Euroapi S.A. (EAPI) Earnings Call Transcript

Hello, and welcome to the Euroapi conference call. My name is Melissa, and I will be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I'll now turn you over to your host, Sophie Palliez, Head of Investor Relations. Please go ahead.

Thank you. And thank you, all of you, for joining us. Today with me are Karl Rotthier, Euroapi Chief Executive Officer; and Antoine Delcour, Euroapi Chief Financial Officer. As just mentioned, this conference call will be recorded and a replay will be available on the website. We will start by a very short introduction from Karl and then open for a Q&A session. I would like to hand it over to Karl. Thank you.

Thank you very much, Sophie. So good evening, everybody, and thank you for joining us on this call on such a short notice. Our goal today is first and foremost, to answer your questions following the press release we just issued. However, I would like to introduce this call with a short summary. As mentioned, the Board of Directors met today to review the full year 2023 results forecast. The forecasts show a lower-than-anticipated top line growth for the balance of the year, impacting our objectives for the full year. So hence, leading us to revise downward guidance. Net sales are now expected to grow between 3% and 5% compared to the 7% to 8% previously. The core EBITDA margin is now expected to stand between 9% and 11% compared to 12.5% to 13.5% previously. The CapEx guidance remains unchanged between EUR 120 million and EUR 130 million. Why is that? The slowdown of the full year 2023 net sales growth is driven by both API Solutions and CDMO activities but yet of different reasons. For API Solutions, our price optimization strategy has recently been impaired by a change in the market environment. In fact, we see now more pricing pressure resulting from lower overall inflation, as well as inventory reduction programs implemented by some of our customers also called destocking. For the CDMO activities, net sales are expected to grow at a slower pace than anticipated due to weaker sales recognition than expected in Q4. As mentioned already in earlier calls, we are impacted by the biotech funding crisis, which accelerated during the last couple of months. In 2023, the revenue of more than 20 projects has been delayed, which means a delay of start of activities, a reduced scope of activity, or a stop of programs. This slower than expected topline growth impacts also our core EBITDA margin with less favorable fixed cost absorption than initially anticipated and an unfavorable margin mix for the balance of the year resulting from the slowdown of the CDMO business. It is yet too early to comment on the full P&L and free cash flow. But however, let me emphasize that this guidance revision does not at all impact the company's financing capabilities in the short term. Based on these new and revised targets, we have decided to conduct a thorough strategic review of our operating model and to suspend our midterm objectives and guidance. We intend to provide information on the outcome of the review on the 29th of February at the latest. So this was my short introduction, and Antoine and myself are now happy to take whatever questions that you might have. Please feel free, operator, to ask for the questions.

[Operator Instructions] Our first question is from Zain Ebrahim of JPMorgan.

Zain Ebrahim, JPMorgan. I've just got a few questions if I may. My first question would just be on revenues and the guidance cut there for 2023. How should we think about how much of that guidance cut is sort of due to the weakness you've seen at API Solutions versus the changing environment you've seen in CDMO? And maybe if you could elaborate on the CDMO weakness that you've seen with the biotech customers in particular. How much visibility do you have on these customers and based on the contract wins you've had previously and visibility now, how much visibility do you have over 2024 revenue for biotech customers? Would be my first question. And then my second question would just be on the core EBITDA margin guidance which gone to 200 [ reps ] wide at 9% to 11%. So just wanted to understand what the differences between the top end and the bottom end. And I think the exit rate implied is maybe high single digit margin for the second half. So is that the sort of margin we can think about as a starting point for 2024? And what other moving parts you just think about for 2024? Would be second question.

Okay. Zain, thank you. Thank you very much for your questions. I will let Antoine in a second come back to the core EBITDA question and the range of 9% to 11%. Your question first on the API Solutions, the revenue for 2023. So what we see indeed and don't forget that we come out of an entire situation where we almost 1.5 years ago, were confronted with an energy and raw material price increase, which we were able to pass through to third parties and partially passed through to Sanofi. We made that very clear in earlier calls. Now we see also, and that is very recent, that the market is changing in this environment leading to a lot of customers who are now destocking and off-taking lesser volume, which leads then indeed to price decreases. As well that we see indeed with some customers coming on in the API Solutions, which, of course, has a higher turnover than the CDMO projects that we were referring to because these were primarily projects coming from preclinical Phase I or Phase II, which are traditionally at a slower pace than the API Solutions business that we have. For '24, that is too early to tell because that's why actually we are initiating this strategic review. We really want to make crystal clear whether the changing market trends that we currently see is there to stay, is there going to continue? How long will it continue? And then in the end, based on these different scenarios that we are going to have developed, what is then the right adaptation for the company and its organization. So that's why it is now a little bit too early to talk about '24 revenues of biotech companies and the funding issues. We really want to have an in-depth analysis and a strategic review. Then on how long will it last and what do we need to do to adapt? Core EBITDA range from 9% to 11%, Antoine.

So as explained earlier by Karl, what drove this change in core EBITDA guidance for the end of this year was price pressure coming from the market on API Solution plus a negative mix with lower contribution of CDMO activity and also the timing of the year give enough time for us to adjust, I would say, our cost baseline accordingly and which impacted also cost absorption. So it doesn't mean that this will be a flaw for the upcoming years. It's still work in progress. It'll depend also on the mix of the sales we'll have in H1 and for next year. And so, we'll communicate to you what will be our guidance as early as possible.

Our next question comes from Gary Steventon of BNP Paribas.

So firstly, just on the revised top line outlook, just conscious that most of what you manufacture probably has lead times in excess of a few weeks. So now we're in October. I guess you should have good visibility on the sales you expect to book for 2023. So given you've still got that 2 percentage point range on the sales outlook, can you just help us understand kind of where you still see risks, which could impact where you end up within that range? And then secondly, you suspended the midterm outlook and there'll be the strategic review to adapt the operating model. So what does that mean for the ongoing capacity expansion projects you have, and particularly the peptide oligo capacity in Frankfurt is due to come online in 2025. So is that something you still remain committed to and have confidence there'll be demand for when that comes online?

Let's start with the second question. Yes, we are indeed fully committed to that, that this, of course, did not change at all. The lead time, 3% to 5% or the growth of 3% to 5%. What we also currently saw, and we have already some initial vision on that is that the market growth in the API business where we are active in our portfolio is indeed only growing at a 3% to 4% range right now, which we, in the beginning, did not see, but now it's coming clearer because of these market circumstances that changed coming out of a period where the focus was fully on the price increase. Hence, we are indeed here more conservative on also our prediction of growth for the portfolio of 3% to 5% going forward as well.

And what I would say to answer to complete -- Antoine speaking, about your question, I guess, for the products we're producing, we have good visibility on PO and delivery time. But as we mentioned on the CDMO part of the business, because of the financing of the biotech, we see some delay of startup activities and so on, which could impair our capacity to deliver top line growth. And this is the reason why we kept the range 3% to 5% as one other reason in order to be also cautious on this aspect.