Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Merck KGaA (MKGAF, Financial) reported a strong second quarter, significantly beating expectations.
- Healthcare division showed excellent performance with a 5% organic sales growth, driven by CM&E and oncology franchises.
- Electronics division achieved 8% organic sales growth, driven by semiconductor solutions.
- Merck KGaA (MKGAF) returned to organic and reported sales growth in Q2.
- The company upgraded its full-year 2024 guidance for net sales, EBITDA pre, and EPS pre.
Negative Points
- The termination of the Xevinapant program was a significant low point for the quarter.
- Life Science division experienced a 4% organic sales decline, still impacted by COVID-related sales headwinds.
- Reported EBITDA pre decreased by 3%, affected by currency headwinds and the Xevinapant termination provision.
- Healthcare's NNI franchise saw a 7% organic decline, with Mavenclad growth muted due to high prior-year comparisons.
- Electronics' EBITDA pre margin declined by 240 basis points year-on-year, partly due to the absence of a one-time patent agreement benefit from the previous year.
Q & A Highlights
Q: On the healthcare division, with recent late-stage failures, how are you thinking of the division? Are you considering filling either the late-stage or early-stage pipeline through deals, or should we think of it as more of a stable cash generator in the midterm? What could that potentially mean for midterm R&D spend for the healthcare division?
A: (Belen Garijo, CEO) Healthcare has been performing strongly with sustained sales growth and high profitability. Despite pipeline setbacks, we expect healthcare to continue delivering slight growth in the midterm. We will focus on accelerating external innovation and increasing shots on goal through licensing, without compromising our capital allocation strategy, which prioritizes life science for M&A. (Peter Guenter, CEO of Healthcare) We expect R&D spending to be around mid to high teens in percentage of sales in the second half of the year, with a gradual recovery depending on internal pipeline success and in-licensing pace.
Q: In life sciences, what gives you confidence in the inventory destocking coming to an end in the second half of this year? Why do you think there is so much volatility in different companies' expectations on the demand environment?
A: (Matthias Heinzel, CEO of Life Science) Our confidence is based on the positive trend in order intake, which has been increasing sequentially and year-on-year. We have detailed models and regular discussions with larger customers, indicating that most have moved past destocking. Volatility in expectations may be due to differences in product portfolios, regional mixes, and the proportion of instrument sales versus materials.
Q: On electronics, could you give us an idea of what percentage of the current semiconductor solutions portfolio is from thin-film materials for AI applications? How fast is this portion of the semi's portfolio growing relative to the rest?
A: (Kai Beckmann, CEO of Electronics) Approximately 10% of the semiconductor market is related to AI technologies, with our semi solutions business closely correlated to the top end of that range. Thin-film materials for AI applications are growing at a considerably higher rate than our midterm guidance for semiconductor solutions, driven by increased value per wafer with each technology transition.
Q: On process solutions, the book-to-bill is hovering around 1. Can you give more color on the consumables or materials reordering across different customer groups?
A: (Matthias Heinzel, CEO of Life Science) We are on a steady course with order intake trends showing positive momentum. CDMOs are showing stronger growth momentum coming out of destocking compared to other customer groups. Overall, the vast majority of our customers have moved past destocking based on our information.
Q: On healthcare, there was some tendering or stocking called out. Could you elaborate on the impact, particularly in China and for the CM&E business? How sustainable is that demand?
A: (Peter Guenter, CEO of Healthcare) We are happy with the performance across all CM&E sub-segments and regions. The low comps in China last year were COVID-related. We do not see a significant impact from anti-bribery measures and believe international manufacturers may have an advantage. Positive tender realizations in some markets contributed to growth, and we continue to guide for mid-single-digit growth in the long term.
Q: On process solutions, can you provide more color on the growth for the back end of the year? How do you think about exit growth rates for 2024?
A: (Matthias Heinzel, CEO of Life Science) We expect continuous positive momentum in process solutions with sequential growth in order intake and sales over the next quarters. The magnitude of incremental growth may vary, but we anticipate a nice exit growth rate towards our midterm guidance by the end of the year.
Q: On the midterm healthcare outlook, what do you think we are mismodeling the most versus your low single-digit growth expectations?
A: (Belen Garijo, CEO) When we say low single-digit growth, we refer to a CAGR view, which may have fluctuations in early versus later years. We will provide more perspective at the Capital Markets Day. (Peter Guenter, CEO of Healthcare) The pace of R&D recovery depends on deal-making execution and internal pipeline progress. We are confident in the slight growth we announced, reflecting the resilience of our portfolio and team strength.
Q: On life science, how are you thinking about your ability to take price across process solutions and the wider life science business from here? Are you seeing any indications that price is becoming a more significant factor for your customers?
A: (Matthias Heinzel, CEO of Life Science) We are still seeing a positive price impact this year, though it has moderated from the high inflation years. Pre-COVID, we saw net price increases of 1-2%, which went up to about 2.5% during high inflation. We expect a net positive price impact year-over-year across life science, driven by the value we create for customers through quality, resilience, and innovation.
Q: On healthcare licensing and M&A, how are you thinking about investing in and adding US-based infrastructure and increasing your US presence?
A: (Belen Garijo, CEO) Our ambition is to increase exposure to the US market, which is highly driven by innovation. We will focus on in-licensing activities and clear-cut, lower-risk M&A deals that create value early on, with a geographical priority on the US.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
