Grifols Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 13 speakers on the call.

Operator

Hello, everyone, and welcome to Grifols conference call. Today, we will be sharing our Q2 financial results. Thank you very much for taking the time to join us today. My name is Dani Sagara, and I'm Vice President of Investor Relations and Sustainability. Today, I'm joined by Grifols' Executive Chairman, Thomas Glantzman Chief Executive Officer, Nat Chavia and Roland Vandeller, President of Biopharma.

Operator

Today's call will last about an hour, including a 30 minute presentation, followed by a Q and A session. As a reminder, this call is being recorded. All materials used during the call are available on the Investor Relations website at griffels.com. The transcript and webcast reply will also be available on the Investor Relations website within 24 hours after this call. Turning to Slide 2, I will first like to share a disclaimer on forward looking statements.

Operator

Forward looking statements are subject to substantial risks and uncertainties. They are only valid on the day of the call and the company is now under obligation to update or revise them. Grifols financial statements are prepared in accordance with EU, IFRS and other applicable reporting provisions. This includes alternative performance measures, also known as APMs, prepared under the Group Financial Reporting Model as defined by the guidelines of the European Securities and Markets Authority. Please note that Grifols Management uses APMs to evaluate its financial performance, cash flow and financial position as the basis for its operational and strategic decisions.

Operator

These APMs are prepared for all time periods presented in this document. Thomas will start the presentation with some opening remarks, and then we will transition to NACCHO's discussion on the business, the financial results for the quarter and his key takeaways following his first 100 days as CEO of Grifols. With that, thank you very much again for joining us today. Thomas, please, over to you.

Speaker 1

Thank you, Danny, and good evening, afternoon and morning to all on the call. I appreciate you all dialing in for our Q2 call. Before I turn to the quarter, I would like to comment on 2 filings. First is the request from the Grifols family shareholders and Brookfield Capital Partners to perform due diligence as a step towards potentially taking Grifols private. The Board has responded to the request accordingly to ensure that all shareholders' interests are warranted and protected throughout this process.

Speaker 1

It has established a transaction committee comprised of independent directors to oversee the due diligence and evaluate any potential future offer. The Board has retained Latham Watkins as legal counsel and Morgan Stanley and Goldman Sachs as financial advisors. The Board has also agreed on the governance of the potential buyout process, respecting the request of conflicted Board members to recuse themselves from any deliberations and decisions related to the request and potential future actions coming out of the due diligence. With the guidance of the advisers, an NDA has been agreed upon, and the due diligence process has been initiated. At this time, and I want to be clear, there is no offer, agreement or decision regarding a potential transaction or the related terms and conditions, nor is there any guarantee that Brookfield and the Reference shareholders will make an offer for Grifols shares.

Speaker 1

Any further update will be communicated to the market in due course and in accordance with applicable laws and regulations. As always, the Grifols Board of Directors and management team are committed to acting in the best interest of all shareholders, and we remain very focused on continuing to execute the company's strategy and deliver to our commitments in the meantime. We are not going to make any further comments on this matter on today's call. I thank you in advance and appreciate your understanding. 2nd is the IP filing that we announced before this call.

Speaker 1

As requested by the CNMV and after being reviewed and agreed upon with our new auditor, Deloitte, we have included some adjustments to the previous year's balance sheet and P and L as of June 30. These adjustments related to the Immunotec and Shanghai RAS transactions at the time of the acquisition back to 2020 have no material impact on the results and no impact on cash flow or leverage ratio. With this communication, the company has provided a response to all information requested by the CNMV. These updates underscore our continued dedication to working closely with regulators and auditors to fortify financial reporting. Now let us turn to the business at hand and Slide 5.

Speaker 1

Over the last quarter, Grifols has continued to deliver on its promises. From a corporate governance perspective, we have implemented all the committed and announced actions to further enhance our corporate policies and governance. With the recent changes in the Board membership, we have reorganized the committees and appointed a new Lead Independent Director, Mansarat Munoz. With her expertise and experience, she will continue to ensure Board independence, and she will act as a key liaison among independent directors, all to better serve the interests of minority shareholders. We, as a board and company, are fully committed to ensuring that we continue to meet best governance and financial practices as we move forward.

Speaker 1

As part of this, and as you know, my position as Executive Chairman is transitioning to a nonexecutive role in line with good governance practices, and I, alongside the Board and management team, stand by that commitment. With regards to the company management, Nacho has established a new executive committee, and we have added Rahul Sirvinavasan as the new Chief Financial Officer to the management team starting in September. Nacho will share more on his background in a few minutes, but we are pleased to add one of the last remaining pieces in completing our leadership team. Nacho himself joined in April, as you know, and since then, we've had a smooth handover and seamless transition. Our common primary focus has been to meet all of our commitments, execute on our strategic initiatives, deliver the financials with a key focus on free cash flow and continue to evolve the organization for the future.

Speaker 1

I also want to touch briefly on the follow-up of the closing of the Haier transaction this June, which was a key commitment from us. We are now progressing with a strategic alliance to explore all potential opportunities. We know this partnership will drive synergies by combining our expertise with Haier's innovative technologies. As part of this strategic alliance, our albumin distribution agreement has also been extended for the next 10 years with an option for a further 10 year extension. This partnership enables us to enhance our diagnostics business with Haier in China, a critical market for Grifols, as we aim to continue our expansion there, and it will also provide us with the opportunity to further leverage China's hemodeveratives market.

Speaker 1

Turning to Slide 6. On the debt management front, I would first like to take this opportunity to provide additional clarity on the company's commercial engagement with Moody's. Grifols decided to terminate its commercial relationship with Moody's as we believe that having ratings from 2 international credit rated agencies is sufficient and a common market standard. The end of this commercial relationship is the sole reason why they will no longer have access to all of Grifols' information and financials. It should be noted that Grifols has always provided all the required information to Moody's in a timely fashion as we do with other rating agencies.

Speaker 1

From now on, we will continue to work closely with S and P Global Ratings and Fitch Ratings. As we have previously stated, debt management is one of our top priorities, and we have made good progress with the €1,600,000,000 proceeds from the sale of the 20% stake of Shanghai RAS as well as the issuance of the €1,300,000,000 private placement notes due in 2,030. The completion of these initiatives clears our debt profile until 2/27, which Nacho will review in further detail later in our presentation. Separately, innovation continues to be a key priority and future engine for growth. Given this, there are 3 specific updates I want to highlight.

Speaker 1

1 is the strengthening of our IG franchise with the FDA approval of BioTest Simugo and its upcoming commercial launch in the United States. This marks a significant achievement not only for BioTest, which will have a commercial presence in the U. S. Market for the first time, but also for Grifols as it strengthened our commercial strategy in the largest plasma market. Also noteworthy is the traction ZEMBI-five, our subcutaneous IG, continues to gain on the back of a strong performance in the U.

Speaker 1

S, coupled with the commercialization in 7 European countries to date and additional ones planned for the remainder of 'twenty four. On a very positive note, the FDA recently also approved extending the label for Sembify to include biweekly dosing. The new FDA approval also covers naive patients, meaning that we are the only 20% sub QIG approved for patients who have never been treated with any type of IG product. The third update is that following the release of positive top line fibrinogen results in February, we completed the clinical study report and found the results to be extremely promising. This completion triggers the regulatory approval process, which we, as planned, will begin in the Q4 of 'twenty four.

Speaker 1

We expect to launch the product in the second half of 'twenty five, first in Europe and then in the U. S. These milestones represent significant steps on our path towards revenue growth and margin expansion. Finally, I want to reaffirm our full year 'twenty four guidance as the strong operational performance reported in the first half of the year is evidence that the company is on the right track to meet its target across all key metrics: revenue, EBITDA, free cash flow and leverage ratio. Before I turn it over to Nacho for more details, I want to recognize the Grifols team and summarize the progress that the company has made since early last year.

Speaker 1

We have further enhanced our corporate governance, restructured and delivered on the cost improvement plan, divested 20% of Shanghai RAS for €1,600,000,000 to reduce our debt, cleared the path our debt until 2/27, recruited a new CEO, made significant management changes and additions and delivered on all our financial commitments to date. Needless to say, we have more work to do, but we continue to be confident in the fundamentals of our business and the opportunities that we are executing to further improve our financials and sustainably grow the company. With that, I will turn over the word to Nacho. Thank you for your attention.

Speaker 2

Thank you, Thomas, for all those relevant updates. Hello to everyone. Today, it marks my 4th month anniversary as CEO of Grifols. And while a lot of things have happened in the last 120 days, as we promised in the quarter one call in May, we have been able to focus on business execution and achieve the goals we set for the Q2 of 2024. I'll explain more about it in the next slides, but first I'd like to provide an update about the leadership team.

Speaker 2

As part of our efforts to reengineer the leadership structure for more effective execution of our priorities, we have streamlined Grifols Executive Committee, which is now comprised of a combination of some external senior executive and some seasoned professionals from within the company. This executive team, which is now by now completed, includes the Presidents of Biopharma, Plasma and Diagnostics, along with the Chief Corporate Affairs and Legal Officer, the Chief Industrial Service Officer, the Chief Human Resources and Talent Officer and the incoming Chief Financial Officer. Regarding the corporate finance function, as Thomas mentioned, we are pleased to welcome Rahul on board. With his recent role as Head of EMEA, Leveraged Finance and Capital Markets at Bank of America in London, Rahul brings extensive experience in senior finance leadership. His expertise expands advisory services, global capital market, risk management, financial planning and analysis, compliance, governance and audit.

Speaker 2

Rajul will play a crucial role in implementing effective cash flow strategies and driving our debt management plan, 2 of the company's two priorities. To complement and support the senior executive team, we have established as well an extended executive committee that includes other key functions that will work alongside the executive committee to further enhance Grifols' value, mission and strategy. These two groups will become paramount to the definition and implementation of our strategies moving forward. And I'm very pleased with the caliber and talent of the team that we have assembled. Turning to Slide 9.

Speaker 2

Our Q2 performance was strong and supported the delivery of a solid first half start to the year. Given this, as Thomas shared, we are reaffirming our full year of 2024 guidance. In terms of revenue, we reached €1881,000,000 in the 2nd quarter, bringing the first half to almost €3,500,000,000 This represents on a constant currency basis an increase in sales in Q2 of 9.3% versus previous year and a 7.5% in the first half of the year. Adjusted EBITDA stood at €441,000,000 this quarter with a margin of 24.2 percent, which led to an adjusted EBITDA of €791,000,000 for the first half of twenty twenty four, which represents a 22% increase of EBITDA value versus last fiscal year. These results aligns well with absolutely priority for me and for the company.

Speaker 2

And with that focus, in the Q2, we have generated €57,000,000 of positive free cash flow. This was mainly driven by improvements in EBITDA and working capital, and we will provide a more detailed analysis of free cash flow in a later slide. Finally, our leverage ratio as per the credit facility declined to 5.5 times, driven by the combination of EBITDA improvement and the €1,600,000,000 cash inflow from the Shanghai RAS divestment. Without including these proceeds, our liquidity improved to €950,000,000 with cash on hand of €565,000,000 All told, we remain confident in our continued progress and anticipate improvement across key financial metrics throughout the remainder of 2024, like with the guidance we provided in February and reconfirmed in May. Diving into the specifics of revenue across all business units.

Speaker 2

As mentioned, total revenue grew by 7.5% in the first half of the year, with a strong second quarter growth of 9.3%, both on a constant currency basis. Biopharma results were just short of 9% growth in the first half of the year, and I'll provide some more details in the next slide. This acceleration of revenue growth has been supported by a strong double digit growth of ex USA markets and a steady progress in the USA. The Diagnostic Vision division delivered a positive second quarter with an increase of 1.2% on a constant currency basis. With Blood Typing Solutions and in Monase donor screening as the main drivers.

Speaker 2

This partially offset the negative growth reported in the Q1 that was due to one off settlement impact in the Q1 of 2023. Excluding this impact, Diagnostics would have grown close to 2% on a constant currency basis in the first half of twenty twenty four. Finally, biosupplies delivered a strong performance in the 2nd quarter, leading to an overall growth of 33% on a constant currency basis in the first half of 2024. Biopharma continued to drive growth in the second quarter with just short of 9% constant currency increase in the first half of twenty twenty four. Immunoglobulin was the highest growth protein, up 13% in constant currency versus previous year, due to a strong IVIG demand and increase in subcutaneous IG traction in the U.

Speaker 2

S. And Europe, with a remarkable 60% increase. Our subcutaneous IG, Schmv5 remains a key lever in our product mix and continued EBITDA expansion. Albumin saw close to 10% growth on a constant currency basis, driven by higher demand in China and in the U. S.

Speaker 2

Meanwhile, Alpha-one and Specialty Proteins revenue were flat, mainly due to some delays in the transition of the Alpha-one specialty pharma distributor in the U. S, which is expected to bear fruit starting at the end of 2024. Switching to a new specialty pharma distributors will enhance the value proposition for our Alpha-one antitrypsin deficiency patients and will drive revenue growth over time. On the plasma front, plasma supply continued to increase compared to the same period in 2023. And we optimized our inventory levels through the management of our network of more than 390 plasma centers globally.

Speaker 2

In parallel, the cost per liter has stabilized compared to the Q1 of 2024 after declining by nearly 25% from the peak in July 20 22. Finally, as part of our continuous improvement initiatives, we are working to enhance efficiencies in plasma and manufacturing yields and to advance our digital technologies to improve the donor experience. Thanks to the solid top line growth and supported by operational efficiencies, our adjusted EBITDA stood at €441,000,000 this quarter, with adjusted EBITDA margin of 24.2 percent, up 2,850 basis points versus the Q2 of the last year. This led to an adjusted EBITDA of €791,000,000 for the first half of the year with a margin of 23%, up to 2.40 basis points versus 1 year ago. Gross margin stood at 37.8%, representing an expansion of 140 basis points compared to the first half of twenty twenty three.

Speaker 2

This is on the back of product mix, lower cost per liter from the second and third quarter of 2023, not in the 9 month lag coming from our long inventory cycle and importantly to a larger operational leverage. Our performance this quarter serves as a bridge to the forecasted sequential growth in the 3rd and 4th quarters this year. This continued improvement provides further confidence in achieving our full year guidance reaching adjusted EBITDA of €1,800,000,000 plus for the fiscal year 2024. I'd like to spend some time now talking about cash flow and debt reduction, which as stated many times remain our top priorities. In the Q2, the company has generated a positive cash flow of €57,000,000 representative of our cash flow turnaround and expected improvement throughout the remainder of the year.

Speaker 2

This figure includes €119,000,000 payment to Immunotec and €20,000,000 in restructuring and transaction costs associated with the extension of the operational improvement plan and the Shanghai RAS deal. Excluding these items, free cash flow would have been close to €200,000,000 EBITDA and effective working capital management were the primary drivers of this quarter's improved free cash flow performance. Notable improvements include more efficient inventory management and better plasma supply handling. Additionally, receivables benefited from the catch up of €150,000,000 payment from China in the Q1 and the normalization of payables. Ables.

Speaker 2

Meanwhile, CapEx, IT and R and D expenses remained stable. On this note, I would like to update you on the progress we are making on the cash flow improvement plan. As you know, the company is actively implementing the plan focusing on the 5 main levers: normalization of our working capital, continuous operational improvement, stringent control of SG and A, spending optimization of real estate and thorough portfolio analysis. We have progressed well since kicking off this project at the beginning of April. As I initially presented in last quarter's call, these initiatives will be as we continue to execute on improvement of cash flow generation.

Speaker 2

On our efforts around working capital, a significant achievement this quarter was the improvement around the management of inventory level of the normalization of receivables and payables. Looking ahead, we anticipate a moderate increase in working capital following continued strong underlying demand across all business units and the inventory build ups to prepare for 2025 growth. But we will continue paying strong attention to tight working capital management. On the operational improvement front, we are continuing to streamline operations, discover not only plasma operation, but also manufacturing operation and all tangent functions, including yields enhancement, donor fee optimization and improvement of industrial processes. While we have made substantial efforts to improve our cost structure last year, we remain focused on this continuous exercise in controlling SG and A spend to operate more efficiently.

Speaker 2

Looking beyond 2024, we have commenced a review of our real estate footprint and initiated a comprehensive portfolio analysis to ensure all projects and business units met expected performance level. These final two pillars are inherently more complex and take more time, but they will contribute to cash flow improvements in the mid and long term. Real estate optimization includes consolidating underutilized office space, option for sales and leaseback transactions and optimization of our leases. And the analysis of our portfolio assesses new opportunities and identifies underperforming assets. To finish the chapter, let me say that Grifols possesses the necessary levels to enhance its cash flow profile and generate substantial additional free cash flow in 2025 and beyond.

Speaker 2

Currently, some key aspects of the free cash flow improvement plan are under detailed assessment, which require further work before we can provide specific updates or guidance on future cash flows. However, we remain committed to achieving the previously provided free cash flow guideline of positive for 2024, which included an impact of €480,000,000 from extraordinary outtends. Moving on to Slide 14. I want to address another of our top priorities, debt reduction. In the first half of the year, we have reduced our leverage from 6.3 times to 5.5 times as per credit facilities.

Speaker 2

The deleveraging process was primarily driven by the EUR 1,600,000,000 proceeds from the Shanghai RAS transaction as well as 2nd quarter's EBITDA improvement of more than €440,000,000 In the second half of twenty twenty four, we anticipate another reduction in our leverage ratio, primarily driven by continuous growth in EBITDA and enhanced cash flow. We remain confident to achieve a target leverage ratio of 4.5x by year end. My presentation is about to conclude, but I hope that with all the developments we have shared today, you can agree with us that Grifols is well on track to meet its full year 2024 guidance. The company's performance in the first half of the year is clear testament of our ability to deliver on this year commitments. In terms of revenue, we continue to see a strong momentum in the second half of the year, mainly due to IG growth on the back of a strong performance in the U.

Speaker 2

S. And new opportunities in Europe, as well as subcutaneous IG continues to gain traction supported by launches in Europe. Albumings increased, thanks to strong underlying demand in China and improved performance on Alpha 1 by the end of this year will also contribute to this growth. Adjusted EBITDA is expected to sequentially improve to over €1,800,000,000 rising from a 24.2% margin in the 2nd quarter to 27%, 28% in the second half, supported by revenue growth with better product mix, lower cost per liter and increased operational leverage. And regarding free cash flow, we have delivered on commitment in the Q2, and we continue to be confident that we will reach positive cash flow for the full year.

Speaker 2

To finish, let me summarize a few important takeaways. My management approach focus on the execution of clear and simple strategies with solid operational and financial discipline that provide optimized business performance. Through this, we will grow our businesses and expand our EBITDA levels while improving free cash flow and reducing our debt over time. Many initiatives are already underway in this direction. Grifols Businesses is underpinned by solid market and product fundamentals, and we operate in a high growth industry with compelling market dynamics.

Speaker 2

This environment offers us significant opportunities for expansion and innovation. In addition, our business operations product portfolio and customer base loyalty are a robust base to ensure we remain strong and we continue to grow profitability as we move forward, allowing us to deliver substantial value for our shareholders. In this quarter, we have delivered on our commitment, executing the Shanghai Rus transaction to reduce our debt, enhancing our governance, improving our cash flow and accelerating our overall performance, all of which ensures we are on track to reach fiscal year 2024 guidance. We are implementing a cash flow improvement plan that is already delivering the results. And in terms of debt management, we have addressed our 2025 maturities and cleared a path for financial stability until 2027.

Speaker 2

Operational excellence and efficiencies continue to be a focal point for us as they drive top line growth, expand our margins and improve our free cash flow, each of which is crucial for Olympus for Grifols long term success and competitiveness. And finally, our innovation milestones are well on track for 2024. We're excited about the upcoming commercial launch of Jimmu in the U. S. And the progress made in fibrinogen clinical trial during the first half of the year, which will continue in the second half with the initiation of the approval process.

Speaker 2

These milestones mark significant progress in our innovation and growth strategy, enhancing our ability to broaden our offerings and more importantly, better serve our patients by addressing unmet needs with differentiated products. Thanks for your attention and time today. And with that, Danny, back to you.

Operator

Thank you, Nacho. Now let's turn to the Q and A. So I see several hands raised. So our first question comes from Joaquin, JB Capital.

Speaker 3

Yes, hello. Thanks for taking. I have two quick questions. First one is on gross margin. If you could please provide a bit more color on why did the gross margin decline in the Q2 of the year, both quarter on quarter and year on year?

Speaker 3

And what can we expect for the second half of the year, as I thought that cost per liter should already run through P and L? And then regarding the financial expenses, which were very high this quarter as well. Part of it was the GIC, but if you can provide a bit more color and then what could be the run rate for the second half of the year for financial expenses once you've used the Shanghai RAS proceeds to pay some of the debt? Thanks.

Speaker 2

Thank you for your question. Let me take the first one and Danny will comment on the second one. As the gross margin, I mean, one part of the activities that we have conducted this year has been a thorough analysis of our inventories. And as a result of that, we've taken a cautionary approach in our inventory management, and we recorded some provision in this quarter to take care of potential inventory issues. And this has been compensated, as you could see in the EBITDA improvement, by operational efficiencies and by controlling well the SG and A levels this quarter.

Speaker 2

But over the next months, we should expect a normalized gross margin levels at the levels of the Q1 and higher. And the second question, Danny could take it.

Operator

The financial expenses, Joaquin, this quarter, I mean, as long as we are repaying TLV, a significant portion of our TLV in the range of BRL 1,100,000,000, there is more an accounting entry here that we are recognized or bring from the balance sheet into the P and L to defer financial expenses. So this is a noncash item, but it hits the P and L. And the second question is more on the financial expenses on a run rate basis. Certainly, I will not take 2nd quarter as a run rate. I will take more the Q1.

Operator

It's certainly in the Q2, we issued some new debt. But it's true, as I was mentioning, that as soon as in July we repay this €1,100,000,000 from the TLB and we expect to repay the remaining proceeds from the Shanghai RAS transaction, the €1,600,000,000 So the whole amount of financial expenses is going to be lower, so offsetting this new debt with higher rates.

Speaker 3

Thank you.

Operator

Okay. So now it's going to be James Gordon, JPMorgan. James, please.

Speaker 4

Hello, James Gordon, JPMorgan. Thanks for taking the question. One question, one clarification. On the question, so free cash flow, it's a lot better today. And I heard you were committed to positive free cash flow for the year.

Speaker 4

But I think the previous target was only very slightly positive. I think it was €5,000,000 of cash generation. But are you still thinking it might be only just into the positive? Or given all the initiatives you were talking about, could you actually do quite a bit more than that? Could you have material cash generation this year?

Speaker 4

And on the you previously said €2,000,000,000 to €2,500,000,000 of free cash flow, €20,000,000 to €27,000,000 and that's under review. Should we assume we get an update on that at the October event? Is that the plan there? That was the question. The clarification was just on the situation with Brookfield, is there any deadline by which we might get an update or we have to have an update so we get clarity?

Speaker 4

Or is diligence just open ended? Can you remind me how does it work in Spain? Can they just do diligence as long

Speaker 3

as they want? Or is

Speaker 4

there a deadline when we get clarity?

Speaker 2

Thank you. Thank you for your question. On the free cash flow, and as I have mentioned, I think that we're actively working on that. We are not ready to provide any guidance and we're going to try to maximize cash flow this year. But we remain at this point still with our guidance of positive cash flow during the year.

Speaker 2

The activity will continue and the focus on cash flow is going to continue being the more relevant focus for the company. But as I mentioned, I think that there's still a lot of unknowns and we remain committed to the positive cash flow this year. But and we will try to make it better if we can, but definitely not a commitment at this point. As for 2020, the next year's cash flow, I think that it was mentioned in the last call. And again, we are not ready to provide just guidance for that.

Speaker 2

October at the Capital Markets Day might be a good occasion for providing that guidance and I expect to be ready by then. As for your second question, no, there is no deadlines. There is no time that we know. And as Thomas has mentioned, there is no further comments on that topic. It's because we don't know more than what has been disclosed.

Speaker 1

James, I think as Nacho just said, there is no deadline, but it's important to make sure that Brookfield gets all the relevant information that they need to really to be assess what they're looking at in the due diligence. So there is no deadline that has been set.

Speaker 4

Thank you.

Operator

Thank you, James. Tom Jones, please. We're looking forward to hearing your question, please.

Speaker 5

Good afternoon. I've got 2, so one operational and one other one. So on the operational side, I just wondered if you could share some more detailed comments around the outlook for the NAT business and the Alpha 1 franchise. 2, if your reasonable revenue generators, which have been struggling a bit of late and when you expect those to return to sort of more normalized growth pattern? And then the second question, I hate to harp back to the free cash flow and the working capital items.

Speaker 5

But I was just wondering if you could give us a little bit more in terms of specifics on some of the things you're working on, particularly around inventories and receivables. I wondered if there's been any change in your approach to factoring receivables, whether you're going to be a bit more enthusiastic with that. And then around inventories, one of the reasons that Grifols has historically carried high inventory levels is it tended to operate in a fairly cautious basis. It like to carry significant safety stocks to take advantage of commercial opportunities. It typically had a longer hold the look back period on the raw plasma carried more inventory for a rainy day, which to be fair, saved you in 2020.

Speaker 5

To what extent is your policy around free cash flow perhaps slightly got to be balanced against the increased risks of running tighter inventories or perhaps paying up to factor a few more receivables here and there?

Speaker 2

Let me comment on that and on the free cash flow and Roland will make some comments about Alpha-one situation. On that, I mean, the NAT business is pretty much flat versus previous year at this point. And we think we have reached the bottom of the situation. And from here, I mean, we have positive expectations based on tenders and based on business prospects that the business will start growing again. So this is about that.

Speaker 2

On the free cash flow activities, as I mentioned in the last call, I mean, obviously, in order to improve in the short term, the main levers that we had was working capital and mostly inventory. It has not been a substantial compared to Q1, it has been not a substantial change in policy from receivables or payables. But in the case of inventory, we have worked very close to the teams across in across functional efforts, I mean, with the plasma collection team, the biopharma team, the supply chain, finance, in order to tie the inventory management. It's we are very much aware that we still have to be able to face opportunities at the market. The market is growing nicely and we have to take advantage of that.

Speaker 2

But at the same time, there are opportunities to make more efficient the way to handle inventory and that's what we have been doing and that's the reason why one of the biggest reason for the free cash flow this year. That's from me. And maybe Roland can comment on Alpha 1 situation.

Speaker 6

Of course, Tom. Alpha-one is a key franchise for us and will remain a key franchise for us, both as a market leader in this space with 70% share, but also looking at the large unmet need with 90% of patients still undiagnosed. We are working to further strengthen our position as a leader in this marketplace over short and long with the European launches of 4 and 5 gram vials and in the U. S. Through the strengthening of our service offering by our specialty pharmacy partner.

Speaker 6

As you know, in the U. S, home care is an important pillar of the value that we can provide for patients. And it's there where we saw an opportunity to further strengthen our offering. We transitioned to a new specialty pharmacy provider in the Q2. And as with any transition like that, we expected and saw that there are some temporary impacts through the reauthorization of patients.

Speaker 6

Having said that, we are at the tail end of this transition and we are very encouraged by the feedback we are getting from the marketplace and expect that this change will bear fruit towards the end of this year. Beyond that, we are working to further increase convenience for patients with developing our subcu dosing option as well as advancing the body of evidence for our SPARTA trials. And beyond that, of course, making sure that we can continue to be the leader to make sure that we can help identify and treat patients with alpha-one antitrypsin deficiency. So from our side, it's a marketplace we stay committed to and where we expect growth over the long term. And we believe that with the transition that we have in Q2, we're set up for a better position moving forward.

Speaker 5

Good. That's all very clear. I've got a couple more, but I'll get back in the queue.

Operator

Thank you, Tom. Thank you, Roland. Now I would like to move to Barclays. Charles Pittman, please.

Speaker 7

Hi, guys. Thank you very much. Charles Wittmann from Kingpin Barker, please. Thanks very much for taking my questions. Just starting off, quick question on your net financial your noncurrent financial assets.

Speaker 7

Just wondering what the kind of key driver is for that increase in the quarter. And then just secondly, a question for Natura, given you've been in the door for 4 months now. And just I would love just to get more of an idea of how you're thinking about Grifols now you've kind of had more of a look around. And what degree of work you believe is still needed to be complete to execute this Grifols turnaround story started back in 3Q 'twenty 2 and to really convince investors that you are in a position to prevent any of the actions that have created recent overhangs to shares mentioned in press releases from repeating, for example, in relation to the accounting misinterpretation as you highlight in the press release from today? Thank you.

Speaker 2

Thank you. I'll take the second question. I will ask Danny to take on the first one. But my impression after 4 months in the job is that this is a phenomenal company with a fantastic business model, very solid business fundamentals with opportunities, opportunities that start to develop back in the beginning of 2023 and that we continue enjoying. And I think the results that we are seeing in this quarter and in this half, I think are a testament of that.

Speaker 2

I mean, all financial indicators are improving, are showing the right direction. I mean, profit, EBITDA, we know we have to work on free cash flow and we are working on that. But everything else is really moving well. And most importantly for me, I think when I see this 9% growth in Bio Pharma, that's a phenomenal springboard to continue generating efficiencies and increasing our EBITDA portfolio. So how to convince investors?

Speaker 2

I think that this is a loaded question. I think that the way to convince investors is to continue delivering. I mean, delivering on our promises, making sure that we have reasonable targets and guidance and we deliver on them without surprises and making sure that we operate in a way that our business is well understood by all the stakeholders. I think that's the plan and that's what we are planning to do moving forward.

Operator

Charles, on the second one, maybe I'm going to ask you to elaborate a little bit more. As the per balance sheet, I mean, there are no significant changes. If you are more looking at our assets, you will see €2,000,000,000 part of our cash line. This is the €1,600,000,000 already includes the €1,600,000,000 that we got from the Shanghai RAS transaction, as explained. The announcement was done mid June and the closing, including the funds, were by then of the second quarter.

Operator

If you are looking more at the liabilities, you will see that the current financial liabilities increase because we are going to repay. Actually, we already did €1,100,000,000 from the TLB. That's why it was reclassified as a current.

Speaker 8

Understood. Thank you.

Operator

Good. Thank you so much, Charles. Now it's turn for Alberto Lente, Alantra.

Speaker 8

Hi, thanks for taking my questions. The first one is, if you could help us reconcile the evolution of net debt during the quarter. I see that your net debt has fallen by 1 point $5,000,000,000 that's after having received $1,600,000,000 from Santander. And you mentioned that you have generated $57,000,000 of free cash flow. So there's probably $100,000,000 in shortfall there.

Speaker 8

So if you could help us understand where is that? And the second question is, if you could please give us some indication of what could be potential scenarios for Class B shares? I mean, if you imagine that in a hypothetical scenario that there were to be a merger of the shares or a delisting of the shares or a voting for Class A and Class B shares to receive different prices in a potential takeover bid. How would that work from a governance standpoint? I don't know the voting rights for each shares, the number the minimum voting result that would be needed to make any changes to the current regulation regarding B shares?

Speaker 8

Thank you.

Speaker 2

As Thomas mentioned and I mentioned, I mean, we are not going to make any comment or any speculation on what could happen. I mean, this is definitely another question for us to answer, and we will not comment further on that. As for your first question on the SEK 100,000,000 that are missing, I think I see Dani Rice in hand to answer.

Operator

Alvaro, I am going to take this one. Pretty much as you say, I mean, the net debt has declined by close to €1,600,000,000 This is pretty much the net proceeds that we got from the China transaction. It's true that our free cash flow is positive by €57,000,000 which is important compared to what we reported in the Q1. But then it's not that a big amount when you're considering other kind of like adjustments like exchange rates impacts, some of them non cash that is bringing any difference between the free cash flow generation for a specific quarter and how the net debt change, again in this case Q1, Q2 versus Q1. But if you want, we can elaborate a little bit more.

Operator

We can bring a little more details, but this is pretty much the answer.

Speaker 8

Okay. If I may squeeze 1 in exchange for the Class B shares. When I look at your short term liabilities, short term financial liabilities, I see $2,700,000,000 I assume that you have reclassified some of that you're going to cancel as short term. But if I were to take out $1,600,000,000 out of that, you still have $1,100,000,000 in short term maturities. Is that right?

Speaker 8

And if so, are you comfortable with your current liquidity position and cash flow generation profile to meet that SEK1.1 billion in short term maturities? Thank you.

Operator

Yes. As I was saying with the question from Charles, this increase is because we reclassify the €1,100,000,000 that we have repaid. Actually, it was last week, early this July, but after the second quarter. And for accounting following accounting principles, we got to reclassify as a current liability. That's pretty much the main reason why it has increased.

Operator

The €1,600,000,000 which you can see taking the picture at the end of the second quarter is more on our cash and cash equivalents. And as we said, we are going to repay the EBITDA on a pro rata basis, €1,100,000 TLV, I said. And the remaining kind of like €500,000,000 is something that we are going to repay next week. Now if I'm getting correctly, this is time for Morgan Stanley. Thibault, please.

Speaker 9

Yes. Thank you very much. My first question is on the Immunotec facilities that you are acquiring. I think the agreement indicates acquisitions of centers in April July 24. So are these centers already operating today, contributing to your plasma supply?

Speaker 9

What is the kind of stage of ramp up of these centers? And then the second question is just on the phasing of free cash flow for the remaining of the year. In one of your slides in Q1, you suggested a progressive improvement in free cash flow generation in Q3 than in Q4 with Q4 being the strongest quarter. Is it still how you see the rest of the year playing out? Or could the pattern be a bit different?

Speaker 2

Yes. On the immunity question, the answer is yes. I mean, some of the centers are already producing and it's already part of our plasma collection plan. So it's producing as planned and as expected. On the free cash flow, I think that still, I mean, we have generated €59,000,000 this quarter, but we started the Q1 with a minus €250,000,000 So we still have €200,000,000 negative that we have to overcome, we are working on that.

Speaker 2

Plus, as I mentioned before, now is the time of the year. We're going to have to increase a little bit our inventory levels in order to prepare and build up inventories for 2025. So that's as well why we keep committing with a positive cash flow at this point because we still have work to do in order to fix the year. So thank you.

Speaker 7

Thank you.

Operator

Thank you so much, Thiago. Jaime from Santander, please you can share your question.

Speaker 10

Good afternoon. So a couple of questions from my side. The first one is to try to reconcile your guidance of $1,800,000,000 for the full year. So if the gross margin you mentioned is going to recover to the results of Q1, so close to 40%, let's assume 40%. In order to get to the $1,800,000,000 and does it not make sense that you have to grow the sales significantly or is it so we have 3 moving parts, right?

Speaker 10

The top line, the gross margin and the OpEx. So in order to get to this $1,800,000,000 if the gross margin does not go up to 42%, 44%, This means that you are going to meet this guidance because of much more top line growth. And if this is the case, maybe you can elaborate on what is what you are seeing, what is the visibility you have in the second half So that you are so confident in this robust top line. Sorry, this is like a little bit elaborated, but it's just one question. And then the second question is regarding the you mentioned that there was also a possibility to sell plasma to third parties if needed in order to boost a little bit the free cash flow is still on the table?

Speaker 10

Do you think you will end up need to do it in the second half or you think you don't need to do it? Thank you very much.

Speaker 2

Yes, thank you. On the I mean, on the second question, it's a quick no that no, that's not on the table. And we will continue our regular operations that we have initiated in order to work on the free cash flow. On the first one, let me give you a little bit more color because probably the I understand the question, but the accruals that we have taken in order to prevent some potential inventory issues would have impacted our gross margin in about 2 50 basis points. So if you add this 2 50 basis points to our gross margin of the year, then the number is even higher than the Q1.

Speaker 2

And the next quarters are progressively going to be even better, again, because of the cost of plasma is the supplies is going to be positively impacted. Is the second half we expect to have a product mix that will favor higher margins. And on top of that, yes, half of the fiscal year. Thank you.

Speaker 10

Thank you very much, Ignacio.

Operator

Ignacio. Thank you, Jaime. Now we would like to get questions from Graham from Bank of America, please.

Speaker 11

Thanks for taking my questions. So just going back to the financial expense. So I wonder if you could just give a specific guide there. So I think you previously said you expected a fall in financial expense from the €574,000,000 last year. If we use the Q1 as the guide for the quarterly run rate in Q3, Q4 that would imply more like €650,000,000 to €660,000,000 for the year.

Speaker 11

So just to be clear, you now expect an increase in financial expense year on year in 2024. And the other clarification point is just on the inventory. You said sorry, just then the 2 50 basis point margin impact. Just to clear, that was for Q2 specifically, not for the full year, you mentioned both. And then second question is on CIDP market dynamics.

Speaker 11

So we've now got Vivghard approved. Just your thoughts on the latest market intelligence on positioning of assets, any kind of impact on your CIDP IG franchise? Thank you.

Operator

Graham, I'm going to take the first two and then Roland is going to take on the CIDP. I mean, I was providing some sort I mean, not guidance, but trying to bring some clarity, some reference about the financial expenses. I remember that in the first call, we were saying that financial expenses in absolute figures it's going to be lower on annualized basis, right? It's true that still in Q3 and part of the second half this year, still there are different pieces that are moving at the very same time. We are repaying €1,600,000,000 but we are not doing at the very same time that we were receiving this €1,600,000,000 from China that Eric was mentioning.

Operator

But when you're putting all the pieces together, you will see probably more from a P and L perspective in 2025 that the whole financial expenses as per the P and L, putting any one off the financial expenses noncash item that I was mentioning when I was taking a previous question, is going to be lower. The cost of debt is going to be slightly higher. The new debt is obviously more expensive than what it was the L1. We expect some decline in terms of the interest rates. But all in all, we shall be expecting something lower.

Operator

Say that, I still thinking that if you are taking Q1 is a good reference to project for the rest of the year. On the gross margin, yes, €250,000,000 is the right way to see the impact of these of the provisions that Nacho was mentioning. Excluding this impact, you will see a sequential improvement around 50, 60 basis points versus Q1, giving strong evidence that we should keep expecting a lower cost per liter or let's put it that way, that the lower cost per liter that we were seeing last year, we are going to see a better positive evolution in terms of the gross margin throughout the year. Roland, please, on CIDP.

Speaker 6

Yes. On the FcRn approval in CIDP, Graham, we estimated a limited impact, and this is what we're seeing in the marketplace today. There's really two factors to it. On one hand, looking at the patient population, as you know, within IG, CIDP is about 20%, 25% of the IG market. There's only a subset of patients that are suitable for FcRn.

Speaker 6

And within that, we would expect a gradual uptake. But on the other hand, and I would say even more importantly, we are very confident that IG will remain the standard of care for first line therapy. This is what we hear from OLs, who comment that IGs are just very suitable for this multifactorial disease. And with the high response rate, proven safety and long standing experience of Graminex in the space, we remain confident and in a swaddler of fact are increasing our engagement in the space. But with all the focus on CIDP, I don't want to take away from the fact that beyond that, if we look at immunodeficiency, primary and secondary, that's where we see and are very excited about the growth potential moving forward.

Operator

We have two more questions. Guilherme, please go ahead. Yes.

Speaker 12

Good afternoon. Thank you for taking my questions. So the first one, if you could update us on the situation of IG in the U. S. And maybe if you could provide us some market share evolution over the past quarters.

Speaker 12

And second one, just a clarification on an accounting topic. First, the Shanghai Hash Capital Gain, the one that was reported versus the $250,000,000 that were initially alluded to? And the changes in the accounting treatment of the 20% shinga half stake sold in H1 versus the treatment that you have had in Q1 in the competition of adjusted EBITDA and what we should consider for the year?

Operator

Okay. I'm going to take this question. On the Shanghai RAS contribution, I mean, it we reported what was the estimated capital gain back in December 2023. At that point, we ran some estimation and number that was provided at the time was compared to the acquisition price as a state in the filing, right? Then we did the same kind of numbers, the same kind of process, but on a consolidation basis, considering how the profits, losses and exchange rate impact, any accounting impact that we had since the acquisition back in 2020.

Operator

And at the end of the day, the capital gain that we included in the 2nd quarter, it has been lower than initially expected. It was more in the €30,000,000 to €40,000,000 range. Okay. And on the I'm sorry. I cannot wrap up on the EBITDA contribution.

Operator

This is I mean, in Q1, I mean, we only consider the 6.6 EBITDA contribution from Shanghai RAS because at that point, Shanghai RAS was still considered as an asset held for sale. Now at the end of the second quarter, by the end of June, the asset was sold. So following accounting rules, we were able to recognize the whole contribution from this asset. Okay.

Speaker 2

Now on the market share side, Roland, would you like to comment?

Speaker 6

Of course, without going into the details of market share numbers, what we can say here is that we're very encouraged with the momentum that we're seeing in the U. S. You saw the growth numbers of our subcu IG XEMBIFY, which is very encouraging and we're very pleased also with the feedback that we get from both health care professionals and from patients. And in addition, we also see very strong momentum on the Gaminex side where we see new accounts coming online. And as a matter of fact, the growth potential that we see in both Gamonex and Sembify are the reason why we decided to give distribution of our new IG in the U.

Speaker 6

S. Humugo to a 3rd party distributor. This setup allows us to maximize the uptake as part of the overall group channel strategy where the Grifols team will continue to focus on growth for our 10% Gamonex across all indications CIDP, PID and ITP and of our subcu XEMVIFY in PID and drive the momentum there, while we have Kedrion, which with whom we had a long standing partnership, focus on establishing IMUGO in the broader marketplace with expected sales of $1,000,000,000 over 7 years.

Operator

Okay. Thank you so much, Roland. Thank you. We're going to take one last question before closing. Alvaro, please.

Speaker 8

Hi. Thanks for allowing me to jump back into the queue. And just I see that the performance on albumin has been very strong. I just wanted to know whether this is just better commercial performance on your side or that you're seeing more demand for albumin as a volume expander or whether you are seeing actually some increased demand for newer therapeutic areas. And in that context, what should we expect?

Speaker 8

Or if you could provide us any update on the clinical trials you're conducting for albumin? And the second question was just to clarify what the adjustment to EBITDA that you have done for Shanghai Ra's 20% stake, which is not the one regarding the capital gain. That other adjustment of $27,000,000 what that is, I didn't really get that. Thank you.

Speaker 6

Yes. Alon, on albumin, we are encouraged with the momentum and the demand that we see, especially from China, as you know, the highest price market where Grifols is very well positioned to continue to capitalize on that growth. And with the newly signed contract with a 10 year exclusivity plus 10 year option beyond, we see continued growth there. And on the body of clinical evidence, you're right, in terms of Preciosa, our study on liver cirrhosis enrollment that we completed in 'twenty three led to the last patient finalizing treatment in May, and we expect top line results there in Q4. We'll be communicating afterwards.

Operator

Albert, I'm going to take the second part. As I was mentioning before, you can see a capital gain of €30,000,000 to €40,000,000 And then you will see the contribution, which is close to €30,000,000 if I'm not wrong. But for a further detail, for some specifics, I will refer more to the annexes and you will see the full reconciliation. Otherwise, we can follow-up offline. Okay, I will bring you all

Speaker 4

the details.

Operator

So with that, we arrive at the very end. Again, thank you very much for joining us today. As said, if you have any follow-up questions, please feel free to mail the IR team. Thank you so much.

Speaker 1

Thank you all for joining.

Speaker 2

Thank you.

Speaker 1

We appreciate it. Thank you. Bye bye.

Powered by Quartr

Key Takeaways

  • The Board has initiated due diligence on a potential take-private proposal from Brookfield and family shareholders, but no offer or agreement has been made and there is no guarantee one will emerge.
  • In Q2 Grifols delivered revenue of €1.881 billion (+9.3% constant currency), adjusted EBITDA of €441 million (24.2% margin) and generated €57 million of positive free cash flow, driving leverage down to 5.5×.
  • Debt management continues to be a top priority: proceeds of €1.6 billion from the Shanghai RAS stake sale plus a €1.3 billion private placement note issue clear the debt profile until 2027, and full-year guidance is reaffirmed across revenue, EBITDA, free cash flow and leverage.
  • Corporate governance and leadership have been strengthened with a new independent transaction committee, appointment of Lead Independent Director Mansarat Muñoz, transition of the Executive Chairman to a non-executive role, and the hiring of Rahul Sirvinavasan as CFO.
  • Innovation milestones include FDA approval and upcoming US launch of BioTest Simugo, label extension for subcutaneous IG Sembify to biweekly dosing and naive patients, and completion of the fibrinogen study triggering a Q4 2024 regulatory filing for a H2 2025 launch.
AI Generated. May Contain Errors.
Earnings Conference Call
Grifols Q2 2024
00:00 / 00:00