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

Welcome from Zofingen. Thanks for having joined this webcast. I think it goes without saying that we are truly excited to be here and to talk to you about this transaction. It has been in the making for a long time, and we are really looking forward now to share some more details with you. We will have a short presentation followed by a Q&A. So with that, Marcel, over to you.

Good morning, everybody. Happy to meet you, to talk with you, and I'm really, really truly excited about this accomplishment that we have the deal now. It took some time, but for Siegfried, it's really a big step forward. And I would like to share with you some insight what does this mean for Siegfried and what are the benefits and why is this target so important to us. First of all, I think it's a compelling manufacturing capacity at a very attractive price. We will come later on and also Reto will be in there as well to share with you more insights. We have signed a binding agreement for the 2 sites in U.S.A. and in Australia. And of course, for us, this was a target which we really want to have because the U.S. market is absolutely crucial. It's growing and also with the current environment, the key market for us to expand. And I think also here, it took some time, as already outlined, but this will definitely change our footprint in U.S. because we are really passing now the critical size in U.S., local to local. Also due to the strong balance sheet, what we have, we will finance through existing and new debt instruments. Also here, Reto will give you a little bit more insights related to that. However, I think as always, and I'm saying for Siegfried, sometimes we are a very boring company because it's the same deal like in the past. We went for a value-accretive acquisition. And also the price already what I can tell you is really in favor of us according to the target. But even more important, we don't have any dilution on the bottom line. So no dilution for our existing EBITDA. Now also to make the link back to our strategy, as you know, and also the market trends. We were reviewing over the last years, not only months, what's the current setup, especially for drug substance small molecules. I highlighted that also in the past that there are not many targets available or also locations in U.S. to fulfill this new demand, which is coming through. When I was listening also to our biggest customers, they were asking me over the last months, especially since the last -- over the last 12 months, can you further support also capacity out of U.S. for U.S. And as you can see at the right side, constrained supply. There are just 15 large-scale chemical CDMO sites in the U.S. And believe me, not many of them are in a good state. So status and for us was really important to find the right one. Of course, you can also read and hear that many greenfield expansions are going on. However, this will take a long time. So we have really a time slot over the next 6 years to jump in and to be the supplier, the preferred supplier for the U.S. market. And it's in line. So still ongoing outsourcing trend in the pharma industry is ongoing, as already shared with you in the past and especially for the small and midsized pharmaceutical company, they need to have a service provider who can provide the full service from early development up to commercial. Siegfried is one of maybe 5 CDMOs who is able to provide this. About the 3 sites, the locations which we bought. We started several months ago. And believe me, it took a lot of time, but also to do a proper due diligence. I was already last April in Wilmington to visit the site to see the assets because assets are absolutely crucial if you want to expand the exclusive business. And what I saw there was really a strong -- a good site with very proper assets in a good condition. And also, of course, due to the fact that prior to SK Capital to Noramco, this site and this location was also belonging to a big pharmaceutical company, which is called J&J. This means process in place, which is crucial, well maintained, highly automated. And this was also then for us, really important to see this is fit for purpose for the exclusive business. There, we have 3 product families, the addiction treatment and preventation, the ADHD portfolio as well as the pain management. The site has approximately 185 FTEs as already outlined high quality and a multipurpose site, which is familiar with all needed and common synthesis, chemical synthesis that what we need to have to provide the service to our customers. The second site is Purisys in Athens in Georgia. Strong people, which I met there as well, strong chemists, which are really in favor to do early development activities, clinical and small-scale manufacturing, and they are really focused and specialists in highly regulated compounds and especially also for niche products. Also here, they are working currently 45 FTEs. It's complementary to the Grafton site and it's not somehow in competition with Grafton. This is also important because Purisys is even stronger at the early phase compared to Grafton. Grafton is than in Phase I, Phase II, the site to be. The third one is the Extractas Bioscience facility in Tasmania and is one of the leading manufacturing of purified products. Here, we are talking about approximately 170 FTEs. And for us, the benefit is really the backward integration. This is increasing the resilience of the supply chain. Overall, on top of the assets, which are really good, really great, I was meeting strong people, people which were already also working for 10 years ago. People are really entrepreneurs. People are hungry to move the needle and to go together with the Siegfried family for a bright future and to develop the business overall. Now what does this mean? I think overall, the business what we have there is really stable. Moderate growth, not a risk, no hiccups but a moderate growth. Also, it's somehow a safety and a secure portfolio what we will take over. We are familiar with that, also due to the fact that we have in Pennsville, some similar products there as well. The proximity of Wilmington and Pennsville is absolutely crucial for us as well. Why? Due to the fact that they are just 20 minutes by car away from each other, we can really get out some synergies. And also from the knowledge point of view, this will help us then also to optimize the portfolio for both sites. And of course, on top, what we are looking forward then is really to repurpose for innovative products, Wilmington because the capabilities which we have there and also the site with the assets will be a differentiator also for our customers for the U.S. supply. Athens and Grafton already outlined. This is to form the best-in-class acceleration hub, what we are calling. So Grafton is the acceleration Hub 1.0 and then Athens 2.0. So overall, this is really a complementary and a comprehensive offering what we can now really start from early phase development up to commercial then for the rest of the sites. We will fill further the pipeline for innovative products. We see the demand. We are moving really nicely forward, increasing our pipeline also with early development projects as well. Now we are passing the critical size. We have now 5 sites and close to 700 employees, which is roughly 20% of the entire organization of Siegfried, which is great. And of course, we are also looking then in U.S. to go for regionalization as well to further gain synergies in the near future. Now about some multiples and financial insights, I'm handing over to Reto.

Thank you very much, Marcel. Very good morning to all of you. Let me add some technical details to this transaction. I will cover valuation, of course, profitability, the time line and of course, also a few technical details on financial impact on 2026 and also beyond and a few considerations on how we will finance this acquisition. On valuation, Marcel mentioned this, we will be able to acquire this business well below recent expectation for U.S.-based assets. And that's just great. We did it once again. This means that the highly selective disciplined approach to M&A will just -- has just been well confirmed today. In the graph to the left, you see a few data points, all referring to enterprise value over EBITDA. Firstly, our own trading multiple, somewhere between 13x and 16x. In the middle, you see recent sellers' expectation for U.S.-based assets. These are assets which we have considered ourselves. Some of these assets have been in the press, so you can Google for them, CDMO U.S., for example, in the FT. And then lastly, you see the valuation that we have now paid and will be paid for this acquisition at hand, well below 10x. Again, disciplined and value accretive. Obviously, why did we pay 10x? Marcel mentioned that it's a stable portfolio, and that's the price that you pay for that. Now obviously important, we are now in a really unique position to extract value from this transaction. We can optimize the portfolio between the very proximity sites of Pennsville and Wilmington. We can free up capacity in Wilmington and then allocate that free up capacity, which, as mentioned by Marcel, is in very high demand to valuable innovative compounds in the U.S. That's immediate. On profitability, not dilutive. The acquired business trades ahead of Siegfried currently. So we have an immediate impact on profitability on the Siegfried Group, and it will not be an adverse one. Now on timing, that's an important one. The closing is subject to some closing conditions, and we expect to close it later in the year. We don't know exactly when this is going to happen. The revenue and profit clock for Siegfried starts at closing. So the earlier we close, the higher the revenue and profit contribution for 2026. That, of course, also has an impact on how we will provide financial guidance for the financial year 2026. So on February 20, when we present the '25 numbers, the transaction will most probably not yet have closed yet. This means that we will guide at that point in time for 2026 without the acquisition impact. And then once the acquisition has closed, we will adjust the guidance to include the acquired business. On financing, we have a strong balance sheet. So we currently expect to finance using existing and also new debt instruments. The selection has not yet taken place. It's too early. It will, of course, you know us follow strict commercial criteria and we'll also consider the state of the debt capital markets, had a really good start into the year, so that makes us very confident. Then lastly, the financial impact. How much net sales is this acquisition going to add to the Siegfried Group? Our best guess as of today is that the acquisition will add approximately 10% of current net sales to the group, and that's for a full year. You must consider that Siegfried and also the acquired entities were clients of each other prior to this transaction. This means that after closing, some revenues on both ends will become internal revenues, while the profitability is capped. And for the avoidance of doubt, the 10%, which I gave you already considers this effect. And again, for the contribution to 2026, this very much depends on the point in time of closing. So I'm excited about this acquisition. It's, I think, at par with BASF in 2015 and the acquisition of the 2 drug products manufacturing sites from Novartis in Spain in 2021. Back to Marcel.

Thank you very much, Reto, for explaining where we are compared to the expectations and also to share that this is really a highly accretive deal. Now to bring that back to the strategy, I think, as already outlined, still one of our top target was to grow in the existing core small molecules, drug substance product. Here, we are talking about drug substance. And especially the opportunities for us currently are even higher in drug substance in -- for U.S. That's the reason why also I'm so happy that we made the deal. Independent of that, you never know also, I think the strategy overall is still valid. And of course, we have the opportunity now to grow the network in U.S., which is absolutely crucial for the demand, what we are looking forward. So that's in a nutshell. I'm totally happy. We are happy, excited about this deal. And now let's go for question and answers. I think there are quite a lot, I believe.

Thank you, Marcel. So we'll now start with the Q&A. [Operator Instructions] First question is from Laura.

Maybe the first one is on the Wilmington site which is 150 cubic meters of capacity, can you please give us an idea on the current capacity utilization you have there? Also on the current profitability with today's portfolio. So is it above like the average for the transaction? Or is it rather maybe below it? And then also, thirdly, if you could provide us more details on your plans and time lines for on the repurposing towards more innovative products?

Yes. I think overall, first of all, the utilization is quite highly utilized. Wilmington, of course, we still have some capacity available. However, we need to combine that and do the reconciliation then with Pennsville we have opportunities. So really to optimize there. And we will free up some quite significant reactor volumes overall for the exclusive business with both sites. So we are talking about roughly 80 cubic meters, which we will have available for our customers. To the second question about the margin, I think already outlined by Reto. So this is in line, in sync with our margin as well. So no dilution with the existing portfolios, there is no hope or any synergies already in. So really straightforward. And I think the third question -- Time lines, yes. I think it depends also how fast we can close the deal. However, we can start immediately when we are talking about to win additional products or also customers, this can start immediately because you are starting anyway first with the tech transfers, method transfers, and this will take anyway 1, 2 years. So I think the impact should be visible then in 2, 3 years, which will really support in our P&L. On top of the existing portfolio and revenue margin, what we are getting there.

Next question is from Charles Weston.

On the -- across the whole of the sort of Wilmington site, how much of what they do is controlled substances? It kind of looks like all of it. And does Pennsville do controlled substances? And does that make it sort of harder to move products from one to the other? That's my first question.

Yes. I think, yes, because we are customers for each other as well. So we know Noramco very well, Wilmington site, and they know us also very well. So we really know what they are doing and they know what we are doing. So there is also some overlapping. That's also why we are looking forward also to optimize overall and we are talking about the product portfolio, what's currently in there. So it's ATAP, the addiction treatment and fermentation in there, the ADHD and the pain management, what they have currently. But also now we figure out or we have, of course, already planned what we want to put, what kind of products in Pennsville and then also for the future in Wilmington.

Okay. And one other question, please, in terms of costs, from a P&L perspective, what would -- what should we expect from a cost synergy perspective? And from a capital cost perspective, how will this change your capital investment strategy or kind of expectations for the next few years?

Yes, Charles, I mean the value potential, the value creation potential clearly is in the repurposing of the Wilmington capacity for innovative business. That's by far the largest lever. Of course, as the 2 sites are really close together, there will be a little bit of opportunities, but that's not the value levers. In terms of CapEx, we have done the plans, what we will need for the Wilmington site. And as Marcel has mentioned, this is a site which is up to date from an investing point of view. So there's no significant catch-up CapEx needed to bring that up to speed. It's already basically good to go. Next question is from Fynn.

So I have a follow-up. You said that the margin profile is pretty much in line with the group, and then you spoke about a stable portfolio. So does that mean the current portfolio is not growing in the 3 sites that you have acquired and it will only really start to grow once the tech transfer is done that you just mentioned, so in 2 to 3 years' time? This would be my first question.

Very good question. I think, yes, there is a growth, but it's not a significant growth. So I think it's a moderate growth between low single digit, mid-single digit. That's what we see in the portfolio also in the analysis. By the way, it was not a big deal for us to do because we know the portfolio and the market very well. Why is it so stable? Also, you need to know that you cannot import this kind of drugs to U.S. It's just local to local. So also from the competitive point of view, this will be not a big change. So this is also why we somehow or this business is protected also from the external companies outside of U.S. Now I think for the 3 portfolios which we were talking about, we have the ADHD, there is quite a nice growth in the upcoming years, what we see. And then we see for the ATAP, this is a moderate growth and a little bit declining in the pain management overall, in reconciliation, it's a moderate growth, so which is good. But this is just one part of the benefits what we are looking for. The more important one is then to gain the new access for the exclusive business in the U.S.

Okay. That's very helpful. And frankly, I'm a bit surprised that you say the utilization is actually quite good. It's not going to be margin dilutive to the group. There's also no major investments required. So then I'm wondering, frankly, why could you acquire the site at such an attractive price?

Very good question, Fynn. This is also the secret of success why we were able to make that happen and also with such a multiple. I think there were more potential buyers in there for sure. However, due to the fact that the market is protected, you need to keep at the end as a new owner of that the supply for these drugs. And this was unique. Siegfried was most probably the only one could offer this. That was the unique pro for Siegfried.

Okay. That's very helpful. And sorry, one last one, just briefly on the 10% of group contribution in terms of revenue that you mentioned. Can you help us with at what utilization sort of the 3 sites sit on average? Because in the past, I think with the Novartis sites, the utilization was likely a bit lower. So is it close to optimal utilization already? Or how much more room would you see there to increase it further?

Yes. I think for the U.S., we still have 20% potential growth opportunities, but also here, this is not the end. So that's exactly why we have a big opportunity to optimize that then with our site in Pennsville. And for Australia, we are very -- what we are looking for really high utilization. So also the demand is for 2026 is already sold out.

The next question is from Daniel Jelovcan.

Okay. Great. Also congrats, very nice deal, obviously. So first question is this Noramco also acquired the drug products business from Cambrex. So I guess this is not included, obviously, but -- and it is the same facility. So -- or maybe not, so then it's totally irrelevant.

Maybe let me answer the first question, Daniel, Danny. Halo is not part of the deal. So this will belong still to SK Capital. So it's really just the drug substance and not the drug product setup.

And not the same location.

Yes. They are in total different locations as well, Danny. So it's really...

Yes. That's great. And the other question is, if I look at the Internet of Noramco, the facility looks quite different versus a normal small chemical facility. And I know the chemist, but I mean, all these treatment ADHD and so on, is that a different approach versus your normal advanced small molecule? Or so in other words, I mean, you mentioned it will take some time to repurpose. But I mean, how easy is it? I mean you have to change a lot the reactors or the setup or software or whatever. That's the question.

No, Danny, short and simple answer is no. It's exactly the same approach with the reactors, so stainless steel, Hastelloy reactors, [ Monel ] reactors. So it's exactly the same. And also what I was sharing already, we can all -- we can run all common chemical synthesis what we are doing in already all other locations as well. So there is not a big investment to come back also with CapEx. There are small changes maybe to optimize that, but from the CapEx point of view, it's not relevant, what we're looking for. And we are in a position really to gain immediately customers with new products. But we are optimizing then, of course, due to the some overlapping stuff then with Pennsville that makes sense to make sure that we have the best place, the best trains and reactors for each of the process steps of products.

Last question is all these 3 product families in Wilmington, which are probably rather low growth, as you said, I mean, do they disappear over time or in favor of more growing newer molecules? Or how can we expect that going forward?

I think they will not -- for sure, I think the supply needs to be given also to the U.S. patients at the end. So this will not disappear at all. for sure. It's, as already outlined, just a moderate growth, and we can absorb that. But with the combination and the proximity with Pennsville, we can gain much more out. So I think at the end, it's not only Wilmington, which will get the benefits also our existing Pennsville site will get also quite a lot of benefits on top of it due to the optimization step.

The next question is from [ Sibylle Bischofberger Frick.]

Congratulations also from my side. I get the feeling that the focus was very much on Wilmington. But therefore, my question on the Tasmania site. For me, it's -- when I think about the M&A for Siegfried, it's not the first, I think what you did there. Could you say something about it? Was it only a deal for 3 sites? That's why you took Tasmania just to get Wilmington?

No. I think overall, maybe to elaborate a little bit on Purisys as well as on Extractas in Tasmania as well. Thanks for your question, Sibylle. I think on Purisys, I was meeting their really strong chemists, and they are doing very nicely also development projects for many customers in U.S. But of course, I think due to the fact that they had also some restrictions and limitations from the capacity point of view, I think we can really now free up the full power of Purisys and on top then together with -- in combination with Grafton, what's already part of our Siegfried family. So here also, I'm looking forward, this will also help us as well for the future, not directly to -- by this site to develop our P&L, however, to fill the pipeline for all other drug substance sites in U.S., now Wilmington and Pennsville, but also for the European sites as well. And by the way, also [indiscernible] was from the culture. When I was meeting these people, the key people in Wilmington, in Purisys but also in Tasmania, these people are really entrepreneurs. They were talking about EBITDA and so on what's not always covered with the big pharmaceutical companies, the colleagues there. very often they are talking about operational income, but not really directly linked with the EBITDA. So I think also from the culture point of view, this is a perfect fit for Siegfried, and I'm really happy to welcome these people quite soon. To go back to the question to Tasmania, I think this is really beneficial for us as well to have the backward integration. So also we have the resilience and especially also over the last 2, 3 years, there were quite a shortage also on this kind of product. So we know what we are talking because also this site in Tasmania is one of our suppliers and we saw that the demand was so high, it was quite difficult to get also the volumes which we had -- which we were looking for. So also, it's not just that we had to take over the Tasmania location to get Wilmington or also the 2 U.S. sites. It's also a very good fit for Siegfried as well. I was also there. So I was prior to Christmas in Tasmania. It was quite a long flight, believe me. But also interesting to see that it's also chemical, it's chemical extraction. So it's not something absolutely new for us. So we are also familiar with this technology and this method as well.

And the other question is about the deal. It seems that you had -- you paid a very interesting price. So does it mean that goodwill intangibles are lower than normal deal? And could you say something about the whole amount and how much would be goodwill intangible and property, plant and equipment? Or do we have to expect or wait for the annual report where you have to mention it anyway?

Well, it's a fair question. A little too early as we have only signed the deal now. And obviously, the exact figures will depend on the point in time of the closing and the state of the target, also including net working capital, et cetera, at the point in time of the closing. From today's perspective, we do not expect a bad will, rather a bit of goodwill. How much this is going to be, we will see. And we will then, of course, provide transparency and disclosure in the 2026 financial report, which -- and on the way there, of course. Today, it's still a bit early for this question to be answered exactly. Next question is from Ed Hall.

Just first one, again, back on Wilmington. And could you just tell us a bit more about the repurposing? I'm curious about sort of licenses that you may need to add or capabilities you may need to add? And then maybe just going a bit further, I mean, have you had conversations with clients? Would this be sort of in your eyes in the next 2, 3 years? Would this be internal transfers from Europe to U.S. or incremental contracts? A bit of scope there would be really, really helpful.