Euroapi S.A. (EAPI) Earnings Call Transcript

Hello, and welcome to the Euroapi H1 2025 Results Presentation. Today's call is being recorded. [Operator Instructions]  I will now hand you over to Sophie Palliez, Head of Investor Relations, to begin today's conference. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining Euroapi H1 2025 Results Conference Call. The call will be hosted by David Seignolle, Chief Executive Officer; and Olivier Falut, Chief Financial Officer. We will start by the usual short presentation of our results, followed by a Q&A session. I will voice over the questions received from people connected to the webcast.  Before we start, I would like to emphasize that some of the information we will share with you today is looking forward and not historical. This information is based on projections and assumptions concerning Euroapi current and future strategy, future financial results, and the environment in which we operate. These forward-looking statements and information do not constitute guarantees of future performances. They may be subject to certain risks and uncertainties, which are difficult to predict and generally outside the control of the group, and could cause actual results, performances and achievements, to differ materially from those described or suggested.  That said, let me leave the floor to David.

Thank you, Sophie. Good morning, everybody. Before turning on to the key outcomes of our first half results, let me give you a quick snapshot of our results on Slide 4. At EUR 412 million, net sales were down 8.2% year-on-year. Sales to Sanofi decreased by 15.3%, while sales to other clients were decreasing by 2% Core EBITDA came in strongly at EUR 39.5 million, a margin of 9.6%. Consistent with our full year ambition, EBITDA was positive EUR 5 million compared to EUR 1.4 million loss in H1 2024. Finally, we invested EUR 37.8 million in CapEx, of which as per plan, 60% was dedicated to growth.  If we move on to Page 5, beyond the number, which Olivier will detail further in about a couple of minutes, and to sum up the first half, 3 words stand out for us: resilience; discipline; and execution. They capture both the challenges we face and the tangible progress we've made so far. First, resilience. The decline in sales to Sanofi reflects several headwinds. The API Solutions business includes a high comparison base in the first half of 2024 as well as a weaker sales of Sevelamer. This masked a strong momentum in our CDMO activity for Sanofi, which posted double-digit growth, underpinned by 2 major CMO contracts: Pristinamycin in Elbeuf; and PLLA, a promising API used in the skin care industry and manufactured in Vertolaye. API sales to other clients were impacted by an unfavorable phasing of Vitamin B12, which offset the solid growth achieved in opioids. On the CDMO side, the ramp-up of CDMO contract signed last year was offset by the discontinuation of several legacy projects. In line with our FOCUS-27 strategy, we continue to proactively derisk our overall CDMO portfolio.  Second is discipline. Despite the top line pressure, we have made meaningful and sustainable progress across the organization in managing costs and improving efficiency. Thanks to strengthened financial discipline, we have significantly cut back on external spending and reduced personnel expenses where relevant. What is important here is that these are not just short-term fixes. Most of those measures we have implemented are structural and long lasting. They lay the foundation for improved profitability going forward. We maintain tight control over operating working capital and remain highly selective in our CapEx investments. Once again, it's all about focusing on what we can control without compromising our ability to grow tomorrow.  Third, execution. From the outset, we knew that the success of FOCUS-27 would depend on thorough and timely execution. And today, we are beginning to show that we can deliver. The successful divestment of Haverhill in the U.K. marks a key milestone in reshaping our industrial footprint. Alongside the advancement of our API discontinuation program, these are concrete actions that are actively repositioning Euroapi onto a more focused, value-generating foundation.  Finally, as you may have seen, we are very pleased to have signed on Monday our IPCEI contract with the French government that will subsidize Euroapi up to EUR 140 million across 3 work packages that we detailed previously.  With that, I will now hand over to Olivier for more details on our financial performance.

Thank you, David. Let me start with a closer look at the evolution of the net sales on Page 7. As David just mentioned, total sales reached EUR 412 million, down 8.2% as reported, compared to the same period last year and minus 7.6% at constant exchange rate. API Solutions sales decreased by 9.8% to around EUR 300 million. Sales to Sanofi decreased by 24.4% on the back of a challenging comparison back to H1 '24 which includes EUR 21 million positive impact from the stock clearance of Buserelin. As said, the decline was notably driven this year by a 29% decrease of sales of Sevelamer, the API produced in Haverhill.  As mentioned in our press release, since the 1st of May, we have adjusted the allocation of the sales between Sanofi and the other clients, following the change in Opella majority shareholder. The impact on H1 was EUR 7 million. Total sales of Opella were EUR 31 million in H1 this year and EUR 70 million in '24. API Solutions sales to other clients increased by 4.3%, as expected. We benefited from a solid growth in opioids, offset by a lower sales of Vitamin B12 impacted by a shift of volumes from H1 to H2. The cross-selling strategy continued to bear fruit and represented approximately 8% of the total API sales to other clients in H1 '25.  CDMO sales decreased by minus 3.4% to EUR 112 million. In CDMO sales to Sanofi increased -- the Sanofi sales increased by 18.4%, driven by a robust demand of Pristinamycin and Poly-L-Lactic Acid. CDMO sales to other clients decreased by 16.7%. Performance was affected by the planned downsizing and discontinuation of several contracts inherited from Sanofi. At the end of June '25, large companies represented 48% of the 50 active projects and 60% were late stage.  Turning to the core EBITDA evolution on Slide 8. Core EBITDA reached EUR 39.5 million in H1. This represents 9.6% margin, down from 10.6% in H1 '24. In H1 '24, the stock clearance of Buserelin has impacted the core EBITDA margin by a positive 2 points. Excluding this one-off impact, H1 '25 core EBITDA margin would have increased by 1.2 points, driven by several items. First, a positive 2.2 points from price and mix, which was partially offset by a negative volume impact of minus 1.9 points, notably due to Sevelamer. Secondly, a positive 0.2 points from the sales of discontinued products, which beneficiated from the exceptional impact of the stockpiling on the absorption of fixed costs. During the semester, these products represented approximately EUR 39 million in sales, of which an estimated EUR 10 million was attributed to the stockpiling.  Next point was about a negative 0.6 points due to the industrial performance of our core manufacturing footprint. While the underlying industrial performance of the sites continue to improve, H1 '25 was affected by a temporary disruption of production in Elbeuf, triggered by a social issue. Reduced energy and raw material brought 2.1 points of margin. And the next item is around the strengthen of financial discipline. Driven by this strengthened financial discipline, the 2.4 points improvement of OpEx reflected lower personnel costs, particularly in R&D and a substantial saving in external expenditure. A significant portion of these savings are sustainable in the long-term and will support the overall improvement of the company's profitability over time.  Brindisi site weighted for 1.9 points in H1 '25 on core EBITDA. And finally, Haverhill weighted for 1.2 points. As you know, Haverhill was sold to Particle Dynamics on June 30th. The site contributes EUR 14 million in net sales and EUR 3 million in core EBITDA in H1 '25 consolidated results.  Let's move to items below core EBITDA on Slide 9, sorry. Non-recurring items totaled EUR 34.6 million in H1 '25, of which EUR 39 million of exceptionals. The vast majority of those were directly related to the execution of FOCUS-27. First, we recorded EUR 20.6 million of idle cost compared to EUR 33.8 million in H1 '24. We expected idle cost to decrease materially for the full year as anticipated. As part of the FOCUS-27, this includes notably the ramp down of the 2 workshops in Frankfurt. Second, we incurred a EUR 4.1 million change -- charge, sorry, relating to the transformation of the company and the implementation of FOCUS-27.  Finally, employee-related expenses linked to the redundancy plans announced amount for EUR 12.4 million. H1 '25 EBITDA was EUR 5 million compared to EUR 1.4 million negative in H1 2024, reflecting increase in underlying efficiencies and consistent with our objective to be EBITDA positive in 2025.  Turning to items below EBITDA on Slide 10 now. Operating income stood at a negative EUR 27.8 million in H1 2025 compared to negative EUR 33.4 million in the previous year. Net financial expenses decreased to EUR 2.3 million compared to EUR 8.1 million in the previous year as a result of the refinancing of the company in the second half of 2024. Income tax -- income before tax was negative by EUR 30 million. The bottom line net income for the semester was EUR 28.5 million loss compared to EUR 34.8 million loss in 2024.  Moving to CapEx now in H -- on Page 11. In H1 '25, we invested EUR 37.8 million in CapEx, representing 9.2% of the sales. The decrease versus last year is mainly due to phasing. 60% of this CapEx were dedicated to growth projects.  Moving now to Slide 12 on net cash evolution. We ended the first half 2025 with EUR 1.1 million net cash position compared to EUR 25 million at the end of 2024. While we continue to tightly manage the operation -- operating working capital, the increase in inventory is linked to the seasonality of the production cycle. Months in hand stood at 7.8 compared to 8.5 in H1 2024. The decrease in receivables reflects the launch of a factoring program aimed to improving liquidity and securing cash inflows. EUR 40 million has been factored at the end of June 2025.  H1 2025 DSO, which includes the impact of the factoring was stable compared to H1 2024, reflecting continued focus on cash collection. H1 2025 other current assets and liabilities were negative EUR 10.8 million. This includes EUR 18 million paid by Sanofi as part of the financing of FOCUS-27 as well as a sum of negative various operating items such as the payment of profit sharing, late invoicing of services and insurance compensation. As a reminder, H1 2024 other assets and liabilities includes EUR 17 million -- EUR 27 million variation of VAT tax reimbursement. As said, we invested EUR 37.8 million in CapEx in H1 2025. The decline versus last year is primarily due to the phasing impact. For the full year, we expect to invest between EUR 80 million and EUR 90 million, which is in line with FOCUS-27 target.  This ends the review of H1 2025 consolidated results. Let me hand over back to David.

Thank you, Olivier. Let's move now to 2025 outlook and a short conclusion before opening the floor to your questions. In light of the first half performance, we are adjusting our full year objectives to better reflect the current trends. In 2025, net sales are expected to decline low single-digits on a comparable basis versus slightly decreasing to steady, initially anticipated. The second half performance is expected to strengthen, driven by stronger HP API sales, increased CMO activities, the continued inventory buildup of discontinued API and a catch-up in Vitamin B12 volumes compared to H1. This should also be supported by further positive momentum in the Pristinamycin and PLLA sales and sustained sales in opiate and opioids.  Despite lower sales, we are pleased to reaffirm our core EBITDA margin target of 7% to 9%. In addition, confident in our ability to sustain the financial discipline that we demonstrated in H1, we now aim to be in the upper part of the range. As a conclusion, over the past few months, we have proven our ability to stay on course despite headwinds, delivering with determination. We enter the second half of the year with confidence to successfully continue our transformation and execute our FOCUS-27 plan.  Thank you for your attention. We are now ready for your questions.

[Operator Instructions] First, we have a question from Zain Ebrahim from JPMorgan.

This is Zain Ebrahim from JPMorgan. My first question is just on the '25 guidance. And it's really on the revenue side, what provides you with confidence in your expectation for a return to growth in the second half and particularly on the phasing of the highly potent API shipments and Vitamin B12 shipments and deferral into the second half? Do you see any risk that these could be deferred further by [ customers ] into '26?  And then on the core EBITDA margin side, direct expectations towards the upper end of the range. But how much of that is driven by the Haverhill divestment versus the underlying performance because that looks reasonably strong as well from the OpEx reductions that you've highlighted? And how should we think about that in the second half?  And then my second question is on the CDMO business, where you've continued to right-size the business in terms of the number of projects and continued to decrease. When do you expect the -- this right-sizing of the portfolio to be completed? And when can we expect the CDMO business overall just to return towards growth?

Thank you for the question. Look, let me give it a go and then maybe Olivier can add if needed. So the 2025 guidance, starting with your first one, we had anticipated such phasing in terms of H1 being slightly lower versus H2, and that's what we reflect today with a EUR 412 million in H1 and a low-digit decrease over the overall year. So there is no surprise for us in that specific case, and a lot of those phasing were anticipated.  Yet what gives us confidence, back to your question, is exactly how I closed the call. I think we have quite some sales that are planned and where all POs are available, and that was phased and driven by, in some cases, production that restarted earlier this year after a very low decrease in inventory last year, if you recall. And therefore, those sales will be realized in H2. And that's definitely valid for the high potent APIs, specifically prostaglandin, for example. We see continued increase in CMO activities. We mentioned some specifically to Sanofi and Pristinamycin and PLLA, where there is not only an increase in H1, but there is a strong overall performance in the year.  And as a reminder, we are investing significantly on those products as well to further fuel growth in the future beyond 2025. There are a couple of other elements. I think you called out specifically Vitamin B12 -- or Vitamin B12, we know what we sold in 2024. There was probably some inventory at the customers. That's how we feel at this stage, but we are fairly comfortable with having a full year sales of Vitamin B12 in line with 2024 numbers. So the -- yes, there may have been some shipments delayed or some inventory that we hold at this stage, but we are fully confident in Vitamin B12 to be delivered this year. We see no specific reason why we would slide those sales into 2026 at present.  If I go to your second question, still on the guidance and the core EBITDA, you've mentioned Haverhill. Yes, Haverhill is a potential improvement of the core EBITDA within H2 versus H1. We feel confident. You've called out a couple of elements that will ensure we continue to have strong momentum in the core EBITDA. I think we are confident, yet we want to be cautious and conservative in our approach and guidance here. I think we are definitely aiming for the upper part of the range that we have -- as we have said and written in the press release.  I will be pleased to share more, but we'll have to wait for the full year results. But we are confident to be able to achieve that, and we are -- we'll be very happy if we can have some good surprises at the end. But I can just give you with this that -- or leave you with this that I think the company is fully on, let's say, on with this topic of core EBITDA and EBITDA, by the way, because this is the first time we are having EBITDA positive. And everyone is working towards this objective to restore profitability, as it is the plan of FOCUS-2027.  The last question you had was on CDMO. You have highlighted couple of elements, including number of projects reducing, et cetera, et cetera. Look, I don't think I can disagree with any of your analysis. I think at this stage there is a lot happening. We are facing some historical contracts that are coming to an end, and that's fair. We are having some number of projects that are decreasing. We are seeing some RFPs that are also -- the number of RFPs coming is also decreasing, but so is our -- so is the market and our competitors. At this stage, what we are looking at is ensuring we are focusing on those right RFPs. We are focusing on those right projects where there is significant opportunity for us to be competitive and to be successful. The -- We are continuing our target to focusing on big pharmas and focusing on large values. The average RFPs that we are receiving is increasing. We are actually talking with a couple of customers of significant size or structural for Euroapi-size project. And that's where we are.  But back to various conversations we have had either in these calls or with you guys in various sessions, I think the key point is around rebuilding the commercial momentum. You are very well aware that we have brought a new Commercial Head at the beginning of June. This was definitely one of my first targets as I took office. And after a couple of months of having [ Frederic ] with us, I am very pleased with seeing the right approach, the right questioning, the right ambition. And hopefully, that will start to deliver very, very soon.

[Operator Instructions] And up next we have Fynn Scherzler from Deutsche Bank.

So the first one is on the 1H EBITDA margin. I think beforehand you had pointed us to a stronger EBITDA generation in the second half of the year. So I'm just trying to understand, has there any -- has there been any meaningful phasing impact over the year so that maybe more EBITDA has fallen into the first half than you had anticipated previously? And implied in that is, why would the EBITDA margin fall again in the second half of the year? So if you could speak about the moving parts there and sort of how the first half has unfolded against your expectations? This would be very helpful.  And then secondly, you've pointed us to the stocking impact that you have seen in the first half. What should we assume for the second half of the year? Should this be at a similar level? Or is there any reason to believe that it should be even stronger in the second half of the year? This would be very helpful.  And then lastly, also in terms of phasing, the total adjustment amount that you've seen in the first half, should we expect sort of a similar magnitude for the second half? Or is there any meaningful changes expected in the different line items?

Okay. Maybe I'll start with the first 2 questions, and then I'll leave the adjustments for Olivier versus H1 and H2. So on EBITDA phasing, well, we were -- I think we didn't see or we didn't plan or we didn't get into the year with a very, let's say, phased EBITDA impact, although we had a slightly lower H1 versus H2 as a plan. In all fairness, we came in stronger in core EBITDA that we had planned and similar to your consensus or the overall consensus was bit on this.  The EBITDA as well was positive, as you noted. I don't know if your question is very specific to EBITDA/core EBITDA, but I'll comment both. But the key point around phasing is two-fold. One, we are planning obviously a much stronger, or a stronger H2 in terms of sales versus H1, which, as we don't expect a very, very different product mix in there despite a bit more inventory stockpiling due to -- customer inventory stockpiling due to the product discontinuation. The product mix may be a bit adjusted in H2 versus H1, yet we believe that the EBITDA generation or core EBITDA generation from H2 sales should be -- I mean, should be also coming in strong.  And the second element of answer to that would be that we have seen quite some improvements in our SG&A and expenses overall in H1 as part of our plan of FOCUS-27 and additional measures we have taken over the last 6 months. Those, as mentioned in the press release and earlier in our presentation, are actually recurrent and will be sustained elements. So we don't expect any H2 moves in terms of EBITDA, core EBITDA similar to last year where it came in strongly in H1 and quite disappointing in H2. So that's why we are very confident to be able to be in the upper part of our guidance on core EBITDA. We haven't given any guidance specific to EBITDA. If you remember our call 4 or 5 months ago, I just said we will be EBITDA positive at the end of the year. Well, I'm confident in our ability to deliver that. Now we have generated EUR 5 million EBITDA at -- in H1.  On the stocking impact, we are -- there is a bit of phasing of our industrial operations in H1 after depleting or improving significantly our overall inventory in 2024. A lot of the operations just resumed in January. And you know that our process are quite long. Our industrial processes can be long. And therefore, there is a lot of activity that has been done in H1 that will be actually sold in H2. And as a result, the working capital should improve from an operational standpoint. So operating working capital from inventory will improve in H2. And even though we are not giving any guidance on the cash flows, we should be providing a better answer in H2 than we have in H1.  In terms of the adjustments, Olivier alluded to it a little bit during the presentation, but maybe you can give a bit more flavor, Olivier.

Yes. Clearly, we do not expect additional items in terms of non-recurring items. We expect the year to be with a decrease of the idle cost and globally speaking, exceptional item in the non-recurring. What occurred in H1 is the impact of the divestment of Haverhill, and we obviously do not expect such an amount in the second half. But for the rest, no significant change.

[Operator Instructions] So there [indiscernible] be no further questions over the call at the moment. So I'd like to hand back over to you, Sophie, for any questions via the webcast.

Yes, please. So, I have 2 questions from the webcast. One is about the definition of opioids. Can you please specify what APIs specifically fall under our definition of opioids? Do you want to... ?