in Q3? And what specifically were those related to?

Yes. Maybe I'll take the first one and Christian, you take the second and the third one. Obviously, Giang, I mean, I didn't say it's going to be lower end. The range is fully intact. And with that, I'll leave it really down to you. But we actually see a clear opportunity in the fourth quarter to substantially increase the EBITDA margin so far reached. Hence, we feel very well positioned to be in that range. So no lower-end perspective and not a higher-end perspective. The range is intact.

Yes. And Giang, coming to your second question regarding the agreement with our glass syringe customer, well, what basically Reinhard said before, we found an agreement that mainly is based on future revenues. And basically, you can say it's a take-or-pay agreement for the upcoming years. We will see first impacts in Q4 2026 and then in the years to come. And that basically underlines that we have found a strong agreement that both partners are going to benefit from. Regarding the third question, when it comes to our production impact, well, we are constantly optimizing both our infrastructure as well as our production processes. And sometimes such optimizations do have an impact on the production process itself, which then is being seen as a temporary production inefficiency. And this is actually what we have seen in the last quarter. It is driven by our ramp-up activities on the one hand and the optimization activities on the other. But what is also very important, the results that we have shown now are very well in line with our plan. And that means at the end, we are not talking about a structural issue. We are rather talking about isolated cases. And while we cannot fully guarantee with certainty that similar effects won't occur again, we believe we are on top of the specific issue.

Next question comes from Jonathon Unwin from Barclays.

I've got three, please. My first question is on the updated guidance for FY '26. You obviously upgraded that based on the renegotiation of contracts with your glass prefilled syringe customer. But I'm just wondering what level of expectation from that customer you had in your midterm growth target from this customer? And if you're lowballing expectations in the midterm and therefore, do you think it's now conservative based on the renegotiated contract plus the DCS strength that you're seeing? My second question is actually on your Indian business, where I believe you're the #1 glass player in the region. I'm just wondering if you've seen a notable pick up in demand in that region since semaglutide went generic in the country? And is that mainly in vials? And then my third question is on vials. Actually, it seems that vials are outperforming expectations after a couple of years of overcapacity and inventory in the market. So can you just talk a little bit about where the utilization of the vials business sits today? And are you getting closer to the sort of over 90% that you target on your other lines?

Jonathon, thank you. I will take your first question. And obviously, I mean, we had always said that this is an important client of ours, one of the larger ones and that 2026 represents a transition year where the impact is the most important one. And also so to say that there was a continuation of that customer relationship expected. Hence, a part of the midterm guidance included volume with this client, and that is more or less now confirmed. So no material change to what is embedded in the midterm guidance, hence, no rise out of, let's say, the new agreement towards the midterm guidance. But yes, there is an impact on 2026, which has led to the increase as well besides the strong momentum underneath all segments.