Yahoo Finance Evotec SE (NASDAQ:EVO) Q4 2023 Earnings Call Transcript
Evotec SE (NASDAQ:EVO) Q4 2023 Earnings Call Transcript April 24, 2024
Evotec SE misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $-0.03333. Evotec SE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Evotec SE Annual Report 2023 Conference Call. I’m Moritz Nikolaus, call operator. I would like to remind you that all participants will be in a listen-only mode, and the conference is being recorded. [Operator Instructions] At this time, it’s my pleasure to hand over to Volker Braun, Head of IR and ESG. Please go ahead, sir.
Volker Braun: Thank you, Moritz. And good day, good morning to all of you on the call. I’m sure you all have seen our press release on our 2023 results this morning, as well as the announcement last night on the appointment of Dr. Christian Wojczewski, who will be our new CEO of 1st of July. This development is the reason why we also have Iris Löw-Friedrich, our Chairwoman of the Supervisory Board, with us on the call today. But before we go there, it’s my obligation to familiarize you with the cautionary language we have outlined on Page 2. But now, without further ado, I would like to hand over to Iris. Please, Iris, the floor is yours.
Iris Löw-Friedrich: Yeah, Volker, thank you very much. And very warm welcome to all of you also from my side. We are ready to win the future for Evotec. Our core offerings are in high demand. Our business model is solid. Business is growing. We focus on profitability. And most importantly, we have a super strong team in place, and we are strengthening the leadership in Evotec further. And that’s the reason why I participate as the Chair of the Supervisory Board in a regular full year results call today. So with me today, Laetitia Rouxel, our Chief Financial Officer, who will cover the review on Evotec’s performance in 2023; followed by Matthias Evers, our Chief Business Officer, who will guide you through the rationale and the details of the reset of the company’s priorities for the coming year.
Our Chief Operating Officer, Craig Johnston; and our Chief Scientific Officer, Cord Dohrmann, will stand by to answer any questions you may want to address to them during the Q&A session. I have the duty to excuse, Mario Polywka, our Interim CEO, who is ill today, and unfortunately not able to participate in this call. So we send him our best wishes for recovery. I would like to deeply thank, Laetitia and Matthias, for stepping in for Mario on short notice. Before we move to operational topics, please allow me to share the good news on the Supervisory Board’s actions taking during the last close to 4 months. These efforts have led to the successful appointment of Dr. Christian Wojczewski, as our new CEO; and of Aurélie Dalbiez, as the newly created management board role of a Chief People Officer.
A few words about the new CEO. The Evotec turnaround starts with a high-performing team at the top. If I can speak about myself, but I know it’s also on behalf of the entire Supervisory Board, we all feel highly accountable to drive the reset of the company, starting with the best leader for the further evolution of Evotec with all the relevant stakeholders in mind. We are confident that we have made the right choice. We reviewed a wide slate of diverse internal and external candidates. We ran a structured interview process with more than 10 candidates and an in-depth in-person workshop with the 5 finalists. We pressure tested their approach to our business. We tested their strategic competency, their operational execution, their experience, and, of course, their leadership skills.
The appointment of Christian Wojczewski, as the new CEO of Evotec underscores our determination to drive a turnaround with a focus on profitability, efficiency, and highest performance, while of course we need to further evolve the excellent science in all businesses of Evotec. Christian Wojczewski comes with an impressive track record of successful transformational change in the life sciences business, the creation of high-performing organizations, and the clear focus on profitable growth. He demonstrated his strategic and operational leadership skills at the Executive Board of Linde, where he transformed the healthcare business into a global market leader with sales tripled and leading EBITDA margins. As the CEO of Mediq, he transformed the business from a distribution model to a service model with streamlined business processes, a focused portfolio and a high performance culture, all of this resulted in a turnaround towards profitable growth.
And these experiences will of course benefit Evotec greatly. So Christian is an accomplished leader who will make Evotec fit for a prosperous future. Next slide please. The management team has further strengthened with the addition of Aurélie Dalbiez, our first Chief People Officer. Aurélie joins us from Corbion, where she was the Chief Human Resources Officer. She comes with a longstanding career in talent-related positions. Aurélie will ensure the alignment of the Evotec’s people strategy and cultural evolution with the company strategy, while she will further evolve sustainability, first and foremost, creating an inclusive culture with proficient teamwork, innovation and customer orientation top of mind. Aurélie was chosen following another intense search process, which illustrated once more that Evotec is highly attractive for eminent leaders.
The combination of heightened attention to our people in Evotec with our high-quality science and innovation and with a performance-oriented business model will make us unique and, I’m deeply convinced, finally unbeatable. I recognize that we have a lot of work to do to achieve this and the reset has started. And with that, it’s my pleasure to hand over to Laetitia to familiarize you all with the details of Evotec’s performance in 2023 and the most recent developments.
Laetitia Rouxel: Thank you, Iris, and a warm welcome to all of you for joining us today to delve into our performance of the financial year 2023. It was a very intense year for Evotec. It started off extremely strong. We expanded and extended two collaborations with BMS and were able to win Janssen as a strong partner in the field of oncology. On April 6, we have been hit by the cyber incident that had led to €70 million missed revenue in 2023, largely in Q2. Despite all the challenges, we could celebrate successes with Just signing a technology alliance with Sandoz in May, validating the Just value proposition. Through our focused efforts, we have seen a strong recovery of the business in Q3, coming back to 80% of operations with a strong revenue growth of 13%.
In Q4, we faced a challenging market environment that was still masked by positive contribution from the fading cyber incident recovery. With that said, let us take a look at the full year results. We are pleased to report that our revised guidance for 2023 was fully achieved. Our Group revenues for the year were €781.4 million in the upper range of €750 million to €790 million as we had projected. Unpartnered R&D expenses totaled €64.8 million falling within our estimated range of €60 million to €70 million and reflected our continued focus on innovation and growth. The adjusted EBITDA for the year was €66.4 million meeting our guidance range of €60 million to €80 million. As just mentioned, we achieved €781.4 million revenue in 2023, a solid 4% increase compared to the previous year, and despite facing significant operational cyber-related impacts for the majority of Q2.
These headwinds mainly in our development and Cyprotex business were more than offset by the strong performance from our key strategic partnerships. Notably, revenue from Just-Evotec Biologics reached €108.4 million reflecting a remarkable rose of more than 110% compared to the prior year. This substantial increase underscores the success of our partnerships, especially with Sandoz and the strengthening of our portfolio. Our gross margin experienced some pressure, declining slightly to 22.6% from 23.2% due to the cyber incident, development market challenges, the ramp-up of capacity at Just-Evotec Biologics, and excluding Just gross margin was 27%. We remain committed to investing in the future with unpartnered R&D expenses of €64.8 million as we continue to drive innovation.
Adjusted Group EBITDA for the year were €66.4 million, marking a 34% decline from last year, largely due to non-recoverable business and reduced capacity utilization in Q2. One from cyber-related costs included in EBITDA represents €26.5 million. Excluding Just-Biologics, Adjusted Group EBITDA would be at €72.7 million with Execute absorbing most of cyber-related expenses. Furthermore, we are proud to have made significant strides in sustainability, reducing our Scope 1 and 2 emissions by 29% to 27,480 tons CO2 equivalent as we are growing greener. As outlined on the previous slide, Innovate has an excellent growth of more than 30% despite the challenges we faced. Main drivers for this positive development were the extension and expansion of contracts with BMS in neurodegeneration as well as in target protein degradation.
Also, new collaboration with Janssen in cell therapy as well as the tech alliance with Sandoz demonstrates that demand for differentiated and paradigm shifting technology platform is very robust and a truly distinctive factor in the overall challenging market. As we indicate here on the slide as well, our full sales funnel has grown significantly across shared R&D and particularly also since validation of our Just-Evotec Biologics CDMO offering. A substantial part of these opportunities sits in early final stages and we are working hard on conversion, winning this new partnership and translating this into revenues in later 2024 and 2025. Total Execute segment including intersegment revenue had stable revenues at €738.7 million, driven by the Sandoz collaboration yielding a gross margin of 20.9%.
Innovate segment revenue was €266.9 million in 2023 reflecting a gross margin of 30.8%. Despite the strong challenges, this year we achieved a 4% organic growth in Group revenues. As mentioned, Just-Evotec Biologics revenue rose by 111% demonstrating exceptional growth driven by the collaboration with Sandoz. Innovate reported a 30% increase showing strong momentum attributable mainly to BMS and other key strategic partnerships. As we mentioned in our previous calls, Execute was mostly adversely impacted by the voluntary shutdown of our operations in response to the cyber incident and the softening market towards the end of the year. However, overall segment revenues for Execute grew over year-over-year, inclusive of intersegment revenues, as we reallocated resources towards supporting high value partnerships within the Innovate segment.
Despite a lower contribution from milestones, upfront and licenses, our diverse business model continues to show its robustness, maintaining a solid gross margin of 27%, excluding Just-Biologics. Focusing on Q4, Group revenue were €201.3 million, reflecting a 16.4% decline compared to the strong comparable base in 2022. While in a challenging market, positive contribution were related to BMS’ Celgene programs and the successful delivery of work packages as part of our new technology partnership with Sandoz. It’s important to note that the revenue mix had a very different structure as opposed to Q4 2022. Contribution for milestone to the tune of €17.7 million were significant in the last year’s quarter, while Q4 2023 was a rather modest period with milestones and upfront payments reaching €1.2 million.
Also Q4 2022 saw the one-off effect of royalty income from [SK bio] [ph] of about €2 million, which had a positive effect on margins too. Gross margin contracted to 18.7% compared to a robust quarter of previous year influenced by the overhang of low sales during the cyber incident, challenging market conditions, unfavorable sales mix and reduced milestones upfront and licenses payment and ramp up of the cost of Just-Evotec Biologics also impact the margin while showing our commitment for the future growth. Switching now our focus to cost management. R&D expenses were €20.2 million for the quarter, 5.4% lower than the comparable prior year period. This decrease was influenced by a temporary reduction in R&D cost stem from the cyber incident, but still indicate our strong dedication to innovation.
Our Adjusted Group EBITDA, which does not include external one of cyber-related cost for the last quarter of 2023 represents €16.5 million compared to €57.1 million in Q4 2022. While the gap is significant, I want to recall that Q4 2022 was the strongest quarter in Evotec history by a wide margin and year-over-year comparison needs to be seen in that context. The negative development in Q4 2023 triggered the need for a comprehensive review of the business. Together with Mario, we therefore initiated an in-depth analysis to assess measures needed to foster a sustainable, profitable growth in the future. With that, I would like to hand over to Matthias to share with you our thought process, findings and decision on actions to be taken.
Matthias Evers: Great. Thank you very much, Laetitia. Good morning, good afternoon, also from my side. Basically, as information about the developments in Q4 materialized, we launched this structured performance review, looking closely at the external environment as well as our inner workings. Let me share with you the top level results today in form of a SWOT analysis. And I will basically walk from the bottom to the top. So I start with the more external-oriented dimensions, opportunities and threats, and then to the strengths and weaknesses. Opportunities. And I start, therefore, for hopefully an obvious reason, because we face very strong demand and opportunities in terms of expanding our human data-centric multiomics approach to R&D.
Here, I mentioned the molecular patient database, which is at the heart of our PanOmics efforts. Clearly, and it has been behind the numbers, and my colleague Laetitia mentioned it, we have seen the commercial validation of Just-Evotec Biologics. We have seen an increasing demand. We have fully capitalized on it. We have a full sales order book. We are quite careful to describe the U.S. BIO-SECURE bill as an opportunity. We just want to signal we are here for the partners in the U.S. to collaborate with them with our global footprint. When it comes to threats, we describe the market at this point of time as a bias market with more challenging dynamics. I will go later in the presentation a little bit into the drivers, but it’s fair to say that particular for biotech companies, 2023 and now 2024 has been a difficult environment.
So we see a market recovery towards 2025, and that is, of course, as stated a threat. Let me move to our strengths. And here I want to be very clear that our scientific expertise combined with our track record, our differentiating capabilities on our integrated end-to-end platform lead to very strong demand that has led to double-digit growth has led to an expansion of our sales pipeline. We see a demand for this, including and leading to customer retention rates north of 90%. There is clearly a weakness identified, and I will come also in this presentation with our response against it. But to put plainly, we have found an internal complexity and operational inefficiencies that we are targeting now head on. When it comes to our capacity, there’s a temporary mismatch because we have seen the softening in the more transactional parts of our business.
So we have to call it temporary, something that we can repair quite quickly and we have a plan for that. With that, let me move to the next chapter of this presentation, which is about the priority reset we are introducing here today. And then Laetitia will continue later on guidance and outlook. As we talk about new priorities, I think it’s very important we put those into external context. As promised, I want to talk a little bit more about how we see the market today. Clearly there is demand, but we have seen cost containment on the biotech side, on the big pharma side, and what is for us relevant to say, we have less Series A, Series B events, and so roughly 40% of our business sits in biotech, and that share has gone down a bit, because there are simply less new starts in the biotech segment.
Overall, I think the market summary is that the effort towards conversion and towards winning business is higher, and we have seen that also in our peer group performance. In summary, I would conclude that we see green shots in the market, like competitors, we see that more towards the end of the year into 2025, and see this type of market environment as a context for the priorities I’m now introducing. We as an organization clearly commit to three priorities under the header towards profitable growth. So we are clearly a company growing at double-digit following this demand, but this growth has to be profitable. Priority number one, clearly, and I will detail it in a second, deals with our focusing on what we are good at and driving smart partnering.
Secondly, we are now adjusting our organization and footprint. And number three, we put the strongest possible team in place for today focusing on the management board, but of course going beyond. Now, indeed, let me double click a little bit into the first priority. You see here two illustrative analyses of where the money is going in deal making: one by therapeutic area; one by modality. And in short, it’s fair to say we have massive opportunities as we are well aligned against these areas, let’s say, in oncology, neurology, cardiovascular, or in the core modalities. What we are doing here is doubling down. And I would call these actions our growth program, because it’s a careful alignment. So to become a little more specific, an example is for instance, metabolic obesity, that we align our efforts in R&D, our strengths against where the market demand is, we clearly double down on key modalities.
And that has to be seen also in the context of Just-Evotec Biologics, where we have a fantastic offering for complex biotherapeutics. And we focus on what we get very strong feedback on, our flexible partnering that we offer win-win models from our partners from foundation to biotech to big pharma, but clearly prioritizing that our models where we cover our R&D funding and generate upsides. With that, let me hand over to you, Laetitia, to detail the restructuring parts of our priorities.
Laetitia Rouxel: Thank you, Matthias. Resetting our focus and offering to a changing environment comes with the need to adjust our organization and footprint to the new realities. Our restructuring focuses our own three targets: one, optimization of our organizational structure and operational model; two, adjustment of our footprint and capacity optimization; and three, as well as improving the efficiency of our enabling function. We completed the diagnostic, and we are now working with full effort on multiple key levers. As a result, we expect to generate visible margin improvements over the coming years. The measures identified at this stage should result in an annualized benefit on EBITDA of more than €40 million. For 2024, we will see a pro rata effect and expect to see a first full impact by 2025 I would highlight our effort in three key levers there.
In procurement, for instance, we aim to leverage our global scale, harmonize and optimize pricing for the good and services we are buying, and rationalize diversity in what we buy. They may be low-hanging-fruit, but they require flawless execution that we commit to. Second, focusing on the right sizing capacity with the right expertise. And thirdly, simplify internal structure like the new segment reporting, which brings us to the next slide where we are grouping the former innovate and execute offering, excluding Just-Biologics into our end-to-end platform serving 500 plus partners. This segment will be called shared R&D. With that, we reduced the recognition of intersegment revenues of meanwhile more than €200 million. This will reduce redundancies of internal structures and will lead to more efficient and linear processes.
The new segment reporting will also give better transparency to Just-Biologics in line with what we heard during our past interactions with you. The new structure will be in place as of Q1 2024 reporting and we will provide more detailed information on comparable numbers versus 2023 in due course. Talking about the start of the year, which in essence saw a continuation of the patterns we saw during Q4, let me share a view on our expectations for 2024. At this stage, we expect revenue grows to remain robust at low-double-digit rates, while the mix is set to change versus prior years. Just-Biologics as well as differentiated offerings will drive the business, while more transactional businesses are likely facing a challenging environment this year.
Future growth, more favorable business mix, as well as our efficiency improvement measures on EBITDA are the basis to assume that EBITDA will grow middle-double-digit. Further details of refined guidance will be dependent on the overall market environment, win rates of existing leads and new collaboration, and phasing of the efficiency gains in 2024. To recap, I want to emphasize on our strengths in revenue growth, while we focus on driving profitability. The structure of our revenue mix suggests that growth at Just-Evotec Biologics will be faster than in shared R&D in the coming years. At this stage, we expect a stable growth of revenue related to milestone and royalty payments, given the growing breadth and depth of our portfolio. For 2025, we expect the double-digit revenue growth at reach to continue bringing us into the ballpark of €1 billion revenue.
In general, we anticipate the mid-term growth profile to remain similar to patterns in the past. As we are here for the long-term, we expect a more favorable revenue mix and more efficient structures to build the basis for the very profitable growth. The details of this new midterm outlook will be assessed together with Christian and we plan to provide the first update also in August. As Iris mentioned already, we can say that our Supervisory Board successfully executed with regard to priority three on our list, which is strengthening our internal team and we look forward to working together with Christian and Aurélie to shape Evotec’s sustainable growth path into the future. They represent two important additions as an example of how important it is for us to focus on talents and fostering expertise at Evotec.
Here are the next important dates of our financial communication in 2024. And to conclude, we have fully met our 2023 revised guidance. We confirm double-digit top-line growth for 2024. We confirm mid-double-digit EBITDA growth for 2024. And we continue to outpace revenue growth in the years to come. We are resetting and right-sizing our operations to drastically enhance profitability. And finally, we are looking forward to driving the next phase with Christian and Aurélie on board.
Volker Braun: Thank you, Laetitia and team. We are now looking forward to taking the questions from people attending the call. And I ask, Moritz, to start the Q&A session now, please.
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