Grifols SA Q4 FY2023 earnings call

Management Statement and Operational Highlights

• Corporate Governance: Strengthened governance by separating ownership from senior management. Appointed Nacho Abia as incoming CEO, to assume role on April 1. New appointments in key leadership functions. Focus on best-in-class governance, simplifying structures, and enhancing capital markets communication.
• Financial Performance: 2023 was a record year with EUR 6.6 billion in revenues, EBITDA of EUR 1.47 billion (26.3% constant currency growth), and an EBITDA margin over 26%. Executed an operational improvement plan yielding over EUR 450 million in savings. Operating cash flow improved by EUR 300 million vs 2022. Leverage ratio decreased to 6.3x.
• Plasma Supply: Plasma volume increased over 10% in 2023. Cost per liter of plasma decreased by 22% from the peak in July 2022. Implemented operational improvements with initiatives to further optimize yields and manufacturing operations.
• Innovation: Pipeline includes over 30 clinical trials. Successfully met 12 innovation milestones in 2023. Announced positive results from Biotest Phase III clinical trial for fibrinogen concentrate, positioning for regulatory approvals.

Segment Performance

• Biopharma: Achieved all-time-high revenues of EUR 6.6 billion in 2023. Biopharma revenue grew 13.3% at constant currency. The IG franchise was the main revenue driver, representing 55%-60% of total revenues with a 15.8% constant currency growth in 2023. Subcutaneous IG Xembify saw nearly 40% growth. Albumin had 17% year-to-date revenue growth, including 40% growth in China. Alpha-1 showed 2.4% growth in Q4 2023. New products like fibrin sealant, thrombin, and Tavlesse demonstrated substantial growth.
• Diagnostics: Fourth-quarter revenue increased 6.4% at constant currency. NAT technology was impacted by pricing concessions, but Asia Pacific revenue and instrument sales in Japan and the U.S. were positive. Achieved tender wins and partnered with the Australian Red Cross for a fully automated NAT testing facility. Blood typing solutions had strong growth in multiple regions.
• Bio Supplies: Recorded a full-year growth of 11.3% at constant currency. Driven by higher demand from existing customers, new customers, and the Access Biologicals acquisition. Underwent commercial and operational consolidations.

Guidance

• Revenue: Expected to grow over 7% at constant currency in 2024, driven by Biopharma (8%-10% constant currency growth).
• EBITDA: Adjusted EBITDA expected to reach over EUR 1.8 billion, with like-for-like of over EUR 1.850 billion and a margin of 27%-28% excluding Biotest. Impacted by operational savings and commercial efforts to regain accounts.
• Cash Flow: Expect cash flow generation to accelerate, with focus on deleveraging. Leverage ratio target below 4x, considering proceeds from the Shanghai RAAS sale.

Risks

• Regulatory Uncertainty: Pending Spanish regulator review following the Gotham report, but Grifols has responded to questions and is awaiting the regulator's decision.
• Market Competition: Potential competitive pressures in markets like the IG franchise and alpha-1, requiring strategic responses.
• Biotest Impact: Biotest will continue to be dilutive to margins until 2026-2027 when new products launch.

Question and Answer

Q: When can we be more confident Spanish regulator won't escalate after Gotham report?

A: Grifols responded timely and completely to regulator questions, awaiting the regulator's decision.

Q: Ballpark free cash flow expectations for 2024?

A: Expected to be around breakeven, impacted by interest, taxes, and CapEx.

Q: Status of Shanghai RAAS deal?

A: Due diligence concluded, closing in the first half of 2024, proceeds to repay debt.

Q: Cost savings targets for 2024?

A: New initiatives like yield improvement and Biopharma manufacturing operations expected to yield savings, but the operational improvement plan from 2023 is closed.

Q: Margin guide for 2024?

A: EBITDA margin expected to be 27%-28% excluding Biotest, impacted by commercial efforts to regain accounts.

Q: IG and alpha-1 growth outlook?

A: IG franchise strong with subcu Xembify growth, alpha-1 expected to rebound with new product launches and testing initiatives.

Q: Leverage target for 2024?

A: Expected to be between 4x and 4.5x, including proceeds from Shanghai RAAS and potential divestments.

Q: Audit opinion status?

A: KPMG expected to issue a clean and unqualified opinion by March 8, 2024, due to administrative matters.

Q: Nonrecurring items in 2024?

A: Expected around 150 million including Biotest next level, restructuring, and transaction costs.