Grifols SA Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Deleveraging Efforts: Committed to a material deleveraging transaction of at least €1.5 billion in cash in 2023 and aiming for a leverage ratio of 4x by 2024. The China transaction announced in June is progressing, expected to be signed by year-end 2023 and closed in first half 2024.
• Revenue Growth: Q3 had strong revenue growth, with 25.1% adjusted EBITDA margin, a 480 basis point improvement from Q4 '22. Revenue growth driven by Biopharma and key protein franchises.
• Operational Improvements: Successfully executed €450 million cash cost savings from operational improvement plan, with margin expansion visible, including lower cost per liter in plasma.
• Innovation and Pipeline: Completed 9 out of 12 innovation milestones in 2023. Biotest's Trimodulin and Fibrinogen trials advancing. Appointed new leadership for innovation and digitalization.
• China Strategy: Progressing with the China transaction to support organic growth and deleveraging.

Segment Performance

• Biopharma: Drove revenue growth, with immunoglobulin (IG) showing strong sales growth, especially subcutaneous IG Xembify. Albumin also saw strong revenue growth. Alpha-1 and specialty protein segment was relatively flat but expected to improve. Cost per liter in plasma continued to reduce, with plasma supply growing at a double-digit pace. Year-to-date, revenues for the first 9 months of 2023 were over €4.8 billion, up 11.7% at constant currency, driven by Biopharma and Biotest contribution.
• Diagnostic: Revenues declined 3.1% at constant currency in the quarter, impacted by pricing concessions for a large contract, but offset by strong instrument sales in Japan and Indonesia. Blood typing solutions showed growth, while recombinant proteins had a renewed supply agreement.
• Bio Supplies: Revenues declined 14.1% in the quarter due to lower cell culture sales from subdued demand.

Guidance

• EBITDA: Revised adjusted EBITDA guidance for full year 2023 to €1.450 billion, with adjusted EBITDA margin anticipated to increase to 28%-29% in line with 2019 levels.
• Revenue: Full year 2023 total revenue growth expected 10%-12% at constant currency, with Biopharma revenue growth 12%-14% at constant currency.
• Leverage: Leverage ratio at 6.7x at end of September 2023, aiming for 4x by end of 2024.

Risks

• Regulatory Hurdles: The China transaction is subject to highly regulated environments, which could delay approvals and closing.
• Market Dynamics: Segments like alpha-1 and Bio Supplies face challenges from industry dynamics and subdued demand, respectively.
• Cannibalization Concerns: Ensuring proper commercial positioning of new products like Yimmugo to avoid cannibalization of existing brands such as Gamunex and Xembify.

Question and Answer

Q: Kind of both of them really relate to the tech transfer agreement with Biotest. Wanted to understand financial weighting of payments and commercial strategy for Yimmugo against existing IgG brands.

A: Victor Grifols Deu mentioned payments related to the tech transfer agreement won't impact consolidated cash flow materially. Thomas Glanzmann stated Yimmugo's strategy is to transition from Flebogamma to Yimmugo over time once approved in different countries.

Q: About GBP 13.7 million of restructuring charges in Q3, which line item were they booked in?

A: Alfredo Arroyo said restructuring charges like severance could go to COGS or SG&A depending on the area.

Q: On divestment plans, cause for delay in closing the China transaction and Biopharma growth guidance slowdown.

A: Thomas Glanzmann said China transactions are complex, taking more time. Victor Grifols Deu affirmed commitment to meet Biopharma growth targets, with Q4 expected to be strong but swings possible.

Q: On albumin sales acceleration and deleveraging beyond Shanghai RAAS stake sale.

A: Victor Grifols Deu said albumin sales momentum is organic and controlled. Thomas Glanzmann stated focus is on signing the China transaction and organic deleveraging to reach 4x leverage by 2024.

Q: On alpha-1 sales weakness and cash flow guidance.

A: Victor Grifols Deu discussed fine-tuning the alpha-1 business model, expecting improvement in 2024. Alfredo Arroyo said cash flow will improve, with positive trends in Q4 and beyond.

Q: Follow-up on organic deleveraging and diagnostic slowdown.

A: Alfredo Arroyo said net debt reduction will come from divestment proceeds. Victor Grifols Deu noted Q2 had an exceptional income not repeating, and diagnostic slowdown is part of normal quarterly fluctuations.

Q: On building pipeline, development strategy of products like Alzheimer's vaccine.

A: Victor Grifols Deu said open to out-licensing the Alzheimer's vaccine for Phase III. Regarding other products, open to deciding on core focus or out-licensing non-plasma programs.

Q: On capacity, CapEx spending, and minority profits.

A: Alfredo Arroyo said capacity was 60% in 2023, with next CapEx expansion in 2028. Minority profits can be extrapolated to €100 million per year.

Q: On funding Alzheimer's vaccine Phase III and EBITDA guidance consensus.

A: Victor Grifols Deu said open to out-licensing the Alzheimer's vaccine. Alfredo Arroyo said comfortable with using the €1.75 billion adjusted EBITDA as a base for future guidance, considering cash savings.

Q: On Shanghai RAAS deal regulatory hurdles and cash realization.

A: Victor Grifols Deu said confident of signing the China transaction by year-end, with closing in first half 2024. Alfredo Arroyo confirmed cash proceeds from the transaction will be used to reduce debt.

Q: On Shanghai RAAS shareholding, Xembify growth, and guidance risk.

A: Thomas Glanzmann said details of Shanghai RAAS shareholding will be disclosed upon signing. Victor Grifols Deu noted Xembify's growth increasing its mix in IG portfolio. Alfredo Arroyo said Q4 is expected to be strong, with risk to guidance upside.