Siegfried Holding AG (SQG0.F) Earnings Call Transcript & Summary

[Presentation] Good morning. Welcome to the presentation of our half year results 2025. My name is Peter Stierli, and I'm here together with Marcel Imwinkelried, our CEO; and Reto Suter, our CFO. Marcel will start the webcast presenting the highlights of our H1 performance. Reto then will talk about the numbers in more detail. And at the end, Marcel will spend a few slides on the outlook and what's to come for Siegfried. At the end, we're going to have a Q&A session and you can dial in and connect to us by clicking on click call on the webcast window. This webcast is scheduled for 45 minutes and will end at 10:45. Please note that the session will be recorded. With that, over to you, Marcel.

Thank you, Peter. Good morning, and a warm welcome also from my side. I'm excited to present to you our half year results 2025, together with Reto. It has been 1 year since I took over as the CEO of the Siegfried Group. Let me tell you. Even after 1 year, I'm still impressed by the great team, the technical capabilities of our sites and the many opportunities ahead of us. Siegfried is unique. At our global manufacturing network of 30 sites, we are able to offer our customers the entire value chain, development and manufacturing services from early phase to commercial scale and from the drug substance all the way to the finished dosage form. And really, the Siegfried team is delivering. Early this year, one of our major customers was looking into building up a second supply point for one of his blockbuster drugs in addition to our site in China. We were able to secure the contract and to offer this second supply point from our site in Saint-Vulbas in France. This truly reflects the strength of our global network. Another example, at our Capital Markets Day, I explained to you that reliability is our license to do business. Our customers cannot afford any supplies interruptions. We measure reliability with the KPI OTIF, this means on time in full, while the team at our drug product side in multi-achieved a staggering 99% OTIF performance this year. In my career, I was responsible for many manufacturing sites and believe me, this is really outstanding and truly impressive. Our global network and our expertise put Siegfried now in a unique position. And this is why I'm so excited to stand here today in front of all of you. I really look forward to talk more about our bright future in the second part of my presentation. But first, let me give you a summary of our half 1 results. If there is one message I want you to remember today, we have delivered a solid performance in the first half of the year, we have executed exactly according to plan, and we have laid the foundation that makes us confident to confirm targets for the full year 2025 and beyond. Moreover, we were able to deliver these results despite inflationary pressures despite adverse currency effects and despite the final wave of customer destocking. I'm particularly excited about two of the numbers on this chart. We have been able to further expand our EBITDA margin to 21.6%, and we have been able to make substantial further progress in our net working capital optimization, freeing up more than CHF 35 million of cash despite increasing inventories due to the manufacturing progress for conversion into revenues in the second half of the year. And of course, M&A is always on in Siegfried. We are confident to confirm our outlook for the full year. For 2025, we expect sales growth in the mid-single-digit percentage range in local currencies and a core EBITDA margin above 22%. Now I would like to hand over to Reto, who will give you more insights about the financial numbers.

Thank you very much, Marcel. I'm happy to be here. Good morning, [indiscernible] A warm welcome to you also from my end. I'm happy to add some additional colors on these great financial numbers now. Also in the first half of 2025, Siegfried has delivered profitable growth, and we have set the foundation for a perfect full year delivery. We have communicated the effects on the top line early on. There were 3 of them. First of all, we have by now seen the last wave of destocking around CHF 10 million, mostly in the drug substances cluster. Of course, the currency headwind was much stronger than what we had anticipated back in February. Following April 2, the foreign currency, specifically the dollar devalued strongly against the Swiss franc. And we have, for this first half a currency headwind of 1.7%. For the full year, we expect that currency headwind to sustain to maybe 1.5% were against us. However, the natural hedge work just beautifully in this first 6 months, and we had no impact at all to the EBIT margin. Lastly, we also spoke around seasonality, and I will take a few minutes towards the end of my presentation to also touch upon this topic. Now what were the results? Drug substances printed CHF 413.8 million, drug products, CHF 205.8 million, in total, CHF 619.5 million which is flat in Swiss francs, but represents a growth of 1.6% in local currencies. The currency split on the right-hand side as well as the net sales split between the clusters is pretty much unchanged to the prior period. Let me take also a moment to speak about tariffs. Good news. The tariff exposure continues to be absolutely minimal. Today, we see less than CHF 5 million of 2025 sales being impacted by tariffs potentially. And even adjustments to the exclusion lists wouldn't materially change that number. That's good news. Now this is an uneventful slide. And that's actually good news. This is the reconciliation from our reported number on the Swiss GAAP FER to the core results, which are important for us to manage and to steer the business. Two items. On the one hand side, you see the one that we do in every reporting cycle. We have reclassified CHF 1.2 million of net interest on foreign pension plans from the operational expenses down to the financial expenses. And then we took out transaction cost of CHF 0.4 million. These were due diligence costs for potential M&A transactions where we had a really close look at, but ultimately decided not to consume the transaction. Then on the adjustments to core net profit, you see again the addition of the core net interest on the foreign pension plan. We are specifically proud around the profitability. In the first half, we have been able to further increase our profitability despite increases in input costs, namely on the personnel expense side. How have we done that? We have used all the levers available, operational excellence, which is a core part of our strategy, EVOLVE+. We continue to apply portfolio optimization and ongoing process for the first time now also including drug products. And of course, as you would expect it from us, a very strict cost disciplines on all the levels, all the sites also at the headquarter. It's no surprise that the profitability increase did show up on the core gross profit level, which we have expanded on an absolute level, but also on a relative level. It's higher 60 basis points in this first half. We kept the core SG&A in Czech despite somewhat changed perimeter, we added the Siegfried Acceleration Hub. I'm sure you're aware and also other parts of our organization continued to grow. Siegfried Dynamics as one example. Now let's focus a bit of time on what happened between the core EBIT and then the core net profit. If you go drill down into the core financial expenses, so below core financial results, you will see that the core financial expenses actually came in lower in this first half of '25, obviously, as a function of the lower interest rate environment here in Switzerland. And then secondly, we had a negative exchange rate differences impact. That's a result of the volatility and the decline, especially in the U.S. dollar. As you're aware, this is a noncash item, and it's also a valuation effect at a specific point in time. Now my favorite financial statement. This is also the financial statement where the [ Execom ] and also our Board of Directors takes a keen interest in on how that's going to develop. And also good news here on this side. We continue to deliver a significant improvement in operating cash flow. The contributions came mainly from our net working capital improvement project, FALCON, and if you drill down, it came mainly from accounts receivable, where we did advance greatly and also from accounts payable. However, due to the seasonality, we have a large portion of the revenues to be generated in H2 sitting in our inventory now. So the positive development is real, but it was masked by these capital allocations into inventory, which is then ready for conversion into sales and accounts receivable and later on then cash in the second half of 2025. If you look at the capital expenditures, that's at the upper end, seasonality. We spent around CHF 100 million on organic expansion, purchase of property, plant and equipment, so fixed assets. The largest project here, of course, as you would expect it, was the high-quality drug substance manufacturing building in Minden. Cash flow from financing, basically as last year. Now status of my balance sheet, really important for a company like us. We are still at a net debt to core EBITDA of around 1.5. And that leaves me with around CHF 600 million of nondilutive debt capacity, which means, and that's good news, too. We are not restricted in any way at this point in time to further conduct organic, but also inorganic M&A acquisitions. Which brings me to something really important. The capital allocation framework, how does the Siegfried Group of companies intend to create long-term value over many years. It's unchanged. We invest into growth options that we have available, both organically as well as inorganically, so M&A, and I will speak about the M&A angle in just a minute. Over time, these options then develop into a strong top line growth. Obviously, as we are becoming more complete as we reach scale, as we become also more valuable to our customers, this strong growth comes also with expanding margins. And if you combine growth and margin expansion, of course, you're at a cash flow generation, which increases period after period. And this is then the cash which is available for further investments into growth again. Let's spend a minute on M&A. M&A is always on, that's known to you. So we never stop. And let me tell you, today is a good environment for doing M&A transactions. When we do M&A, we are always very clear about the purpose of the deal. Does it add scale? Does it add new abilities, and that includes also geographical expansion? Or does it add a new technology platform that we did not own so far or any combination, of course. As evidenced in the core adjustments, we will continue to be very selective also going forward. The easiest way to destroy value is a bad deal. So we will focus on creating as before value for our customers as this translates automatically into value for our shareholders. And we continue to see M&A as a very capital-efficient alternative, also a time-saving alternative to organic deployment of capital. That was the remainder of the capital allocation framework, dividend policy, this committed dividend program increase of CHF 0.2 (sic) [ CHF 0.02 ] per period that's going to stay. We're committed to a conservative investment-grade leverage levels. Important for us, despite the fact that we generate significant amounts of cash going forward, because important to us is a strong balance sheet and the preservation of our financial flexibility because this then allows us at any point in time to engage also into M&A and continue with organic investments. And with that, we are optimally positioned to capture long-term value creation. Let me conclude my remarks with a few sentences on seasonality. As previously highlighted, the seasonality in '25 is stronger compared to the last prior -- previous years. And of course, it all starts with the revenue recognition. The Siegfried Group on an annualized basis recognized is 98% to 99% of revenues at the end of a campaign. And you see from the chart to the left-hand side, that the majority of these campaigns actually end in H2. Let's spend a minute on the production plan, a very simplified version. The gray arrows, they stand from manufacturing for production campaigns, you see that these arrows are long. Some of them are longer than 1 year. And each of these manufacturing campaigns consists of dozens of individual management and manufacturing steps. At the end, we recognized the revenue that's the blue dots at the bottom of this chart. And you also see looking at this chart that the majority of the revenue to be recognized in the second half of '25, by now is already now at very far advanced stages of manufacturing. So the idea or the question for a ramp-up risk is actually not a real question. If you then move to the right-hand side, that's the resulting revenue profile. You just multiply the revenue recognition point with the volumes. That's where you end up. And there's 2 statements that I would like to make here. The first is it really changes this pathway through the year are different from year to year, dependent on the production plan. And the second one is, it's obviously not a straight line. So this lumpiness, this bumpiness in revenue recognition, we will always have, and it will continue also in the future. In brief, what we have been observing now in 2025, it's perfectly normal. With that, I'm happy to hand back to Marcel for the outlook.

Thank you, Reto. And now let us talk about our bright future and how we are laying the foundation for profitable, sustainable growth. As I explained to you at our Capital Markets Day in October in Barcelona, Siegfried is on track to outpace the market growth across all key segments we operate in. There are 4 important long-term trends, which drive growth across these segments. I'm particularly keen to highlight one of these 4 trends. This is the increasing number of innovations coming from small and midsized pharma companies. More than 80% of new molecules currently in the pipeline are owned by small-, medium-sized pharma companies. Why is this so exciting for us? Many of these companies do not have their own manufacturing capabilities and capacities. It would be too risky and too capital intensive for them to build up manufacturing facilities on their own, and they do not have the manufacturing expertise. They rely on us, a high-quality CDMO like Siegfried who can take their innovations to commercial scale. And this is also one of the reasons why we see an ongoing outsourcing trend within our pharmaceutical industry. Now this is exactly where our strategy EVOLVE+ comes in. With EVOLVE+, we are best positioned to capitalize on these long-term trends, and we are set to grow above market across all the segments that we are operating. One of the most important dimensions of our EVOLVE+ strategy is our technology offering. We strongly believe that the broad technology offering is a key differentiator for acquiring new business and to secure long-lasting partnerships with our customers. This is why we are continuously expanding our technology offering in those areas where we see the best long-term growth opportunities. Let me give you an example. 2 years ago, everyone was talking about emerging GLP-1 drugs and the need to be able to offer large-scale capacities, high-speed lines for prefilled syringe. What we did, we took a step back, first of all, carefully analyzing the brand, and we came to a different conclusion. Instead of putting all eggs into one basket, we understood that the obesity market will evolve into something much bigger, much more diverse. And that's what we need to be able to offer a set of key technologies in order to position ourselves as a reliable long-term partner in this area. Today, we are able to offer a broad technology portfolio for the development and manufacturing of important drugs, including obesity drugs. Filled finished services for preferred syringe, as you know, we are investing in 2 lines in Hameln, in our site in Germany. We're investing for high-volume manufacturing also for linker molecules used for peptide-based GLP-1 drugs and also for large-scale manufacturing of very complex drug substances used for oral applications, including obesity drugs. Spray drying is the bridging technology between drug substance and drug product. And we are investing in Barberà in spray drying to enhance the salability and the bioavailability of such oral applications. We are even offering development and manufacturing services for the next generation of obesity drugs, which will be administered through viral vectors. This is why we truly believe that building out a broad technology offering is essential to secure long-term growth. And we can do this through organic investment or if needed, we can always fast track specific technologies upgrades through M&A. Already today, we have a very diverse technology offering, and as a part of a EVOLVE+ strategy, we are making this as an even stronger differentiator. Another great strength we have is commercial and operational excellence. Cash is king. And a great example is Project FALCON, our net working capital optimization initiative, which are presented to you at our Capital Markets Day as well. We take this initiative very seriously. I and the executive committee track progress on a monthly basis. On the left, you see one of the charts that we regularly look at. We are comparing to this net working capital with the net working capital a year ago, and we take a close look at the various components, and we are making the adaptations where needed. We do this on all levels. When you examine these monthly analytics over time, you arrive at the chart to your right-hand side. As you can see, immediately after we have kicked off in May 2024 the project FALCON, the project FALCON started to show substantial results. For the full year of 2024, we have been able to reduce our inventory by more than 10% compared to 2023, and we were able to release close to CHF 60 million in cash. But it doesn't stop here. Therefore, it continue. Today, FALCON is delivering efficiency across all levels of our organization. In the first half of this year, we were able to release more than $35 million in cash, and we were able to do this despite a significant increase in inventories for ongoing manufacturing that will convert into revenues in the second half of the year. With this, we expect to release more than CHF 100 million cash for 2025. To sum up, we have delivered a solid performance in the first half of the year. We have executed exactly according to our plan, and we have laid the foundation that makes us confident to confirm targets for full year 2025 and beyond. With our laser focus on our strategy EVOLVE+ and with the winning spirit of our team, we are set to outpace the market across all key segments we are operating. This makes us confident on our positive midterm outlook. Siegfried will continue to grow above market, excluding M&A. We will step expand our profitability with capital expansion in the low teens. And of course, M&A is always on in Siegfried at the right price, but only just for the right business. We will continue our journey of profitable growth through 2025 and over the midterm. Step-by-step, year after, I'm sure you understand now why we are confident that we're going to hit the targets this year and beyond. Thank you for your attention. And now with that, I hand over to Peter for the Q&A session.

[Operator Instructions] The first question is from Chris Richardson from Jefferies. How do you see the cell and gene pipeline developing? And how do you plan to commercialize the products for your customers given that you do not have much experience yet in commercial manufacturing? Marcel?

Yes. Thanks a lot for this question. Good question. First of all, happy to share with you that we are progressing very well. We were able to win 6 additional or new customers 2025, which is great, and it's evolving very nicely. But now, of course, the next step will be then to produce the GMP batch to commercialize that. Also here, we are in discussions, of course. And the first step which we need to achieve is now what we are doing is to integrate the site. We are very close to finish that, and then also, we have the health authority out it. Everything will happen in the second half of the year. So for next year, we will be ready then also to produce commercial products as well.

Thanks, Marcel. And he has a second question, which I would like to hand over to Reto, how was the receivable improvement achieved? Is there any factoring?

Yes. No, to be very specific, there was no factoring involved. So no special one-off effect that we would see only now in this first half. This really was an effort in making customers pay and we are paying in the -- you know what. So it was really just an effort in the very close monitoring involved. Obviously, we also had quite a high amount of accounts receivable as a position towards the end of 2024.

The next question is to Ed Hall in the video call.

I guess first question would just be on the pricing power that you're seeing within drug substance and products. I'd be curious to see sort of what was the contribution to volume versus price in the top line numbers? That would be my first question. And then I guess second question would just be just to your topic on M&A and how do you see sort of valuations in the U.S.? How has this changed in the last 6 to 12 months today versus that prior period? And then just a comment on the sort of in the cash flow statement on the income tax paid and the, let's say, the large swing that we've seen there? And any sort of further commentary that you could elucidate on that those 3 would be really helpful.

Reto, would you like to take this question?

Yes, sure. No. Maybe on the first topic that you have on pricing power, majority of the increase that you have seen now was indeed volume. Obviously, we have had rounds of pricing increases in the past, but obviously, a little bit of price was also included there as well. Second, on the valuation of assets in the U.S. I mean, first of all, we need to see that prices targets denominated in U.S. dollars following April have become 10% cheaper. So that's what happens as someone who's thinking in Swiss francs. Then obviously, yes, I mean, these assets have been of value before and they are of value now. So very much depends on the very specific situation. There are still situations where Siegfried could extract some value also for us. Then the last question was on the cash flow statement. Remember, in the second half of 2024, we had this large income tax payment in Hameln, where we had this very profitable Vaccines business, which led to higher taxes, while this had been recognized, of course, in the P&L statements in the periods before, at some point, you need to pay, and this did just not reoccur as we don't do vaccines business in Hameln anymore.

The next question is from Laura. Can you please update on the progress of 2 Spanish sites in terms of capacity utilization, profitability improvements and also the new contracts? Marcel?

Happy to do so. I think first of all, very good news is El Masnou. El Masnou is very, very nicely utilized. So we -- this will be also the first site where we are now starting also to portfolio management. By the way, also, we are quite -- as you know, and also what we have highlighted and shared with you investing and expanding in El Masnou because we are really acting here in a niche in the OFTA business and more also new novel drugs are coming through. In Barberà, here, we are according to the business plan. Of course, we have also signed some additional contracts with new customers as well. But of course, also what we have already shared with you, we had a big contract signed 1 year ago, which will become then commercial, what we see then in the P&L really then in 2026.

The next question is from Fynn.

I have 3. So maybe first, you touched upon your tariff exposure, which is very helpful, a question that I often get is also on potential U.S. drug price cuts and how this could affect your business and how immediate any effect would be. So maybe you could help us there? And then in peer reporting, we had actually heard that it seems -- there is very good industry activity in the CDMO space overall. I mean your 1H growth looks rather subdued. Is that something that could help boost your second half? Is that a development that you would confirm? And then lastly, on the M&A environment, I think you just that you walked away from a deal, so maybe could you speak about the likelihood of a deal in the next 12 months given you say the environment is still very good?

Marcel, do you want to take the M&A question and the tariff question?

Sure. Happy to do so. I think first -- that was the price queries. I think here, obviously, I think there is something coming not a surprise when we are and personally, I'm looking at that regarding price. Will this have an immediate effect? I'm not sure. I think it's more mid- to long term, but we are not directly impacted because I think price-wise, and also if you're looking at the COGS for this blockbuster very important products, they are very often at single-digit COGS base. So I think what we can do as a CDMO and what we are doing also according to our strategy EVOLVE+ is operational excellence further to improve our productivity and also then at the end to be competitive also for our customers as well. M&A wise, of course, I think we have already twice or 3 times also highlighted that in our presentation is always on, but already, as outlined just for the right price and for the right business. What we see currently, but it's not only in U.S. but also in other regions as well that are quite much more activities are ongoing and which is really interesting also for us.

Thanks, Marcel. Reto?

Yes. No, on industry activity. That's obviously something that we observe as well. This is also something which makes us really happy, and it's also a confirmation of the very strong sustainable business case of the CDMO industry as a whole. Now you specifically asking whether this will have a huge impact on the H2 growth? I mean, as mentioned in my part of the presentation, most of the revenue for revenue recognition in H2 is now already at very advanced stages in manufacturing. So while a read across is certainly okay, this doesn't happen in the really ultra short term.

Next question is from Dominik Feldges. Siegfried is rather short of production facilities in the U.S. do you plan to change this? Marcel?

Also happy to answer that, of course, regarding the activities in U.S., of course, there are also customers long relationships, which we are having with them to now also to establish a second supply point. We have 3 sites in U.S., one for early development for drug substance. The second one also then for commercial for drug substance. And what we see, of course, customers are asking now and looking forward also to have a second supply point, which we can also offer. Of course, we are also looking, this is nothing new when we are talking about the M&A that not only due to the geopolitical situation because we were already able and looking at that 10 years ago, when one of our key customers was asking us to have a second supply point that we built up the second supply point in U.S. as well. So this is not something totally new for us, but we are also looking forward according to our M&A strategy to further expand for the right price than our network and footprint in U.S.