Ladies and gentlemen, welcome to the Evotec SE Quarterly Statement Q1 2024 Conference Call. I am Sandra, the chorus call operator. I would like to remind you that all participants have been in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Volker Braun. Please go ahead, sir.

Thank you, Sandra, and good day, good morning to all of you in the call, the Q1 2024 results call. I trust you have seen the press release this morning, and we are happy to share more details with you today. Before we do that, it's my obligation to familiarize you with the cautionary language as outlined on page two. And with that, I would like to hand over to Mario Polywka, our Interim CEO. Please Mario, go ahead.

Thank you, Volker, and a very warm welcome to everyone on the call. The entire management team is present in this call with me, and they will do the main update on the development of the first quarter and on the program we have initiated in resetting and right-sizing Evotec for future profitable growth. So welcome, Laetitia, Matthias, Craig, and Cord. I will spend a few moments recapping the developments in Q1 before handing over to Laetitia and Matthias for the majority of the presentation. On Slide 6, we give a brief summary of our Q1 developments. Our business, like many of our peers, continues to operate in a challenging market environment. It is clear that the more differentiated our offering is, the better positioned we will be to grow our business in the future. For clarity, you will see and Laetitia will discuss this further later; we have moved our reporting to Shared R&D and just Evotec Biologics. In Shared R&D, despite the poor market conditions, we have still closed a number of exciting deals, including the AI-powered strategic partnership with Owkin, a precision medicine collaboration in cardiology with Bayer, and of course, our strategic partnerships with BMS continue to make good progress. Despite our 23% revenue decline in Shared R&D in Q1 of 2024 versus Q1 of 2023, which you will all remember was the strongest in our history. On a more positive note, the 70% increase in our Discovery Sales Book points to a recovery in the second half of 2024. Just Evotec Biologics, as Matthias will describe in more detail later, has made good progress, especially within the tech partnership with Sandoz and a number of new projects. The revenue growth over Q1 of 2023 was nearly 400%, and the breakeven in EBITDA is a strong signal as to the health and huge potential of this business. You will hear from Laetitia that our reset initiative as described in the April call is progressing well and remains the key focus to return Evotec to its strong profitability position. Firstly, however, it's my honor to pass over to Laetitia to walk you through the Q1 financials. Over to you, Laetitia.

Thank you, Mario. In Q1 2024, we achieved €208.8 million in revenue, which represents a slight 2% decrease compared to the same period in 2023. While the decrease was driven by a decline in our shared R&D business, down 23% versus prior year, primarily on the transactional side, we saw remarkable growth at Just Evotec Biologics, reaching €53.5 million revenue in Q1, as mentioned by Mario, an increase of over 380% compared to the same period last year. The growth of Just Evotec Biologics was driven by higher revenues due to our collaboration with Sandoz, the Department of Defense, and others in what has been an exceptionally strong quarter. The new factory in Toulouse, France is expected to be fully operational in Q1 2025. Our gross margin experienced some pressure, declining to 17% from 25% due to our high fixed cost base in Shared R&D and the ramp-up of capacity at Just Evotec Biologics. We remain committed to investing in the future with R&D expenses of €16.2 million in Q1. However, we reduced spending from €18.5 million in Q1 2023 to €16.2 million as we focus on platforms that are best aligned with the strategic fit and relevance for our partners. Adjusted Group EBITDA for Q1 2024 was €7.8 million, marking a 73% decline from prior year, mainly driven by higher revenues and low overall cost increases. To sum up, we faced another challenging quarter in Q1 that showed solid underlying performance but was held back by the high fixed cost base and slow market demand in the transactional business, which we are addressing through priority resets over the next quarters. This is the first period in which we report our new segment logic, Shared R&D and Just Evotec Biologics, which reflects the way we manage the business internally, minimizes the inter-segment elimination, and gives better transparency to Just Evotec Biologics. You can find the restated Q1 2023 figures in our Q1 financial statement. As we already discussed the revenue and margin developments on the previous page, I will only comment on the SG&A expenses, which totaled €45.9 million in Q1, an 8% increase compared to last year. The increase was primarily driven by higher IT expenses to upgrade and introduce new systems, as well as additional personnel to strengthen the end-to-end global processes and systems. As you can see, our balance sheet continues to offer a solid base for our strategic execution. While total assets decreased slightly to €2,208.7 million, our equity ratio remains around 50%. Our cash flows were impacted in Q1 by a challenging operational environment and certain exceptional effects, such as the elevated payables balance at 2023 year-end. This cash outflow combined with our reduced LTM EBITDA has resulted in an increase in our net debt ratio to 2.9. We expect our cash outflow, while remaining negative, to materially improve over the coming quarters as our operational profitability improves and we complete committed CapEx investments. So while our net debt ratio may increase slightly in future quarters, we continue to have strong financial flexibility to navigate the current environment with over €500 million in liquidity at the end of Q1. I will now hand over to Matthias, who will guide you through our strategic and operational update.

Great, thank you, Laetitia. Good morning, good afternoon, everyone. I'm very excited to provide a top-line view on a few disclosed partnerships we were able to close, particularly as part of our Shared R&D efforts. So if I quickly talk through them, there's an AI-powered partnership with the tech bio Owkin, where we combine their expertise on the target side with our integrated discovery and development platform in oncology and inflammation. We also announced another partnership with the Crohn’s & Colitis Foundation, where in the high unmet need area of inflammatory bowel disease, we again provide them access to our integrated R&D platform. Quite interesting is also the collaboration framework with Claris Ventures because this allows them to have access to our R&D capabilities across different therapeutic areas for their companies in the UK, Italy, and Switzerland. After the period ended, we are also excited to approach cardiology in a new way with our precision approach across Bayer and Evotec. Now, in summary, we feel quite confident that our differentiated, integrated offerings are very attractive for various partners. The contracts we successfully closed are leading indicators of new revenues later in the year. Combined with what we are hearing, and you are hearing from competitors and peers, it gives us a solid footing and planning for stronger business momentum towards the end of the year. Let me move to our second reporting segment, Just Evotec Biologics. Here we see a continuation of a strong business building and growth story that we are obviously excited about. Our close sales are ahead of expectations, and we are now slowly moving towards an order book of closed sales of $1 billion. What is more important is all I think we are making strategic progress. The molecules we contracted with Sandoz are under development, we are expanding with existing customers, and we are increasing our options towards commercial supply. We have signed a first phase 3 supply, and lastly, we are working with a big pharma, which is an important segment for us, on a bispecific molecule, a complex biotherapeutic. Complex biotherapeutics are very much in demand today, and we see that right now more than 40% of our molecules fall into that category. Given the feedback we receive from partners, we see our continuous manufacturing platform as the preferred platform for these types of biotherapeutics. Now, let me dive a little more into how our pipeline looks. This is significant because we have touched over 150 molecules and are currently working on roughly 56 active molecules. We've touched more than 100 molecules in molecular optimization, where our artificial intelligence solution plays a critical role and is part of our value proposition. Regarding IND enabling, we have touched more than 50 molecules, and in late-stage clinical supply, we have 10 molecules, which means 10 chances for commercial supply in the coming years. Our pipeline clearly needs capacity, and I'm pleased to report that J.POD 2 in Toulouse is fully on track. We expect it to open in September. We invite you again for the Capital Markets Day in Toulouse on October 10. Thank you for allowing me to share our strategic operational update. I'll quickly hand it back to you, Laetitia.

Thank you, Matthias. We are progressing well also on the execution of our three priorities to sustain the profitable growth at Evotec. Let me highlight the key updates since our last call. On priority one, we are focusing on doing more of what we do best, focusing on smart partnering. We are exiting our Orth site and correspondingly our gene therapy business to concentrate on our core modalities. First R&D savings have been initiated through focusing our capital allocation to the right R&D projects that align with the strategic priorities of our partners. Additionally, we continue to strengthen our business development to accelerate the conversion of commercial leads for further revenue growth. There are early signals of positive momentum, particularly in discovery, as Matthias previously explained. On our second priority, we are in full swing driving the execution of our cost optimization initiatives. We've initiated a global purchasing optimization program with external support to maximize savings and triggered short-term facility space reduction and footprint optimization. Constructive discussions with the Workers Council are ongoing, and we will provide further details once the regulatory process is completed. Next, let me provide details on the progress of individual initiatives. Regarding capital allocation, we've launched a program to optimize and harmonize pricing and rationalize the diversity of options. We continue to invest in R&D and focus on our platforms that have the best possible leverage and scalability for future collaborations. Investments in IT are essential to run a resilient business, and we are continually improving our systems. Lastly, we are addressing headcounts to manage our current overcapacity. We have started constructive discussions with the Workers Councils, and we will provide further details once the regulatory process is completed. While we need to be mindful of capacity needs in fast-growing areas, such as Just Evotec Biologics, or areas where scaling back is not acceptable, we believe our improving results in the second half of the year are based on disciplined execution. Our focus on the execution of cost improvements will show the first visible impact in the second half of the year. We continue to drive positive trajectory in early business development pipeline and closed sales, especially in our Discovery business. For 2024, we expect a clear indication of our trajectory to achieve top-line guidance. Just Evotec Biologics, along with differentiated offerings, will drive the business while more transactional businesses may face a challenging environment in 2024. Future growth, a more favorable business mix, and our efficiency improvement measures on cost are the basis to expect that EBITDA will grow mid-double digits. On this, I will hand it over to Mario to conclude this presentation.

Thank you, Laetitia. Thank you, Matthias, for your summaries there. On this slide, we present important upcoming dates for your general meeting, the first half report, the Capital Markets Day, and our nine-month quarterly statement. To conclude this presentation, what are our takeaway messages? The reset is fully underway, and we continue to progress and push our initiatives to get our profitability back on track and to align ourselves and right-size the organization for market demands. We believe we have a challenging first half, as you've heard, but we think it is the trough of the difficult market environment. There are credible signs for business recovery in the second half. Thank you to all of our employees, shareholders, and stakeholders for your support throughout this period. I am incredibly grateful to this management team for their commitment to steering Evotec through these challenging times. They have done a magnificent job and have handled the hard lifting in the last five months. Together with the new CEO Christian and the new CPO Aurélie, they will form a formidable team driving Evotec forward. Thank you all, and that concludes the presentation.

Thank you, Mario and team. We are now looking forward to taking questions from people attending the call, and I ask Sandra to start the Q&A session, please.

Thank you. We will now begin the question-and-answer session. Our first question comes from Charles Weston from RBC. Please go ahead.

Hello, thank you for taking my questions. I'll ask three please. The first one is more of a clarification. On the call last month, one analyst asked whether the EBITDA guidance for 2024 meant €100 million, and, Laetitia, I think you did say €100 million upwards, although you carried out a bit with the word ballpark. Can you just confirm what you mean here and what the range of EBITDA implied by your guidance of mid-double digits?

The guidance we shared is a mid-double digit percentage. The consensus that is coming to us is around €95 million, and that's directionally where we are targeting for this year.

Thank you. Can I ask what's driving that 70% growth in discovery work? Is it more relating to the Innovate business model, i.e., not really delivering necessarily near-term margin, or is it more on executing? Is it more biotech or pharma? And I'm asking this because a month ago you said you weren't seeing much improvement in demand from biotech funding improvements, nor from BIO-SECURE. So I'm just trying to figure out if that's changed.

Thanks for the question, Matthias here. First, let’s highlight the strong traction we are experiencing with customers. This often occurs when we provide an integrated offering that spans multiple steps along the value chain. It's important to understand that although we discontinued Innovate as a reporting tool, those contracts still have near-term margin. What has changed is the progress we are making based on feedback from our partners, which indicates we are effectively developing the business. We are capitalizing on our relationships, and the deals we closed were prepared since last summer. While we see potential demand from the BIO-SECURE Act, and we hope for an improving biotech environment, we currently do not observe that. Instead, we are translating our value proposition into business, which gives us hope. Combined with what we hear from competitors and see in the market, we anticipate a much better outlook toward the end of next year.

Thank you. That’s clear. My last question relates to milestones. In the original 2025 guidance, this included roughly €70 million from milestones. I know you're not giving guidance now, but could you at least indicate whether the programs that you had factored in to deliver those milestones are still on track?

We can’t say a lot about that, to be very honest. We have not guided on that, so that's not fully correct. We mean that in 2024 is weak or soft in milestones. 2025 can be stronger if the science is progressing and can be much stronger. But we have not and cannot provide guidance in a quantitative form.

Yes, thank you. My first question is about the early dynamics in the second quarter. You mentioned the split between the first half and the second half, noting that the first half is still challenging. Based on the initial trend you are observing this quarter, should we anticipate that the second quarter will resemble the first quarter regarding revenue growth and profitability, with the year leaning more towards the second half? Some details on this would be appreciated.

In terms of Q2 dynamics, we are progressing towards H2 to get momentum in revenue. H2 will be the quarter where we will see a trend shifting. We are currently securing contracts and sales orders, and while we are seeing this dynamic, it takes a few months for it to translate into revenue. In the short-term, you should look towards the end of the year and H2 to see this ramp-up.

Thibaut, let me comment on your second question. We won’t discuss margin difference between transactional services and discovery, as it presents a spectrum. One reason is not wanting to, as our COO Craig will always tell us we have to optimize existing capacity and have high-margin work, while we need the volume to drive the overall margin. The bigger difference is the strength of our value proposition. It’s stronger on the integrated side where we have the differentiated offering.

Thanks for taking my question. I want to go back to the orders or the closed sales and discovery, the helpful chart you had during the presentation. It seems that those order trends are relatively volatile historically, more so than we would have thought. So I'm curious, what makes those order trends so volatile? Is there any seasonality or are there single customer orders that tend to swing that? Just trying to gauge how predictive that strength you've seen in 1Q and you're seeing in 2Q should be.

Thank you for that question. In fact, we don't have stable, predictable demand of small units. Our real value comes from high-value large contracts, which drives this volatility. You will see a spike in upcoming quarters due to large contracts, and we want to reduce this volatility.

Just a follow-up on that. On the cost optimization, you provided color on your progress with facility footprint reduction and headcount reduction. I'm wondering if you're still seeing no change in your timelines or in the extent of your cost reduction.

It’s Craig here. The expected timeline for the cost reduction is fully on track. Much of the cost reduction that we have in the reset frame will be delivered during 2024. As Laetitia mentioned, some key indicators show we are well underway, such as the closure of Chemistry Marcy and the exit from gene therapy, which we announced yesterday. We are optimizing our facility footprint without affecting revenue or headcount.

It’s important we prepare for a successful strategy, reducing the fear of just another reset. The short answer is no, we don't see shifting timelines. We just want to move with a more cost-effective Evotec while preparing for future growth.

Just a couple of questions - obviously, we've got to deal with the cyberattack, the CEO departure, and a big reset of expectations. In terms of calming investor fears in the market, it sounds like we have a CEO incoming in a couple of months. There's naturally a fear in the market of another painful reset. I hear your story about order book dynamics, but could you clarify if you’re implying no revenue growth year-on-year in Q2?

Yes, you heard us right that we position H1 as a trough. The ramp-up time on the transactional side of the business moves more slowly. We are currently seeing this situation, leading into a recovery more in H2.

Q2 2024 is expected to see a top-line positive growth versus last year, where we experienced the cyber incident. While Q2 will likely follow a similar path to Q1, we expect growth year-on-year.

Just two questions from me. Firstly, what should we expect from the Capital Markets Day later in the year? Is there any thought going on there regarding longer-term aims for the business?

On the Capital Markets Day, the primary idea is to provide a deep dive into our Just Evotec Biologics business. You will be located in the Grand Beauty on J.POD 2 in Toulouse, and that will be a significant focus.

Could you talk about how you can capitalize on potential future demand in ADC space, and what makes you differentiated there?

We have a strong value proposition in the ADC space. Our integration allows us to combine our chemistry and discovery capabilities effectively. The continuous manufacturing platform is prime for ADCs due to its flexibility in delivering against fluctuating demands, along with GMP conjugation capabilities, which we are open to discussing with partners. We are not fully equipped yet, but we have many ingredients.

I would like clarification on the orders translating to sales and revenue. Can you specify how many months we are talking about?

We indicated a range, typically from four months to eight plus months. From contract signature to ramp-up may consume time; thus, we expect closed sales to translate into recovery later this year and into next. On the EBITDA aspect, we’re looking at qualitative guidance and will come back with quantitative guidance as promised.

On the Sandoz collaboration, can you provide how much revenue and EBITDA comes from that work? Is that work segmented, or does it include any milestones?

About Just Evotec Biologics, it was an exceptionally strong quarter. While I can't provide specific figures, Sandoz is a significant partner along with multiple others contributing to the mix. We see similar growth again from last year.

Regarding Bayer, we have ongoing partnerships in the field of kidney diseases, while our efforts in Women's Health division have been essentially discontinued. The collaboration in cardiovascular is just beginning based on our iPSC drug discovery platform, which we believe has significant potential.

On the gene therapy closure, we recognize it as a technically challenging area. With technological challenges and safety concerns in our industry, we can't maintain competitive advantage there while focusing our R&D investments into areas where long-term growth and development are assured.

So regarding customer exposure, could you clarify how much of your revenue comes from large customers, particularly BMS?

Our collaborations with BMS contribute less than 10% of our top line. We continue to have discussions with multiple partners to expand these collaborations, ensuring a broad customer base.

To clarify, we track our customer concentration closely. With our breadth of the customer base, we're less concerned about dependence, although we aim to broaden further.

Could you provide an understanding of upcoming visible revenue from BMS in a similar fashion to this year's contributions?

We expect similar revenues going forward, potentially growing as projects continue to mature and we expand the pipeline of opportunities with BMS.

Thank you to everyone in the call for your interest in our efforts to reset Evotec towards profitable growth. If further clarifications are needed, feel free to reach out anytime. We look forward to speaking again at our H1 call on August 14 or at our AGM in Hamburg on June 10. Thank you, and goodbye.

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