Merck KGaA

XETRA:MRK

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and welcome to the MERCK Results Q3 Conference Call. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Mr. Thomas Müller. Please go ahead, sir.

[Thomas Müller]

Good morning, and welcome to our Q3 media call. Thank you all for dialing in. My name is Thomas Müller. I'm Head of Communications at Merck, and I'm delighted to also welcome today Belen Garijo, Chair of the Executive Board and CEO of Merck; and our CFO, Marcus Kuhnert. Thank you both for joining us. As you already noticed, we are holding this call in English. Simultaneous translation in Germany is available. For this, please see the dial-in data we sent you with the invitation. Belen and Marcus will now further explain our Q3 business results and our outlook for the fiscal 2021. Afterwards, we're looking forward to taking your questions. [Operator Instructions] So much for the introduction. I now hand over to Belen.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Thomas. And also a very warm welcome to our media call from my side. Marcus and I are looking forward to sharing with you our strong Q3 results. We already published the figures last Wednesday. So you may have seen that already. I'm sure you have done so. And it comes down to very solid results once again in Q3. Strong results, which clearly illustrates that we are well on track to deliver on our ambitious business goals in 2021 and beyond. And moving into Slide #5, where you find the highlights of our Q3 results. First of all, all our business sectors, again, delivered. We have a full organization mobilized for efficient double-digit growth. Group sales rose by almost 11% organically, and this was driven by the excellent performance of our big 3 growth engines. Process Solutions stayed the main growth driver in Life Science and in the group, with organic sales growth of almost 28%. Please note that Life Science gained more than 17% in sales against the previous year Q3, which was already boosted by recovered impact. In Health Care, we have seen substantial contributions from some of our new launches, in particular Bavencio. Within Electronics, our semiconductor solutions business recorded organic sales growth of more than 20%. Reported EBITDA pre came in at lower when compared with Q3 2020. But keep in mind, and this is a very important piece of information that last year, we benefited from the release of a provision coming from a litigation with Biogen. Restating the figures for this onetime effect, our organic EBITDA pre growth is at 13%, so leverage versus top line revenue growth. Due to our strong performance, we were able to gain significantly lower our net financial debt, and Marcus will further detail on this later on. And also due to our strong performance, we once again, upgraded our guidance for the full year, and we now expect sales between EUR 19.3 billion and EUR 19.85 billion and an EBITDA pre between EUR 6 billion and EUR 6.3 billion. I am now on Slide #6, and I want to highlight 2 main points. First of all, as you can see, all our business sectors contributed to our organic sales growth. We also benefited in the quarter from minor tailwinds from the currency side for the first time in the year. Second, excluding the Biogen effect in Q3 2020, organic EBITDA pre growth was stronger, as I already mentioned, than organic sales growth. That is also due to the rigorous cost discipline that our teams have been showing for many months now, and also underlines our full commitment to continuously deliver what we call efficient growth. Looking at the regional breakdown in the next slide. You see that Merck active organic growth in all regions, and that was primarily driven by the strong performance of Life Science. However, every sector contributed to the growth of the regions, in particular, the new products of health care and semiconductor solutions from electronics. We are once again benefiting from a well-balanced regional footprint, with tremendous future growth opportunities globally. And with that, I would like to hand it over to Marcus Kuhnert, who will provide you with further details on our results. I will come back to the guidance. Thank you.

[Marcus Kuhnert, CFO & Member of Executive Board]

Thank you very much, Belen, and a warm welcome also from my side. I'm now on Slide #9, which contains the most important figures for the past quarter. Looking on the numbers, I can only echo Belen's comments. This indeed was a very good quarter in which we, once again, demonstrated strong and efficient growth. Group sales increased by 11.8% to almost EUR 5 billion. The EBITDA pre declined by 8.7% to almost EUR 1.6 billion, but, as Belen already mentioned, we must keep in mind that Q3 last year included EUR 365 million from the release of the Biogen provision. If we exclude this effect, we see a 16.2% increase in EBITDA pre and a margin expansion of 120 basis points. Operating cash flow also increased by more than 25%, which significantly supported our reduction in net financial debt. As you can see, we managed to lower our net financial debt by around EUR 1.4 billion since end of last year. EPS pre stands at EUR 2.24 compared to prior year on an underlying basis, and that is without the Biogen effect, an increase of around about 30%. Moving on to Slide #10, you will find the reconciliation from EBIT to earnings per share. Reported EBIT came in around 10% lower compared with Q3 2020 due to the before mentioned provision release. Not taking this into account, EBIT would have grown by 31%. The improved financial result was due to lower interest expenses from the reduced financial debt as well as to the development of the time value of Max share units within the scope of our long-term incentive plan. This is a little bit more of a technical effect, so to say. The lower tax rate stems from a favorable country mix of profits before taxes in our fast-growing Life Science business. Let's take a deeper look now into our 3 business sectors, I'm starting with Life Science on Slide #11. Process Solutions grew organically by almost 28% compared with previous year's quarter due to additional coverage-related business as well as continued high demand in the base business. Also, please keep in mind that Q3 2020 already included a significant portion of COVID-driven demand. Research Solutions grew organically by almost 7%, and this was mainly driven by a strong demand in the base business. And also, Applied Solutions increased its sales organically significantly by almost 8%. And please keep in mind that our COVID exposure here in this business is negligible. Marketing and selling expenses rose by a little more than 10%, much slower than sales growth, and the higher R&D costs reflect investments in high growth and emerging segments. All in all, the strong operating leverage, our favorable business mix and also our pricing power continued to support EBITDA pre growth of almost 31% to EUR 824 million and, at the same time, a margin expansion to 36.6%. Turning to Healthcare on Slide #12. As mentioned by Belen, Bavencio Mavenclad continue to drive the organic growth of this business sector. In the neurology and immunology franchise, the strong growth of Mavenclad by 33% more than compensated the declining sales of Rebif. Looking at oncology, we see Bavencio more than doubling its sales, mainly due to the approvals for the treatment of certain forms of bladder cancer in the U.S., in Europe and in Japan in Japan. [indiscernible] sales grew in all regions, especially in Asia Pacific. In our Cardiovascular, Metabolism and Endocrinology franchise, sales declined by around 3% organically, driven by a minus 10% decline in sales of our diabetes medicine, Glucophage, which was due to the volume-based procurement regulation in China. On the other hand, our fertility franchise achieved an organic sales growth of more than 7%, driven by strong demand in all regions. Marketing and selling expenses rose by 1.9% and by that, slower than organic sales growth. The increase in research and development costs resulted from 2 effects. Firstly, the lower costs in the year earlier quarter, which reflected the comparatively low investment requirements at that time. And secondly, we have set up provisions for winding down the bintrafusp alfa program and the termination of the partnership with GSK. Decline in EBITDA pre of almost 40% to EUR 551 million and the lower EBITDA pre margin reflects the Biogen litigation provision release in Q3 of last year. Underlying EBITDA predevelopment would have been about stable at a level of more than 30%. Finally, we have a look on Electronics on Slide #13. Semiconductor Solutions achieved another record quarter in absolute sales and an organic sales increase of almost 21%, which was driven by both of the business, business units and different businesses, so by semiconductor materials and also by delivery systems and services. Sales of Display Solutions declined organically by around 7% as the strong sales growth in OLED materials managed to at least partially compensate the decline in liquid crystals. Surface Solutions sales gained around about 10% organically driven by the continued recovery from the COVID-19 crises, especially in cosmetics. The marketing and selling expenses rose by 9.8%, more slowly than it's sales. This increase was primarily driven by measures to support sales growth as well as also rising logistics costs driven by global shipping capacity constraints and higher fuel costs. Organically, EBITDA pre grew by more than 11%. On top of that, FX effects provided a tailwind of 5.4%. Consequently, the EBITDA pre of Electronics grew by a total of almost 17% to EUR 297 million, the EBITDA pre margin reached 31.7%. Let's now take a brief look at our balance sheet on Slide #14. I just want to point out a few aspects here. As you can see, our balance sheet increased by around about EUR 2 billion since the end of last year, mainly because of our growing business and also due to foreign exchange effect. The higher cash level has been driven by the strong operating cash flow, obviously, while higher receivables and inventories reflect the growth of the business primarily driven from Life Science. Looking at the liability side, you will note that we also reduced our financial debt by more than EUR 1 billion. Net equity significantly increased since the end of last year, driven by net earnings of the first 9 months, pension valuation effects and currency translation. Thus, our equity ratio now stands at 47%. Moving on to Slide 15, and to our cash flow statement. Let me just highlight also only a couple of points here. The strong operating cash flow was primarily driven by higher underlying profit after tax, especially in Life Science. The negative delta in profit after tax was obviously impacted by the release of the Biogen provision in Q3 last year, and also the provision we had to make in Q3 this year due to the termination of the bintrafusp alfa program. Our CapEx spend increased to EUR 295 million, reflecting our ongoing capacity expansions to support the strong growth of our businesses. Finally, the significant increase in the financing cash flow results from net repayments of bank liabilities and commercial payers. That's all from my side. With that, back to Belen for the outlook.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Marcus. So before I move into our outlook for 2021 and beyond, let me spend one second, to share our achievements when it comes to the implementation of our sustainability strategy. One year ago, when we presented our results for Q3 2020, we also introduced our sustainability strategy and set ourselves very clear targets. One of these objectives calls for climate neutrality by 2040. In the past months, we have been progressing our path towards that goal. We have discussed what technologies are needed, what are the processes we need to change and what investments we need to make to deliver on this ambition. As a result, we recently signed a commitment letter from the science-based target initiative, and our submission of the validation documents will follow already until the end of this year. This decision will help us ensure that we are aligned with what the latest climate research deems necessary in order to reach our climate targets. And we would be pleased if the science-based target initiative confirms our plan with a certificate in Q2 2022. Let's now look at the guidance for 2021 on Slide #18. Back in August, I emphasized that we are raising the bar for Merck. Now we are moving it even a bit higher because our business has developed in recent months very, very strongly. Therefore, we now expect group revenues to grow organically between 13% and 15% versus prior year and negative currency effects lowering to minus 1% to minus 2%. All in all, our group sales should reach between EUR 19.3 billion and EUR 19.85 billion in 2021.For EBITDA pre, we anticipate organic growth between 26% and 29%. Negative currency effects to the amount equally to minus 1% to minus 2%. Against this backdrop, EBITDA pre for 2021 should now reach under the new guidance between EUR 6 billion and EUR 6.3 billion. Finally, we now expect earnings per share pre between EUR 8.5 and EUR 9. That's our ambition for 2021, yet, our business momentum will continue beyond the year-end. We, as I mentioned before, continue to mobilize our organization for efficient growth. And I'm extremely focused on what is going to help us deliver in 2022 and onwards. Slide#19 summarizes our midterm goal. This is very easy to remember, 25by25, around EUR 25 billion in sales by 2025. We want to add more than EUR 1 billion of organic sales growth every year. That is EUR 5 billion, plus some additional very minor sales coming from inorganic initiatives by 2025. Our big 3 engines will continue to be our main growth drivers. The past months have shown at what speed these businesses can run. And I am highly confident that we have still some shipped up some years. Our team will continue to push us forward to accelerate our business and to take the company to new heights. I reiterate my confidence about our company's future prospects. Our laser-sharp focus is on 4 goals. First of all, continuously mobilized our teams for efficient growth. Being committed to creating a high impact culture and actually overhauling our current talent and performance management processes to deliver on the expected leadership behaviors. We are driving innovation that is increasingly powered by digital and by data. Last, but not least, we think and act sustainably. And by doing so, the company has everything that it takes to deliver on the aspiration of becoming the global 21st Century science and technology pioneer. This is more than an aspiration. It's a true ambition, and we will continue to forcefully pursue this ambition today, in the next quarter and in the years to come. Now let me conclude by summarizing the highlights of our Q3 results. First, all our business sectors have delivered very solidly. Being mobilized for efficient double-digit growth, driven by the outstanding performance of our big 3 growth engines, mainly Process Solutions, the new products from our health care pipeline, in particular, at this time, Mavenclad and Bavencio, and Semiconductor solutions. Our momentum is super strong. That is why, secondly, we, once again, upgraded our full year guidance. We are absolutely fully committed to deliver on very ambitious business goals in 2022 -- in 2021 [indiscernible]. And that is getting me to my third and last point. 2021 is only the prelude of the new growth area at Merck. We aim for 25by25, around EUR 25 billion in sales by 2025, and this is a clear commitment on which you can count. With this, I would like to hand it over back to Thomas. Now I'm looking forward to taking your questions. Thank you very much.

[Thomas Müller]

Thank you, Belen, and thank you, Marcus. We are now looking forward to see your questions. Again, please post your questions in the language of your respective call. We'll start with the English call and then move on to the German one. Operator, can we have the first question, please?

[Operator]

Certainly. We will now take our first question from Sabine Obus from APM Health Europe.

[Unknown Analyst]

I would have a question about an update for the pharma R&D strategy. So as I understand, in bintrafusp alfa is not part of the strategy anymore, right?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Let me first emphasize -- of course, our L&D pipeline is not only bintrafusp alfa. The program is still moving on with some of the ongoing studies, in particular, in HPV-driven tumors. So we are very confident that we are extremely well placed with our pipeline in oncology and immunology, and we will be further detail in our plans during the R&D call that is going to be held in November.

[Operator]

We will now take our next question from Sigrid Hoffman from [indiscernible].

[Unknown Analyst]

I have just 2 questions on your Life Science business. Firstly, the COVID-19 part, how big is it in absolute terms? And then looking forward, do you assume in your planning that this COVID-19 business is going to be a sustainable business? Or you calculate some sort of decrease in the years ahead, maybe next or '23? How do you think about this going forward?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

So in Life Science, we have seen pandemic-related impacts, particularly in Process Solutions, and at the beginning of the pandemic also in Research Solutions. Today, the growth, both in Q2 and Q3, is actually driven for Life Science almost equally, but COVID-related impact and our core business. Obviously, it's difficult to predict the future, but our assumptions are very, very clear. We are confident to keep our COVID-related business in 2022 and progressively declining in future years. Once again, there has been a revolution around the market [ evolution ], I would call it, on the announcement of new antiviral data. We are very confident that vaccines will stay a main therapeutic access of dealing with the COVID-19 pandemic in the future. However, I insist that our business assumptions contemplate that the impact will be fading away post 2022 progressively declining. So perhaps Mark Marcus can give some more color on the specific numbers and the guidance that we have put forward on the COVID-19-related business.

[Marcus Kuhnert, CFO & Member of Executive Board]

Yes, [indiscernible]. Yes. When we look on 2021, we slightly upgraded our guidance for this year from around about EUR 1 billion that we expected still in August to happen for 2021, now to a level of, let's say, at least EUR 1.1 billion. The lion's share of that, mainly around about EUR 1 billion, is attributable to Process Solutions. So still the Q3 growth of Process Solutions, a 28% organic growth, is composed of roughly 2/3 of that growth is actually coming from COVID-19-related products, while the COVID contribution on applied and research solutions is basically -- so on research, it is fading away a little bit. On applied, it has been negligible already since the entire year. When we look into 2022, we believe that the strong tailwind from 4 process solutions from COVID-19 products will prevail, however, at a slightly lower level. So we expect here a number of around about EUR 900 million for next year [ COVID ] tailwind for Process Solutions.

[Operator]

[Operator Instructions] We will now take our next question from Ludwig Burger from Reuters.

[Unknown Analyst]

My question again would be, with all this success and growth in Process Solutions, on the downside, can you highlight potential supply squeezes or supply shortcomings or where demand is clearly hot stripping supply where you are struggling to meet demand, specific examples if you can, if that's currently the case?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you. Look, the initial rapidly increasing demand put pressure on the supply chain, obviously. Since then, we have heavily, heavily invested on expanding our capacity. And today, I can very confidently assert that we are very well on track to deliver on our capacity expansion objectives.

[Unknown Analyst]

Okay. I would still like to follow up with that question. Does that mean you currently do not have any squeeze or a supply shortfall?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

We are really very well trained at this time, I would say, to deal with the supply chain pressures, and we are obviously prioritizing demand to be able to serve as to bridge supply to demand. What I can say is that we have made tremendous promises, right? However, our order book is still growing faster than our sales, reflecting that we are catching up, and we are getting the situation back on track, but it's going to take a little bit of time, right? To get each and every site up to the necessary targets to be able to fulfill 100% of the customer demand. Of course, something that is very important, Ludwig, is that this, of course, has to do with our -- mostly with our single-use assemblies and filtration. We have no shortages anywhere else.

[Operator]

We will now take our next question from Timothy Lee from Bloomberg.

[Unknown Analyst]

Kind of piggybacking on the last question. Since you guys are, with Process Solutions and COVID products, have been involved in vaccines and in test components and in therapies. I have 2 questions. First reflecting on 2021, I suspect vaccines, components for vaccines has been the lion's share of your COVID boom there. Is that right? Can you sort of break down what percentage is vaccines, what percentage is therapies and what percentage is [indiscernible]? And then my second question is, now we have these [indiscernible] coming online, dynamics are changing, boosters, do you see the sort of balance between these 3 buckets changing heading into 2022? And if so, how?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Tim, thank you for your question. The lion's share of our COVID-19-related business is coming from vaccines. We are supporting more than 80 vaccine manufacturers in all modalities, including mRNA. We are one of the few companies that are providing custom lipids to enable mRNA vaccine manufacturing. I mentioned already that the environment is still volatile. So we do believe that vaccines will continue to be a main stay of the COVID-related business. Obviously, the initiation of boosters was not initially factored in our guidance. Now that we have more visibility on that, we have integrated some impact. Remember, boosters are only half of the dose, right? And in that context, we are very confident on the guidance for 2022 that Marcus has shared a minute ago, and we will continue to monitor the market. If you ask me, my own view is that vaccines and boosters will be very, very important to address the challenges of the COVID-19 pandemic, and this will go to the future.

[Operator]

There are no further questions on the English line. [Operator Instructions] There are currently no questions on the German line. I will turn the call back to your host.

[Thomas Müller]

Thank you very much. to all of you participating today. If you have further questions in the course of the day, please contact our media office. The team will be absolutely happy to provide you with all the necessary relevant information. We're looking forward to talking to you again on March 3, latest when we present our full year results. I also want to make you aware of our health care R&D call, which is scheduled for November 22. As this was my last quarterly call at Merck, I want to take this opportunity to thank you for your great collaboration over the past years. It has been a pleasure to work with you, and I'm sure we will stay in touch. Once again, thank you for joining and bye-bye.

[Operator]

Ladies and gentlemen, that will conclude today's conference. You may now all disconnect.